THE EUROSYSTEM''S EXPANDED ASSET PURCHASE PROGRAMME: New evidence of domestic and international macroeconomic effects
21 Mar 2016
The Eurosystem's expanded asset purchase programme will help lift inflation towards the European Central Bank''s target and boost economic activity in the euro area. Its spillovers to the rest of the world are positive, notwithstanding the euro''s depreciation brought about by the programme. The effects tend to be stronger for countries that are more integrated with the euro area and that do not counteract the rise in inflation resulting from the programme via tighter monetary policies.
These are the findings of new research by Pietro Cova, Patrizio Pagano and Massimiliano Pisani, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016.
The authors evaluate domestic and international macroeconomic effects of the APP using a multi-country model of the world economy, featuring the euro area, the United States, Japan, China and a residual region labelled ''the rest of the world''. The study considers monthly purchases of 60 billion euro area long-term sovereign bonds by the euro area monetary authority, financed by injecting money into the economy, from March 2015 to September 2016. The results are as follows:
• If not for the APP, euro inflation would be around one percentage point lower after the first year. Within the same time frame, the APP would also bring an increase in euro area real GDP of about one percentage point.
• The boost to euro area aggregate demand would positively affect other countries'' exports towards the euro area, notwithstanding the euro exchange rate depreciation. Euro area imports decrease only when it is assumed that the exchange rate depreciation is immediately and fully passed through into the prices of euro area imported goods. In fact, the empirical evidence suggests that the exchange rate pass-through takes around four quarters to be completed.
• The APP''s effects on other world regions are expansionary, but limited. They depend on the regions'' degree of trade integration with the euro area: the rest of the world – which exhibits the largest bilateral trade flows with the euro area – would experience a GDP increase equal to around one tenth of that in the euro area.
• Spillovers are strongest in regions where monetary policy does not counteract the rise in inflation resulting from the APP. An accommodative monetary stance, which may be rationalised by the presence of generally subdued inflationary pressures and economic activity, would lift the expansionary spillover to around one quarter of the overall effects of the APP on the euro area''s GDP.
Alongside government bonds, the APP purchases include other securities (issued by European supranational institutions, asset-backed securities and covered bonds), which are not accounted for by the model.
The focus is also on the original duration of the APP. The programme was recalibrated in December 2015, extending the net purchases until the end of March 2017, or beyond if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its aim of achieving inflation rates below but close to 2% over the medium term. Moreover, the Eurosystem will also reinvest the principal payments on the securities purchased under the APP as they mature, for as long as necessary.
The researchers assume that in each country households hold a portfolio of assets consisting of money, short and long-term government bonds denominated in US dollars and euros and – for Japan, China and the rest of the world – in domestic currency. The assets provide liquidity services needed for consumption purchases. But they differ in the degree to which they provide these services, with money being the most liquid and thus the most effective asset in facilitating purchases.
When implementing the APP, the euro area central bank exchanges money for euro area long-term government bonds, causing an increase in their prices and a fall in their return. Households – particularly those in the euro area, whose portfolio share of euro area long-term bonds is relatively large – have an incentive to substitute money and other bonds for euro area long-term government bonds. The increased availability of money and the corresponding fall in long-term yields induces euro area households to increase consumption, stimulates investment in physical capital and depreciates the euro vis-à-vis the other major currencies.
Pietro Cova, Patrizio Pagano and Massimiliano Pisani (2015) ''Domestic and international macroeconomic effects of the Eurosystem expanded asset purchase programme'', Temi di discussione (Economic working papers) 1036, Bank of Italy, Economic Research and International Relations Area. Pietro Cova and Massimiliano Pisani are at the Bank of Italy. Patrizio Pagano is at the World Bank. The views expressed are those of the authors and do not reflect those of the Bank of Italy or the World Bank.