ECB: Quo Vadis?

The European Central Bank has implemented a very ambitious monetary policy since the financial crisis of 2008, intervening heavily in the eurozone economies. This policy has generated substantial risks to both the ECB’s primary task and its independence. It is therefore time for a fundamental evaluation of the ECB’s monetary policy strategy.     

Driven by the markets? ECB sovereign bond purchases and the securities markets programme

At the height of the European sovereign debt crisis, the European Central Bank decided to purchase distressed European government bonds. Even worse, and more importantly, the ECB is providing direct support of several hundred billions of euros to troubled banks via its normal monetary policy operations by granting them the opportunity to refinance at an interest rate of 1%. This article argues that these purchases will result in common monetary policy being dominated by national fiscal policies. The most worrisome aspect is that the euro area appears to have stumbled into unconventional monetary policies that, once started, will be difficult to exit. In the euro area, properly functioning financial markets are at risk.     

The Euro's place in the world monetary system

The European Union is striding ahead on schedule towards European monetary union (EMU). Eleven member states will introduce the euro for book-keeping purposes on 1.1.1999, assigning responsibility for monetary policy to the European System of Central Banks. On 1.1.2002, the euro will also be in circulation as notes and coins, and the participating countries will abandon their national currencies by 30.6.2002 at the latest. But what part will the euro play in the world monetary system? And what conclusions do we need to draw?     

Problems of measuring money supply in the Euro Area

With just a few weeks left to go before responsibility for monetary policy is transferred from the EMU member countries to the European Central Bank, there is still no standardised concept for measuring a euro area money supply which could serve as a statistical basis for a money-supply oriented monetary policy strategy. Which problems remain to be solved?     

Treaty Reform: Consequences for Monetary Policy

The proposed reform treaty, aimed at enhancing the efficiency and democratic legitimacy of the enlarged Union as well as its position on the global stage, has a number of important implications for monetary policy and the status of the European Central Bank. Can the reforms be expected to make euro area governance more efficient? Could they potentially jeopardise the ECB's independence and European monetary policy? Member of the Panel of Experts of the Committee on Economic and Monetary Affairs of the European Parliament, to which the article was first presented as a Briefing Paper for the Monetary Dialogue with the President of the European Central Bank in October 2007. The author gratefully acknowledges the helpful comments of Edin Mujagic and the excellent research assistance of Rob Nijskens.     

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.     

Zur Problematik einer politisierten Europäischen Zentralbank

In September 2012, in order to save the euro, the Governing Council of the European Central Bank (ECB) announced unlimited purchases of crisis-country bonds if necessary (Outright Monetary Transactions). This was a significant change in monetary policy, leading to a controversial integration with fiscal policy and endangering the ECB’s independence as well as the preservation of price stability as its primary target. To restore the strict distinction between monetary and fiscal policy and to avoid monetary deficit financing, the author proposes to forbid purchases of government bonds not only on primary but also on secondary financial markets.     

Niedrige Zinsen — gesamtwirtschaftliche Ursachen und Folgen

Due to the financial crises from 2008 to 2012, unconventional monetary policy caused an environment of record low interest rates around the world. Maintaining the low interest rate policy might be reasonable for the ECB in the short run in order to fight the fragmentation of the financial market and the risk of defl ation in the Eurozone. Some authors argue that permanently low interest rates lead to wrong incentives in the financial market for debtors and creditors alike. They fear potential risks for fiscal policy and financial stability in Germany and recommend macroprudential measures beyond the Basel III framework and a beginning exit of the ECB from its unconventional monetary policy. Others warn against overburdening monetary policy. They find rather that effective financial market regulation and proper fiscal rules and institutions are required to secure financial market stability and the sustainability of public debt and that a premature exit from accommodating monetary policies would do more harm than good. They argue that monetary policy alone will not solve Europe’s problems. The differing recommendations are mainly based on differing assessments of the European business cycle.     

How Large Is the Risk of Stagflation in the Eurozone?

The rapid recovery of demand combined with supply constraints has led to rising prices during the past months. This is evident in oil and gas markets, but also in international trade, which has been thrown out of step by bottlenecks at Asian ports. This situation creates a trade-off for the European Central Bank, because a more expansionary monetary policy cannot mitigate the supply bottlenecks and supply-side restrictions, while a more restrictive monetary policy would slow down the economic recovery. For this reason, key interest rate hikes in the eurozone are not to be expected for 2022. If the supply-side factors become persistent and wage policy tries to pass the price effects on, monetary policy will be forced to become restrictive.

     

Wie soll die EZB aus ihrer unkonventionellen Geldpolitik aussteigen?

As economic conditions improve in the euro area, the European Central Bank (ECB) has to decide how to sequence the normalisation of monetary policy. Phasing out asset purchases first would mainly increase long-term rates and help to mitigate some of the most negative side effects of the extremely expansionary monetary policy, such as misallocations in asset markets. In contrast, starting with an increase of the rate on the deposit facility would reduce the implicit tax on banks’ liquidity holdings at the ECB, which could improve financial stability. Forward guidance and clear communication from the ECB are crucial to safeguarding a smooth transition back to a more conventional monetary policy.     

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.     

