The ECB During the Financial Crisis. Not so Unconventional!

The European Central Bank's balance sheet has expanded notably, without banks granting more credit, and the overnight interest rate has stayed close to the deposit facility level for long periods of time since the onset of the financial crisis. This appears to go against the logic implicit in the post‐Keynesian Horizontalist approach to monetary macroeconomics, which links reserves to credit and holds that a central bank accommodates the demand for reserves in order to control the overnight interest rate. In this article, we analyze the monetary policy implemented by the ECB since the third quarter of 2008, with a view to studying its implications for monetary theory, concluding that this approach can still explain much of what has happened in the Euro Zone in the last troubled years, despite paradoxically, there being excess reserves and simultaneously accepting that reserves are demand led, and that the ECB has lent them at the official rate while the overnight interest rate has been close to the deposit facility rate. Further, this analysis reveals that mainstream monetary theory has not been very useful, because neither the link between reserves and loans nor the relation between reserves and inflation have worked. This leads us to believe that some transmission channels of the monetary policy implemented by the ECB since late 2014, which can be deemed unconventional, will not perform well.