Winter 2020
Monetary Policy in the European Union

Monetary Policy in the European Union


Prompt for Discussion

Contributors:  Annelise Riles, Marco Goldoni, Joana Mendes, Jens van’t  Klooster,  Brigitte Young, Jamee  Moudud, Jeremy Leaman, Sebastian Diessner, Agnieszka Smolenska and Will Bateman

The European Central Bank played an important and powerful role in the management of the eurocrisis. Today, in the midst of the COVID-19 pandemic, the ECB once more emerges as a crucial actor. With its Pandemic Emergency Purchase Programme it is taking decisive steps to address the fallout from the crisis – not only attempting to safeguard financial stability, but also to prevent massive unemployment. As the ECB becomes an indispensable actor in crisis management, as its private and public sector bond purchase programmes become ever more far-reaching and larger in volume, it attracts more and more attention. A vibrant debate amongst legal and economic experts and with civil society actors confronts ECB practice with important questions of legality, democracy and policy.

Questions of legality include the following: Is the ECB still acting within its mandate? Can quantitative easing programmes – such as the public sector purchase programme or the pandemic emergency purchase programme – be qualified as monetary policy measures; or are they really economic policy measures that remain within the competence of member states? Is the ECB acting in violation of the prohibition of monetary financing (Art. 123 TFEU) when it purchases public sector bonds in such large quantities and with the aim of ameliorating refinancing conditions of member states?  Is the ECB pursuing with its crisis measures the primary objective of price stability (as mandated by Art. 127 TFEU) or are the ECB’s policy decisions not only informed, but guided by other – secondary – objectives? These questions have been at the heart of two constitutional complaints before the German Federal Constitutional Court (FCC) against two ECB quantitative easing programmes (OMT and PSPP) which triggered a confrontation between the FCC (doubting the legality of the programmes) and the Court of Justice of the European Union (adopting a quite lenient standard of review and confirming their legality).

Apart from debates of legality, questions of legitimacy, democracy and social justice take center stage: Given that the ECB is such a powerful actor and given the distributive consequences of its policy measures, shouldn’t it be subject to greater democratic control? Should monetary policy be democratized? What would it mean to democratize ECB policy? Here, too, views are divided. They are divided as concerns the empirics – the effects of QE programmes on social inequality, the actions of corporations and capital concentration. They are also divided as concerns democracy and democratization: Should central bank independence from politics be safeguarded and in return monetary policy powers be reined in and subjected to strict judicial review (this appears to be the view of the FCC)? Or should the conduct of monetary policy – in recognition that monetary policy cannot be neatly separated from non-monetary economic policy – be “politicized” and become more transparent and inclusive.

Finally, policy considerations are heatedly debated: If the ECB has such powerful policy instruments at its disposal, might it/must it employ them to address pressing public concerns such as climate change, social inequality and structural imbalances between member states?  Suggestions for the (re-)deployment of monetary policy abound: to selectively support green industry; to engage in more outright monetary financing to support the budgets of member states; to start a programme of peoples’ QE, inter alia to promote social cohesion. Yet, can monetary policy make up for the “design flaws” of European monetary union with its separation of monetary policy (as an exclusive EU competence) from fiscal/economic policy (remaining largely a competence of the member states)? Can “more money” – even if directed with precision towards social objectives – be a solution to the current existential crises or does it fuel a growth spiral that is co-responsible for the social and ecological crises we are in?

While the ECB currently addresses some of these questions in its Strategy Review 2020, we wish to join the debate with this roundtable. Our aim is, ideally, to forge a transatlantic debate. We hope to address common concerns raised by central bank monetary policy and in particular quantitative easing – once considered unconventional monetary policy and today widely used by the ECB, the Fed and other central banks around the world. We also want to identify the specificities of ECB monetary policy that result from the particular institutional design of the European monetary union when compared, for example, to the United States system of government.


