September 30, 2020
Goethe University Frankfurt
In her first speech at the conference The ECB and Its Watchers, Christine Lagarde clarified the key issues of the ongoing strategy review of the European Central Bank (ECB). The ECB President emphasized that the euro area should have an inflation goal "that the public can easily understand" and which is calculated in a way that better reflects people's everyday lives. A policy of committing to make up for low inflation after missing the goal for a while "could be examined," she added referrring to the strategy of the Federal Reserve that allows inflation to temporarily rise above the institution's target.
Due to the Coronavirus pandemic, Lagarde spoke to the conference in a video livestream. The 21st edition of The ECB and Its Watchers on September 30th took place in a hybrid format with only a few panelists and participants at the conference venue and most of the audience taking part remotely. The conference organized by Volker Wieland, Endowed Chair of Monetary Economics and Managing Director of the Institute for Monetary and Financial Stability (IMFS), is integrated into the process of reviewing the ECB's strategy. Hence, the three panels, all chaired by central bank governors, investigated issues central to the review.
"The more widely we interpret our mandate, the greater the risk that we will become entangled with politics and overburden ourselves with too many tasks," Jens Weidmann, Bundesbank President, argued during the first panel on whether and how the ECB's mandate should be modified to be fit for the future. According to Christian Noyer, former governor of the Banque de France, moving to an average inflation target is "the worst change you could make". According to Jordi Galí of CREI and the University Pompeu Fabra, the ECB's two-pillar strategy was obsolete and rather a "distraction, instead of a useful tool". Focusing on the legal aspects, Helmut Siekmann, IMFS Distinguished Professor and former Endowed Chair of Money, Currency and Central Bank Law, explained that the word "mandate" was rather a weasel word and not part of the Primary Law, neither was the term "maintaining price stability".
During the second conference panel regarding ECB's instruments and the lessons from the financial crisis and the debt crisis chaired by Pablo Hernández de Cos, Governor of Banco de España, Lucrezia Reichlin of the London Business School pointed out that the credibility of inflation targeting was crucial. In the opinion of Athanasios Orphanides of the MIT Sloan School of Business, the ECB is confronted with two urgent matters: adopting a clear, symmetric 2 percent inflation goal and correcting "fragility-inducing aspects" of the ECB's policy implementation strategy. Claudio Borio of the Bank for International Settlements warned that unconventional monetary policies, such as balance sheet operations, forward guidance and negative rates, had been successful in supporting the economy, but had limitations and appear to exhibit diminishing effectiveness. Therefore, "building policy buffers is essential – in monetary policy just as in other areas. The challenge is now".
Otmar Issing, who conducted the last review of the ECB strategy as chief economist in 2003, stated that a review was overdue. However, he warned that "central banks should think twice before following the Fed". The Federal Reserve in the United States has undertaken a similar assessment and announced in August that it would be allowing inflation to run above its target of 2 percent for some time. François Villeroy de Galhau, who chaired the session, argued that "our inflation objective, being symmetric and medium-term, -- if credibly, I stress credibly, symmetric and medium-term –- would probably achieve similar outcomes ex-post to flexible average inflation targeting".
Petra Geraats of the University of Cambridge also adopted a critical attitude towards an average inflation target. She told the conference that this was "attractive in theory" but showed several shortcomings, such as creating uncertainty regarding the size and duration of the inflation overshoot or risking the unanchoring of inflation expectations, which would increase volatility. According to Geraats, the ECB should first focus on improving fundamentals of the monetary union, namely creating a proper banking union with effective supervision and resolution and implementing macroprudential policy to manage risks of the loose monetary policy. John B. Taylor of the Hoover Institution and Stanford University saw the need to return to a monetary policy that works. "Monetary policy must return to a rules-based policy," he claimed.
In a wrap-up of the conference, Philip Lane of the ECB described the various workstreams of the strategy review where the conference findings would also be integrated. Results are not expected until September 2021. "We’re still in the learning stage," Lane said. The ECB needed to come to a shared understanding of twenty years of monetary policy.