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The ECB’s balance sheet continues to contract


At the press conference following the European Central Bank’s (ECB) meeting of the Governing Council on April 3, 2014, ECB President Mario Draghi commented on the state of the European economy and the scope of possible policy responses: He said that, in light of an “overall subdued outlook for inflation” and the “broad-based weakness of the economy,” the Governing Council “is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.” In today’s meeting, the ECB reaffirmed the possibility of using unconventional instruments, if necessary, to achieve its mandate.

Understandably, European financial markets have been speculating that the ECB will soon begin purchasing assets. This policy action, commonly known as quantitative easing (QE), would increase the size of the ECB’s balance sheet, though not necessarily in the same manner as QE has increased the size of the Fed’s balance sheet. As Draghi noted, the purpose of implementing a QE-style monetary program would be to accelerate the pace of real GDP growth, which remains sluggish, and raise inflation, which remains about 1.5 percentage points below its 2% target rate. The chart, which shows the asset side of the ECB’s balance sheet, illustrates why some European economic analysts expect the ECB to soon put in place a QE program. Unlike the Fed’s balance sheet, which continues to increase, the ECB’s balance sheet—as measured by the asset side—has been contracting for almost two years. Since July 2012, the ECB’s balance sheet has declined from a little less than 3.2 trillion euros to about 2.2 trillion euros. Many economists have found this decline a little puzzling, given that the ECB’s balance sheet was contracting as Europe fell into a recession (see this presentation by St. Louis Fed President Bullard). Whether this policy will succeed as intended is another matter: U.S. economists continue to debate the effectiveness of the Fed’s QE programs.

How this graph was created: In FRED, enter “ECB Assets” in the search box. The data are in levels (no transformation).

Suggested by Kevin Kliesen

View on FRED, series used in this post: ECBASSETS


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