The Transmission Protection Instrument
The ECB recently approved the Transmission Protection Instrument (TPI), its newest tool aimed at preventing fragmentation as it tightens monetary policy. According to TPI:
- The ECB will be able to make secondary market purchases of securities issued in jurisdictions experiencing a deterioration in financing conditions not warranted by country-specific fundamentals.
- The scale of TPI purchases would depend on the severity of the risks facing monetary policy transmission.
- Purchases are not restricted ex ante.
- Eligibility criteria include: 1) compliance with the EU fiscal framework; 2) absence of severe macroeconomic imbalances; 3) fiscal sustainability; 4) sound and sustainable macroeconomic policies.
The issue of moral hazard
In this commentary Bartzokas et al. identify two problems with TPI:
- ECB policy should not be redefined to meet intra eurozone regional macroeconomic differences.
- With the ECB providing even more uncapped fiscal insurance there is the risk of moral hazard for individual governments. This issue leads to the question of what role monetary-fiscal policy coordination should have in the eurozone.
Instead the authors argue that there should be close coordination between the new mechanism and the implementation of the EU’s Recovery and Resilience Facility:
Should the Transmission Protection Mechanism and a permanent-style Recovery and Resilience Facility loan facility be linked, conditionality would come from market discipline. Most of the underlying loans to the final beneficiaries in the real economy would be channelled via international financial institutions, commercial banks, and private investors, thus increasing competition. Also, in the absence of compliance with Recovery and Resilience Facility loans’ milestones, the ECB would simply stop buying bonds through the Transmission Protection Mechanism.
Assessing the ECB’s new Transmission Protection Mechanism
By: Anthony Bartzokas, Renato Giacon, Corrado Macchiarelli – University of Athens, EBRD, NIESR
Will the ECB’s portfolio expand?
Feld et al. question whether it will be possible to keep the ECB’s bond portfolio from expanding ( consistent with the ECB’s fight against inflation) while implementing TPI. One way could be replacing maturing German or Dutch bonds with Italian debt.
But it cannot be ruled out that – contrary to current plans – the ECB’s overall government bond portfolio will expand. The ECB is thus deviating from principle: It usually purchases government bonds according to the capital key in order to avoid undesirable fiscal redistribution effects and to protect the independence of its monetary policy.
The ECB’s Toxic Bond-Purchase Program
By: Lars P. Feld, Clemens Fuest, Volker Wieland – University of Freiburg, Ifo, Goethe University
