ECB prevented further eurozone deflation, BdF paper says

Researchers say inflation and GDP growth would have entered negative territory in 2015–17

The European Central Bank stopped the eurozone from suffering deflation from 2015–17, a working paper published by the Banque de France argues.

In Evaluating the macroeconomic effects of the ECB’s unconventional monetary policies, Sarah Mouabbi and Jean-Guillaume Sahuc look at data from the eurozone from 1999 to 2017.

The authors present a dynamic stochastic general equilibrium model, which features “shadow interest rates” derived from a term structure model. The authors write that the shadow rate “coincides with the policy rate in normal times and is free to go into negative territory when the policy rate is stuck at its lower bound”.

They find that without the ECB’s quantitative easing measures, the eurozone would have suffered a “substantial loss of output” after the immediate financial crisis, and then “a period of deflation from mid-2015 to early 2017”.

Without QE, year-on-year inflation in the eurozone from 2014–17 would have been on average 0.61% below its actual levels, they find. Average eurozone GDP growth over the same period would have been even more strongly affected, they say, falling 1.09% below its recorded levels.

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