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Kiel Institute Focus

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No. 25    June 6, 2014
by Joachim Scheide and Björn van Roye

 

The ECB’s low interest rate policy: The German economy at risk

The European Central Bank (ECB) continues its low interest rate policy. Since it relies on the average price development in the euro area for its monetary policy, a key rate currently amounting to 0.15 percent appears to be appropriate as inflation is low and the economic recovery is sluggish. However, the member countries are in different situations as far as the business cycle is concerned, which means that the level of interest rates is not appropriate for all economies. Monetary policy has already been too expansionary for the German economy for a number of years now. And due to the unconventional measures, the degree of expansion is even intensified. Consequently, a boom is imminent in Germany which is typically associated with substantial undesirable developments, in particular the misallocation of capital. This increases the risk to financial stability and could lead to a massive economic setback.

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Kiel Institute Focus

The Kiel Institute Focus Series presents papers on current economic policy topics. Their authors are solely responsible for their content and their views or any policy recommendations they may make do not necessarily represent the views or recommendations of the Institute.

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