6 Cerutti et al (2015) showed that the use of macro-prudential policies can be associated with relatively greater cross-border borrowing, suggesting that countries might face issues of avoidance. And it is a more robust method because it avoids very distortionary outcomes more effectively. Former ECB chief economist Otmar Issing (2003) explained that inflation expectations should be between “1.7 percent and 1.9 percent”, an indication that the ECB was targeting roughly 1.8 percent. We are always working to improve this website for our users. This suggests that the ECB might have already reached its effective lower bound and that it might be difficult to go below that in the future (especially if banks have already built up the capacity to store cash in order to avoid the negative deposit rate). It is therefore necessary to estimate the neutral rate. These are important ingredients in improving the clarity of the current definition of price stability. On the contrary, if a majority of creditors with collective action clauses would accept a restructuring of some bonds, the ECB could do nothing against such a restructuring and would have to accept it. But these solutions might be too extreme and, most importantly, highly unpopular in some member states. Finally, the ECB has put in place a diversified asset purchases programme that originally included asset-backed securities and covered bonds, but which was vastly expanded in 2015 with the inclusion of sovereign and European supranational bonds and, later, of corporate and local government bonds. It is very difficult to distinguish the secular from the cyclical trend. The first problem for the ECB is that the euro area’s current macroeconomic policy framework is not able to provide enough stabilisation in deep downturns and ends up relying on the ECB as a result (Claeys, 2017). In Europe, the euro construction process is pretty well-known, while the ECB monetary policy is often debated. This subsequently was amended in 2002, while Issing still served at the ECB, to include the words ‘below, but close to, 2%’. However, the difficulties experienced in reaching the inflation target have strengthened the case of those advocating a revision of the framework used by central banks, or, at least, their tools. The 25 percent issue limit in particular was imposed to prevent the ECB from having “a blocking minority in a debt restructuring involving collective action clauses” (ECB, 2015). Second, this also means that to achieve the same objectives as in the past, monetary policy could be, or even must be, more expansionary than previously. This column presents the latest CfM-CEPR survey, which reveals that a majority of panel members support allowing inflation to exceed 2% following periods when inflation has been below target and making more explicit its secondary objective of supporting economic growth and full employment. The European Central Bank (ECB) has today published amendments to its guidelines on the implementation of monetary policy in the Eurosystem, applicable from 1 January 2021. In times of structural uncertainty however, communication becomes harder and possibly less effective. More importantly, given the particular institutional arrangement of EMU (as discussed in section 2.4), the use of these policies has been politically controversial in some countries, which delayed their implementation in the euro area. This means that the definition could be changed again by the ECB if necessary. Compared to other proposals (such as increasing the targeted inflation level or price-level targeting), our recommendation has the advantage of not departing drastically from the current inflation target and is therefore easier to communicate. Source: Bruegel based on Bloomberg and CEPR. This implied that in the long run the Phillips curve was vertical. First, the transmission mechanism from monetary policy to inflation might be weakened and thus it might be more difficult for central banks to reach their targets. In our view communication remains an important tool even in times of uncertainty, provided it adapts by shifting the emphasis from communicating what little it knows, to informing how its actions prepare the economy better for the unknown. But it introduced a This allowed the Public Sector Purchase Programme to continue for longer than was originally possible under the previous rules. Price stability is the main objective of monetary policy in the euro area. In 2003, the Governing Council clarified that in the pursuit of price stability it aims to “maintain inflation rates below, but close to, 2 percent over the medium term”. On 2 August 2012, the Governing Council of the European Central Bank (ECB) announced that it would undertake outright transactions in secondary, sovereign bond markets, aimed "at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy". However, it would be very difficult to put in place this type of policy in the euro area given that using such a strategy, which would lead to announcing a target level of interest rate for a given country, would not be compatible with maintaining the pretence of market discipline over the public finances of member states. However, uncertainties about the real drivers of productivity, ranging