February 26, 2021
The Hegemony of Central Bankism and Authoritarian Neoliberalism as Obstacles to Human Progress and Survival
Jeremy Leaman, Loughborough University

February 18, 2021
Opening up ECB’s Black Box and Painting it Green- the Monetary Policy Mandate in the Age of New Challenges and Uncertainty
Agnieszka Smoleńska, European Banking Institute

February 10, 2021
The Distributive Impact of Central Banks’ Quantitative Easing Program
Brigitte Young, University of Münster

February 3, 2021
Money and the Debunking of Myths
Jamee K. Moudud, Sarah Lawrence College

January 25, 2021
Post-Crisis Central Banking and the Struggle for Democratic Oversight in Europe – a Trilemma and a Paradox
Sebastian Diessner, European University Institute and London School of Economics

January 18, 2021
The ECB, the climate, and the interpretation of “price stability”
Jens van’t Klooster, KU Leuven

January 12, 2021
Beneath the Spurious Legality of the ECB’s Monetary Policy
Marco Dani, University of Trento, Edoardo Chiti, Sant’Anna Scuola Universitaria Superiore Pisa, Joana Mendes, University du Luxembourg, Agustín José Menéndez, Universidad Autónoma de Madrid, Harm Schepel, University of Kent, Michael A. Wilkinson, London School of Economics

January 4, 2021
Rekindling Public Trust in Central Bankers in an Era of Populism
Annelise Riles, Northwestern University

December 28, 2020
Quantitative Easing, Quasi-Fiscal Power and Constitutionalism
Will Bateman, Australian National University


Link to Article



The Distributive Impact of Central Banks’ Quantitative Easing Program

February 10, 2021

Brigitte Young, University of Münster, Germany

An important and still contested issue is the introduction of unconventional monetary policies of central banks in high-income countries. Quantitative Easing (QE) was first introduced in Japan in the 1980s to stimulate the economy. In response to the financial crisis of 2007, the US Federal Reserve (FED) purchased longer-term securities (government bonds as well as mortgage-backed securities) from the open market to increase the money supply and expand economic growth. These purchases have the effect of expanding the quantity of assets in the balance sheets of central banks. QE is used when the interest rate is close to zero, and when the normal tools of monetary policy are no longer effective. Buying financial assets in large quantities adds new money to the economy in order to provide banks with more liquidity. When central banks purchase securities, it increases the demand for these assets, which in turn raises their price. Since bond prices and bond yields (interest rates) are inversely related, the interest rates fall as the bond price increases. As interest rates fall, banks are able to lend at easier terms to stimulate the economy by keeping credit markets functioning and interest rates low.[i]

Between 2008 and 2014, the FED enacted three QE programs. The Bank of England followed with QE between 2009 and 2014 and introduced it once again after the Brexit vote in July 2016. In contrast to these early introductions of QE, the European Central Bank (ECB) started the policy only in 2015. Recently, an extraordinary QE program, the Pandemic Emergency Purchase Program (PEPP) was implemented during 2020 to address the Covid-19 pandemic’s depressing effects on both the supply and demand side.[ii] The ECB recently signaled that it would expand its €1.35tn emergency bond-buying program for the next year to stem the ‘worrying’ fallout from the pandemic.[iii]  

The distributional impact of central bank policy in advanced countries has received little attention until recently. Only with the persistence of central banks interest rates at the zero lower bound and the consecutive switch of major central banks to unconventional monetary policy did distributional impacts of QE increasingly enter the policy and economic agenda. This is reflected in a rise of speeches and papers by central bank governors, central bank board members and affiliated researchers focusing specifically on the distributional impact of QE.[iv] Yet, there is considerable disagreement among experts in assessing the effectiveness of the QE programs.

Quantitative Easing of the ECB seems to have had a strong effect on the exchange rate, having weakened the euro-dollar exchange rate. It lowered the long-term interest rates and thus improved investment conditions for businesses, discouraged savings and lowered the yields on sovereign bonds. Yet, QE failed as a tool to increase inflation to the stated target of 2%. In addition, the fall in interest rates has reduced banks’ profitability, since their business model consists of turning short-term savings into long-terms loans. If long-term interest rates are low, banks make less money. Low interest rates have also led to virtually zero interest rate returns for deposit owners.[v]

Of particular concern is the role of QE in increasing inequality, although the impact of QE on wealth inequality is difficult to quantify. In response to the Fed’s announcement of QE, steep stock market rallies in equities occurred. This was the case in 2014, when the US stock market rose almost 20 percent since mid-October, twice as much as the US S&P 500.[vi]The same increase in equity prices happened after the ECB’s extension of QE in March 2016 when the ECB raised the amount of bond purchases from €60bn to €80bn, including also high-quality corporate bonds.[vii]

