Philipp Hartmann, Glenn Schepens, 12 May 2021

The 2020 ECB Forum on Central Banking addressed some key issues from the ongoing monetary policy strategy review and embedded them in discussions of major structural changes in advanced economies and the post-COVID recovery. In this column, two of the organisers highlight some of the main points from the papers and debates, including whether globalisation is reversing, implications of climate change, options for formulating the ECB's inflation aim, challenges with informal monetary policy communication, relationships between financial stability and monetary policy, how to make a monetary policy framework robust to deflation or inflation traps and the role of fiscal policy for the recovery from the pandemic.

Asger Lau Andersen, Niels Johannesen, Mia Jørgensen, José-Luis Peydró, 19 April 2021

Who gains – and by how much ­– when central banks soften their monetary policy regime is a key policy question. This column discusses new evidence on the distributional effects of monetary policy based on detailed administrative household-level data. The authors show that the gains from lower policy rates exhibit a steep income gradient, with the increases in income, wealth, and consumption modest at the bottom of the income distribution and highest at the top. 

Eric Monnet, 26 March 2021

Since 2008, a new central banking model has emerged. Monetary authorities increasingly engage in targeted lending, hold large amounts of public debt, and focus on climate change. This column argues that the new practices of central banks call for an updated institutional framework in order to maintain democratic legitimacy. It proposes the creation of a European Credit Council, which would provide impartial assessments of the ECB’s decisions, particularly those with large distributional consequences. In addition, it would develop proposals for coordinating monetary policy with other EU policies and reinforce the role of the European Parliament.

Gene Ambrocio, Andrea Ferrero, Esa Jokivuolle, Kim Ristolainen, 06 March 2021

Central banks often have inflation targets at the centre of their monetary policy regimes. This column presents survey data from 613 leading economists to explore their views on these inflation targets and wider policies within their countries of residence. The results suggest that maintaining the prevailing inflation target (for central banks that have one) has more support than changing it does. But more respondents are pessimistic about central banks’ ability to meet these targets, particularly in the euro area.

Valentin Jouvanceau, Ieva Mikaliunaite, 25 February 2021

The Euro Area Monetary Policy Event-Study Database makes available intraday asset price changes around ECB policy announcements for a wide range of assets, but conceals unrecognised effects of the ECB’s actions and communications. This column presents three new types of monetary surprises: ‘duration’, ‘sovereign spread’, and ‘save the euro’. These reflect the frequent and significant reactions of long-term sovereign bond yields to ECB monetary policies.

Ioana Duca-Radu, Geoff Kenny, Andreas Reuter, 09 February 2021

When interest rates cannot go any lower, the economy can be stabilised if consumers expect the rate of inflation to increase. Yet, the evidence for this stabilising effect has been very mixed. This column presents new evidence from a monthly survey of over 25,000 individual consumers across the euro area, showing that consumers are indeed more ready to spend if they expect inflation to be higher in the future. While generalised in the population, the stabilising effect is stronger when nominal interest rates ­are constrained at the lower bound.

Ignazio Angeloni, 03 December 2020

Ethan Ilzetzki, 16 November 2020

The ECB is in the process of reviewing its monetary policy strategy. 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. Only a minority support increasing the inflation target itself. 

Angela Capolongo, Barry Eichengreen, Daniel Gros, 23 October 2020

Seeking to internationalise the euro is now an official policy of EU institutions.  But a constraint on wider use of the euro, by central bank reserve managers in particular, is the shortage of safe euro assets – a problem that is being made worse by the ECB’s asset purchase program. This column proposes a solution to this problem: issuance by the ECB of its own certificates of deposit.

Willem Buiter, 01 October 2020

National central banks within the Eurosystem with substantial holdings of own risky sovereign debt are at material risk of default if their sovereign defaults, since the likelihood of recapitalisation of an insolvent national central bank by its defaulted sovereign is low.  Risk exposures of a national central bank that are out of line with the risk exposures of the consolidated Eurosystem are therefore an existential threat to the monetary union. This column discusses the key flaws in the design of the Eurosystem responsible for this threat and explores three approaches to reducing the insolvency risk of national central banks.

Johannes Fleck, Adrian Monninger, 02 October 2020

Household portfolios in the euro area differ systematically between countries. As a result, ECB policies have asymmetric effects and views on a potential EU financial transaction tax are divergent. This column argues that cross-country variation in portfolio structures is due to variation in country-specific beliefs on social and communal insurance. These beliefs lead to differences in subjective expectations regarding the availability of external support during financial distress. This means that they regulate the extent to which households use their portfolios for self-insurance, as well as their readiness to participate in debt markets.

