The European Central Bank (ECB) issued a statement after its June 2019 meeting on monetary policy that
Question:
The European Central Bank (ECB) issued a statement after its June 2019 meeting on monetary policy that contained the following:
The interest rate on the deposit facility will remain unchanged at . . . -0.40%. . . . The Governing Council intends to continue reinvesting, in full, the principal payments from maturing [long-term government] securities purchased under the asset purchase programme for an extended period of time.
a. Why was the interest that the ECB paid banks on the banks’ deposits negative?
b. Why had the ECB been purchasing long-term government securities? What might the ECB have done instead of using the funds from maturing securities to buy new securities? What would have happened to the size of the ECB’s balance sheet if it had followed this alternative policy?
c. Based on the ECB’s statement, do you expect that the inflation rate was above or below the ECB’s inflation target? Briefly explain.
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