European monetary policy: Institutional design and policy experience

The following article examines design issues relevant to European monetary policy: central bank independence, and the accountability and transparency of monetary policy strategy. An empirical approach is then applied which allows a comparison between the ECB and other central banks. It also enables an investigation of whether the ECB simply follows the US Federal Reserve Bank, as is sometimes claimed.     

Transparenz und Forward Guidance: Stimulierung der Volkswirtschaft in der Eurozone?

The author delivers details on whether and how the effectiveness of the ECB’s policies can be improved through more transparency and “forward guidance”. Is publishing the minutes of Council meetings really a good idea? How should we assess the publication of the details of who has voted (and in what way) in the meetings? Is the ECB plagued by deficiencies in transparency, with an eye on the bank’s steadily growing responsibilities? Should the ECB stick to the instrument of “forward guidance” even beyond the crisis period? How predictable and assessable can and must monetary policy be? Can central banks endowed with too much guidance become a source of volatility? The ECB will adopt banking surveillance in the euro area: do particular transparency and accountability obligations result from this? And if yes, how can they be fulfilled? Finally, the author assesses the limits of the transparency and communication of central banks.     

EZB-Krisenpolitik: OMT-Programm, Vollzuteilungspolitik und Lender of Last Resort

This paper applies the economic argumentation put forth by the OMT’s opponents before the German Federal Constitutional Court [Bundesverfassungsgericht] to the full allotment policy practiced by the ECB since October 2008. The comparison shows that under this line of reasoning, the full allotment policy also contravenes the ECB’s mandate. Ultimately, therefore, the ECB is not in court because of monetary financing, but rather in its role as a lender of last resort. Accordingly, a court decision against the OMT would endorse an economic argumentation which contradicts 150 years of modern central bank history.     

ECB: Independence at risk?

The extraordinary measures taken by the ECB to combat the fi nancial crisis have led many observers to question whether the bank has put its independence at risk. The bank’s vow to do “whatever it takes” to save the euro has added a second (and potentially contradictory) goal alongside its primary mission of achieving price stability. This expansion of the ECB mandate could expose the bank to national and European political demands, thereby endangering its prized independence.     

Geldpolitik und Nachhaltigkeit

Wirtschaftsdienst - ECB President Christine Lagarde and others have suggested that climate change creates risks for price stability and for the viability of counterparties to central bank...     

基于市场预期行为的货币政策透明度检验

通过考察金融市场参与者的行为变化或分析市场利率在政策公告后的变化趋势,可以间接对货币政策透明度进行度量;利用相应的货币政策透明度检验模型和我国金融市场的利率数据进行检验,可知我国中央银行在基准利率调整和准备金率改变等重大的政策决策上,货币当局更倾向于采用模糊的政策操作方式,由此会导致市场预期的混乱,并最终对政策实施效果产生负面影响,因此,我国有必要借鉴西方国家的政策操作经验,进一步增加政策操作方面的透明度,并借以最终建立一个简单透明、效率更高的政策调控框架。     

Bundesverfassungsgericht und Krisenpolitik der EZB — Stellungnahmen der Ökonomen

In June 2013, the Federal Constitutional Court in Germany held an expert hearing on the suitability of ECB measures, such as the purchase of government bonds, and their compatibility with existing EU and German legislation. The statements of five invited experts are documented here. The authors comment on the path from the agreement that has laid down the basic rules for the euro area to a crisis-driven approach that seems to have forgotten these rules. The ECB policy holds many risks - above all that of financing public budgets almost without limits - for the stability of monetary and fiscal governance in the euro area. On the other hand, ECB measures can also be interpreted as a necessary means to comply with the ultimate task of the ECB, the defence of price stability. Hence the ECB’s crisis measures do not represent any intention to intervene in fiscal or economic policy measures, and after the crisis the ECB can return to a narrower interpretation of the role of a central bank. It should not be forgotten that the ECB measures bear high risks for the countries in trouble as well as for those countries supporting them.     

ECB monetary policy during the “Weak Euro” period of 1999/2001

The European Central Bank has often been accused of lacking transparency in the conduct of its monetary policy. This article analyses the theoretical strategy of the ECB and compares it with the policy actually pursued. Conclusions are drawn and recommendations made for future policy.     

