SPEECH
Monetary policy in a pandemic: ensuring
favourable financing conditions
Speech by Philip R. Lane, Member of the Executive Board of the ECB, at the Economics
Department and IM-TCD, Trinity College Dublin
26 November 2020
Introduction
My aim in this speech today is to explain the role of monetary policy in the pandemic, with a natural
[1],[2]
focus on the ECB and the euro area. I will first review the monetary policy measures that we
have taken in response to the pandemic before highlighting some of the current economic and
financial challenges that confront the euro area. I will then explain why the current priority for
monetary policy is to ensure favourable financing conditions to support the economic recovery and
counteract the negative impact of the pandemic on the projected inflation path.
The ECB's monetary policy measures in 2020: a recap
The scale and nature of the pandemic shock called for an extraordinary policy response. The three
main tasks for the ECB since the onset of the pandemic have been: first, to stabilise markets;
second, to protect credit supply; and third, to neutralise the pandemic-related downside risks to the
inflation path. Addressing the first two challenges are high priorities, given that market instability
and/or a credit crunch would undermine the running of an effective monetary policy; meeting the
third challenge is central to delivering our price stability mandate.
In terms of our monetary policy measures, the combination of the already-low levels of our main
policy rates and our previously-installed forward guidance on the future path of interest rates
(which links the path of our policy rates to the robust convergence of inflation to our aim) has acted
as an automatic stabiliser through the adjustment of policy rate expectations - and hence the entire
spectrum of monetary conditions - to pandemic-related changes in the inflation outlook.
Since additional monetary policy measures were clearly necessary to meet the scale and special
nature of the pandemic shock, we introduced a comprehensive package of complementary
measures that acted along two main dimensions: (i) asset purchases; and (ii) liquidity operations.
For asset purchases, an extra €120 billion was added to the ongoing asset purchase programme
(APP) on 12 March and the pandemic emergency purchase programme (PEPP) was launched on
18 March; for liquidity operations, the main element was the revision of the structure and pricing of
the targeted longer-term refinancing operations (TLTRO III) programme. These flagship initiatives
were accompanied by a suite of supporting measures, including the easing of the collateral
framework along various dimensions.[3],[4] In parallel to the monetary policy measures, the
European banking supervision (Single Supervisory Mechanism) and national macroprudential
authorities also quickly implemented a host of countercyclical measures.
The PEPP and the easing of conditions under the TLTRO programme have been the two
cornerstones of our monetary policy response: their design and calibration are directly linked to the
evolution of the pandemic and its impact on the monetary transmission mechanism and the
economic outlook.
The PEPP plays a dual role of stabilising financial markets and contributing to easing the overall
monetary policy stance. The stabilisation function, which is facilitated by the ability to purchase
volumes in a flexible manner over time, across asset classes and countries has been successful in
addressing fragmentation risks, has provided a stabilising force for markets and has helped to
reverse the tightening in financial conditions that was observed earlier in the year, as illustrated by
the convergence of the euro area GDP-weighted sovereign yield curve to the overnight indexed
swap (OIS) curve, which is an important indicator of the euro area risk-free term structure (Chart
1).[5] Sovereign bond yields, in turn are central for determining the funding conditions of banks,
corporates and households across the euro area. Moreover, the PEPP eases the monetary policy
stance by extracting duration risk held by investors. By pushing down the medium-to-long end of
the yield curve, the PEPP also reinforces the impact of negative interest rates and forward
guidance on the path of policy rates.
Chart 1
Drivers of the euro area GDP-weighted 10-year yield
(percentage points)
Source: ECB calculations.
Note: The latest observation is for 24 November 2020.
In addition, the easing of the conditions governing the TLTROs has been crucial in warding off the
risks of a credit crunch. This effect was reinforced by an easing of collateral requirements to ensure
that banks could make full use of these operations. The TLTROs incentivise banks to lend to the
real economy. As shown in Chart 2, these operations have substantially supported the granting of
loans to the non-financial private sector, have been effective in easing terms and conditions on
bank lending and have helped keep lending rates near historic lows.
Evolution of expected use of TLTRO III funds
(share of respondents weighted by TLTRO III and bridge LTROs outstanding amounts)
Sources: ECB, euro area bank lending survey.
