See also N. Sudo (2021), “Quantifying stock and flow effects o f QE”, Journal of Money, Credit and Banking 53(7), pp. 1719-1755. This study attributes ro ughly three-quarters o f the impact o f the PEPP programme in spring 2020 to the effect o f the anno uncement of the o verall purchase envelo pe, and just o ne-quarter o f its effects to the actual flo w o f purchases. 14  Fo r instance, acco rding to the SMA, the median respo ndent expects APP reinvestments to last until June 2023, with a steady reductio n in the APP po rtfo lio thereafter. 15  Under the TPI, the Euro system will be able to make seco ndary market purchases o f securities issued in jurisdictions experiencing a deterio ratio n in financing co nditions not warranted by co untry-specific fundamentals, subject to fulfilling established eligibility criteria. Fo r further details, see ECB press release, “The Transmissio n Protection Instrument”, 21 July 2022. 8  monetary policy is tightening while economies are facing an energy shock. In this context, fiscal policy should refrain from providing across -the-board fiscal support, as this would further raise inflation. 16 In turn, higher inflation would eventually force monetary policy to tighten further, with the resulting adverse implications for governments’ financing costs and for the economy more broadly. More generally, the optimal response, in my opinion, should be guided by four criteria. First, the aggregate euro area fiscal policy stance should also be normalised.
When the central bank has pushed interest rates do wn as far as it can, we say that the interest rate has reached its effective lo wer bo und (ELB). 3  by buying government bonds and other securities in the secondary market – an assetpurchasing policy often referred to as quantitative easing (QE) –, and through targeted longterm lending to commercial banks. Let me now recall briefly how each of these policy instruments works. I will start with asset purchases. The ECB launched its Asset Purchase Programme (APP) in September 2014. The purpose of asset purchases (i.e. buying bonds from euro area governments and other public sector entities and from the safest corporate issuers) is to decrease longer-term interest rates. Conventional interest rate policy moves the short-term rate on interbank markets, but medium and long-term rates also have a bearing on investment decisions, be they buying a house or purchasing new machinery. Long-term rates are the sum of three components: the expectation of future short-term rates, the term premium and the default premium. Asset purchases affect each of these components in different ways. First, the signalling channel, by which bond purchases often signal to markets the central bank’s commitment to engage in expansionary monetary policy. This adjusts market expectations about the future course of short-term interest rates, which in turn affects longterm rates. Second, investors demand a term premium over expected short-term rates.