All this will create the necessary preconditions for an eventual more robust and sustainable recovery in the euro area. Implications for monetary policy Leaving aside the ECB’s newly acquired role as supervisor and its traditional contribution to institutional reforms in Europe, what are the implications of a balance sheet recession for the monetary function narrowly defined?
For the euro area in particular, inflation expectations have remained very well anchored following the non-standard liquidity provision measures undertaken by the ECB. The anchoring of expectations at relatively low levels probably reflects continued negative output gaps in the euro area as well as confidence that the ECB will be able and willing to drain liquidity if and when necessary to control inflation.