Fiscal capture at the ECB
By using all the means at its disposal to support potentially debt-distressed member states, the European Central Bank is not merely serving as a market maker of last resort. Rather, it is engaged in fiscal-support operations, potentially to the detriment of its mandated objectives.
Willem H Buiter
LONDON – Since the second quarter of 2021, inflation in the United Kingdom, the United States, and the eurozone has far exceeded their central banks’ 2 per cent target. This surge could well be explained by the unexpected severity and duration of the Covid-19 pandemic, the fallout from Russia’s war in Ukraine, and repeated errors of judgment by the Bank of England, the US Federal Reserve, and the European Central Bank.
But another possible explanation is that monetary policy has been subject to fiscal dominance or fiscal capture. In this interpretation, major central banks have engaged in aggressive low-interest-rate and asset-purchase policies to support their governments’ expansionary fiscal policies, even though they knew such policies were likely to run counter to their price-stability mandates and were not necessary to preserve financial stability.
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