Making a virtue of necessity? The economics and politics of the ECB’s monetary policy, 1999-2019

PDF
Published: Jul 29, 2020
DOI: https://doi.org/10.12681/rp.23791
Keywords:
ECB central bank independence monetary policy monetary policy strategy transmission mechanism zero lower bound lender of last resort investor of last resort.
Nikos Koutsiaras
National and Kapodistrian University of Athens
Abstract

The ECB could hardly afford political neutrality, even in the monetary union’s “honeymoon phase”. Being a stateless central bank entailed striking compromises between confl icting (national) monetary policy preferences. However, such compromises would often be reached at the expense of theoretical consistency and to the detriment of coherence in the ECB’s monetary policy strategy. And, perhaps inevitably, they would also bear the mark of the dominant partner in the European Monetary System, that is prior to the establishment of the monetary union, now also being the biggest subscriber to the ECB’s capital. Political neutrality and, for that matter, monetary activism on the part of the ECB -as well as liquidity in the euro-area- were largely inadequate during the euro area crisis, especially in its early phase. They were subsequently increased, but at a slow pace and in a preferential fashion, that is, largely to the benefi t of the banking industry. Eventually, the ECB did try to make a virtue of necessity; yet, this could only go so far. Thus, the ECB has reluctantly become the only game in town, its reluctance being mostly associated with the overriding concerns of certain national central banks of the Eurosystem, most notably the Bundesbank; namely, ensuring monetary dominance, averting (at that time illusory) infl ationary dangers, preventing moral hazard, enforcing structural reforms and, not least, fending off any, indirectly emerging, type of transfer union. Therefore, the ECB could have no great ambitions; its lonely game was unlikely to produce a medal-winning policy maker in the world championship of central banking.

Article Details
  • Section
  • Research Articles
Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Authors who publish with this journal agree to the following terms:

· Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution Non-Commercial License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.

· Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g. post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.

· Authors are permitted and encouraged to post their work online (preferably in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work.

Downloads
Download data is not yet available.
Author Biography
Nikos Koutsiaras, National and Kapodistrian University of Athens

