A Combined Arms Strategy

The culmination of the European Central Bank’s (ECB) policy evolution was the ‘combined arms strategy’ that started taking shape in 2014–2015. In this chapter, we review how four unconventional measures—negative interest rates, asset purchases, targeted lending operations, and forward guidance—were progressively combined into a unified policy package. We recount the sequence of ‘recalibrations’ of these tools that took place between December 2015 and June 2018 and the internal debates that informed them. We then conduct an impact analysis where we seek to isolate and examine the contribution of the policy package to financial conditions and macroeconomic outcomes. The novelty of our analysis lies both in its methodological approach and in its diagnostics, which allows us to disentangle the respective contribution of each instrument and assess counterfactual scenarios in which they were not combined. We end by considering some of the side effects of our unconventional policies with a focus on the banking sector.