The unconventional monetary policy of the European Central Bank: Effectiveness and transmission analysis

Since the beginning of the financial crisis in summer 2007, the European Central Bank (ECB) has redirected traditional monetary policy, based on interest rates, to an unconventional monetary policy focused on the quantitative expansion of its balance sheet. In this context, the present paper aims to assess the effectiveness of unconventional monetary policy instruments with regard to inflation and economic growth. To this end, the methodology is based on the estimation of a structural vector autoregressive model for the period 2007:Q1–2018:Q4, using four variables: EONIA, the total amount of assets on the ECB's balance sheet, the Eurozone inflation rate and the Eurozone economic growth rate. The results show a slight impact of the different balance sheet policies on inflation and economic activity behaviour, especially during the last year of the financial crisis. The robustness of these results is supported by the estimation of the same model replacing EONIA rates with shadow rates. Therefore, the results support the existence of monetary transmission for the period during which the unconventional monetary policy was developed as well as the effectiveness of the monetary policy adopted by the ECB in its commitment to price stability.     

Issues of European monetary integration

In recent years significant progress has been made towards European monetary integration. Widespread agreement as to the role of monetary policy has been established and there were no realignments of exchange rates within the European Monetary System between March 1983 and July 1985. This was the longest period without realignment in the EMS and contrasted sharply with the six realignments observed in the four years previously. What are the prospects for the further strengthening of the EMS? How can the present system be developed further?     

The reality of integration within the european union

The European Single Market program has put in place legislation that provides the free circulation of goods, capital, and people. Further, the recent implementation of monetary union provides a single currency and a common monetary policy in 11 out of the 15 Member States. Yet significant practical barriers to European integration remain. Legislation concerning taxation and company law is still primarily nationally based. More fundamentally from a business perspective, the European environment continues to be characterized by divergent industry structures and national cultures. Although there is considerable momentum for political and economic integration at present, this deep-seated national diversity remains strong and can hinder businesses from adopting an integrated approach toward the European Union. © 1999 John Wiley & Sons, Inc.     

Is an ECU parallel currency the way to achieve European monetary integration?

A very lively debate has now developed about the future of European monetary policy. Dr. Peter Bofinger analyses the arguments for and against the promotion of the ECU as a parallel currency.     

The impact of banking behaviour on monetary strategy in Europe

Over the last twenty years, the process of European integration, and improvements in the processing and transmission of information, have meant that the European financial system has become less bank-based and more market-based. This trend has been reinforced by the transition to a single European currency. European banks are now increasingly expanding into asset management as well as the consulting business. What are the consequences of this for the effectiveness of European monetary policy? How should the ECB react?     

MONETARY POLICY RULES IN THE RUN‐UP TO THE EMU

We characterize central bank behavior in the euro area during the run‐up to the European Economic and Monetary Union (EMU) era by estimating Taylor rule‐type reaction functions at both the individual and aggregate level. We focus on whether national monetary policies during the run‐up to the EMU were responding to economic developments according to their own policy rules or to a broader, euro area‐wide, policy rule. To consider the last possibility we examine whether national monetary policies were responding to German interest rates. Finally, we compare the performance of the estimated with imposed policy rules.     

从欧债危机看欧洲一体化进程中存在的问题

欧债危机根源于欧盟内部经济发展的不平衡以及欧盟内部体制上存在的缺陷。欧债危机的产生与欧洲一体化进程中存在的一味加快一体化进程,物质基础被破坏,欧盟制度安排存在缺陷,统一的货币政策与分散的财政政策无法有效协调等问题有着必然联系。要彻底解决欧债危机必须加快实现财政一体化,尽快缩小欧元区内部各国经济发展的差距;改革劳动力市场政策,促进劳动力要素自由流动;改革欧盟的制度安排,增强欧盟相关制度对成员国的约束力。     

Is the US Dollar a Suitable Anchor for the Newly Proposed GCC Currency?

Responses of inflation and non‐oil output growth from the Gulf Cooperation Council (GCC) countries to monetary policy shocks from the United States (US) were estimated to determine whether there is evidence to support the US dollar as the anchor for the proposed unified currency. A structural vector autoregression identified with short‐run restrictions was employed for each country with Fed funds rate as the US monetary policy instrument, non‐oil output growth and inflation. The main results suggest that for inflation, the GCC countries show synchronised responses to monetary policy shocks from the US which are similar to inflation in the US, and for non‐oil output growth, there is no clear indication that US monetary policy can be as effective for the GCC countries as it is domestically. Consequently, importing US monetary policy via a dollar peg may guarantee only stable inflation for the GCC countries – not necessarily stable non‐oil output growth. If the non‐oil output response is made conscientiously – and there are concerns over the dollar’s ability to perform its role as a store of value – a basket peg with both the US dollar and the euro may be a sound alternative as confirmed by the variance decomposition analysis of our augmented SVAR with a proxy for the European short‐term interest rate.     

Monetary policy spillovers and currency crisis in comparative perspective: East Asia before the 1997 crisis and Eastern Europe after tapering

This paper estimates the possibility of currency crisis in Eastern Europe that can be triggered by monetary policy change in the key currency countries, such as tapering measure. We examine the crisis possibility in the five Eastern European nations—the Czech Republic, Poland, Hungary, Bulgaria and Romania—by performing a comparative analysis with East Asian countries before the 1997 currency crisis. For the analysis, we estimate how much the exchange rate deviates from the estimated equilibrium exchange rate, as well as the synchronicity of currency value towards some of the key currencies by creating market pressure index. The results can be explained in two ways. First, the market pressure in the Eastern Europe after 2012 is smaller than they were in East Asia before 1997. The crisis possibility especially intensifies when more the exchange rate deviates from the equilibrium value. Second, the monetary policy change in the key currency countries does not greatly affect the crisis possibility in Eastern Europe when their local currencies have the strong synchronisation with euro. Therefore, Eastern European countries show strong synchronicity towards the euro, so the crisis possibility may be alleviated if the Eurozone continues its expansionary monetary policy.