Associate Professor

References
Aghion Ph., A. Bergeaud, G. Cette, R. Lecat, H. Maghin (2019), “Financial constraints and productivity growth: An inverted-U relationship”,https://voxeu.org/article/fi nancial-constraints-and-productivity-growth.Akerlof G. A., W.T. Dickens, G.L. Perry (1996), “The Macroeconomics of Law Infl ation”, Brookings Papers on Economic Activity, 1: 1-76.Allard J., M. Catenaro, L.-P. Vidal and G. Wolswijk (2012), “Central Bank Communication on Fiscal Policy”, Working Paper No. 1477, European Central Bank (ECB).Altavilla C., L. Burlon, M. Giannetti, S. Holton (2019), “Is there a zero lower bound? The effects of negative policy rates on banks and fi rms”, Working Paper No. 2289, European Central Bank (ECB).Ampudia M., D. Georgarakos, M. Lenza, J. Slacalek, O. Tristani, P. Vermeulen, G. Violante (20 18), “Monetary policy and household inequality”, Working Paper No. 2170, European Central Bank (ECB).Arrigoni S., R. Beck, M. Ca’ Zorzi, L. Stracca (2020), “Globalisation: What’s at stake for central banks”, https://voxeu.org/article/globalisation-what-s-stake-central-banks.perifereia t.9o.indd 7515/6/2020 1:18:02 μμ
ΠΕΡΙΦΕΡΕΙΑBall L. and S. Mazumder (2020), “A Phillips Curve for the Euro Area”, Working Paper No. 2354, European Central Bank (ECB). Barrios S. and A. Schaechter (2008), “The quality of public fi nances and eco-nomic growth”, Economic Papers No. 337, European Economy.Bernanke B. (2014), “A Conversation: The Fed Yesterday, Today and Tomorrow”, Central Banking after the Great Recession: Lessons Learned and Challenges Ahead – A Discussion with Federal Reserve Chairman Ben Bernanke on the Fed’s 100th Anniversary (excerpt), Washington D.C., January 16, 2014, The Brookings Institution, https://www.brookings.edu/wp-content/uploads/2014/01 /20140116_bernanke_remarks_transcript.pdf. Best J. (2016), “Rethinking Central Bank Accountability in Uncertain Times”, Ethics & Intranational Affairs, 30(2): 215-232.Blanchard O. (2019), “Public Debt and Low Interest Rates”, American Economic Review, 109(4): 1197-1229.Blanchard O. and J. Gali (2007), “Real wage rigidities and the New Keynesian model”, Journal of Money, Credit and Banking, 39(1): 35-65.Blanchard O., G. Dell’ Ariccia, P. Mauro (2010), “Rethinking Macro Policy”, https://voxeu.org/article/rethinking-macro-policy.Blinder A.S. (1997), “What Central Bankers Can Learn from Academics – and Vice-Versa”, Journal of Economic Perspectives, 11(2): 3-19.Blinder A.S. (2018), “Through a Crystal Ball Darkly: The Future of Monetary Policy Communication”, AEA Papers and Proceedings, 108: 567-571.Blinder A.S., M. Ehrmann, M. Fratzscher, J. De Haan, D.-J. Jansen (2008), “Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence”, Journal of Economic Literature, 46(4): 910-45.Bordo M.D., J. Landon Lane, A. Redish (2004), “Good versus Bad Defl ation: Lessons from the Gold Standard Era”, Working Paper No. 10329, National Bureau of Economic Research (NBER).Brunnermeier M.K., H. James and J.-P. Landau (2016), The Euro and the Battle of Ideas, Princeton and Oxford: Princeton University Press. Buiter W.H. (2008), “Can Central Banks Go Broke?”, Discussion Paper No. 6827, Centre for Economic Policy Research (CEPR).Buiter W.H. (2019), Central Banks as Fiscal Players: The drivers of fi scal and monetary policy space, htt ps://willembuiter.com/CUP.pdf.Buti M. (2020), “Economic Policy in the Rough: A European Journey”, Policy Insight No. 98, Centre for Economic Policy Research (CEPR).perifereia t.9o.indd 7615/6/2020 1:18:02 μμ
REGION & PERIPHERY[77]Caballero D., A. Lucas, B. Schwaab, X. Zhang (2019), “Risk endogeneity at the lender/investor-of-last-resort”, Working Paper No. 2225, European Central Bank (ECB). Clarida R., J. Gali and M. Gertler (1999), “The Science of Monetary Policy: A New Keynesian Perspective”, Journal of Economic Literature, 37(4): 1661-1707.Commission EC (2008), “EMU@10: Successes and challenges after 10 years of Economic and Monetary Union”, European Economy, 2. Cui W., V. Sterk (2018), “Quantitative Easing”, Discussion Paper No. 13322, Centre for Economic Policy Research (CEPR).Darvas Z. (2018), “Forecast errors and monetary policy normalisation in the euro area”, Policy Contribution, Issue No. 24, Bruegel. Darvas Z. and G.B. Wolff (2014), “So Far Apart and Yet So Close: Should the ECB Care About Infl ation Differentials?”, Policy Contribution, Issue 2014/10, Bruegel.Davies G. (2020), “A crossover of fi scal and monetary policy”, Financial Times, February 16, 2020.De Grauwe P. (2005),The Economics of Monetary Union, (6th edition), Oxford: Oxford University Press.De Grauwe P. and M.