Recently, the president of European Central Bank (ECB), Mr Mario Draghi, announced that he is thinking of applying Quantitative Easing (QE) within the Eurozone. Assume that you are a member of the ECB board of governors.
This essay deals with the economic and financial aspects, why Mr Mario Draghi is willing to make use of Quantitative Easing, as well as pointing out the potential advantages and disadvantages of this monetary policy and analysis of Nash Equilibria.
A1) In your view, what could be the reasons behind this decision?
Recently, the president of European Central Bank (ECB), Mr Mario Draghi, announced that he is thinking of applying Quantitative Easing (QE) within the Eurozone. Quantitative Easing is a monetary…show more content… The main objective of Mario Draghi is to inject money directly into the euro-zone economy; hopefully this will boost the economies in the Eurozone if the target of 2% inflation is met. Essentially, if the inflation rate is above 2%, then the Bank will have to reduce the pace of spending and decrease the inflation in order to maintain the 2% criteria. In comparison, if the inflation is below the minimum percentage, it decreases the bank rate to the extent of boost of inflation and spending.
Conversely, on behalf of a member of the ECB board of governors, applying quantitative easing within the Eurozone is seen as a very unbalanced approach, unbalanced approach in terms of effecting financial activities and may be beneficial for some countries in the Eurozone. Nevertheless, the Germans may see Quantitative Easing as an ineffective monetary policy regarding that, if the European Central Bank (ECB) purchase governments or corporate bonds from high debt countries then the “German taxpayers will face a risk of having to foot the bill. This occurs if one or more of these countries default on their debt. Also, it will create a loss on the balance sheet of the ECB. The other member countries in the euro zone, especially Germany, will then have to step in to cover the loss” (De Grauwe, 2015). Mario Draghi believes that the programme of bond buying is an important financial approach to circumvent the Eurozone from a deflationary situation. Whereas, the Germans fear