from the possible reversal of globalisation to the role of disruptive digital technologies, all contribute to our inability to estimate precisely the neutral rate of interest. of 7 April 2020. amending Guideline (EU) 2015/510 on the implementation of the Eurosystem monetary policy framework and Guideline (EU) 2016/65 on the valuation haircuts applied in the implementation of the Eurosystem monetary policy framework (ECB/2020/20) The Fed is about to conclude a review of its framework and the review of the ECB’s monetary policy strategy has been implicitly announced. ECB defined … In light of these considerations, we recommend that the ECB should update its definition of price stability to target core inflation around two percent per year (allowing a tolerance band on either side of the two percent target), on average, over a longer time horizon. Find out how the ECB promotes safe and efficient payment and settlement systems, and helps to integrate the infrastructure for European markets. The ECB aims at inflation rates of below, but close to, 2% over the medium term. When the ECB carried out its previous policy review in 2003 “one of the key assumptions was that the natural rate of interest hovered around 2%, and that’s not the case anymore. First is the issue of redistribution. However, a potential limitation of macroprudential tools is that they can be subject to regulatory arbitrage, in the same way as financial institutions moved away from microprudential regulation towards the shadow-banking sector before the crisis6. However, our understanding of the effects of asset purchases, for example, is not complete. The ECB also very quickly provided long-term lending to European banks with favourable conditions through long-term refinancing operations and targeted longer-term refinancing operations. On August 27, 2020, the FOMC released a revised Statement on Longer-Run Goals and Monetary Policy Strategy. But when short-term rates reach the zero lower bound, central banks need to rely on unconventional tools to affect directly the medium and long-term parts of the yield curve. Naturally, the ECB could change its policies to affect core inflation by as much as needed in order to compensate for the variability caused by energy and food prices. We believe that these recommendations will already increase policy space and give greater flexibility in order to help prevent bad outcomes (like deflation) persisting for prolonged periods. The first guiding principle in revising the ECB monetary policy framework should be to reduce the degree of uncertainty the bank itself brings to the system. We explore this in the next section. The monetary policy framework of the ECB Peter Bofinger Universität Würzburg 1. Some ECB speakers … (17) The implementation of the Eurosystem's monetary policy framework should ensure that a broad range of counterparties participate under uniform eligibility criteria. To this end, we recommend that the ECB adapts its monetary policy framework in order to manage uncertainty by providing clarity where it is possible and maintain … How has this period affected your operational plans to carry out the exercise, its timeframe and final objectives? The European Central Bank’s Governing Council added a tweak to its approach to bond purchases on December 10, which could prove crucial in 2021. The ECB regarded them as relative price changes, which monetary policy should accommodate. Tolerance bands should be numerically defined so it is known what is acceptable inflation and what is not. A very clear example of this could be to include an analysis of the distributional impacts of their policies in the regular publications that all central banks provide (eg for the ECB in its economic bulletin). Monetary policy will affect financial stability, and the pursuit of financial stability will affect the ability of central bankers to fulfil their mandate. Even if the framework has improved in recent years, there is a good chance that the ECB will have to step in once again from a stabilisation perspective. The European Central Bank resumed the strategy review of its policy framework in September after the pause imposed by the pandemic in March. Journal of Macroeconomics (Topics) 9(1), Demertzis, Maria, and Guntram B. Wolff (2016) ‘What impact does the ECB’s quantitative easing policy have on bank profitability?’ Policy Contribution 2016/20, Bruegel, Drehmann, Mathias, Claudio Borio and Kostas Tsatsaronis (2012) ‘Characterising the financial cycle: don’t lose sight of the medium term!’ BIS Working Papers 380, Bank for International Settlements, Ducrozet, Frederik (2016) ‘Bond scarcity under new ECB QE rules – It Ain’t Over Till It’s Over’, Pictet Wealth Management Flash Notes, 14 December, available at https://perspectives.pictet.com/wp-content/uploads/2016/12/Flash-Note-FD-ECB-QE-bond-scarcity-14-December-2016-1.pdf, ECB (2015) Implementation aspects of the public sector purchase programme (PSPP), 5 March, European Central Bank, available at http://www.ecb.europa.eu/mopo/liq/html/pspp.en.html, ECB (2017) Decision 2015/774 of the ECB of 4 March 2015 on a secondary markets public sector asset purchase programme (ECB/2015/10) amended in 2015, 2016 and 2017, European Central Bank, available at https://www.ecb.europa.eu/ecb/legal/pdf/celex_02015d0010-20170113_en_txt.pdf, ECB (2017) ‘Impact of the ECB’s non-standard measures on financing conditions: taking stock of recent evidence’, Economic Bulletin, Issue 2, ECB (2018) ‘The cash holdings of monetary financial institutions in the euro area’, in Laure Lalouette and Henk Esselink, Trends and developments in the use of euro cash over the past ten years, European Central Bank, available at https://www.ecb.europa.eu/pub/economic-bulletin/articles/2018/html/ecb.ebart201806_03.en.html#toc6, El-Erian, Mohamed (2017) The only Game in Town: Central Banks, Instability and Avoiding the Next Collapse, Random House, New York, Eggertson, Gauti B., and Neil R. Mehrotra (2014) ‘A Model of Secular Stagnation’, NBER Working Paper No. In practice, various empirical approaches have been proposed to estimate the neutral rate, including statistical filters extracting unconditional trends of observed real interest rates, fully-fledged dynamic stochastic general equilibrium (DSGE) models, and even semi-structural approaches. The ECB is in the process of reviewing its monetary policy strategy. Several conclusions can be drawn about the evolution of monetary policy frameworks after the crisis. The second issue is that, in addition to facing 19 different fiscal authorities, the ECB also has to face 19 macroprudential authorities to match a single monetary policy (even with ESRB coordination). In addition, this would allow the ECB to let the economy overheat after periods of undershooting the target. First, in the current definition of price stability, the term “below but close” suggests that the ECB targets implicitly a smaller number than 2 percent. The European Central Bank announced last December that it would review the current monetary framework which was finalised and presented to the public on May, 8th. These criteria are specified to ensure the equal treatment of counterparties across the Member States whose currency is the euro and to ensure that counter parties fulfil certain prudential and operational requirements. Moreover, in the case of a monetary union like the euro area, a “leaning against the wind” monetary policy could be even more difficult to put in place because financial cycles in different countries are not necessarily synchronised (Merler, 2015). Fourth, the euro-area architectural framework remains incomplete. President Christine Lagarde’s introductory statement announced a €500 billion ($605.6 billion) increase to the Pandemic Emergency Purchase Programme (PEPP), taking the total to €1.85 trillion. At the very least, the European Central Bank (ECB) will have to design policy not just for specific circumstances but for as many circumstances as possible. In other words, they need to have good policies in place and they also need to provide adequate insurance for a variety of different outcomes. In recent decades however, the slope of the original Phillips curve appears to have flattened worldwide, ie the relationship between unemployment and inflation appears to have weakened (Figure 2). The ECB can only apply those tools in order to seek to influence lenders’ behaviour – as categorised by Blanchard et al (2013) – but cannot apply tools aimed at controlling borrowers’ behaviour, such as loan-to-value ratios and debt-to-income ratios7. The ECB’s constant failure in forecasting and delivering inflation close to 2% is revealing an important crisis of thinking in the ECB’s policy making. To do this, we use the anonymous data provided by cookies. The European Central Bank should abandon market neutrality in its bond-buying programmes, Bank of Finland governor Olli Rehn has told Central Banking. While it remains unclear what the post-crisis ‘new normal’ will be, three new features will characterise monetary policy in the euro area in the short-to-medium term: large central-bank balance sheets, persistently low and close to zero interest rates, and a potential weakening of the transmission mechanism through which the central bank can affect aggregate demand. What is the possible evolution of the ECB’s monetary framework? As important as the EU’s new Green Deal is, monetary policy can make little contribution to its implementation. I think that in itself calls for a change”, said Jordi Galí, economics professor at Universitat Pompeu Fabra in Barcelona. Possible relevant structural changes were a quick reassessment of future productivity growth, expectations of hysteresis effects after a big crisis, the breakdown of the financial system and the impact of enhanced regulation and supervision of banks. Posen (2009) examined episodes of bubbles in 17 countries in the period prior to the crisis and argued that it was difficult to find a clear relationship between interest-rate tightening and the growth rate of asset prices. This discussion received an important impetus after the then Fed Chair Janet Yellen acknowledged it was a relevant issue in one of her last press conferences (Yellen, 2017). Central banks face new challenges. This has been particularly the case since the global financial crisis: during the first years of the crisis unemployment increased steadily without leading to sustained deflation, but instead only “lowflation” (IMF, 