Side Effects of Monetary Accommodation

Abstract

The long period of monetary accommodation after the Great Financial Crisis has triggered an intensive debate about the potentially negative side effects of these policies—especially regarding the growth and distribution of financial wealth and the stability of financial market development. Clearly, the interest income of savers has declined as a result of monetary policy in the euro area, while borrowers have benefited. The long-term income to be expected from savings funds, especially for retirement, has diminished, due to the dearth of returns. Therefore, funds need to be replenished. Financial markets have become more exposed to the risk of high asset valuations and—in recent years—to a return of rising leverage in most economies. Such side effects of monetary policy that intend to stimulate economic activity in the short term pose risks for future long-term growth. For the euro area, the ECB’s monetary policy has affected countries differently, benefiting economies with higher net borrowing in the private and public sector. Also, the rise of Target II imbalances in the payments system of the ECB shows that there has been a redistribution of sovereign risks in the course of the central bank’s asset purchase program.