Jens Weidmann Monetary policy and the role of central banks – an outlook -BIS.ppt

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1、Monetary policy and the role of central banks an outlookSpeech delivered to the Freundeskreis of the Ludwig-Erhard-Stiftung01.07.2021|virtual|Jens Weidmann DE FR 1 Introduction 2 The time inconsistency issue 3 Government bond purchases and risk of fiscal dominance 4 Monetary policy strategy review 5

2、 Climate protection 6 Central bank digital currency 7 Concluding remarks1 IntroductionMr Koch,Mr Seeler,Many thanks for your warm welcome and words of introduction.Ladies and gentlemen,Last spring,the coronavirus pandemic plunged our economy into a deep crisis.Still it continues toshape our everyday

3、 lives;even this speech is taking place in the virtual sphere.Advances made on the vaccination front are raising hopes that the pandemic can be suppressed forgood and that the protective measures that are restricting economic life so much can be lifted.But17.Shin,H.S.(Seite),Central banks and the ne

4、w world of payments,speech delivered on 30 June 2020.t18.King,M.,Monetary policy:Theory in practice,speech delivered on 7 January 2000.are as important to understanding societal development,as powerful forces in societal change aswars and revolutions,”writes American historian Frank Snowden.1An epid

5、emic also features in early western literature.Homers Iliad,perhaps the oldest epic poemrecorded in writing in Europe,tells of the last days of the Trojan War.Agamemnon,the general of theAchaeans,harshly rejects one of Apollos priests,whereupon Apollo punishes the Achaeans byunleashing a plague,and

6、conflict breaks out between Agamemnon and the hero Achilles.The rage ofAchilles and his retreat from the battlefield bring the Achaeans to the brink of defeat.This just goesto show that epidemics have accompanied mankind for millennia.Time and time again,they haveshaped the course of history,as well

7、 as being something of a societal stress test.My speech today mainly considers what euro area monetary policy might look like in the aftermath ofthe COVID-19 crisis.Id particularly like to discuss the thorny relationship between monetary policyand fiscal policy.The pandemic hit the Eurosystem just a

8、s we had started our monetary policy strategy review.Thatdelayed discussions surrounding our future strategy,which have not yet been finalised.But there area few facets of this debate Id like to illuminate today specifically,how we could formulate ourmonetary policy objective in concrete terms,and w

9、hat significance climate protection might have forthe fulfilment of our mandate.To conclude,Id like to touch upon the topic of the digital euro,because the pandemic has addedpace to the digital transformation and also changed peoples payment behaviour,at least temporarily.22 The time inconsistency i

10、ssueSuch topics ultimately circle back to how an independent and stability-oriented central bankinterprets its role.So lets circle back to Homer,who can help us explain the existing institutionalarrangement.In the Odyssey,which follows on from the Iliad,Odysseus,returning home,has to sail past the S

11、irens mythical beings who lure sailors to their island with their bewitching song.Seafarers who give in totheir charms are doomed.Yet Odysseus is still curious to hear the Sirens song,though he suspectshow difficult it will be to resist the temptation.We encounter a similar temptation in many areas

12、of economic policy specifically,the issue of timeinconsistency.Policymakers or institutions could announce a future policy today,but might later havestrong incentives to move away from these plans.3For example,a government could announce that it is aiming to achieve price stability.But it wouldhave

13、an incentive to depart from this objective further down the line in favour of pursuing other17.Shin,H.S.(Seite),Central banks and the new world of payments,speech delivered on 30 June 2020.goal,s ch a ed cing unemp oyment by means of nant cipa ed inflat on B t fi m and ho sehold18.King,M.,Monetary p

14、olicy:Theory in practice,speech delivered on 7 January 2000.cannot be deceived in the long run.If they see through the manoeuvre,they will still expect higherinflation in spite of the announced objective and adjust prices and wages accordingly.The end resultis that inflation is pushed up systematica

15、lly without reducing unemployment.Resourceful as he was,Odysseus ordered his crew to tie him to the mast of his ship.That way,hewouldnt(Tonne)be able to succumb to temptation.Applying this tale to the present day,monetarypolicy decision makers need to credibly commit to the objective of price stabil

16、ity if they want toovercome the time inconsistency issue and avoid distorting inflation.That is why American economist Larry Summers came to the conclusion that“issues of dynamicconsistency and commitment are crucial to the design of appropriate monetary policies.Institutions should be drafted to so

17、lve time-inconsistency problems.”4Against this backdrop,legislators in many countries have passed on the task of ensuring price stabilityto central banks.At the same time,they granted them independence in order to protect them frompolitical pressure and thus create the preconditions for their credib

18、ility.However,interaction between monetary and fiscal policy cannot be avoided,even if central banks areindependent.5 The question,then,is not whether but rather how this relationship can be given asmart design that allows price stability to be preserved.3 Government bond purchases and risk of fisca

19、l dominanceHere I take a critical view of extensive central bank purchases of government bonds,in particular.While it is true that they can be a legitimate and effective monetary policy instrument,one of theirchief risks is that they might blur the boundary between monetary and fiscal policy.Particu

20、larly in amonetary union made up of fiscally sovereign states,this risk is of major significance and must not beunderestimated,in my view.As I see it,therefore,government bond purchases should be reserved forexceptional situations.The pandemic is just such an exceptional situation.Because price stab

21、ility was under threat,the ECB Governing Council put together a package ofmeasures to ward off the crisis and considerably eased the monetary policy stance.Chief amongthese was the pandemic emergency purchase programme,or PEPP for short.Under this programme,the Eurosystem is acquiring,first and fore

