# Why did it take so much QE by the ECB to raise the Eurozone inflation to 2%?

From 2015 to 2018 the ECB increased the money supply by around 20% (around 6% y/y), with a GDP increase rate under 1%. Yet the inflation rate remained under 2%. A back-of-the-envelope calculation would expect a much larger inflation rate (around 5% or more). What happened?

UPDATE: here is my calculation: using a quantity of money model: $$Y P = v M$$ where $$Y$$ is the GDP, $$P$$ is the price level, $$v$$ is the money velocity and $$M$$ is the money supply, then the inflation (rate of variation of $$P$$) is the rate of variation of $$M$$ less the variation of $$Y$$, that is about 6% - 1% = 5%

• I think you're assuming there was full employment in 2015, and I'd say that was not the case – Patricio Jan 1 '19 at 8:53
• Could you share your back-of-the-envelope calculation with us? Your underlying assumptions are probably relevant to the answer. – Giskard Jan 1 '19 at 10:46
• Patricio: in the period, the employment grew around 1% per year (comparable with the GDP growth, therefore, no big changes in productivity). That makes the puzzle stronger, since increments in employment are usually correlated with inflation increase (Phillips curve) – Stefano Cirolini Jan 2 '19 at 20:03

Because commercial banks have used injected liquidities to consolidate their balance sheet instead of stimulating demands by creating credits (that did not previously exist when they make loans). This is called the money multiplier effect. The multiplier was somehow blocked (to ~$$1$$) because of their precaution behaviour, and so was the money velocity.