The two-dimensional feature of ECB monetary policy

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In the last 15 years, monetary policy in the euro area, as elsewhere, has developed a variety of instruments beyond the steering of short-term interest rates. This multi-instrument monetary policy has allowed central banks to control the position of the yield curve as well as its slope and to influence general financing conditions. New instruments designed by the ECB include forward guidance, asset purchase programmes, and targeted loans to banks.

When discussing exit from monetary easing today, the ECB has to decide not only on the timing and speed of exit, but also on the sequence. Indeed, it has been announced that a withdrawal from asset purchases will go first and interest rate increases will follow, which will have the effect of steepening the safe yield curve. 

Although this strategy has the desirable consequence of favouring the profitability of banks and insurance companies, it requires a fast rate of exiting from asset purchases…

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