Putting Deflation First

The European Central Bank is moving, hesitantly but ineluctably, toward quantitative easing, because the threat of deflation – and the ineffectiveness of its previous measures – leaves it no choice. The question is whether the ECB will be able to move quickly enough.

CAMBRIDGE – The European Central Bank is moving, hesitantly but ineluctably, toward quantitative easing. The threat of deflation – and the ineffectiveness of its previous measures – leaves it no choice. The question is whether the ECB will be able to move quickly enough.

The ECB has already attempted to ease credit conditions by purchasing high-quality asset-backed securities. It has bought securities backed by cash flows from private-sector mortgages, so-called covered bonds, and it has floated the idea of buying corporate bonds and multilateral securities issued by the European Investment Bank.

But it is clear that this will not be enough. Supplies of private-sector securities are limited, reflecting the dominance of bank lending in Europe and depressed sentiment in securitization markets. Augmenting the supply of such securities will take time, which is not something European policymakers possess.

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