-A.Sénégas (2003), “Monetary Policy in EMU When the Transmission is Asymmetric and Uncertain”, Working Paper No. 891, Category 6: Monetary Policy and International Finance, CESifo.DeLong, J.B., L.H. Summers (2012), “Fiscal Policy in a Depressed Economy”, Brooking Papers in Economic Activity, Spring: 233-297. Dietsch P., F. Claveau, C. Fontan (2018),Do Central Banks Serve the People?, Cambridge: Polity. Dobbs R., S. Land, T. Koller, and A. Shwayder (2013), “QE and ultra-low inter-est rates: Distributional effects and risks”, Discussion Paper, November, McKinsey Global Institute.Draghi M. (2012), “The monetary policy of the European Central Bank and its transmission in the euro area”, Speech by Mario Draghi, President of the ECB, Università Bocconi, Opening of the academic year 2012-2013, Milan, 15 November 2012, https://www.ecb.europa.eu/press/ key/date/ 2012/html/sp121115_1.en.html.Draghi M. (2016), “On the importance of policy alignment to fulfi l our economic potential”, 5th Annual Tommaso Padoa-Schioppa Lecture by Mario Draghi, perifereia t.9o.indd 7715/6/2020 1:18:02 μμ
ΠΕΡΙΦΕΡΕΙΑPresident of the ECB, at the Brussels Economic Forum 2016, Brussels, 9 June 2016, https://www.ecb.europa.eu/press/key /date/ 2016/ html/sp160609.en.html.Duisenberg W.F. (1999), “The Eurosystem’s monetary policy strategy: The fi rst year’s experience”, Speech by the President of the European Central Bank at the joint congress of the Federations, EUROFINAS and LEASEUROPE, 11 October, Paris, https://www.ecb.europa.eu/press/key/date /1999 /html/sp991011.en.html.Duisenberg W.F. (2001), “Current fi scal and monetary policy issues in the euro area”, Speech by Dr. Willem F. Duisenberg, President of the European Central Bank, Taxpayers Association of Europe’s, Taxpayers’ Award 2001, Brussels, 12 December 2001, https://www.ecb.europa.eu/press/key/date/2001/html/sp011207.en.html.Eberly J. and M. Woodford (2020), “Emi Nakamura: 2019 John Bates Clark Medalist”, Journal of Economic Perspectives, 34(1): 222-239. Eggertsson G.B. (2009), “What Fiscal Policy is Effective at Zero Interest Rates?”, Staff Report No. 402, Federal Reserve Bank of New York (Staff Reports).Ehrmann M., M. Jarociński, C. Nickel, C. Osbat, A. Sokol (2020), “Infl ation in a changing economic environment: Insights from a conference at the ECB”, https://voxeu.org/ article/infl ation-changing-economic-environment.Esselink H., L. Hernández (2017), “The use of cash by households in the euro area”, Occasional Paper No. 219, European Central Bank (ECB). European Central Bank (2012), “Monetary Policy Decisions Decided by the Governing Council on 6 September 2012”, ecb.europa.eu/pub/pdf/other/mb201209_focus01.en.pdf. El-Erian, Mohamed A. (2016), The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse, New York: Penguin Random House.Fahri E. and I. Werning (2019), “Monetary Policy, Bounded Rationality, and Incomplete Markets”, American Economic Review, 109(11): 3887-3928.Farmer R. and P. Zabczyk (2018), “Why unconventional monetary policy works in theory”, https://voxeu.org/article/why-unconventional- monetar y-policy-works-theory.Fontan C. (2018), “Frankfurt’s double standard: the politics of the European Central Bank during the Eurozone crisis”, Cambridge Review of International Affairs, 31(2): 162-182.perifereia t.9o.indd 7815/6/2020 1:18:02 μμ
