The ECB and Its Watchers XV

March 12, 2014

Festsaal Casino
Campus Westend
Goethe University Frankfurt

In the fifteenth year of the conference "The ECB and Its Watchers" there are still many topics that are hotly debated among policy makers and market participants. In his opening remarks Volker Wieland, co-organizer with Günter Beck, for the first time welcomed the participants at Goethe University’s Westend Campus.

The first session of the conference focused on central bank communication. In this regard, Peter Praet, member of the Governing Council of the European Central Bank, pointed out in his speech that opinions had fundamentally changed within the ECB. Since the ECB wants to benchmark the discussion, Praet connects his monthly presentations of monetary policy proposals with proposals on communication, he explained. Nevertheless, in the future the ECB does not plan on publishing the names of the members in the Governing Council, revealing who took which position in a discussion.

Charles Goodhart of the London School of Economics interpreted Praet’s suggestions regarding greater transparency as an indication that the ECB was moving towards an individualistic committee rather than a collegial committee as it had asked to be from the outset.

Paul Sheard, Chief Global Economist of Standard and Poor’s, emphasized the differences in the issues the various central banks had to face. Whereas the Federal Reserve and the Bank of England had been dealing with a “plain vanilla financial crisis”, the ECB had to face existential questions whether the Eurozone as a construct would actually survive. According to Sheard, the complexity is much higher for the ECB.

Donald Kohn of Brookings Institution highlighted central bank communication as a key way to influence inflation expectation and financial conditions. "When the policy interest rate is extremely low, central banks are increasingly relying on words to influence financial conditions," he said. After the crisis, central banks needed to explain themselves better. However, they also needed to recognize the limits of communication, Kohn added.

Whether we were back to the "new normal" in the Eurozone now, ECB board member Benoit Cœuré deliberated on during the conference’s second session, putting emphasis on the new set of questions that have arisen with inflation being low and remaining low.

Lucrezia Reichlin of London Business School particularly pointed out some of the key problems in the euro area nowadays, looking at the fragility of banks and financial segmentation. "Although we are in a recovery, nominal GDP is still very weak", Reichlin warned. In her opinion the ECB has to experiment with new tools and clarify its view on the tradeoffs.

Whether the ECB does have enough policy measures Lars E.O. Svensson of Stockholm University discussed during his presentation, indicating the big difference that might occur between the official policy rate and the Eonia rate. “Why not have a smaller corridor?” Svensson suggested, citing the Riksbank’s fine-tuning system as an example. Concerning negative interest rates Svensson appealed to the ECB not be nervous about experimenting.

John B. Taylor of Stanford University in his presentation especially focused on the consequences of unconventional monetary policy. Looking at the Federal Reserve, forward guidance had been unpredictable Taylor pointed out. Analyzing possible exit strategies, Taylor called for a more rules-based system with the central banks explaining the deviations. Most of all, “an exit should include a statement about the policy strategy in the future”, Taylor said.

The challenges the ECB has to face as banking supervisor were in the center of the conference’s third session. In this regard, ECB board member Yves Mersch referred to the protection of the monetary policy independence as the first objective. Furthermore, talking about individual corporations and decisions, Mersch mentioned confidentiality as another objective.

In his speech Stefan Gerlach, Deputy Governor of the Bank of Ireland, reminded the participants of the fact that central banks had been the original supervisors and that supervision was not a new activity for central banks. According to Gerlach, separation of monetary policy and supervision is done very differently in various countries. “There is no one size fits all”, Gerlach added.

For Nouriel Roubini, however, there is a much bigger dilemma for central banks than the separation of banking supervision and monetary policy. “All central banks were created in the first place to achieve financial stability”, he said. Thus, central banks have to deal with two goals, price stability and financial stability. “But central banks do not know if they have the second instrument to do it right” he concluded.

As the ECB is taking on the responsibilities of banking supervision, for Dirk Schoenmaker of Duisenberg School of Finance the ECB is now becoming a full central bank. From the experience in the Netherlands, Schoenemaker gave the advice that the head of the banking supervision should appear on television and in parliament if something happened in the banking sector, not the governor of the central bank, thus, avoiding reputational risks.

After these discussions, co-organizer and IMFS research fellow Günter Beck, who will take over the responsibilities as sole organizer of the next ECB watchers conference, saw off the participants.

• Interview Charles Goodhart (Video)
  Charles Goodhart explains why the crisis in the Eurozone is not over and how the difficulties are metamorphosing.
• Interview Lars Svensson (Video)
  Lars Svensson gives his view on the biggest challenges for the European Central Bank in the near future.
• Interview Stefan Gerlach (Video)
  Stefan Gerlach interpretes the crisis as a return to the start of central banking and the role of the ECB as banking supervisor.
• Interview Volker Wieland (Video)
  Volker Wieland explains why it would be perfectly fine for the ECB to start the publication of its minutes without giving names
• Interview Dirk Schoenmaker (Video)
  Dirk Schoenmaker reveals the real cause of the euro crisis and explains how future crises could be avoided.
• Interview John B. Taylor (Video)
  John B. Taylor comments on the differences in the operations between the Fed and the ECB and the Eurozone as an experiment.
• Interview Paul Sheard (Video)
  Paul Sheard elucidates how central banks should deal with rules and the role of the ECB as the first real European institution.