LIST OF ABBREVIATIONS 7

LIST OF FIGURES 8

LIST OF TABLES 8

EXECUTIVE SUMMARY 9

1. INTRODUCTION 10

2. TEMPORARY OR PERMANENT SHOCK 12

3. SUPPLY OR DEMAND SHOCK 14

4. THE LIMITATIONS ON THE USE OF INTEREST RATE POLICIES 16

4.1 Impact of interest rate policies 16

4.2 Cost of interest rate policies: interest transfers to banks 18

5. QUANTITATIVE TIGHTENING 20

6. INFLATION DIFFERENTIALS WITHIN EURO AREA 22

7. ECB COMMUNICATION 24

REFERENCES 25

APPENDIX 26