These are replies to comments on my previous post.
In reply to anonymous: I read the Ennis/Wolman Richmond Fed piece, and found it confused. This relies on Old Monetarist money-multiplier thinking, which I think is wrongheaded. People need to understand that, when there is a positive quantity of reserves in the system, the interest rate on reserves (IROR) becomes the relevant policy rate. Rather than, as in normal times, conducting open market operations to target the fed funds rate, what is going on now is that IROR is set by the Fed, and all the other short rates follow. If holding other assets starts looking more attractive to banks, then the price level will rise if IROR stays constant. To prevent the price level from rising, the Fed has to increase IROR to induce the banks to hold the reserves. Term deposits accomplish absolutely nothing. If there is any marginal liquidity value to the reserves in interbank transactions, then the Fed has to pay more for the reserves in the form of term deposits (the term deposit rate has to be higher than the IROR). At best, the reserves have zero marginal liquidity value and the term deposit rate is the same as IROR - but then it does not matter at all whether the outside money is reserves or time deposits. This old piece, that Ennis/Wolman cite, is even more confused.
In reply to Andolfatto: A key point is that the ECB is not "monetizing" the Greek debt. They are intermediating the debt, and what comes out the other end is interest bearing reserves, which under the current circumstances looks just like T-bills (or whatever you call a short-term riskless Euro-denominated security). The EMU may not have understood this, but when they acquired Greece as a member, they were committing to a long term policy where they have to take responsibility for Greece's debt. Right now, the ECB is hoping that it can acquire Greek debt, finance this with interest bearing reserves, and that Greece will ultimately get its act together, in which case the ECB makes a profit on the deal. If Greece ultimately defaults on its debt, then it looks like you are correct - there are inflationary implications, as the ECB somehow has to make up for the losses on its asset portfolio. Otherwise, I think we are agreed that there are no inflationary implications. Now, can the purchase of Greek bonds matter for the market prices of those bonds? That's the debatable part. I think the Fed thinks that its acquisitions of long-maturity Treasuries and MBS changed the term structure of interest rates, even though they were just swapping short maturity interest bearing reserves (i.e. T bills) for long-maturity treasuries. One might think that arbitrage would dictate that this is neutral. Maybe financial markets are somehow segmented, and this segmentation is even more acute for something like Greek debt? In that case, the acquisition of Greek debt by the ECB increases the prices of Greek bonds, and this benefits the Greeks. I'm not sure how this market segmentation might work, but if it does it is at the heart of some recent central bank interventions.