[ECB Debt Certificates - New Use for an Old Instrument?]

Area of Science:

• Monetary policy and central banking operations.
• Financial economics and market stability.

Context:

• The Eurosystem significantly increased Asset Purchase Facility (APP) and Pandemic Emergency Purchase Programme (PEPP) bond purchases during the coronavirus crisis.
• This expansion of unconventional monetary policy generated substantial excess liquidity within the financial system.

Purpose:

• To analyze alternative methods for absorbing excess liquidity generated by central bank asset purchases.
• To evaluate the feasibility and implications of the European Central Bank (ECB) issuing debt certificates as a liquidity-absorbing tool.

Summary:

• Selling previously purchased bonds to reduce liquidity risks financial sector instability and rising government bond yields, especially for vulnerable economies.
• This paper explores the issuance of debt certificates by the ECB as a viable alternative to bond sales for managing excess liquidity.

Impact:

• Provides a potential solution for central banks to manage liquidity without causing market disruptions.
• Offers insights into safeguarding financial stability during periods of unconventional monetary policy unwinding.