Pitfalls of Quantitative Easing Effect on the EMU Economic Growth: Searching for Turning Points

Abstract

This study aims to fill the gap in recent research on the effect of quantitative easing proxied by the broad money growth on economic growth in Economic and Monetary Union (EMU) countries. Specifically, we aim to determine an optimum level of quantitative easing in specific countries that enabled the highest possible economic growth from 2010 to 2019. The results based on the system generalized method of moments (GMM) estimation suggest the inverted U-shaped curve relationship between the broad money growth and GDP per capita growth/GDP growth with the parabola peak between 6.24% and 8.08%. After exceeding this level of broad money growth, the effect on economic growth appears negative, implying that excessive usage of quantitative easing hampered EMU economic growth. Therefore, we assume that sporadic and moderate quantitative easing could be beneficial in times of recession and in the absence of inflation pressures. Otherwise, the risk of stagflation would become real.