Quantitative easing with bite: a proposal for conditional overt monetary financing of public investment

To address the on-going crisis in the euro area it is proposed to introduce a scheme of conditional, overt monetary financing of public investment (COMFOPI). The inadequate response of monetary and fiscal policy is shown to explain the weak performance of the euro area compared with other advanced countries since the crisis. The measures currently on the table, including the Juncker Plan and quantitative easing QE, are unlikely to bring about the needed substantial improvement in economic growth, while putting growth on a sustainable footing. Advantages and dangers of monetary financing of fiscal policy are discussed in the light of the recent literature. COMFOPI is a form of QE in which bonds newly issued by the European Investment Bank are purchased, on secondary markets, by the ECB, and the financial resources are made available to national governments to finance investment projects. The scheme is explicitly time-limited by being made subject to a price-stability criterion ("conditional"). The provision of central bank money leads directly to higher spending in the economy ("overt"), unlike with QE which relies on indirect channels. A number of ways to operationalise the scheme are discussed.