Notes: The four bars in the third column to the right measure the outstanding TLTRO III amounts in September
2020 distributed by the responses to the October 2020 BLS. The red bar measures the take-up of banks that
reported that they will use TLTRO funds to substitute market funding sources. The blue bar measures the same
take-up by banks that intend to use the funds for granting loans. The yellow bar reflects take-up by banks that
intend to use the funds for purposes other than substituting market funding or granting loans (government
securities, holding as cash, financing other financial entities, and others). The green bar reports the take-up by
banks that plan to allocate the funds to more than one purpose. The bars in the first column to the left measure
the outstanding TLTRO III amounts in December 2019 distributed by the responses to the January 2020 BLS.
The bars in the second column in the centre measure the outstanding TLTRO III amounts in March 2020 and the
amount of bridge LTROs distributed by the responses to the April 2020 BLS. Shaded areas report take-up of
banks that change their expected use of funds between survey waves.
The cost of monetary policy inaction
In assessing the contribution of monetary policy to countering the pandemic shock, a natural
benchmark is to calculate the adverse impact that would have materialised had monetary policy not
been responsive.
To calculate the alternative path the economy would have taken in the absence of our monetary
policy measures, we can construct constellations of financial conditions that would have
materialised in the absence of our monetary policy actions, and then feed these counterfactual
financial conditions into macroeconomic models.
A first approach to calculating counterfactual financial conditions is to employ pre-pandemic impact
estimates of past monetary policy recalibrations in order to calculate by how much higher, say,
average yields would have been in the absence of monetary policy action.
Counterfactual analysis by ECB staff based on this approach suggests that, absent our monetary
policy measures, euro area output would be 1.3 percentage points lower and the annual inflation
rate would be 0.8 percentage points lower by 2022 in cumulative terms (Chart 3).[6]
Estimated impact of the ECB's decisions since March 2020 on the central tendency of
inflation and economic activity
(percentage points)
Source: ECB calculations.
Notes: The estimated impact via a suite of models refers to the average across a set of models used by the
Eurosystem for policy simulations, a BVAR model (Rostagno, M., Altavilla, C., Carboni, G., Lemke, W., Motto, R.,
Saint Guilhem, A. and Yiangou, J. (2019), "A tale of two decades: the ECB's monetary policy at 20", Working
Paper Series, No 2346, European Central Bank), the NAWM-II model, and the ECB-BASE model.
These calculations are based on estimated elasticities of financial conditions to policy impulses that
are obtained using data generated under calm market conditions: as a result, the impact estimates
are typically moderate in size. It follows that this first approach to quantifying the effects of our
policies is likely to underestimate by a wide margin their true effect under the macro-financial
conditions generated by the extraordinary pandemic shock.
A more realistic assumption for constructing counterfactual financial conditions is to recognise that,
in the event of policy inaction, financial markets - which were already highly destabilised - would
have gone into a tailspin, sending the economy into a meltdown.
In the type of macroeconomic models that central banks typically use for simulation and policy
analysis, it is challenging to reflect the role of monetary policy measures in providing a credible
backstop against adverse tail risks - such as an arrest in the flow of credit to the economy and
acute financial instability.
However, building on recent advances in the macro-econometrics of estimating the impact of
financial tail risks, preliminary results by ECB staff indicate that the ECB's removal of the financial
tail risk associated with the pandemic ensured a degree of support to growth that is several times
larger than the impact derived by the more limited calculation shown in Chart 3.[7],[8] In particular,
as Chart 4 shows, econometric analysis that quantifies the impact of a tightening in euro area
financial conditions - not only on the mean of output growth but also on different parts of its
empirical distribution through quantile regression - shows a negative impact on activity that is
several times larger when the economy is experiencing headwinds than in a situation in which a
tightening occurs during better economic times.[9] ECB analysis also finds that our measures have
been crucial in preserving the flow of credit to the economy and preventing disruptive financial
instability.[10]
Chart 4
Impact on output of a tightening of credit conditions under different states of the
economy
(year-on-year percentage changes)
Source: ECB calculations.
Notes: The chart shows the response of real GDP growth to a tightening in financial conditions (one standard
deviation) measured through a financial conditions index. The right panel shows the impact across quantiles of
the GDP distribution.
Economic and financial challenges
While the recent news on vaccines is very welcome and reduces the likelihood of the most severe
scenarios, the current surge in infections and the re-imposition of containment measures serve as
warning signals that the recovery path will still be long and fraught with risks. Economic
developments are likely to be unsteady and uneven across countries and sectors for some time to
come and remain subject to elevated uncertainty.
