No abstract

No abstract

The 20th anniversary of Economic and Monetary Union (EMU) offers an opportunity to look back on the record of the European Central Bank (ECB) and learn lessons that can improve the conduct of policy in the future. This volume charts the way the ECB has defined, interpreted, and applied its monetary policy framework—its strategy—over the years from its inception, in search of evidence and lessons that can inform those reflections. Our ‘Tale of Two Decades’ is largely a tale of ‘two regimes’: one—stretching slightly beyond the ECB’s mid-point—marked by decent growth in real incomes and a distribution of shocks to inflation almost universally to the upside; and the second—starting well into the post-Lehman period—characterized by endemic instability and crisis, with the distribution of shocks eventually switching from inflationary to continuously disinflationary. We show how the most defining feature of the ECB’s monetary policy framework, its characteristic definition of price stability with a hard 2 per cent ceiling, functioned as a key shock absorber in the relatively high-inflation years prior to the crisis, but offered a softer defence in the face of the disinflationary forces that hit the euro area in its aftermath. The imperative to halt persistent disinflation in the post-crisis era therefore called for a radical, unprecedented policy response, comprising negative policy rates, enhanced forms of forward guidance, a large asset purchase programme and targeted long-term loans to banks. We study the multidimensional interactions among these four instruments and quantify their impact on inflation and the macroeconomy.

The culmination of the European Central Bank’s (ECB) policy evolution was the ‘combined arms strategy’ that started taking shape in 2014–2015. In this chapter, we review how four unconventional measures—negative interest rates, asset purchases, targeted lending operations, and forward guidance—were progressively combined into a unified policy package. We recount the sequence of ‘recalibrations’ of these tools that took place between December 2015 and June 2018 and the internal debates that informed them. We then conduct an impact analysis where we seek to isolate and examine the contribution of the policy package to financial conditions and macroeconomic outcomes. The novelty of our analysis lies both in its methodological approach and in its diagnostics, which allows us to disentangle the respective contribution of each instrument and assess counterfactual scenarios in which they were not combined. We end by considering some of the side effects of our unconventional policies with a focus on the banking sector.

While the EU Treaty established the European Central Bank’s (ECB) primary objective as price stability, defining price stability was left to the ECB’s Governing Council (GC). This chapter shows how the GC chose to formulate an objective that subtly but consciously differed from the standard inflation targeting framework of the time. Rather than expressing a preference for a particular rate of inflation, a ‘target’ that could be changed if circumstances changed, it opted to qualify price stability unconditionally as an inflation rate below 2%. We explain some of the factors behind this decision and describe the process whereby, already in 2003, the ECB’s monetary policy strategy came to be reviewed. The internal debates that informed the ECB’s characteristic ‘below but close to 2%’ objective and ‘two pillar’ strategy are discussed. The chapter also focuses on the ECB’s early critics.