Macroeconomics by Davide Buccheri

The European Central Bank is arguably the second most powerful central bank on the planet after the Fed. As such, its impact on the world economy should be substantial. However, the ECB has often struggled to reach its objectives. These failures have pushed it to adopt some unorthodox monetary policies whose effects in the long run are yet to be seen. Here, I look at some interesting data, which suggests that the ECB possibly never had the economy under its control and was just a passenger all along. Targeting Inflation The main objective of the ECB monetary policy is to keep a stable rate of inflation of around 2%. Looking at the historical CPI in the Eurozone, the ECB arguably failed in this objective in the past, with inflation closer to 1% and on a relatively stable downtrend. A more interesting way of looking at inflation and monetary policy is to analyse the implied inflation of inflation-linked treasury bonds and see how this changed when policy rates were altered....

Money supply in Europe has been in an astonishing uptrend for the past 20 years now, driven by extremely expansionary monetary policies. The latest innovation in this field was introduced in late 2013, when the ECB announced that it was ready to cut interest rates into negative territory. More recently, the incumbent ECB President, Christine Lagarde, has signalled her intentions of further lowering rates. However, this move might be short-sighted and potentially pushing the ECB further into a corner from which it is becoming extremely difficult to get out, without massive market turmoil. Policy objectives First of all, it isn’t at all clear how negative rates would help the ECB pursuing its monetary policy objectives. The ECB has as its main target price stability above all. This is quantified as an inflation rate below but close to 2%. It is debatable whether the ECB was successful in its objectives so far, as “close” is a vague term. The yoy monthly inflation rate a...