The European Central Bank's Monetary Policy during Its First 20 Years

Abstract

, the European Central Bank (ECB) celebrated its 20th anniversary. This paper provides a comprehensive view of the ECB's monetary policy over these two decades. The first section gives a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, going through four cyclical phases "conditioning" ECB monetary policy. We describe the monetary policy decisions from the ECB's perspective and against the background of its evolving monetary policy strategy and framework. We also highlight a number of the key, critical issues that were the subject of debate. The second section contains various assessments. We analyze the achievement of the price stability mandate and developments in the ECB's credibility, and we also investigate the ECB's interest rate decisions through the lens of a simple empirical interest rate reaction function. Finally, we present the ECB's framework for thinking about nonstandard monetary policy measures and review the evidence on their effectiveness. One of the main themes of the paper is how the ECB utilized its monetary policy to respond to the challenges posed by the European twin financial and sovereign debt crises and the subsequent slow economic recovery, making use of its relatively wide range of instruments, defining new ones where necessary, and developing the strategic underpinnings of its policy framework.

The Resilience of the Euro

“…These timeframes should be regarded as schematic; for example, the initial phases of the financial crisis can be traced to August 2007; similarly, although 2014-2019 was a period of improved performance, it did include some major risk episodes, most prominently the tensions over an official funding program for Greece in spring 2015.3 Comprehensive analyses of the first two decades of the euro from a monetary policy perspective are provided byHartmann and Smets (2018) andRostagno et al (2019).…”

Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment

“…Finally, the first-difference rule shown in the final row of the table prescribes interest-rate policy in terms of the change in the policy rate. It captures the ECB's interest-rate policy up to mid-2012 quite well and is therefore often used as a benchmark for monetary policy in the euro area (see, e.g., Hartmann and Smets, 2018). When simulating the model with these alternative rules, we impose, with a view to broadly capturing the present configuration in the euro area, an inflation target of 2%, a long-run equilibrium real interest rate of 0.5% and an ELB at −0.5%.…”

The Ecb's Price Stability Framework: Past Experience, and Current and Future Challenges

“…Besides the quantification of the price stability objective, the monetary policy strategy of the ECB has traditionally been described as comprising two other elements, namely (i) the medium-term orientation, and (ii) the two pillars 2 This chapter draws from Rostagno et al (2019) and Hartman and Smets (2018), who present an extensive treatment of the rationale underlying the design and evolution of the monetary policy strategy of the ECB.…”