Who Supports the ECB? Evidence from Eurobarometer Survey Data

This paper studies the determinants of the support for the European Central Bank (ECB) in the member countries of the European Monetary Union (EMU) and their evolution from 1999 to 2015. Our contribution is to examine micro‐level sociodemographic characteristics from the Eurobarometer surveys jointly with macroeconomic indicators of trust in a central bank in order to evaluate econometrically their relative importance over time. Pseudo‐panel logit estimates reveal that the former have a dynamically stable, and generally stronger influence taken altogether, when compared with the latter. Interestingly, we find that while expected inflation becomes a positive determinant of trust in the ECB after the global financial crisis (GFC), actual inflation gets no statistical significance. Having taken centre stage in the monetary policy debate in the Euro‐area post‐GFC and especially since 2013, excessive disinflation and risk of deflation attracted strong attention by the public and have consequently affected its perceptions about the ECB. Accordingly, our results emphasise forward lookingness of the EMU population with regard to ‘deflation scares’ in determining trust in the ECB, in addition to disentangling the contributions of the key individual‐level sociodemographic factors, and can duly inform ECB's communication strategy.     

Monetary dialogue 2009–2014: Looking backward,looking forward

In response to the fi nancial crisis, the ECB has had to adopt new instruments to support the euro area economy and preserve the integrity of the single currency. This has challenged the current framework of the Monetary Dialogue exercise. This paper briefl y assesses the implications of enhanced transparency and “forward guidance” for the effectiveness of the ECB’s policies. It then checks whether the Monetary Dialogue works, and if and how the current Monetary Dialogue framework needs to change in order to fulfi l its goal.     

The ECB During the Financial Crisis. Not so Unconventional!

The European Central Bank's balance sheet has expanded notably, without banks granting more credit, and the overnight interest rate has stayed close to the deposit facility level for long periods of time since the onset of the financial crisis. This appears to go against the logic implicit in the post‐Keynesian Horizontalist approach to monetary macroeconomics, which links reserves to credit and holds that a central bank accommodates the demand for reserves in order to control the overnight interest rate. In this article, we analyze the monetary policy implemented by the ECB since the third quarter of 2008, with a view to studying its implications for monetary theory, concluding that this approach can still explain much of what has happened in the Euro Zone in the last troubled years, despite paradoxically, there being excess reserves and simultaneously accepting that reserves are demand led, and that the ECB has lent them at the official rate while the overnight interest rate has been close to the deposit facility rate. Further, this analysis reveals that mainstream monetary theory has not been very useful, because neither the link between reserves and loans nor the relation between reserves and inflation have worked. This leads us to believe that some transmission channels of the monetary policy implemented by the ECB since late 2014, which can be deemed unconventional, will not perform well.     

Ist der Euro jetzt gerettet?

The paper analyses the German Federal Constitutional Court??s ruling on the ESM Treaty and the Fiscal Pact in the framework of the interim measures and provides an outlook on the decision in the main action. The material scope of the judgment and the standards of review are identified as well as the possible effects on the political scope of further euro bailout policy. The current crisis does not allow sufficient time for making the required changes to the EU treaties and to the German constitution. In view of the expected decision on the monetary policy strategy of the ECB, legal and economic aspects are considered, and the role of the central bank is critically reflected.     

US–Euro Area Monetary Policy Interdependence: New Evidence from Taylor Rule‐based VECMs

(1227) Ansgar Belke and Yuhua Cui This paper analyses the monetary policy interdependence between the European Central Bank (ECB) and the Federal Reserve (Fed) for the period 1999–2006. Two models are specified: a partial vector error correction model (VECM) and a general VECM. In the partial VECM, we look for a long‐run interdependent relationship between the interest rates of the two currency areas and specify the Taylor Rule terms as exogenous variables. In the general VECM, we regard all variables as endogenous, and look for long‐run equilibrium relationships among them, which may reveal monetary policy interdependence between the two central banks. Weak exogeneity is checked in both models in order to establish a possible leader–follower relationship. The empirical results of both models indicate interdependence between the ECB and the Fed, but only the general VECM testifies a leader–follower pattern between the two central banks. According to this pattern, the ECB does follow the Fed.     