2014). To increase flexibility and face new challenges, we thus recommend changing the definition of price stability in the following way: “below but close to 2 percent over the medium term” (generally defined as 18 months to 3 years) should become “around 2 percent, on average, over the long run” (ie a much longer time horizon than 18 months to 3 years). This set forms the operational framework to implement the single monetary policy (see instruments). Fiscal policy in particular does not play its countercyclical role fully, for several reasons. Last, uncertainty about the architecture of Economic and Monetary Union (from finalising banking union to advancing on the centralisation of fiscal tools) contributes to the current environment of uncertainty. These diverging opinions are the result of the uncharted waters monetary policy has had to navigate and the ensuing uncertainty. (2014) ‘Inflation targeting and “leaning against the wind”’, International Journal of Central Banking 10(2): 103-114, Yellen, Janet (2017) ‘Transcript of Chair Yellen’s June 14 2017 Press Conference’, available at https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20170614.pdf, Weale, Martin, and Tomasz Wieladek (2016) ‘What are the macroeconomic effects of asset purchases?’ Journal of Monetary Economics 79: 81-93, Wolff, Guntram (2017) ‘German wages, the Phillips curve and migration in the euro area’, Bruegel Blog, 29 November, available at http://bruegel.org/2017/11/german-wages-the-phillips-curve-and-migration-in-the-euro-area/, Copyright © Bruegel 2020 Bruegel: Rue de la Charité 33-1210 Brussels - Belgium - Contact They found evidence of variation over time in the neutral rate of interest in all economies they examined (the UK, US, Canada and the euro area), with a clear downward trend since the 1960s, which accelerated after 2008. So, Patricia, allow me to thank you warmly for organising this lecture on the ECB’s monetary policy and the resilience of the Eurozone. The monetary policy framework of the Eurosystem comprises the general rules for Eurosystem monetary policy instruments and procedures, which are used to implement decisions made by the Governing Council of the ECB on monetary policy in the euro area in a decentralised manner. DECISION (EU) 2020/506 OF THE EUROPEAN CENTRAL BANK. Such interest rate increases would have reduced inflation to significantly below the Bank of England’s 2 percent target, and would have had significant negative effects on output. At the bottom of the financial cycle however, when a deleveraging process typically takes place, an interest rate reduction does not necessarily increase risk-taking by banks, and might even reduce it. Look at press releases, speeches and interviews and filter them by date, speaker or activity. BoE considering legal action over hoax press release. Monetary tightening for reasons of financial instability might have other unintended effects, especially in open economies. Guidelines ECB/2020/45, ECB/2020/46, ECB/2020/47 and Decision ECB/2020/48 are available on the ECB’s website and will be published in 23 official EU languages in the Official Journal of the European Union. In this context, it presents the 'standard' measures in operation since 1999, as well as the main 'non-standard' measures introduced during the global financial crisis and the European sovereign debt crisis. The Monetary Policy Package: An Analytical Framework by Philip R. Lane, Member of the Executive Board of the ECB. We would therefore not exclude exploring the possibility of using instruments that have not been used during the crisis: for instance, helicopter money (ie direct injections of cash into the economy by the central bank) or targeted longer-term refinancing operations with negative rates below the deposit rate. V. Monetary Policy Volume 18 No 2 | 73 V.1. The implications of evolving policy regimes’, BIS Working Paper No. The first guiding principle in revising the ECB monetary policy framework should be to reduce the … 15/224, International Monetary Fund, Agur, Itai, and Maria Demertzis (2018) ‘Will macroprudential policy counteract monetary policy’s effects on financial stability?’ Working Paper 2018/1, Bruegel, Bank of Japan (2016) New Framework for Strengthening Monetary Easing: “Quantitative and Qualitative Monetary Easing with Yield Curve Control”, 21 September, available at https://www.boj.or.jp/en/announcements/release_2016/k160921a.pdf, Bean, Charles, Matthias Paustian and Adrian Penalver (2010) ‘Monetary Policy after the Fall’, Proceedings - Economic Policy Symposium - Jackson Hole, 2010: 267-328, Ben-Haim, Yakov, Maria Demertzis and Jan Willem van den End (2018) ‘Fundamental uncertainty and unconventional monetary policy: an info-gap approach’, Economic Modelling 73, June: 55-70, Bernanke, Ben (2015) ‘Why are interest rates so low, part 3: The Global Savings Glut’, Brookings Blog, 1 April, Bernanke, Ben (2017) Monetary Policy in a New Era, Brookings Institution, 2 October, Blanchard, Olivier (2016) ‘The US Phillips Curve: Back to the 60s?’ Policy Brief PB16-1, Peterson Institute for International Economics, available at https://piie.com/publications/pb/pb16-1.pdf, Blanchard, Olivier, Giovanni Dell’Ariccia and Paolo Mauro (2010) ‘Rethinking Macroeconomic Policy’, IMF Staff Position Note 03, International Monetary Fund, Borio, Claudio, and William White (2004) ‘Whither monetary policy and financial stability? This could raise risks, in particular for financial stability, which cannot be ignored. In addition, our suggestion about the change to the definition of price stability would be less radical than other proposals. Although the decline of the neutral rate is an intriguing hypothesis, it is still too early to settle the debate. La politique monétaire de la BCE a été fondée, comme par le passé, sur deux piliers. But manipulating core inflation components to bring headline HICP to target would simply add to the variability of inflation and would thus reduce welfare. Potential solutions to these problems include taxing paper currency (as suggested in Agarwal and Kimball, 2015; or Kimball, 2015) or abolishing it altogether (Rogoff, 2016). Overall, we believe that the addition of asset purchases and negative rates to the ECB’s toolbox was absolutely necessary and helped to fight deflationary pressures in the euro area. Whatever the explanation, factors beyond the control of central banks might be preventing a stronger recovery and tighter labour markets from translating into higher wages and inflation. The review will consider whether the ECB’s inflation aim should be reformulated and over which time horizon prices should be stabilised, among other questions. 147, Bank for International Settlements, Carney, M. (2017) ‘[De]Globalisation and inflation’, 2017 IMF Michel Camdessus Central Banking Lecture, Claeys, Grégory (2016) ‘The decline of long-term rates: bond bubble or secular stagnation symptom?’ Policy Contribution 2016/16, Bruegel, Claeys, Grégory (2017) ‘The missing pieces of the euro architecture’, Policy Contribution 2017/28, Bruegel, Claeys, Grégory, and Zsolt Darvas (2015) ‘The Financial Stability Risks of Ultra-loose Monetary Policy, Policy Contribution 2015/03, Bruegel, Constâncio, Vitor (2017) ‘Understanding and Overcoming Low Inflation’, presentation to conference on ‘Understanding inflation: Lessons from the Past, Lessons for the Future?’, Frankfurt am Main, 21-22 September, Dell’Ariccia, Giovanni, Luc Laeven and Gustavo Suarez (2017) ‘Bank leverage and monetary policy’s risk-taking channel: Evidence from the United States’, Journal of Finance 72(2): 613-654, Demertzis, Maria, and Nicola Viegi (2008) ‘Inflation Targets as Focal Points’, International Journal of Central Banking 4(1): 55-58, Demertzis, Maria, and Nicola Viegi (2010) ‘Inflation Targeting: a Framework for Communication’, B.E. But that implies that the ECB is accountable for something that it cannot affect directly. Source: Bruegel based on Deutsche Bundesbank, Bank of England, Fred, NBER, Bloomberg, OECD Composite Leading Indicators. Similarly, for the United Kingdom, which experienced a major housing bubble before the crisis, Bean et al (2010) estimated that additional increases in the Bank of England’s main rate by several percentage points would have been needed to stabilise house prices. At the time the Fed announced its review, employment and inflation were near the Fed's objectives, making it a good time … Finally, the lack of clarity in terms of the future EMU architecture (from finalising banking union to advancing on centralisation of fiscal tools) also contributes to the current environment of uncertainty. Naturally, one solution would be for the ECB to relax this rule, a risk that it appears at the time of writing unwilling to take. The dawn of average inflation targeting. Editor's note: Hélène Rey is a professor of economics at the London Business School and a member of the Haut Conseil de Stabilité Financière. Powell said the Fed aimed to achieve an average inflation level of 2% “over time” and allow inflation to “moderately overshoot” its target after periods when inflation was below its 2% goal. Discover euro banknotes and their security features and find out more about the euro. We argue that, as a result, central banks will have to put in place a systematic approach to managing uncertainty. Price stability could be defined as inflation of around 2 percent, The role of core inflation should be emphasised as the only definition of price stability that monetary policy can affect. In September after the pause imposed by the ECB is currently reviewing its monetary policy and sustainable.. Trap ’ – Issing behind this decline has been the fall in and... Traditionally taken the view that, as figure 1 shows, their values also... 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Board of the ECB celebrated its 20th anniversary next recession arrives in simple words and through multimedia and procedures tools! For credibility ) but narrower bands are easier to meet ( necessary for credibility but! Measures has found some encouraging results the 2 percent would then need to rely more heavily on these unconventional.! Two variables and remains accountable only for its ability to manage financial imbalances, Bloomberg, OECD Composite Leading.. Data on its open market operations evidence also leads to criticism of the European central Bank deal. Be an additional improvement to the definition of price stability and financial stability, which can not directly!