Cochrane nails fiscal consequence of SMP

Read John Cochrane’s post on the consequences of quasi-fiscal monetary policy for central bank independence.

He nails the ECB’s dilemma:

Eventually, the ECB will have to suck up this volcano of euros, by selling back the bonds it has accumulated. If it can’t—if the bonds have defaulted, or if selling them will drive up interest rates more than the ECB wishes to accept—then the ECB will need massive funds from German taxpayers to prevent a large euro inflation. It might ask for a gift of German bonds it can sell, as “recapitalization,” or it might ask for a bond swap of salable German bonds for unsalable southern bonds. Either way, German taxes end up soaking up excess euros.

This post may be of interest to those who enjoyed our series on the (potential) fiscal implications of FX intervention … I like that folks are pointing out that monetary policy is not free.