Low for how long? Estimating the ECB’s “Extended Period of Time”
Tilman Bletzinger, Volker Wieland 05 September 2013
The ECB has promised to keep interest rates low for an “extended period of time”. In a broad hint to the profession, President Draghi stressed a reasonable forecast of this period could be extracted from a monetary policy reaction function. This column presents one such forecast based on published macro forecasts and a reaction function that fits the ECB’s past behaviour. The result is that ECB interest rates will rise by May 2014 at the latest.
The ECB Governing Council has given hints that it will keep rates low for long (see its May and June statements). On 4 July 2013, the Council went further embracing ‘forward guidance’ (Praet 2013, Woodford 2013).1
“The Governing Council expects the ECB interest rates to remain at present or lower levels for an extended period of time.”
ECB, forecast, monetary rule
How to jumpstart the Eurozone economy
Francesco Giavazzi, Guido Tabellini 21 August 2014
The stagnating Eurozone economy requires policy action. This column argues that EZ leaders should agree a coordinated 5% tax cut, extension of budget deficit targets by 3 or 4 years, and issuance of long-term public debt to be purchased by the ECB without sterilisation.
The mantra is that once again it is up to the ECB to save the Eurozone. Quantitative easing is the last policy tool available to jumpstart the Eurozone economy. The longer the ECB waits before starting to buy government bonds, the further away will the recovery be. This analysis, however, overestimates the power of monetary policy.
Europe's nations and regions Macroeconomic policy
ECB, monetary policy, fiscal policy, quantitative easing, public debt, aggregate demand, Eurozone economy, stagnation
Revisiting the pain in Spain
Paul De Grauwe 07 July 2014
There has been a stark contrast between the experiences of Spain and the UK since the Global Crisis. This column argues that although the ECB’s Outright Monetary Transactions policy has been instrumental in reducing Spanish government bond yields, it has not made the Spanish fiscal position sustainable. Although the UK has implemented less austerity than Spain since the start of the crisis, a large currency depreciation has helped to reduce its debt-to-GDP ratio
The different macroeconomic adjustment dynamics in Spain – a member of a monetary union – and the UK – a stand-alone country – is stark. Paul Krugman popularised this contrast in his New York Times blog with the title “The Pain in Spain” (Krugman 2009, 2011), and commented on my own analysis in De Grauwe (2011).
Europe's nations and regions Global crisis Macroeconomic policy
ECB, monetary policy, euro, EMU, Spain, monetary union, fiscal policy, UK, government debt, austerity, EZ crisis, Outright Monetary Transactions, currency depreciation
The euro crisis: Muddling through, or on the way to a more perfect euro union?
Joshua Aizenman 03 July 2014
After a promising first decade, the Eurozone faced a severe crisis. This column looks at the Eurozone’s short history through the lens of an evolutionary approach to forming new institutions. German dominance has allowed the euro to achieve a number of design objectives, and this may continue if Germany does not shirk its responsibilities. Germany’s resilience and dominant size within the EU may explain its ‘muddling through’ approach to the Eurozone crisis. Greater mobility of labour and lower mobility of under-regulated capital may be the costly ‘second best’ adjustment until the arrival of more mature Eurozone institutions.
The short history of the Eurozone has been remarkable and unprecedented – the euro project has moved from the planning board to a vibrant currency within less than ten years. Otmar Issing’s optimistic speech in 2006 reflects well the buoyant assessment of the first decade of the euro – an unprecedented formation of a new currency without a state.1 Observers viewed the rapid acceptance of the euro as a viable currency and the deeper financial integration of the Eurozone and the EU countries as stepping stones toward a stable and prosperous Europe.
Institutions and economics International finance Monetary policy
Germany, ECB, eurozone, inflation targeting, euro, institutions, Eurozone crisis, GIIPS
Saving the euro: self-fulfilling crisis and the ‘Draghi put’
Marcus Miller, Lei Zhang 26 June 2014
Like banks, indebted governments can be vulnerable to self-fulfilling financial crises. This column applies this insight to the Eurozone sovereign debt crisis, and explains why the ECB’s Outright Monetary Transactions policy reduced sovereign bond spreads in the Eurozone.
