Title page
Contents
ABSTRACT 2
LIST OF ABBREVIATIONS 5
EXECUTIVE SUMMARY 7
1. INTRODUCTION 8
2. PROSPECTS FOR INFLATION 11
2.1. Avoidable forecast errors? 12
2.2. Hardwired models? 14
2.3. Monetary policy driven by models with fixed long-term inflation (expectations) 15
3. ASSET PURCHASES VERSUS INTEREST RATES AND THE SEQUENCE OF POLICY NORMALISATION 19
3.1. The recent time path of Eurosystem sovereign bond purchases and stocks 19
3.2. The impact of asset purchases, reinvestments and stocks 21
4. POLICY NORMALISATON AND RISKS TO FINANCIAL STABILITY 22
4.1. The end of negative interest rate policies and bank profitability 22
4.2. The end of bond purchases and the risk of fragmentation 22
4.3. Bond purchases and spreads 23
4.4. Fiscal risks as a source of fragmentation? 24
5. CONCLUSION 27
REFERENCES 28
Figure 1. Development of international gas and oil prices, euro area headline and energy inflation 11
Figure 2. Timeline of monetary policy decisions during 2020-2022 12
Figure 3. Development of the HICP and HICP energy inflation 13
Figure 4. Market-based inflation measures - inflation-linked swap rates 17
Figure 5. Government bond purchases since January 2020 20
Figure 6. Eurosystem sovereign bond holdings since January 2020 20
Figure 7. Snowball effect on gross public debt, as a percentage of GDP at current prices 26
Boxes
Box 1. Details of the December 2021 monetary policy decisions 18
Box 2. The March 2020 episode 23