Equity prices were almost 90 percent higher in 2014 than in 2009 when QE commenced in the UK. Corporate bond prices are over 40% higher and government bond prices 15% higher. In the US, the numbers are 120%, 30% and 12% respectively. In other words, the wealth, as well as the income, would most probably have been materially smaller absent extra-ordinary monetary stimulus.[viii] After three rounds of QE, where the Fed purchased billions of bonds, the Fed’s balance sheet rose from $2.1 trillion to $4.5 trillion.[ix] 

While the increase in asset prices is not exclusively triggered by unconventional policy, nevertheless studies show that QE may have contributed to higher wealth inequality.[x] Central banks’ increased asset purchases have boosted asset prices. Given the uneven distribution of assets across private households and with higher-income households accumulating a disproportionate share of total assets, QE increases wealth inequality.[xi] However, as a caveat, there is much uncertainty linking QE to wealth inequality, since there are indirect effects such as a reduction of the unemployment rate and the increase in the labor income of the poorer segment of society.

Nevertheless, Ben Bernanke, the former Chair of the Federal Reserve, explicates a possible link between the increase of asset prices and inequality in a Brookings blog:   

The claim that Fed policy has worsened inequality usually begins with the (correct) observation that monetary easing works in part by raising asset prices, like stock prices. As the rich own more assets than the poor and the middle class, the reasoning goes, the Fed’s policies are increasing the already large disparities in wealth in the United States.[xii]

Bernanke refers to the asset price channel of QE which impacts asset prices. Bond purchases by the central bank increase the demand for and the prices of those assets. In addition, financial market actors might use the liquidity which the central banks provide to the market via its QE operations, to purchase other assets, e.g., equity or real estate.[xiii] Restored and increased asset prices improve the balance sheet of asset holders which are financial intermediaries, including banks, but also companies and private households. Stronger balance sheets of market actors in turn could encourage stronger credit supply by financial intermediaries and stronger credit demand by companies and private households.

Yves Mersch, a former member of the ECB‘s Executive Board, acknowledges that in times of exceptionally low interest rates and non-standard monetary policy measures there may be distributional effects, some resulting ‘in potential economic damage to some parts of society; and the potential for others’.[xiv] However, Mersch qualifies this intervention and notes that central banks are not charged with the task of addressing inequalities and are not responsible for economic justice for society as a whole. The clear mandate of the ECB is to maintain price stability over the medium term. The possible distributional side-effects are, according to Mersch, to be tolerated as collateral effects, and these non-standard measures should be temporary.[xv]

The asymmetric power of central banks might also partially account for the long-term trend in inequality. The most vulnerable groups of society are foremost squeezed during economic down-turns or periods with restrictive policy, but these groups are not lifted back up to their pre-crisis social and economic status during expansionary phases. The negative impact of the down-turn is not necessarily reversed. Janet Yellen, former Federal Reserve Chair, acknowledged the widening inequality and suggested that while the stock market rebounded, wage growth and improvements in the labor market have been slow, and the increase in the home prices has not fully restored the housing wealth lost by a large majority of households for which the home is their primary asset. Yellen invoked the ‘Great Gatsby Curve’ suggesting that greater income inequality is associated with diminished intergenerational mobility.[xvi]

As pointed out above, QE is not neutral in terms of distributional effects, neither in the short-term nor in the long-term. Accordingly, distributional impacts of QE should be of concern to central banks and be included in future academic research. Not least because inequality might reduce the operation of the monetary transmission channel, limit the multiplier effect of aggregate demand and hence dampen the expansionary effects of QE on growth.