As Chart 5 shows, the services sector is clearly bearing the brunt of the pandemic, especially
those services industries (including travel, tourism and entertainment) that are most affected by
social distancing and containment measures. Chart 6 shows that the impact of the pandemic also
varies across countries, in line with differences in the relative importance of the services sector and
available policy space.[11]
Chart 5
Sectoral decomposition of GDP
(quarter-on-quarter percentage change, percentage point contributions)
Sources: Eurostat and ECB staff calculation.
Notes: Data for the third quarter of 2020 are based on Germany, France, Spain and the Netherlands. The latest
observation is the third quarter of 2020.
Chart 6
GDP growth rates across countries
(year-on-year percentage change)
Chart 7 shows that, despite the pandemic-related decline in hours worked and earnings, the
disposable incomes in the household sector have been largely protected by countervailing fiscal
measures. In terms of composition, households in the lower portion of the income distribution have
been most affected by the pandemic (Chart 8). However, the results of the ECB's pilot Consumer
Expectations Survey (CES) confirm that these households are receiving a higher share of
pandemic-related government support. Since, as is shown in Chart 9, lower-income households
also face greater liquidity constraints and exhibit higher marginal propensities to consume, fiscal
support for this group is especially important from a macroeconomic perspective.
The elevated uncertainty about future employment and wage dynamics (and, more generally,
uncertainty about the wider implications of the pandemic) is leading many households to exercise
caution in their consumption behaviour. This has led to very high savings rates especially among
the higher-income cohorts (Chart 10 and Chart 11).[12]
Chart 7
Disposable income and consumption
(year-on-year percentage change, percentage point contributions)
Sources: Eurostat and ECB staff calculations.
Note: The latest observation is for the second quarter of 2020.
Chart 8
Decline in hours worked and government support by income percentiles
Source: ECB pilot Consumer Expectations Survey (CES) - June 2020 wave.
Note: All reported numbers are aggregated using individual household weights.
Chart 9
Liquidity constrained households by income percentiles
(x-axis: income percentiles, y-axis: percentage of respondents)
Source: ECB pilot Consumer Expectations Survey (CES) - June 2020 wave.
Note: All reported numbers are aggregated using individual household weights.
Chart 10
Private consumption and consumer confidence in the euro area
(year-on-year percentage change, percentage balance)
Sources: European Commission Directorate-General for Economic and Financial Affairs, Eurostat and ECB.
Note: The latest observation is for the second quarter of 2020 for consumption and November 2020 (flash
estimate) for consumer confidence.
Chart 11
Household savings, deposits, loans and currency in circulation
(change since end-2019, percentage points of disposable income)
Sources: European Commission Directorate-General for Economic and Financial Affairs, Eurostat and ECB.
Notes: Change since December 2019 for deposits, loans, and currency in circulation and since the fourth quarter
of 2019 for the savings rate. Loans to households are reported with an inverted sign. The contribution of currency
flows should be considered an upper bound, as a breakdown by holding sector is not available. The latest
observation is for October 2020 for deposits, loans and currency in circulation and the second quarter of 2020 for
the saving rate.
In relation to business investment, firms are likely to postpone or cancel some of their capital
expenditure plans against a background of heightened uncertainty about future demand for their
products, spare capacity and weakened balance sheets (Chart 12). So far, supportive policies
such as loan guarantees and moratoria, together with capital relief provided by supervisory
authorities, have also been effective in averting a liquidity crisis, as indicated by the sharp
improvement in the quick ratio - a measure of a firm's ability to meet its short-term obligations with
its most liquid assets (Chart 13). This has also allowed firms to finance working capital and
compensate for diminished revenues, which has been fundamental for heading off a wave of
insolvencies and permanent damage to productive capacity, as well as protecting jobs.[13] At the
same time, firms have been taking on more debt, as reflected in leverage ratios (Chart 14). The
evidence suggests that firms entering the last financial crisis with a higher leverage ratio
experienced a sharper decline in investment.[14] This points to the risk that cumulated leverage
might weigh on business investment during the post-pandemic recovery phase.
Chart 12
Industrial confidence and investment in machinery and equipment
Sources: European Commission Directorate-General for Economic and Financial Affairs and ECB.
Notes: Industrial confidence is de-meaned using the sample period 1999-2020. The latest observation is for the
second quarter of 2020 for investment in machinery and equipment and the fourth quarter of 2020 for industrial
confidence.
Chart 13
The quick ratio of firms
(median)
Sources: Standard & Poor's and ECB staff calculations.
Notes: The latest observation is for the third quarter of 2020. The quick ratio is defined as total cash and short-
Chart 14
Leverage ratio of firms
(percent, median)
Sources: Standard & Poor's and ECB staff calculations.
