The impact of quantitative easing in the Netherlands: A stock-flow consistent approach

The Netherlands is a prosperous, small open economy with a large financial sector and a trade balance surplus. Current observations suggest that the quantitative easing (QE) initiated by the ECB has a strong impact on the financial sector and international capital flows, while the impact on economic growth is relatively weak in the Netherlands. We analyse these stylised facts using the stock-flow consistent (SFC) approach which builds on earlier work.

We develop an open economy SFC model for the Netherlands with an elaborated financial sector, including pension funds which invest to a large extent abroad, and recognise that firms invest a considerable part of their financial assets abroad. This enables us to explain that the direct effects of QE are relatively small due to substantial foreign selling of Dutch government bonds and recapitalisations of the financial sector. The indirect effects of QE are much stronger. They influence the economy through low interest rates and exchange rate appreciation, but have unintended consequences through increased housing prices and asset prices - the latter two are endogenous in our model.

We calibrate the model to mimic the observed stylised facts for the Netherlands and perform some policy experiments.

JEL Classification: E44, B5, E6, F45, G21, G32

Keywords: stock-flow consistent modelling, quantitative easing, current account surplus