Macro Focus - The Three-Body Problem of Monetary Policy
The Three-Body Problem of Monetary Policy

  • Innovative use of QE, policy rates, and TLTROs will going forward be key tools for the ECB 
  • The monetary toolkit has expanded massively in the past decade; the focus will be on how the tools interact, which will offer more opportunities to fine-tune policy and manage side-effects 
  • Challenges to monetary policy will remain extraordinary  


European monetary policy has evolved a lot over the past decade. Next to negative interest rates, the European Central Bank added both quantitative easing and targeted long-term refinancing operations to its tool kit to both compensate for the lack of effectiveness of traditional interest rate policy and address specific issues in the financial system. The latest move, to a dual-rate system, is only in its beginning stages. The current tool kit provides ample manoeuvring space, and its potential is still not fully realised. However, the higher the complexity of the system, the more difficult it is to analyse and predict the outcomes and side-effects. The three main instruments of the ECB; QE purchases, targeted longer-term refinancing operations, and traditional policy rates, are not acting in a vacuum but interact with each other in the financial system, either reinforcing or dampening each other. From these interactions, the largest effects of monetary policy will emerge going forward.

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 For more information please contact

Vytenis Šimkus Vytenis.simkus@swedbank.lt +370 687 17870

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