Note: The latest observation is for the third quarter of 2020
Fiscal policy is in the best position to differentiate and channel economic support to where it is
needed most. Fiscal policy also has an important role to play as a driver of aggregate demand. It
follows that there is a clear lead role for fiscal policy in driving overall demand and addressing
sectoral asymmetries.[15] This is even more the case under current conditions, since the effects of
decisive and well-targeted fiscal action will likely prove to be stronger than usual. In particular,
fiscal transfers in normal times are associated with only-limited effects on output, but these
constitute a powerful instrument when granted to liquidity-constrained households or struggling
firms in the current environment.[16] Moreover, the pursuit of fiscal support for the economy and an
accommodative fiscal policy are facilitated by the knowledge that there is light at the end of the
tunnel.
The risk of an adverse real-financial feedback loop
The ruling out of adverse feedback loops between the real economy and financial markets is a
central task for policy makers. A tightening in funding costs or worsening liquidity positions have so
far been forestalled by the prompt policy reaction, and banks, in turn, have been able and willing to
meet the strong demand for liquidity over the course of the pandemic.
However, there are some worrying signals in recent survey data. The October euro area bank
lending survey (BLS) reports a broad-based tightening of credit standards that banks attribute
primarily to the risks underlying the macroeconomic environment and a deterioration in borrower
creditworthiness (Chart 15). The BLS also shows that the scaling back of investment plans has
been an important source of the decline in credit demand in the last quarters (Chart 16). A similar
message is also provided by the latest Survey on the Access to Finance of Enterprises in the euro
area (SAFE): SMEs expect the availability of external and internal sources of finance to deteriorate
(Chart 17).
Chart 15
Changes in credit standards applied to the approval of loans or credit lines to
enterprises and contributing factors
(net percentages of banks reporting a tightening of credit standards and contributing factors)
Source: ECB (October 2020 euro area bank lending survey).
Notes: "Actual" values are changes that have occurred, while "expected" values are changes anticipated by
banks. Net percentages are defined as the difference between the sum of the percentages of banks responding
"tightened considerably" and "tightened somewhat" and the sum of the percentages of banks responding "eased
somewhat" and "eased considerably". The net percentages for responses to questions related to contributing
factors are defined as the difference between the percentage of banks reporting that the given factor contributed
to a tightening and the percentage reporting that it contributed to an easing. "Cost of funds and balance sheet
constraints" is the unweighted average of "costs related to capital position", "access to market financing" and
"liquidity position"; "risk perceptions" is the unweighted average of "general economic situation and outlook",
"industry or firm-specific situation and outlook/borrower's creditworthiness" and "risk related to the collateral
demanded"; "competition" is the unweighted average of "competition from other banks", "competition from
nonbanks" and "competition from market financing". The net percentages for the "other factors" refer to further factors
which were mentioned by banks as having contributed to changes in credit standards, currently mainly related to
the policy interventions in response to the COVID-19 pandemic. The latest observation is for the third quarter of
2020 for actual credit standards and the fourth quarter of 2020 for expected credit standards.
Chart 16
Changes in demand for loans or credit lines to enterprises and contributing factors
(net percentages of banks reporting an increase in demand and contributing factors)
Source: ECB (October 2020 euro area bank lending survey).
Notes: "Actual" values are changes that have occurred, while "expected" values are changes anticipated by
banks. Net percentages for the questions on demand for loans are defined as the difference between the sum of
the percentages of banks responding "increased considerably" and "increased somewhat" and the sum of the
percentages of banks responding "decreased somewhat" and "decreased considerably". The net percentages for
responses to questions relating to contributing factors are defined as the difference between the percentage of
banks reporting that the given factor contributed to increasing demand and the percentage reporting that it
contributed to decreasing demand. "Other financing needs" is the unweighted average of "mergers/acquisitions
and corporate restructuring" and "debt refinancing/restructuring and renegotiation"; "use of alternative finance" is
the unweighted average of "internal financing", "loans from other banks", "loans from non-banks",
"issuance/redemption of debt securities" and "issuance/redemption of equity". The latest observation is for the
third quarter of 2020 for actual demand and the fourth quarter of 2020 for expected demand.
Chart 17
Change in the expectations of euro area enterprises regarding the availability of
financing
Source: ECB (Survey on the Access to Finance of Enterprises in the euro area).
Note: "Actual availability" refers to the period from April to September 2020 and "expectations" refers to the
period from October 2020 to March 2021.
