Economists’ roundtable on the euro zone: QE is no silver bullet

Posted: November 6, 2014 in economy
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Continuing our discussion of QE and the euro zone is Demosthenes Tambakis of the University of Cambridge. The other contributions to the roundtable are here, here and here. 

One could list several reasons why full-blown quantitative easing (QE) cannot save the euro.Below I outline three, each working at different timeframes.First, in the short term falling oil prices are likely to cause a further round of deflationary pressure. That is because favourable supply shocks tend to be recessionary when constrained by the zero lower bound of nominal interest rates, just as adverse ones are likely to be expansionary. Falling input prices results in lower expected inflation, driving up short-term real interest rates as the policy rate cannot adjust. Hence, the ECB’s timing occurs at the wrong point in the global oil and commodity cycle: adopting full-blown QE now may amplify deflationary tendencies. Second, in the medium term the euro-zone banking system remains very fragile compared to America’s, and no amount of QE can fix that. If a contagious banking crisis is to be avoided, the 5% leverage ratio being implemented in America will soon have to be adopted by systemically important European banks whose ratios stand closer to 3%. In that respect, the recent bank …

via Economic Crisis


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