ECB purchases of Irish sovereign debt can significantly mitigate the negative impact of COVID-19
The QEC Special Article Sovereign debt after COVID-19: How the involvement of the ECB can impact the recovery path of a member state explores how ECB purchases of Irish sovereign bonds can impact the recovery path of the Irish economy over the next 10 years. The model used examines how policy intervention can mitigate the negative effects of the pandemic.
Two scenarios are assessed, a V-shaped recovery and a long-lasting recovery. In both cases the supply and demand shocks from COVID-19 have significant implications for key economic and fiscal variables.
The article quantifies how the policy response of Irish and European authorities can impact both sets of variables. Regardless of the policy mix chosen by national authorities, intervention from the ECB in the form of Irish sovereign debt purchases mitigates the decline in output significantly.
Over a five-year horizon, we estimate that the participation of the ECB in this manner could reduce the loss in Irish output by more than 2 percentage points compared to when the debt is raised purely through private markets. The ECB intervention would also reduce the increase in the deficit and public debt which will occur due to the pandemic.
Commenting on the work, author Kieran McQuinn of the ESRI stated:
“Given the critical role played by the ECB in the current crisis, it is important to be able to quantify the impact of monetary policy on the recovery path of the domestic economy.”