Taken together, the BLS and SAFE surveys signal some risk of a mutually-reinforcing adverse
loop. In one direction, banks may view the dwindling loan demand as a negative signal about the
state of the economy. In the other direction, firms may see their concerns about the future
prospects for the macroeconomic situation confirmed by a tightening of borrowing conditions.
Furthermore, this adverse interaction would be reinforced if household spending were to weaken
and thereby were to further dampen firm prospects.
Another type of adverse real-financial feedback loop under pandemic conditions consists of the
self-reinforcing nature of a sub-optimal fiscal-financial interaction process by which fiscal policy
insufficiently responds to the pandemic shock in fear of triggering an unwarranted tightening of
funding conditions. In a high-multiplier environment, this equilibrium could be self-reinforcing since
the associated deterioration in the macro-financial environment could indeed validate an increase
in sovereign risk premia. By contrast, the positive macro-financial impact of a vigorous fiscal
response can reconcile the twin phenomena of an increase in fiscal deficits and a decline in
sovereign yields.
It therefore remains vital for fiscal and monetary policymakers to guard against the risks of these
financial amplification channels.
Ensuring favourable financing conditions
At our October monetary policy meeting, we announced that, on the basis of a thorough
assessment of the economic outlook and the balance of risks surrounding it, we will recalibrate our
instruments, as appropriate, to respond to the unfolding situation and to ensure that financing
conditions remain favourable to support the economic recovery and counteract the negative impact
of the pandemic on the projected inflation path.
Ensuring favourable financing conditions to support the economic recovery and counteract the
negative impact of the pandemic on the projected inflation path is essential for several reasons.
First, the commitment by the central bank to ensure favourable financing conditions supports
confidence levels among consumers, firms, financial intermediaries and governments.
Second, this commitment also reduces the likelihood of the materialisation of the adverse
realfinancial doom loops outlined above. In particular, the emergence of self-fulfilling trajectories by
which borrowers and lenders pull back in fear of a tightening of financial conditions is less likely if it
is commonly understood that market disruptions will trigger central bank intervention.
Third, since it is clear that considerable fiscal support (at both EU and national levels) remains
necessary for as long as the pandemic limits the normal operation of the economy and in order to
underpin the post-pandemic recovery phase, monetary policy must act both to facilitate the
necessarily-expansive fiscal stance and to minimise the crowding-out of private sector activity that
would occur if high levels of public borrowing were transmitted to an increase in sovereign yields.
Fourth, while the arrival in the coming weeks and months of further positive signals about progress
in the rollout of vaccine treatments would certainly be highly welcome, these "news shocks" might
be more quickly absorbed by financial markets than by households and firms. Accordingly, it is
essential that the macroeconomic recovery is not derailed by a premature steepening of the yield
curve.
Finally, ensuring favourable financial conditions is central to restoring inflation momentum and
ensuring that inflation expectations are guided by the commitment of the central bank to counter
the negative pandemic shock to the inflation process and secure convergence towards the inflation
aim over the medium term. Chart 18 shows the challenge for inflation stabilisation in stylised form.
[17]
Before the onset of the pandemic (time t), inflation was expected to rise gradually towards the
inflation aim ("π*") following the "AD" path (the bold blue line). The pandemic has resulted in
disinflationary pressures, with the downward impact of greater economic slack outweighing any
inflationary pressures from supply constraints. In the chart, this negative shock to the inflation
outlook is represented by the downward shift in the expected path of inflation from "A" to "B".
Chart 18
The projected inflation path
Source: ECB.
Notes: "AD" (the blue line) represents the expected inflation path before the pandemic shock. The initial negative
impact of the pandemic shock - in the absence of additional monetary policy accommodation - is captured by the
downward shift in the expected path from "A" to "B". The "BE" path (the yellow line) illustrates a transition path of
inflation that is even lower than originally envisaged. By providing additional monetary policy accommodation, the
central bank can aim towards the upper region of the "BCDE" zone, so that the adjustment is closer to the "BCD"
path.
Tolerating a longer phase of even lower inflation (illustrated by the yellow "BE" path in Chart 18)
than originally envisaged would be costly and risky. First, it would imply a weaker recovery of
consumption and investment, as a result of higher expected real interest rates. Second, it would
contribute to a downward drift in inflation expectations that might become entrenched. The risk to
inflation expectations is especially relevant in the context of the euro area, since inflation has
already been below target for a prolonged period. In this context, it is essential that inflation
expectations are anchored by the commitment of the central bank to offset the negative pandemic
shock to the inflation path and ensure convergence to the inflation aim over the medium term.
