The effect of Monetary policy tools of low-interest rate and Quantitative Easing on Inflation in the last decade in the Eurozone

Abstract

The past decade has seen unprecedented consequences due to low-interest rates and unconventional monetary policy tools, such as quantitative easing (QE). In the Eurozone, these policy tools have been accompanied by chronically low inflation. This paper attempts to test the relationship between inflation, low-interest rate, money supply, and core money growth through empirical research. Historical connections proved a positive relationship between money supply and inflation, but contemporary economics has challenged this. Is it the inflation shock from the supply and demand shocks of COVID-19, and the Ukrainian War costing in an Energy Crisis, or the loose monetary policy leading to high inflation and a need for central bankers to use extreme measures to tighten policy? This paper's findings indicate that the Ukraine war and its interaction terms with the monetary policy tools indeed had a positive effect on inflation, unlike COVID-19 and its interaction terms with the monetary policy tools which had a positive effect on inflation. Interest rate variables did partially support the inverse relationship with inflation. However, Money supply proved against the positive hypothesis of this paper and recorded a negative relationship with inflation.