European Quantitative Easing

Mario Draghi announced European Central Bank Quantitative Easing yesterday. The plan is to buy long term public bonds for 60 billion euros a month from March at least through September 2016. Draghi said the program could be extended if inflation of slightly below 2% isn’t achieved.

60 billion a month is slightly above analysts’ average guess (warning in Italian). The hint that the purchases might be extended should, in theory, be important. All in all the announced program is more than forecast.

Paul Krugman is, of course, totally on the story.

He looked at German inflation protected securities vs regular Bunds and calculates an 0.2% increase in expected annual inflation over then next 5 years. This confirms the impression that the program is bigger than expected. 0.2% more inflation (and so 0.2% lower safe short term real interest rates) will not have a large effect on investment. This is just the expected extra effect from the program being more aggressive than was guessed before it was announced.

Euro QE should cause the the Euro to depreciate. I fair use this graph from the Wall Street Journal. It shows an announcement effect which is not large enough to make a big difference (again the announcement effect is just the effect of the program being more aggressive than expected).

This is not a huge shift. It is a large but not huge decline by the standards of the past month

More generally, the fairly dramatic discussion of Euro QE yes or no, and huge or gigantic didn’t cause extaordinary volatility.

My view so far, is my usual view of non Japanese QE. Effects are of the expected sign, but not very big. The assets being bought are fairly close substitutes for money. Fiscal stimulus is still needed.