Under these conditions, the first challenge in delivering the medium-term inflation aim is to
reconnect inflation to its pre-pandemic projected path. This means boosting inflation momentum
towards the upper part of the "BCDE" area (the grey shaded area), so that the adjustment
approaches the "BCD" path. By setting the monetary stance at the appropriate level to deliver the
financial conditions required to offset the pandemic shock to inflation, the underlying inflation
trajectory will be restored. In turn, this also serves to underpin the formation of inflation
expectations in a manner that is consistent with meeting the medium-term inflation aim.
Looking beyond the immediate task, even once the disinflationary pressures caused by the
pandemic have been sufficiently offset, the second challenge will be to ensure that the
postpandemic monetary policy stance will deliver the timely and robust convergence of inflation to our
medium-term aim. In this context, our in-progress strategy review will help to shape the future
course of our monetary policy.
Conclusion
The pandemic constitutes a multi-phase challenge for monetary policy. In the initial weeks of the
pandemic in spring 2020, the top priority was clearly to stabilise markets. With the ongoing
interruptions to economic activity throughout 2020 and running into 2021, monetary policy
continues to have a clear role to play in ensuring the preservation of favourable financial
conditions. This will remain an essential priority even in the post-pandemic phase, given that the
macroeconomic hit from the pandemic is likely to persist even after medical solutions have been
rolled out. Only by ensuring appropriately-favourable financial conditions will the full economic
recovery be assured and, by countering the negative impact of the pandemic on the projected
inflation path, will robust convergence to our medium-term inflation aim be copperfastened.
[1]
I am grateful to Krzysztof Bankowski, Giacomo Carboni, Maarten Dossche, Marien Ferdinandusse, Fédéric Holm-Hadulla,
John Hutchinson, Danielle Kedan, Nick Ligthart, Arthur Saint-Guilhem and Roberto De Santis for their contributions to this
speech.
[2]
See also Lagarde, C. (2020), "Monetary policy in a pandemic emergency", keynote speech at the ECB Forum on Central
Banking, 11 November; Lane, P. R. (2020), "Understanding the pandemic emergency purchase programme", speech at the
Princeton BCF Covid-19 Webinar Series, 22 June; Lane, P.R. (2020), "The pandemic emergency: the three challenges for the
ECB", speech at the Jackson Hole Economic Policy Symposium, Federal Reserve Bank of Kansas City, 27 August; Lane, P. R.
(2020), "The ECB's monetary policy in the pandemic: meeting the challenge", speech at the 62nd NABE Annual Meeting, 6
October.
[3]
For a full list of ECB measures in response to the pandemic, see Chart 4 in Lane, P. R. (2020), "The ECB's monetary policy
in the pandemic: meeting the challenge", speech at the 62nd NABE Annual Meeting, 6 October
[4]
See also de Guindos, L. and Schnabel, I. (2020), "Improving funding conditions for the real economy during the COVID-19
crisis: the ECB's collateral easing measures", blog post, 22 April.
[5]
See also Lane, P. R. (2020), "The market stabilisation role of the pandemic emergency purchase programme", ECB blog
post, 22 June.
[6]
To arrive at these estimates, a suite of models is deployed. This approach reflects the uncertainty about the most
appropriate model representation of the monetary transmission, which is particularly acute when the monetary impulse is
imparted through unconventional tools such as asset purchase programmes. Adopting such a broad-based modelling
approach increases the robustness of the estimates.
[7]
See Lane, P.R. (2020), "The ECB's monetary policy response to the pandemic: liquidity, stabilisation and supporting the
recovery", speech at the Financial Center Breakfast Webinar organised by Frankfurt Main Finance, 24 June.
[8]
A recent Federal Reserve study makes further progress towards the construction of counterfactuals that are more realistic
when the starting conditions are extremely fragile: see Kiley, M. T. (2020), "Pandemic Recession Dynamics: The Role of
Monetary Policy in Shifting a U-Shaped Recession to a V-Shaped Rebound", Finance and Economics Discussion Series
2020083, Board of Governors of the Federal Reserve System. Kiley illustrates how effective US monetary policy has been in
responding to the pandemic and, in doing so, preventing a V-shaped rebound from morphing into a deep U-shaped recession.
The paper shows how the sharp increase in financing conditions at the outset of the pandemic were assuaged by a QE
programme that eased balance sheet constraints on financial intermediaries, which in turn improved overall financial
conditions. The study also shows t