REGION & PERIPHERY[79]Forder J. (2004), “’Credibility’ in Context: Do Central Bankers and Economists Interpret the Term Differently?”, Econ Journal Watch, 1(3): 413-426.Forder J. (2014), Macroeconomic and the Phillips Curve Myth, Oxford: Oxford University Press.Giavazzi F. and A. Giovannini (1989), Limiting Exchange Rate Flexibility: The European Monetary System, Cambridge/Mass: The MIT Press. González-Páramo, José Manuel (2011), “The ECB′s monetary policy during the crisis”, Closing speech by José Manuel González-Páramo, Member of the Executive Board of the ECB, at the Tenth Economic Policy Conference, Malaga, 21 October 2011, https://www.ecb.europa.eu/ press/key /date/2011/html/sp111021_1.en.html.Honohan P. (2019), Currency, Credit and Crisis: Central Banking in Ireland and Europe, Cambridge: Cambridge University Press.Hartmann P. and F. Smets (2018), “The fi rst twenty years of the European Central Bank: monetary policy”, Working Paper No. 2219, European Central Bank (ECB).Heider F., F. Saidi, G. Schepens (2019), “Bank lending under negative policy rates”, https://voxeu.org/article/bank-lending-under-negative-policy-rates.Hughes H.A., W. Lechthaler, C.A. Reicher, M.F. Tesfaselassie, C. Blot, J. Creel, X. Ragot (2015), “Is nominal GDP targeting a suitable tool for ECB mon-etary policy?”, Monetary Dialogue, September 2015, European Parliament – Directorate-General for Internal Policies (Policy Department for Economic and Scientifi c Policy).Issing O. (2005), “Communication, Transparency, Accountability: Monetary Policy in the Twenty-First Century”, Federal Bank of St Louis Review, 87(2): 65-83.Issing O., I. Angeloni, V. Gaspar, H.-J. Klöckers, K. Masuch, S. N. Altimari, M. Rostagno, F. Smets (2003), “Overview of the background studies for the evaluation of the ECB’s monetary policy strategy”, in O. Issing in coopera-tion with I. Angeloni, V. Gaspar, H.-J. Klöckers, K. Masuch, S.N. Altimari, M. Rostagno, F. Smets (eds) Background Studies for the ECB’s Evaluation of its Monetary Policy Strategy, Frankfurt am Main: European Central Bank: 5-30. James H. (2012), Making the European Monetary Union, Cambridge/Mass. & London: Belknap/Harvard University Press.King M. (2003), Speech by the Governor of the Bank of England, East Midlands Development Agency/Bank of England Dinner, 14 October, Leicester, htt-perifereia t.9o.indd 7915/6/2020 1:18:02 μμ
ΠΕΡΙΦΕΡΕΙΑps://www.bankofengland.co.uk/ speech /2003/east-midlands-development-agency-dinner.Koo R.C. (2011), “The world in balance-sheet recession: causes, cures, and poli-tics”, Real-World Economics Review,Issue No. 58, http://www.paecon.net/PAEReview/issue58/Koo58.pdf. Koutsiaras N. (2001), “Social and Employment Policy”, in R. Hall, A. Smith and L. Tsoukalis (eds) Competitiveness and Cohesion in EU Policies, Oxford & New York: Oxford University Press: 277-313.Koutsiaras N. (2005), Understanding Economic and Monetary Union, Athens: Metamesonykties Ekdoseis (for the Institute of European Integration and Policy – National and Kapodistrian University of Athens).Koutsiaras N. and Z. Manouzas (2016), “ECB for Greece: Sometimes independ-ent, sometimes conservative?” Research Paper No. 20, Crisis Observatory, ELIAMEP (in Greek). Krugman P.R. (2018), “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap”, Brookings Papers on Economic Activity, 2: 137-205. Lagarde C. (2019), “The future of the euro area economy” Speech by Christine Lagarde, President of the ECB, at the Frankfurt European Banking Congress, Frankfurt am Main, 22 November 2019, https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp191122~0c1f115db0.en.html.Lagarde C. (2020), “Introductory statement by Christine Lagarde, President of the ECB, on the occasion of the presentation of the ECB Annual Report 2018 at the European Parliament”, Strasbourg, 11 February 2020, https://www.ecb.europa.eu/press/pr/date/2020/html/ ecb.pr200123~3b8d9fc08d.en.html.Leeper E.M. (2010), “Monetary Science, Fiscal Alchemy”, Working Paper No. 16510, National Bureau of Economic Research (NBER).McMahon M., U. Peiris, H. Polemarchakis (2012), “Outright Monetary Transactions sterilised?”, https://voxeu.org/article/outright-monetary-transactions-sterilised. Mertens T.M., J.C. Williams (2019), “Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates”, Staff Report No. 877, Federal Reserve Bank of New York.Mody A. (2018), Euro Tragedy: A Drama in Nine Acts, New York: Oxford University Press.Mody A., M. Nedeljkovic (2 018), “Central Bank Policies and Financial Markets: Lessons from the Euro Crisis”, Working Paper No. 7400, CESifo.perifereia t.9o.indd 8015/6/2020 1:18:02 μμ
