Could the Public Debt Management via ECB’s QE Create a Surge of Inflation in the Euro Area?

Stephanos Papadamou, Moïse Sidiropoulos and Aristea Vidra

Revue française d'économie, 2021, vol. XXXVI, issue 3, 187-217

Abstract: Based on the recent experience of quantitative easing (QE) programs with negative interest rates adopted by ECB after the public debt crisis in the euro area (2010-2011) and in the face of the pandemic in 2020, we investigate the effects of its recent unconventional monetary policy on the surge of inflation in the euro area via the banks’ lending margin mechanism. By using Panel Vector Autoregressive (PVAR) methodology on eight member states of euro area, this paper establishes that an expansion of ECB’s balance sheet due to the public debt monetization generates a weaker positive effect on the inflation rate of the euro area when accompanied with a negative rate policy. These results validate also the suggestion that “the fear expressed by some that the monetary overhang from the large injections of liquidity through quantitative easing might lead to inflation in the Eurozone does not stand up to scrutiny either” (De Grauwe [2021]) as well as Christine Lagarde’s [2021] proposal reiterating that QE program of the ECB will continue and that there is no thought of raising interest rates in 2022.

Date: 2021
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