QE as debt management means ECB vs 19 DMOs

Larry Summers and others have wondered how much the US Treasury’s tilt towards easing undid the Fed’s program of quantitative easing, pointing out that the central bank stimulus was hampered by an uncoordinated and opportunistic change in issuance as longer yields fell.

If you are in the camp that QE only works through altering the relative demand and supplies of debt of different maturities – for example, that, hypothetically, QE could be replicated by the issuance of very short duration debt for the purchase of longer duration debt – then this is a big deal.

We might wonder if a single central bank/government can’t coordinate a combined reduction in the amount of long duration debt held in the private sector, what hope is there for the Eurozone?  There, we have a single 19 member ECB policymaking committee, but 19 debt management functions, many acting on behalf of governments sorely short of funds.

How will the ECB stop member state debt management undoing QE?


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3 Responses to QE as debt management means ECB vs 19 DMOs

  1. Max says:

    The debt-management view of QE is suspect (as are the other 20 theories of QE proposed by central banks). The way QE works is probably much simpler and stupider: by communicating a vaguely ‘dovish’ attitude toward inflation. In other words, if central banks had a perfectly rigid and unambiguous policy (like New Keynesian models assume they do), QE would have no effect.

    Arguably the same is true of interest rate policy; when a CB raises or lower rates by 0.25%, it’s not the rate that matters as much as the revealed policy. Although rates do matter, so it’s not *just* communication.

  2. djb says:

    all monetary interventions will be limited if there is inadequate aggregate demand

    you can argue over cash going from one bond to another bond of different duration or whatever

    with inadequate aggregate demand investment in jobs creating, income increasing, production increasing venture wil be lacking

    and the effect of monetary policy will be limited, especially at zero lower bound

    at least that is how i see it

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