The European Monetary Policy Responses During the Pandemic Crisis

Abstract

This paper uses an event-based analysis to describe how the European Central Bank’s (ECB’s) policy responses to the pandemic crisis have affected the European financial and economic system. The result of our exercise, which is based on the examination of the main measures taken by the ECB during 2020, is that these responses have positively affected the European economic system by improving banks’ lending activity and by indirectly creating room for expansionary fiscal policies in the euro area’s high-debt countries that do not have fiscal capacity.

Monetary policy during the wartime: How to ensure macroeconomic stability

“…In such conditions, the restoration of the pre-crisis level of economic productivity (Y) becomes possible only with an increase in the money supply in the economy (M). That is, the use of monetary instruments to expand the money supply during the crisis (including a significant reduction in interest rates) has a stabilizing effect allowing to maintain liquidity in the economy, reduce risk premiums and interest rates, which saves jobs and counteracts the spiral of bankruptcies (Benigno et al, 2020;Chen et al, 2012).…”

“…A number of authors (Benigno et al, 2020;Chen et al, 2012;Ferrando et al, 2021) consider it reasonable for central banks in times of structural breakdowns such as war or other insurmountable disasters to temporarily refrain from applying monetary policy to achieve inflation targets, focusing on maintaining demand and liquidity in the economy. During the war, relative price stability was achieved through administrative price controls and sales rationing, rather than through monetary instruments (IMF, n.d.b).…”

The ECB's asset purchase programme: Theory, effects, and risks

“…In this respect, it has been argued that the ECB's APPs have encouraged opportunistic behavior on the part of national policymakers, delayed the implementation of structural reforms, and slowed down the efforts for fiscal consolidation in countries with huge government debt. Benigno et al (2021a) show that the restrictive or neutral stance of the EA's fiscal policies in the 2011-2019 period overburdened the ECB's role: monetary policy remained the "only game in town," so that relationships between fiscal and monetary policies in the EA were characterized by fiscal and financial dominance. 29 Hence, we are ready to recognize that the ECB's independence was severely threatened before the pandemic shock; and that, despite the new and more balanced ''policy mix'' attained in the EA during recent years (2020 and 2021), fiscal and financial dominance could retake center stage in the post-pandemic period.…”

Response to Covid-19: Perspectives of EU policies and domestic policies

“…By differentiating banks into the most, the medium and less virtuous banks. The ECB reduces the interest rates on the three classes' respective facilities in order to facilitate financing [6].…”

“…The example of Italy Covid-19 in Europe was first started in Italy. It was almost the first impression of Covid-19 for European citizens who saw on television the sad routes used to transport the remains of victims in Italy's most developed region (the Lombardy region) and found the health emergency beyond the control of the government [6]. As the third largest economy in the European Union, Italy has a complete range of industrial sectors and highly sophisticated industrial production capacity.…”