Euro Area Policies: Selected Issues

IMF Staff Country Reports, July 19, 2023

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Euro Area Policies: Selected Issues

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Bibliographic details

• Published: July 19, 2023
• Series: IMF Staff Country Reports
• DOI: https://doi.org/10.5089/9798400248733.002

Executive summary and scope

• This Selected Issues paper highlights quantitative tightening (QT) by the European Central Bank (ECB).
• It uses evidence from the literature on the impact of central bank bond purchases and sales on bond yields, and the monetary policy stance, to outline a roadmap for reducing the Euro system’s bond holdings.
• The current tightening cycle provides an opportunity to revisit the ECB’s balance sheet policy.
• With inflation running above target, the monetary accommodation provided by the ECB’s bond holding is no longer necessary.
• The paper concludes that the ECB’s short term policy rates should be the main choice for adapting the monetary policy stance to changing circumstances and QT should proceed in a gradual, predictable manner as outlined by the ECB.

Key findings

• Quantitative tightening (QT) is central to the paper’s analysis and recommendations regarding the ECB’s balance sheet policy.
• Literature evidence is used to link central bank bond purchases and sales to bond yields and overall monetary stance.
• The paper emphasizes that, given inflation running above target, the accommodation from the ECB’s bond holdings is no longer necessary.
• The current tightening cycle is characterized as an opportunity to revisit and adjust the ECB’s balance sheet policy.

Policy recommendations and roadmap

• Primary instrument: ECB short term policy rates should be the main choice for adjusting the monetary policy stance to changing circumstances.
• QT approach: QT should proceed in a gradual, predictable manner as outlined by the ECB.
• Balance sheet objective: Reduce the Euro system’s bond holdings following the roadmap informed by the literature on policy impacts on yields and monetary stance.

Publication and metadata

• Publication date: July 19, 2023
• Pages: 18
• Volume: 2023
• Issue: 265
• Series: Country Report No. 2023/265
• DOI: https://doi.org/10.5089/9798400248733.002
• Stock No: 1EUREA2023002
• ISBN: 9798400248733
• ISSN: 1934-7685
• Subjects: Central bank policy rate, Financial institutions, Financial services, Financial statements, International organization, Monetary policy, Monetary stance, Public financial management (PFM), Securities, Unconventional monetary policies
• Keywords: app portfolio, bond supply net of ECB, C. Policy consideration, Central bank policy rate, ECB balance sheet, ECB Policy rate, Financial statements, Monetary stance, Securities, Unconventional monetary policies

Source: International Monetary Fund, Euro Area Policies: Selected Issues, IMF Staff Country Reports No. 2023/265 (July 19, 2023).

Content in this bundle

• Euro Area Policies: Selected Issues; IMF Country Report No. 23/265; June 29, 2023
  • Euro Area Policies: Selected Issues; IMF Country Report No. 23/265; June 29, 2023 (Markdown version)
  • Euro Area Policies: Selected Issues; IMF Country Report No. 23/265; June 29, 2023 (PDF)