In the E.U. and the U.K., central banks are tasked with the responsibility of determining monetary policy to ensure price stability. Central banks conduct monetary policy by adjusting the supply of money, generally through open market operations. For instance, a central bank may reduce the amount of money by selling government bonds to commercial banks under a “sale and repurchase” agreement, thereby taking in money from those banks. This is known as quantitative easing (“QE”).
However, QE activities through the purchase of government bonds on secondary markets may constitute monetary financing, which is prohibited under Article 123 of the Treaty on the Functioning of the European Union. This note, published in pursuit of the FMLC’s educational remit, outlines some of the legal issues which arise in the context of monetary policy and monetary financing, and considers a recent judicial decision in relation to the distinction between monetary policy and monetary financing, so as to highlight particular consequences for stimulus policies by National Central Banks.
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