Managed floating as a strategy to achieve selected monetary policy objectives

The paper considers the connection between exchange rate regimes and economic performance as measured by inflation, output growth, and their volatility. It is argued first that the choice of an intermediate exchange rate regime is complicated by potential conflicts with the requirements of central bank transparency and accountability. These are considered to be longer run questions. Next, three types of managed floating regimes are defined. A variety of counterfactual experiments are shown to illustrate that a managed float, such that the objective of monetary policy is expressed in terms of an inflation target, will produce the most desirable macroeconomic outcome. The counterfactuals are supplemented with estimates of forward-looking Taylor rules to ascertain whether such rules are informative under a managed floating scenario. In general, the answer is that central bank reaction functions become less useful when the exchange rate regime is an intermediate one.     

The ECB’s New Monetary Policy Strategy

The ECB updated its monetary policy strategy for the first time in 18 years in July 2021. Therein, the ECB announced that it is willing to accept a transitory period of moderate inflation overshoot in its efforts to push inflation upwards after a long period of undershooting its target. This study explores whether such an overshoot can be economically justified employing a simple Phillips curve model. The results point to the conclusion that the average inflation rate over the business cycle consolidated about one percentage point below the ECB’s target rate. A temporary asymmetry of the ECB’s monetary strategy seems therefore justified to realign inflation and inflation expectations with the target rate.

     

The new ECB voting system: Some room for improvement

In order to overcome the “numbers problem”, the ECB recently proposed a weighted rotation system that limits the number of votes to at most 21. Many academics heavily criticise the proposal. Besides very fundamental criticism the composite indicator that allocates national central banks into the voting groups has especially been called into question. Its implementation would cause some conflicts concerning procedure and in connection with the discretionary elements of the ECB proposal.     

Talking by numbers — Communicated uncertainty of the ECB

Using a novel approach, this paper analyses the deliberately communicated uncertainty of the ECB to the market. Specifi cally, it semantically analyses the uncertainty expressed in offi cial ECB press statements. The analysis shows how the ECB tries to alert or appease the market with different levels of communicated uncertainty. The appeasement through low uncertainty communication levels is particularly pronounced during times of fi nancial distress. Further, the analysis shows that the ECB tried to alert the market through an increasing level of communicated uncertainty prior to the outbreak of the global fi nancial crisis.     

Dauerkritik an der Europäischen zentralbank

The ECB’s decision in favour of additional unconventional monetary policy measures has been severely criticised by German economists, experts and the media. This is consistent with the relentless criticism that the ECB has been subject to over recent years, even though the facts clearly show that the ECB has been living up to its mandate. The prevalence refl ects adherence to a monetary theory that is wrongly applied. The collateral damage of this misapplication is huge as the permanent and unjustifi ed criticism undermines confi dence in the ECB and hence a key element of European integration.     

A Simple Post-Crisis EMU Phillips Curve — Implications for Monetary Policy

The persistently low wage and price growth in the EMU after the Great Recession of 2009 led some economic observers to conclude that the Phillips Curve has broken down and that the ECB should therefore reconsider its infl ation target. This study makes use of the considerable cross-country and cross-time heterogeneity in terms of infl ation and capacity utilisation of EMU member states after the Great Recession to investigate whether these claims are corroborated by empirical evidence. The results point to the conclusion that the Phillips Curve is alive and well in the EMU and centred at or only slightly below the ECB’s inflation target. Therefore, a readjustment of the infl ation target seems unjustified. Furthermore, as the ECB can expect inflation to return to its target, it possibly can accelerate tapering its unconventional monetary policy measures as the recovery continues.     

Financial Crises and Central Bank Independence

Although cooperation between central banks and treasuries is controversial, this paper contends that in a crisis it is inevitable and desirable. Six reasons for cooperation in a crisis are advanced. Disengagement in the aftermath and restoring central bank independence is tricky, however. The paper concludes with comments on what is necessary to maintain central bank credibility.