One area which has received little attention in the literature is the different impact QE has on income and wealth inequality for women and men, and minority groups. Discovering an asset bias, a phenomenon which would show whether (white) men, the better educated, those with higher incomes, or those that own inheritance are more likely to benefit from an increase in the value of shares, bonds and mutual funds is a much-needed research topic. Such an analysis may demonstrate that wealth and income distribution are both correlated with the central banks’ QE programs in that unconventional monetary policy increases wealth inequality particularly in the higher income quintiles. For example, the top 10% of Americans own 84% of the country’s shares. The top 1% own about half. The bottom half of Americas own almost no stocks at all.[xvii]  In my present quantitative research relying on the results of the Household Finance and Consumption Survey (HFCS) of the ECB, I hypothesize that since the rich own more assets than the poor, unconventional monetary policy benefits the wealthier quintile in the eurozone countries (on average, comprised of more men) at the expense of the poorer strata of society (on average, comprised of more women).[xviii]   

While the role of money is that it is one of the most important channels in the transmission between monetary policy and household wealth, none of the central banks, affiliated researchers, or even economic gender experts have included the topic of gender and racial impacts in empirical studies, nor is the topic accounted for in monetary policy formulation or policy design. This theoretical and structural neglect of gender and racial impact in the design of monetary policy needs to be explored further in order to deepen our understanding of the operation of monetary policy, and in particular quantitative easing, to identify the different impacts on income and wealth inequality among different gender and minority groups, different countries and regions, and different economic structures.

[i] Liber8, Economic Information Newsletter, Quantitative Easing Explained. Research Library of the Federal Reserve Bank of St. Louis (April 2011).   

[ii]  Luigi Bonatti, Andrea Fracasso, Roberto Tamborini, Covid-19 and the Future of Quantitative Easing in the Euro Area: Three Scenarios with a Trilemma, European Parliament (September 2020) https://www.europarl.europa.eu/RegData/etudes/IDAN/2020/652740/IPOL_IDA(2020)652740_EN.pdf

[iii] Financial Times, ECB signals additional eurozone stimulus (November 27, 2020), p. 2

[iv] Yves Mersch, Monetary Policy and Economic Inequality, Keynote speech at the Corporate Credit Conference, Zurich (October 17, 2014). https://www.ecb.europa.eu/press/key/date/2014/html/sp141017_1.en.html  

[v] Maria Demertzis and Guntram B. Wolff, The Effectiveness of the European Central Banks’ Asset Purchase Programme, Bruegel Policy Contribution, Issue 2016/10.  https://www.bruegel.org/2016/06/the-effectiveness-of-the-european-central-banks-asset-purchase-programme/

[vi] Atkins, Ralph and Michael Mackenzie, Bonds: Caught in a debt trap. Financial Times, (28. January 2015).  p. 7. 

[vii] Financial Times, ECB cuts rates and boosts QE to ratchet up eurozone stimulus. (11 March 2016). pp. 1-2)

[viii] Haldane, Andrew G. Unfair Shares, Remarks at the Bristol Festival of Ideas Event. Bristol (21st May, 2014).

[ix] Yahoo!finance. The Fed caused 93 % of the entire stock market’s move since 2008: Analysis. https://finance.yahoo.com/news/the-fed-caused-93–of-the-entire-stock-market-s-move-since-2008–analysis-194426366.html

[x] Claes, Gregory, Zsolt Darvas, Alvaro Leandro and Thomas Walsh. The effects of ultra-loose monetary policies on inequality, Bruegel Policy Contribution, Issue 2015/09:1-23.

[xi]  Martina Metzger, Brigitte Young, No Gender Please, We’re Central Bankers: Distributional Impacts of Quantitative Easing, Berlin School of Economics and Law, Berlin, Working Paper No.136/2020. https://www.econstor.eu/bitstream/10419/214915/1/1692376071.pdf  

[xii] Ben Bernanke, Monetary policy and inequality (2015). https://brookings.edu/blogs/ben-bernanke/posts/2015/06/01-monetary-policy-and-inequality

[xiii] Epstein, Gerald, Montecino, Juan Antonio. Did Quantitative Easing Increase Income Inequality?  INET Working Paper No. 28 (October 2015).

[xiv] Mersch op., cit. 2014. 

[xv] Mersch ibid., p. 1

[xvi] Janet Yellen, Perspectives on Inequality and Opportunity from the Survey of Consumer Finances. Speech delivered at the Conference on Economic Opportunity and Inequality, Federal Reserve Bank of Boston, Mass. (October 17, 2014). https://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm

[xvii] Edward Luce, A dangerous reliance on the Fed. Financial Times. (4. January 2021).

[xviii] Brigitte Young, The impact of unconventional monetary policy on gendered wealth inequality. Papeles de Europa. 31(2) 2018: 175-185.