In surveying eight centuries of financial folly, Reinhart and Rogoff (2009) observed that:
International finance Monetary policy
ECB, eurozone, sovereign debt, financial crises, sovereign debt crisis, Outright Monetary Transactions, European sovereign debt crisis, self-fulfilling crises
Central bank transparency and committee deliberation
Stephen Hansen, Michael McMahon, Andrea Prat 20 June 2014
Central bank transparency is essential to democratic accountability. Central bankers often limit it – fearing its stifling effect on frank debate. Yet transparency may induce monetary policy committee members to be better prepared. This column discusses evidence showing that the ‘better prepared’ effect is important empirically. Exploiting a natural experiment in the Fed Open Market Committee in 1993 – and using computational linguistics tools to measure the impact of transparency on deliberation – the research shows that the net effect is a more informative deliberation process.
ECB, computational linguistics, central bank transparency, FOMC
Will voters turn out in the 2014 European Parliamentary elections?
Owen McDougall, Ashoka Mody 17 May 2014
Turnout in the 2014 European Parliament elections is seen as a critical test for EU democracy. This column presents some predictions. Trust in the ECB – rather than in the European Parliament itself – has been associated with higher turnout in previous elections. Macroeconomic conditions are also important – where a country’s fiscal problems are greater, voters are more inclined to vote.
The extent of voter turnout in the 2014 European Parliamentary (EP) election is widely viewed as a critical test for European democracy. Turnout in the EP elections has steadily declined over three decades, from 62% in the first election in 1979 to 43% in the 2009 election (EP Liaison Office undated). There is great concern that the legitimacy of the EU is at stake should there be a further slide in voter turnout.
EU institutions Politics and economics
elections, ECB, democracy, EU, trust, voting, European parliament, turnout
ECB: An appropriate monetary policy
Mickey Levy 16 May 2014
As banks repay their loans from the Long-Term Refinancing Operation, the ECB’s balance sheet is shrinking. This column argues that, given the slow recovery and sustained low inflation, the ECB should replace its bank lending programme with quantitative easing. Buying short-term government debt would be consistent with the ECB’s inflation target, would keep the ECB’s monetary policy separate from its role in bank supervision, and would create a built-in exit strategy from unconventional policy.
Europe’s modest economic recovery and uncomfortably low inflation put the ECB in a bind. Although economic conditions are improving gradually (European Commission 2014), concerns about the potentially negative impacts of deflation persist (Armstrong et al. 2014). The ECB’s top near-term priorities are to avoid deflation (and apparently even sustained low inflation) and extend the economic recovery.
ECB, eurozone, monetary policy, quantitative easing, bank lending
Europe’s banking problem through the lens of secular stagnation
Jan Willem van den End , Jakob de Haan 28 March 2014
While many economists argue that demand stimulus is needed, this column argues that supply side measures are necessary to avoid secular stagnation. In the Eurozone, it is necessary to clean up and strengthen the balance sheets of banks, which can kick-start the flow of new lending. The comprehensive assessment by the ECB is an important step in this direction.
What is the economy’s new normal? Will it be secular stagnation as suggested by Summers (2013)? According to this view, the economy will be in a permanent state of recession because aggregate demand is below potential output. As the actual real interest rate exceeds the negative equilibrium real interest rate (the natural rate), investment activity is too low. In the secular stagnation view, the zero lower bound (ZLB) prevents an adjustment of the interest rate to the (negative) equilibrium rate. Consequently, the economy ends up in a liquidity trap (Krugman 2013).
Financial markets Monetary policy
ECB, balance sheets, secular stagnation
Considering QE, Mario? Buy US bonds, not Eurobonds
Jeffrey Frankel 24 March 2014
The Eurozone needs to further ease monetary policy because under the current low inflation and high unemployment periphery countries need to suffer painful deflation. However, the ECB faces challenges other central banks do not face. This column proposes a way to overcome some of these hurdles. It argues that the ECB should buy US treasury securities, lowering the foreign exchange value of the euro. That would be the best way to restore the export sector of the periphery countries.
The ECB should further ease monetary policy. Inflation at 0.8% across the Eurozone is below the target of ‘close to 2%’, and unemployment in most countries is still high. Under the current conditions, it is hard for the periphery countries to bring their costs the rest of the way back down to internationally competitive levels as they need to do. If inflation is below 1% Eurozone-wide, then the periphery countries have to suffer painful deflation.
Macroeconomic policy Monetary policy
ECB, euro, quantitative easing