Effectiveness of the ECB Programme of Asset Purchases: Where Do We Stand?

Large-scale asset purchase programmes are a form of monetary policy in which market interest rates are reduced by different amounts at different maturities – in particular lowering them at the long rates that affect investment and consumption decisions. They are intended to stimulate spending by increasing liquidity, raising asset prices, creating wealth effects, lowering borrowing costs and increasing investment spending.
The ECB’s expanded asset purchasing programme is too young to allow a final assess-ment of its impact or effectiveness. But the results so far are similar to those elsewhere, perhaps a little weaker.
The impact may be weaker because the programme is proportionately smaller than the US and UK programmes. It contains public sector asset purchases at its core, with two essential compliments (covered bond purchases, and asset-backed securities) that spread the effects to private sector behaviour to stabilise financial conditions, to provide higher quality collateral for loans, and reduce risk premia by region or sector. It is argued that these qualitative benefits are going to be more important than the quantitative results.
Nevertheless, damaged transmissions (from increased credit to new loans and spending) and debt deleveraging are the major impediments that remain. Various extensions of the ECB’s programme are possible: negative interest rates, “funds for lending”, fiscal coordination and helicopter money. They offer some scope, but have disadvantages. The most promising is the exchange rate channel. But this is a longer term proposition and requires structural reform to be self-sustaining.