The ECB and Its Watchers XVII

Natascha Lenz

With the eurozone still lagging despite the ultra-low interest rates and the bond-buying program of the European Central Bank, unconventional monetary policy measures were in the center of the discussion of the seventeenth edition of the "The ECB and Its Watchers" conference. The ECB's measures could be increased Peter Praet, the ECB’s chief economist, told the audience. "If further adverse shocks were to materialize, our measures could be recalibrated once more commensurate with the strength of the headwind, also taking into account possible side effects". Without the stimulus, inflation in the euro area would have been around half a percentage point lower in the first months of 2016 and the economy would be around 1.5 percent smaller by 2018, he said. However, he pushed back against radical proposals. Helicopter money was "not on the table", Praet told the audience. "It's not even discussed informally". Time and again, some economists argue that central banks should apply radical measures like this textbook concept of printing money and handing it to citizens in order to prevent deflation in the euro area.

Benoît Cœuré, ECB Executive Board member, emphasized the ECB's independence. "Our mandate is not conditional on what others are doing," he said. Growth-friendly measures would make the ECB's ultra-easy monetary policy more effective, he added. Regarding the question what could be done collectively to make monetary policy more effective Cœuré came to the conclusion that "taking forward the EMU integrations will also improve the effectiveness of monetary policy transmission".

In his presentation, Charles Bean, professor at the London School of Economics, investigated monetary policy in a disinflationary world, looking at forward guidance, quantitative easing, negative interest rates or rather exotic options such as raising the inflation target to e.g. 4 percent or eliminating cash. Warning the central bank about trying to squeeze more and more out of monetary policy, Bean concluded that it was "time for fiscal and structural policies to play a bigger role". Also to Hans-Helmut Kotz monetary policy is overburdened. However, "the need for more coordination is dependent on the context", the Senior Fellow at the Center for Financial Studies warned.

Hyun Shin of the Bank of the Bank for International Settlements drew the attention to the banking sector criticizing that banks don't figure that much in macroeconomic models. However, in his view it was absolutely crucial to focus on bank capital. Presenting his recent study "Why bank capital matters for monetary policy", Shin appealed that "equity is the foundation of lending". As banks were better capitalized they could borrow more cheaply. Martin Hellwig of the Max Planck Institute for Research on Collective Goods touched upon the relationship between financial stability and monetary policy. Over the past one and a half years many unusual policies were applied, "all of them in the name of fighting inflation". However, according to Hellwig the justifications for unconventional measures were too weak, asking the ECB for more patience. "It took two or three years in the past for measures to have an effect," Hellwig recalled. "If you don't want to wait then force banks to capitalize now," he concluded.

Catherine Mann, Chief Economist at the OECD focused on the challenges for monetary policy looking at global growth weakness "through the trade lens". In Mann's view, the responsiveness of many central banks by recurring to negative interest rates reminded her of a fashion item. As the global growth weakness was caused by China to a large extent, the development of its economy after the internal rebalancing was an important aspect.

Regarding the question whether monetary policy should take into account financial stability risks explicitly "weak macroprudential policy may increase the severity of a crisis," Lars Svensson, professor at Stockholm University, warned. Anil Kashyap of the University of Chicago argued that leaning against the wind in monetary policy "slows growth in the future but also can prevent a very costly crisis". In his opinion, the Bank of England model "beats the US and euro area model for tackling instability". But "it had not been tested yet".

Giovanni Dell'Arriccia of the International Monetary Fund warned of challenges that come to central banks' independence when their mandate is expanded: "When you include financial stability everything becomes more complicated".  Also to ECB Governing Council member Ignazio Visco it is very difficult to consider both financial stability and monetary policy. Nevertheless, "growth and price stability are key for financial stability," he underlined. "A very accommodative monetary policy involves risks but low levels of interest rates reflect a slack in the economy and dangerously low actual and expected inflation," he added.