Former central banker Paul Tucker is the chair of the Systemic Risk Council, a Fellow at the Harvard Kennedy School, and author of Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State. 

LONG BIO

The ECB’s QE: The rule of law, democratic politics and incomplete contracts

I will say something briefly about three topics: whether the ECB was right to launch QE; how the transmission mechanism into nominal demand and so inflation might work, drawing on the Bank of England’s experience; and, most important, where on a spectrum of dismayed to applauding we should be about the almost year-long debate around the politics of QE.

Moody’s/Peterson Institute Conference, Frankfurt, Germany

Paul Tucker, Harvard Kennedy School and Harvard Business School

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I am very glad to be here in Frankfurt so soon after the ECB provided monetary stimulus to euro-area aggregate demand by launching quantitative easing (QE). This will work by purchasing government bonds in proportion to the ECB’s ‘capital key’, ie roughly proportional to each member country’s share of area-wide GDP.

I will say something briefly about three topics: whether the ECB was right to launch QE; how the transmission mechanism into nominal demand and so inflation might work, drawing on the Bank of England’s experience; and, most important, where on a spectrum of dismayed to applauding we should be about the almost year-long debate around the politics of QE.

I think the ECB was right to launch QE. For some considerable time the euro area has in my view faced a problem of deficient demand, in addition to needing structural reforms of various kinds. Even when, going back a year or so, the central (expected) outlook for inflation was reasonably thought to be positive, there must surely have been a critical probability mass below zero. In my view the public debate — as well as, perhaps, the Governing Council’s own deliberations — about the course of monetary policy would be materially helped if the ECB’s published forecasts for growth and inflation were explicitly probabilistic, bringing out the upside and downside risks to growth and inflation.

Over those twelve months or so, commentators and analysts have argued that buying German and French government bonds wouldn’t help the crisis-hit countries of the south. That line of argument betrays a fundamental confusion between, on the one hand, crisis management in and for the so-called ‘peripheral’ economies and, on the other hand, nominal demand management in the euro area as a whole in order to meet the inflation target (known as monetary policy). If one believed, as I amongst many others did, that there was deficient aggregate demand in the so-called ‘core’ and, thus, in the currency area as a whole, then more monetary stimulus was warranted. It is in that sense that, although introduced in unusual circumstances, the latest stimulus is regular monetary policy in the sense that it is designed to close the gap between aggregate demand and the economy’s productive capacity, reducing downward pressures on wage and price formation. Whether or not it is a mistake turns on macroeconomic judgments about the outlook for demand and inflation. At times, too little of the public