A safe asset for Eurozone QE: A proposal
Luis Garicano, Lucrezia Reichlin 14 November 2014
The ECB seems to be edging towards QE, but faces a quandary on what to buy. This proposal suggests that the ECB buy ‘Safe Market Bonds’. These would be synthetic bonds formed by the senior tranches of EZ national bonds combined in GDP-weighted proportions. The ECB would merely announce the features of the synthetic bonds it will purchase. The market would create the bonds in response to this announcement, thus avoiding new EZ-level institutions or funds.
As Europe moves closer to deflation, the ECB is gradually inching towards outright quantitative easing (QE) – increasing the monetary base through purchases of government bonds (Draghi 2014). But undertaking such purchases confronts a problem. There is no Eurozone ‘government bond’ to purchase. Were the ECB to purchase the debt of all member countries, it would end up with a large amount of debt on its balance sheet, making it impossible for a country to default without triggering very large redistribution.
Macroeconomic policy Monetary policy
Eurozone QE, Safe Market Bonds, ECB, quantitative easing, unconventional monetary policy, diabolic loop, doom loop, sovereign debt, safe assets, savings glut, risk weights, bank capital
Understanding the global turmoil: It’s the general equilibrium, stupid
Ricardo Caballero 21 May 2010
Are policymakers on track to prevent a repeat global crisis? This column says the answer is probably “no”. It argues that the current financial reform efforts are mostly aimed at the symptoms rather than the underlying illness. The fundamental problem in the current global macroeconomic and financial equilibrium is one of a shortage of safe assets.
Here we go again. Financial volatility is re-emerging, this time from the other side of the ocean. But in the current globalised environment the ocean isn’t wide enough to contain the contagion and fear.
- Will this rollercoaster ride end any time soon?
- Do policymakers (and Congress in particular) have the right diagnosis so we can hope that a cure is around the corner?
I fear the answer to both is no.
securitisation, global crisis, safe assets