In this context, an expanded asset purchase programme was then launched. On March 9th, the Eurosystem began purchasing public sector securities in the secondary market along the curve from 2 to 30 years, being mindful of being market neutral. Purchases of securities at negative yield are permissible, as long as the yield is above the deposit facility rate. Marketable securities purchased under this program will be made available for securities lending. This programme is intended to stimulate the economy through different channels. The first one is the portfolio rebalancing channel, in which the fall in yields on safe government bonds induces investors to buy riskier assets, thereby stimulating the economy. Since the launch of the programme yields have dropped not only for the assets purchased but also for bank and corporate bonds and equity prices have continued to rise. A second channel works through lowering and flattening the yield curve. The purchase programme will continue until the end of September 2016 and beyond if we do not see a sustained adjustment in the path of inflation. This reinforces the guidance that interest rates will remain low for an extended period of time. A third channel is related to increasing credit supply. If the Euro-system buys assets from non-banks or institutions, then these funds will reappear as deposits in the banking system. 6  Andrade and Le Bihan, 2013, Inattentive professional forecasters, Journal of Monetary Economics, volume 60, p. 967–982.
This came as a surprise because realized GDP growth rates in 2013 and 2014 were about 0.5 percentage points lower than forecasts made in 2012.3 Our analysis suggests that this economic slack contributed substantially to low inflation. For example, in the fourth quarter of 2014, if we assume no economic slack, HICP inflation would have been higher by around 0.8 percentage points. Such a counterfactual exercise is however surrounded by a large uncertainty. First, potential output is hard to estimate. That said, if potential output and domestic slack were lower than assumed, the weakness of inflation would be all the more puzzling. Second, some observers argue that the Phillips curve of the euro area is steeper than before,4 partly explaining the low level of inflation. Although we do not share this diagnosis for the recent past,5 a stronger sensitivity of prices to slack might be observed in the future as a result of labor market reforms and lower unemployment in several countries. Third, downward nominal wage rigidity may blur the relationship between inflation and domestic slack. Nominal wage inflation, which remained persistent during the crisis, is likely to stay subdued during the recovery, thus leading to a lower inflation. One caveat specific to the euro area is the asymmetric adjustment process currently at work among jurisdictions. Member countries that experienced large capital inflows in the years preceding the financial crisis experienced significant reductions in price competitiveness.