A Tale of Two Decades: The Ecb's Monetary Policy at 20

337 Pages Posted: 8 Jan 2020

See all articles by Massimo Rostagno

Massimo Rostagno

European Central Bank (ECB)

Carlo Altavilla

European Central Bank (ECB)

Giacomo Carboni

European Central Bank (ECB)

Wolfgang Lemke

European Central Bank

Roberto Motto

European Central Bank (ECB)

Arthur Saint Guilhem

European Central Bank (ECB)

Jonathan Yiangou

Independent

Date Written: December, 2019

Abstract

The 20th anniversary of Economic and Monetary Union (EMU) offers an opportunity to look back on the ECB’s record and learn lessons that can improve the conduct of policy in the future. This paper 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 – characterised by endemic instability and crisis, with the distribution of shocks eventually switching from inflationary to continuously disinflationary. We show how the most defining element of the ECB’s monetary policy framework, its characteristic definition of price stability with a hard 2% 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 economic activity.

Keywords: financial crises, monetary policy, non-standard measures ECB, policy strategy

JEL Classification: E50, E51, E52

Suggested Citation

Rostagno, Massimo and Altavilla, Carlo and Carboni, Giacomo and Lemke, Wolfgang and Motto, Roberto and Guilhem, Arthur Saint and Yiangou, Jonathan, A Tale of Two Decades: The Ecb's Monetary Policy at 20 (December, 2019). ECB Working Paper No. 2346. Available at SSRN: https://ssrn.com/abstract=3515400

Massimo Rostagno

European Central Bank (ECB) ( email )

Kaiserstrasse 29
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D-60311 Frankfurt am Main
Germany
+49 69 1344 7663 (Phone)
+49 69 1344 7604 (Fax)

Carlo Altavilla (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Giacomo Carboni

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Wolfgang Lemke

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Roberto Motto

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany

Arthur Saint Guilhem

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jonathan Yiangou

Independent ( email )

No Address Available
United States

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