Financial stability and the ECB

For nearly two decades, the policy debate has focused on the attitude of central banks regarding financial stability and asset price bubbles. This debate is resurfacing with the recent episodes of expansionary monetary policies implemented through unconventional measures. The aim of this policy brief is to feed reflections on the risks for financial stability associated with the extension of quantitative easing (QE) by the ECB. We first recall that the theoretical and empirical literature does not provide a clear consensus on the influence of monetary policy on asset price bubbles. Then, we propose indicators of asset price bubbles for the euro area and we discuss the effect of monetary policy on these indicators. So far, there is no evidence of presence of asset price bubbles in the euro area. Besides, the change in the ECB balance sheet would not trigger bubbles in the stock and housing markets. However, it may be a concern for the bond market. From this, we argue that a gradual decline in ECB’s balance sheet would be important to limit the risk of a new banking crisis in the euro area