The real surprise about the unexpectedly low amount of central bank money that has been issued through the latest ECB’s monetary policy instrument, the TLTRO (Targeted Long Term Refinancing Operations), is that it was a surprise. In fact, the TLTRO is not that different from other ECB’s instruments to inject liquidity, like the LTRO, as it relies largely on banks’ demand for liquidity. The link to banks’ financing of non-financial institutions, rather than mortgages or Government bonds, does not change the substance of the problem. When the economy slows down and is dangerously approaching a deflationary trap, banks have no interest in lending more money, and thus have no incentive to request liquidity from the central bank. If the horse does not drink, there is no point in bringing him bucks full of water.
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