Márcia Pereira, José Tavares, 17 September 2020

Crises such as the sovereign debt crisis and the current Covid-19 crisis place significant pressure on European institutions, raising scepticism over policy decisions and speculation as to how member states’ differing needs are taken into account. This column uses estimated counter-factual country-specific interest rates to extract the country weights implicit in the ECB’s conventional monetary policy. Germany, Belgium and the Netherlands are associated with the largest weights, and Greece and Ireland with the smallest. Nonetheless, the weights of the larger economies are smaller than their output and population shares. The results change minimally when the crisis period is compared with the period before. In sum, while weights differ across countries, they do not seem to unduly weigh larger economies. Further, estimated country weights are positively correlated with the degree of co-movement between each country’s and Germany’s business cycles.

Eric Lonergan, Megan Greene, 03 September 2020

The low interest rate environment since the Global Financial Crisis has led economists and analysts to suggest that major central banks have run out of monetary policy tools with which to face major downturns, including the Covid-19 crisis. This column argues that a dual interest rate approach could help to eliminate the effective lower bound and given central banks infinite fire power. By employing dual interest rates, central banks can go beyond targeting short-term interest rates and providing emergency liquidity to provide a stimulus across the economy. As political support for fiscal stimulus in the face of the Covid-19 crisis wanes, central banks can and should step in with overwhelming force.

Giancarlo Corsetti, Joao B. Duarte, Samuel Mann, 07 August 2020

A persistent challenge for the ECB has been meeting the various needs and demands of euro area member states. This column provides empirical and quantitative evidence suggesting that the transmission of the ECB’s monetary policy varies significantly across member states. For variables such as those related to housing and labour markets, the dispersion of responses to a monetary shock is twice as large as the average response. The results also suggest that the disruption to market integration brought about by the COVID-19 crisis may create further challenges to conducting monetary policy in the euro area.

Carlo Altavilla, Refet Gürkaynak, Roberto Motto, Giuseppe Ragusa, 03 August 2020

Mapping the impact of central bank policy communications onto yield curve changes  is important but challenging. This column studies policy communications of the ECB and maps these communications onto yield curve changes by studying the information flow on days when a monetary policy decision is communicated. Using the now publicly available Euro Area Monetary Policy Event-Study Database,it finds that different monetary policy measures affect different segments of the interest rate term structure, with policy rate changes mostly influencing the short end of the curve, quantitative easing measures more the long end, and forward guidance policies affecting intermediate maturities. 

Maritta Paloviita, Markus Haavio, Pirkka Jalasjoki, Juha Kilponen, Ilona Vänni, 28 July 2020

The introductory statements made by the ECB are some of the most important sources of insight into the central banks’ policy goals. This column presents a textual analysis which seeks to measure the tone of the statements, with the aim of estimating the Governing Council's ‘loss function’. The results suggest that the ECB has been either more averse to inflation above the 2% ceiling, or that the de facto inflation target has been considerably below this threshold. The results also suggest that an inflation aim of 2%, combined with asymmetry, is a plausible specification of the ECB's wider preferences.

Peter Bofinger, Martin Hellwig, Michael Hüther, Monika Schnitzer, Moritz Schularick, Guntram Wolff, 08 June 2020

Ignazio Angeloni, 26 May 2020

In 2012, at the peak of the euro crisis, the leaders of the EU launched the banking union, involving the transfer of large parts of the banking regulatory and supervisory framework from the national domain to the euro area. This column introduces a new report which takes stock of this reform so far and proposes policy measures to improve its performance. It identifies three strategic goals for regulatory and supervisory action aimed at reviving the banking union: reduce overbanking among weaker players; favour consolidation and enhance efficiency among the stronger ones; strengthen balance sheets further, while encouraging area-wide diversification. The proposed measures cover, among other areas, the crisis management mechanism, with a revamp of the instruments and functions of the Single Resolution Board; banking supervision, to enhance the ECB’s action in the micro and macroprudential fields; and the state-aid controls in the banking sector.

Jeffrey Chwieroth, Andrew Walter, 23 May 2020

Although necessary, many of the economic policy responses to the COVID-19 crisis may end up damaging political incumbents in the medium and long term. This column presents evidence suggesting that voters expect great things from their leaders in deep crises. Yet the potential for great disappointment arises from the inevitable perceived inequities that will follow from the coronavirus crisis bailouts. As the pandemic exacerbates existing divisions within societies, the political costs predicted implies that only a minority of the most skilled political leaders are likely to survive this crisis.

Marcus Hagedorn, Kurt Mitman, 15 May 2020

Heterogeneous-Agent New Keynesian models offer new perspectives on fiscal and monetary policy interaction in the euro area. The current question is whether ECB measures are predominantly motivated to ensure price stability (with fiscal consequences a side effect), or whether they are motivated by an overriding economic policy objective. This column presents evidence that, according to the HANK models, there is no distinct separation between fiscal and monetary policy. Fiscal policy is an important determinant of inflation at the zero lower bound, and properly designed asset purchases are an effective instrument to satisfy the price stability mandate.



CEPR Policy Research