Paul De Grauwe and Yuemei Ji — Fiscal implications of the ECB’s bond-buying programme

The monetary-fiscal policy connection is under scrutiny by the German Constitutional Court in the context of the ECB’s OMT bond-buying programme. This column argues that most analyses are deeply flawed by the misapplication of private-company default principles to the central bank. ECB bond-buying transforms public bonds into monetary base, and sovereign-default risk into inflation risk. The real question is: What is the non-inflationary limit to money-base expansion? This depends upon the economic situation and is much higher in the current liquidity-trap setting.

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Fiscal implications of the ECB’s bond-buying programme
Paul De Grauwe, Professor of international economics, London School of Economics and Yuemei Ji, Economist, LICOS, University of Leuven

Voices of reason in Europe.

This is a keeper. Not perfect, but close enough. A bit lacking in the case of explaining the money multiplier with clarity. A bit Krugmanesque there, and still confused. Following Friedman and Schwartz, they think that money is exogenous. That's a disappointing close after getting off to a strong start. But overall a huge improvement over mainstream fare over there. B+