<p>Because commercial banks have used injected liquidities to consolidate their balance sheet instead of stimulating demands by creating credits (that did not previously exist when they make loans). This is called the <a href="https://en.m.wikipedia.org/wiki/Money_multiplier" rel="nofollow noreferrer">money multiplier</a> effect. The multiplier was <em>somehow</em> blocked (to ~<span class="math-container">$1$</span>) because of their precaution behaviour, and so was the money velocity.</p>

<p>On March 10, 2016, the ECB has even considered the possibility of giving 200€ per month and per person to stimulate inflation. And this with the main idea of circumventing the commercial-bank system. This unconventional monetary policy is called <a href="https://en.m.wikipedia.org/wiki/Helicopter_money" rel="nofollow noreferrer">monetary helicopter</a>.</p>

CC BY-SA 4.0
2019-01-04T20:12:27.170Z
my own solution would be in that direction too. I was wondering if there was perhaps any alternative explanation.
Stefano Cirolini
CC BY-SA 4.0
2019-10-17T11:34:25.327Z
Any question @Stefano ?
keepAlive
CC BY-SA 4.0
2019-01-04T01:51:49.603Z
2019-01-12T22:22:06.867Z
2019-01-12T22:22:06.867Z
keepAlive
<p>To quote from this <a href="https://en.wikipedia.org/wiki/Quantity_theory_of_money#Fisher&#39;s_equation_of_exchange" rel="nofollow noreferrer">Wikipedia link</a>...</p>

<blockquote>
  <p>a 10% increase in M could be accompanied by a
  change of 1/(1 + 10%) in V </p>
</blockquote>

<p>If the model is true, it seems the velocity of money is not a constant. This is the answer.</p>

CC BY-SA 4.0
2019-01-03T01:41:36.470Z
2019-01-04T02:09:08.507Z
2019-01-04T02:09:08.507Z
H2ONaCl
<p>From 2015 to 2018 the ECB increased the money supply by around 20% (around 6% y/y), with a GDP increase rate under 1%. Yet the inflation rate remained under 2%. A back-of-the-envelope calculation would expect a much larger inflation rate (around 5% or more). What happened?</p>

<p>UPDATE: here is my calculation: using a quantity of money model: <span class="math-container">$Y P = v M$</span> 
where <span class="math-container">$Y$</span> is the GDP, <span class="math-container">$P$</span> is the price level, <span class="math-container">$v$</span> is the money velocity and <span class="math-container">$M$</span> is the money supply, then the inflation (rate of variation of <span class="math-container">$P$</span>) is the rate of variation of <span class="math-container">$M$</span> less the variation of <span class="math-container">$Y$</span>, that is about 6% - 1% = 5%</p>

CC BY-SA 4.0
2019-01-01T08:53:49.460Z
I think you're assuming there was full employment in 2015, and I'd say that was not the case
Patricio
CC BY-SA 4.0
2019-01-01T10:46:52.667Z
Could you share your back-of-the-envelope calculation with us? Your underlying assumptions are probably relevant to the answer.
Giskard
CC BY-SA 4.0
2019-01-02T20:03:26.053Z
Patricio: in the period, the employment grew around 1% per year (comparable with the GDP growth, therefore, no big changes in productivity). That makes the puzzle stronger, since increments in employment are usually correlated with inflation increase (Phillips curve)
Stefano Cirolini
<macroeconomics><inflation><money-supply><euro-area>
Why did it take so much QE by the ECB to raise the Eurozone inflation to 2%?
Stefano Cirolini
# Why did it take so much QE by the ECB to raise the Eurozone inflation to 2%?

(Asked by: username_0 on 2019-01-01)

From 2015 to 2018 the ECB increased the money supply by around 20% (around 6% y/y), with a GDP increase rate under 1%. Yet the inflation rate remained under 2%. A back-of-the-envelope calculation would expect a much larger inflation rate (around 5% or more). What happened?

UPDATE: here is my calculation: using a quantity of money model: $Y P = v M$
where $Y$ is the GDP, $P$ is the price level, $v$ is the money velocity and $M$ is the money supply, then the inflation (rate of variation of $P$) is the rate of variation of $M$ less the variation of $Y$, that is about 6% - 1% = 5%

**Tags:** macroeconomics, inflation, money-supply, euro-area

> **Comments:**
> **username_1**: I think you're assuming there was full employment in 2015, and I'd say that was not the case  
> **username_2**: Could you share your back-of-the-envelope calculation with us? Your underlying assumptions are probably relevant to the answer.  
> **username_0**: username_1: in the period, the employment grew around 1% per year (comparable with the GDP growth, therefore, no big changes in productivity). That makes the puzzle stronger, since increments in employment are usually correlated with inflation increase (Phillips curve)  

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## 2 answers

### Answer by username_3 on 2019-01-04. Score: 1

Because commercial banks have used injected liquidities to consolidate their balance sheet instead of stimulating demands by creating credits (that did not previously exist when they make loans). This is called the [money multiplier](https://en.m.wikipedia.org/wiki/Money_multiplier) effect. The multiplier was *somehow* blocked (to ~$1$) because of their precaution behaviour, and so was the money velocity.

On March 10, 2016, the ECB has even considered the possibility of giving 200€ per month and per person to stimulate inflation. And this with the main idea of circumventing the commercial-bank system. This unconventional monetary policy is called [monetary helicopter](https://en.m.wikipedia.org/wiki/Helicopter_money).

> **Comments:**
> **username_0**: my own solution would be in that direction too. I was wondering if there was perhaps any alternative explanation.  
> **username_3**: Any question @Stefano ?  

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### Answer by username_4 on 2019-01-03. Score: 0

To quote from this [Wikipedia link](https://en.wikipedia.org/wiki/Quantity_theory_of_money#Fisher's_equation_of_exchange)...

> a 10% increase in M could be accompanied by a
> change of 1/(1 + 10%) in V

If the model is true, it seems the velocity of money is not a constant. This is the answer.


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