ECB’s Policy Normalization with the EMU’s Consolidated Government

Abstract

This paper addresses the ECB’s policy normalization elasticity of the unconventional monetary policies (UMPs). We modify it such as Thomas Piketty did. We show that the ECB should launch policy normalization during the sustained low natural interest rate due to its low elasticity at a minimum of around 0.5. Methodologically, we assume the New Keynesian model based on Suzuki (2021) and simulate the natural interest rate elasticity of monetary policy and variables by the basic quantum mechanics of Kalman filtering. Intuitively, we treat the natural rate as potential rate of private investment capital return as the costs of policy normalization.