Thread by @R2Rsquared

** The past and present of QE by the ECB

The German constitutional court ruling from ten days ago has gotten a lot of attention for its legal and political implications. Here is my take on the economics from reading the ruling.
[1/13]
bit.ly/2Z6FPGK

Most of the ruling is criticisms by the German court (GFCC) of the Court of Justice of the EU (CJEU), and defenses of the GFCC imposing its power. The political & legal implications are serious. The ECB got caught in the no-man's land of this fight.
2/13
on.ft.com/2zLsPfm

The main economic argument is that QE ignored the principle of proportionality. Some have ridiculed its application: the Treaty says the primary goal is price stability giving it a disproportionate weight. I disagree, I think the German court is right
3/13
bit.ly/2XfAiLN

Imagine QE brought inflation closer to the target by 0.01% but caused unemployment of 30%. The Treaty tells the ECB to be conservative in Rogoff sense, a targeter with strong weights in Svensson sense. It does not tell it to be an inflation nutter
4/13
bit.ly/36fRHYR

This bar is easily met. QE in general and the PSPP maybe had:
1) little effect on inflation or anything else
2) some effect on inflation but little else
3) some effect on inflation and on unemployment, financial stability, fiscal burden
My view is (ii), should write a survey
5/13

But, imho, theory and evidence *strongly* reject the view that QE had both a small effect on inflation and very large effects on other economic variables. Given the Treaty's primacy to price stability, then QE was clearly legally proportional.
[6/13]
bit.ly/2WZPc8F

2nd point by the Court is that the ECB didnt show it had considered proportionality of measures. But the Court seems to only consider governing council statements. The ECB has put out hundreds of speeches, bulletins, ..., discussing trade-offs.
[7/13]
bit.ly/3fYiqxw

Again bar is low. The ECB, imho, should welcome all requests to explain its actions. (Not macho attitudes of refusing to respond.) Send thick binders with the documents where it discussed tradeoffs to Bundesbank. Ask them to forward to German court.
8/13
bit.ly/2X0rkSh

That is the heart of the economics. ECB easily wins on the econ. Past QE (PSPP) is legal.
(Both courts also spend pages confused about whether holding the bonds to maturity implies monetary financing. No, it doesn't, holding to maturity is irrelevant)
9/13
bit.ly/3cCKFQ7

But present QE is in danger. The GFCC interprets the CJEU ruling on PSPP as having defined *necessary conditions* for QE to be legal. It even picks two of them "the purchase limit of 33% and the distribution of purchases according to the European Central Bank’s capital key"
10/13

The GFCC writes: "It is by now established case-law of the Federal Constitutional Court that the review of a programme for the purchase of government bonds may, in principle, refer to the “safeguards” set out by the CJEU in its Gauweiler Judgment." If so, PEPP is illegal
[11/13]

But the EU court decision was clear: these are sufficient, not necessary conditions. The German court affirms as new "established case law" what imho is a misreading of CJEU decision. Surely, the CJEU will respond. Again, ECB caught in the cross-fire between the two courts
12/13

Conclusion on QE: the two courts will keep on duking it out. The ECB would do well to keep pursuing its mission. Most CBs get legally challenged all the time as well. But, especially during a crisis, monetary policy should focus on the economics, not on court turf wars.
13/13