This means that the impact of negative rates on inflation and financing conditions via the exchange rate is more powerful. In short, faced with a new environment of downside risks and limited conventional policy space, the ECB showed that it had no shortage of tools available to respond.
Unconventional measures proved suitable substitutes for conventional ones: using market prices to construct a so-called “shadow short rate”,17 the stimulus provided appears broadly in line with the recommendation of monetary policy rules as suggested by recent academic research.18 Our capacity to react in this way was made possible by the flexibility embedded in our mandate – a flexibility that was confirmed by the recent ruling of the European Court of Justice.