On Monday, June 22, 2020, Philip Lane joined the Princeton Bendheim Center for Finance to discuss the ECB’s pandemic emergency purchase program (PEPP).
Lane is the Chief Economist of the ECB, a member of the ECB Executive Board, and a former Governor of the Central Bank of Ireland.
PEPP is different from previous EU QE measures in that its main goal is market stabilization. While ECB’s asset purchasing program (QE) objective is to fight the downside risk to the inflation, Lane says the main goal of PEPP is market stabilization. It’s also more flexible in how it can respond.
There’s lots of evidence that PEPP has contributed to market stabilization. According to several measures—including systemic stress (CISS), corporate bond spreads, the stock market, and 3-month Euribor rates—the EU has seen significant stabilization. Lane argues sovereign yields are an important indicator for the ECB because they are closely reflected in bank funding and passed onto households.
Without such aggressive intervention by the ECB and central banks, we would have seen a much bigger amplification of the pandemic shock driven by flight-to-safety capital flows. Still, he notes, national and EU fiscal responses are/will be essential. Of course, ultimately it is not always easy to tell whether macro fundamentals or multiple equilibrium frictions are driving re-allocations.
New data show that wholesale funding is fickle while retail funding remained stable. Domestic banks provided missing funding to national sovereigns. The big sellers in March were institutional investors, with a smaller share from insurance companies. They were selling bonds more than equity. National banks, in contrast, were net acquirers of debt. In March, the EU saw a typical sell-off of foreign assets across borders. In April, the pullback effect dissipated for both less and more vulnerable countries, indicating that these countries’ residents saw stabilization. See chart of cross-border portfolio investment flows by country.