REGION & PERIPHERY[81]Pain N., I. Koske and M. Sollie (2008), “Globalisation and OECD Consumer Price Infl ation”, Economic Studies No.1, OECD.Pereira M. and J. Tavares (2019), “Extracting Implicit Country Weights in ECB’s Monetary Policy”, Discussion Paper No. 14090, Centre for Economic Policy Research (CEPR). Perotti E., O. Soons (2020), “The euro: A transfer union from the start”, https://voxeu.org/ article/ euro-transfer-union-start.Posen A. (1995), “Central Bank Independence and Disinfl ationary Credibility: A Missing Link?”, Staff Reports No. 1, Federal Reserve Bank of New York.Praet P. (2013), “Forward guidance and the ECB”, https://voxeu.org/article/forward-guidance-and-ecb.Praet P., A.S. Guilhem and J.-P. Vidal (2019), “The single monetary policy: 20 years of experience”, in “20 years of European Economic and Monetary Union: Conference proceedings”, ECB Forum on Central Banking, 17-19 June 2019, Sintra Portugal, https://www.ecb.europa.eu/pub/pdf/sintra/ecb.forumcentbank201911~e0dd97f2c0.en.pdf: 88-112. Reichlin L., A. Turner, M. Woodford (2019), “Helicopter money as a policy op-tion”, https://voxeu.org/article/helicopter-money-policy-option.Rogoff K.S. (2003), “Globalisation and global disinfl ation”, in Monetary policy and uncertainty: adapting to a changing economy, a symposium sponsored by the Federal Reserve Bank of Kansas City, 28-30 August, Jackson Hole: 77-112.Rogoff K.S. (2016), The Curse of Cash, Princeton & Oxford: Princeton University Press. Rostagno M., C. Altavilla, G. Carboni, W. Lemke, R. Motto, A.S. Guilhem, J. Yiangou (2019), “A tale of two decades: the ECB’s monetary policy at 20”, Working Paper No. 2346, European Central Bank (ECB). Saka O. (2020), “Banks and government bonds: A love story”, https://voxeu.org/article/banks-and-government-bonds-love-story. Samarina A. and N. Apokoritis (2020), “Evolution of monetary policy frame-works in the post-crisis environment”, Working Paper No. 664, De Nederlandsche Bank (DNB).Sandbu M. (2015), Europe’s Orphan: The Future of the Euro and the Politics of Debt, Princeton & Oxford: Princeton University Press.Shirai S., E.A. Sugandi (2019), “The cash hoarding puzzle”, https://voxeu.org/article/ cash-hoarding-puzzle-and-rising-global-demand-cash.perifereia t.9o.indd 8115/6/2020 1:18:03 μμ
ΠΕΡΙΦΕΡΕΙΑSchoenmaker D. (2019), “Greening monetary policy”, Working Paper, Issue 02, Bruegel.Smets F. (2003), “Maintaining price stability: how long is the medium term?”, Journal of Monetary Economics, 50(6): 1293-1309.Sturm J.-E. and T. Wollmershäuser (2008), “The Stress of Having a Single Monetary Policy in Europe”, Working Paper No. 2251, Category 6: Monetary Policy and International Finance, CESifo. Svensson L.E.O. (1997), “Infl ation forecast targeting: Implementing and moni-toring infl ation targets”, European Economic Review, 41(6): 1111-1146.The Economist (1999), “The Navigators: A Survey of the World Economy”, September 25th 1999.Tooze A. (2018), Crashed: How a Decade of Financial Crises Changed the World, London: Allen Lane.Trichet J.-C. (2011), “Remarks at the farewell event”, Speech by Jean-Claude Trichet, President of the ECB, Frankfurt am Main, 19 October 2011, https://www.ecb.europa.eu/press/ key/date/2011/html/sp111019.en.html.Tucker P. (2018), Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State, Princeton & Oxford: Princeton University Press. Wendschlag M. (2018), “Central Bankers in Twelve Countries between 1950 and 2000: The Making of a Global Elite”, in Y. Cassis and G. Telesca (eds) Financial Elites and European Banking: Historical Perspectives, New York: Oxford University Press: 182-208. White W.R. (2013), “Is Monetary Policy a Science? The Interaction pf Theory and Practice Over the Last 50 Years”, Working Paper No. 155, Federal Reserve Bank of Dallas – Globalization and Monetary Policy Institute. Wolf M. (2019), “How the euro helped Germany avoid becoming Japan”, Financial Times, October 29, 2019.Wyplosz C. (2003), “The New Eurosystem”, Briefi ng Notes to the Committee for Economic and Financial Affairs of the European Parliament.