22、most,large volumes of bonds issued by the Member States.But even during a crisis,it is crucial for the programmes to have the right measure and be designedsmartly to keep the risks in check.The key issue for me here is that monetary policy must keep asufficient distance from monetary financing of go

23、vernment.This includes ensuring that incentives forsound public finances are maintained.The disciplining effect of the capital markets on fiscal policy has an important role to play.Marketparticipants use differences in bond prices to signal how much confidence they have in the17.Shin,H.S.(Seite),Ce

24、ntral banks and the new world of payments,speech delivered on 30 June 2020.soundne s of co n ry pu lic finance.Y eld p ead between bonds i s ed b Me ber S ate with18.King,M.,Monetary policy:Theory in practice,speech delivered on 7 January 2000.Even prior to the pandemic,the Eurosystem had become the

25、 Member States largest creditor.As aresult,a significant portion of government debt is uncoupled from the capital market.Holdings ofgovernment bonds on Eurosystem central banks balance sheets could approach 40%of euro areaGDP next year.If these holdings become too large,there is a danger that the ce

26、ntral banks willacquire such a dominant market influence that the markets disciplining effect on public finances isundermined.This is why we have to make sure that our emergency measures dont(Tonne)become a permanentstate of affairs.From the very start,it was important to me that the PEPP is closely

27、 tied to thepandemic.6 Once the emergency situation is over,the PEPP needs to be terminated.Even then,the monetary policy stance will still be very loose overall.The prospect of fiscal policy increasingly engulfing monetary policy still worries me today.To stickwith the Greek mythology imagery nobod

28、y should confuse central banks with a cornucopia thatcontinually fulfils its owners desires.Here it is worth taking a look at how public finances and the central bank are interwoven throughthe balance sheet.For the vast majority of their bonds on the books of central banks,Member Statesare ultimatel

29、y paying interest to themselves,as the interest flows back to them via central bank profit.7This effect is becoming stronger owing to the expanding central bank holdings of government bonds.It is,however,being counteracted by growing amounts of short-term commercial bank deposits withthe central ban

30、ks.Interest is paid on these at the deposit rate.At the end of the day,the effectiveborrowing costs for this portion of government debt thus depends on the central bank interest rate.For Member States,this means having a funding cost advantage as long as the central bank interestrate is lower than t

31、he interest rate on medium to longer-term government bonds.The higher aMember States borrowing costs are on the capital market,the larger the difference is.But at the same time,this makes public finances more vulnerable to future changes in central bankpolicy rates.Yo u see,if the Eurosystem raises

32、its key policy rates again,this will weigh on its ownbalance sheets.Higher interest will have to be paid on the bank deposits,while interest income fromthe purchased bonds will remain constant,to begin with.This slims down central bank profitdistributions to government coffers.Depending on its scale

33、,an interest rate reversal might then evenlead to negative annual results.Rising short-term interest rates might end up impacting publicfinances sooner than was previously the case.In view of this,too,the high levels of government debt could expose the central banks to politicalpressure to keep inte

34、rests rates low even if the inflation outlook actually warranted a normalisation.17.Shin,H.S.(Seite),Central banks and the new world of payments,speech delivered on 30 June 2020.18.King,M.,Monetary policy:Theory in practice,speech delivered on 7 January 2000.If the central banks really were to give

35、in to this pressure in the end,they would be subordinatingprice stability.This could lead to monetary policy and fiscal policy swapping their usual roles:ifmonetary policy guarantees a countrys solvency,ultimately fiscal policy considerations determine themonetary policy stance and thus also the lev

36、el of inflation.Paving the way for this regime of fiscal dominance could set dangerous dynamics in motion:if fiscalpolicymakers become convinced that monetary policy will always come to their rescue in the end,they might take the sustainability of public finances for granted and potentially see this

37、 as a freepass to accumulate more debt.As a result,the pressure on the central banks could become evengreater,increasing the likelihood of them caving in.This is why the Eurosystem now already needs to credibly communicate that we will raise interestrates if needed to safeguard price stability irres

38、pective of public finances.Central banks musttherefore bind themselves in this respect,too just like the way Odysseus was tied to the mast.It would be best for the central bank not to be put in a situation in the first place in which it is forcedto choose between subordinating its objective of price

39、 stability and risking a financial and sovereigndebt crisis.Ultimately,monetary policy is reliant on sound government finances.And that is preciselywhy fiscal policymakers also need to bind themselves and why having credible fiscal rules andmonitoring them consistently is so decisive in a monetary u

40、nion.4 Monetary policy strategy reviewLadies and gentlemen,With sound public finances,independence and a clear mandate,monetary policy requiresfoundations that it cannot lay itself.The Eurosystem,however,can shape its monetary policy strategyso that we can fulfil our mandate the best we can,namely b

41、y safeguarding price stability as ourprimary objective.To this end,the Eurosystem is currently conducting a fundamental review of itsstrategy.One of the key questions here is how we should formulate our specific policy objective.Thus far,theECB Governing Council has aimed to keep inflation rates in

42、the euro area below,but close to,2%over the medium term.An explicitly symmetric formulation of our policy objective as an inflation rateof 2%over the medium term would,I believe,be clearer and easier to understand.It could help tokeep inflation expectations firmly anchored.Including the wording“over

43、 the medium term”is important,as it makes clear that monetary policycan neither immediately influence inflation nor steer it with pinpoint accuracy.This realisticformulation gives the ECB Governing Council the freedom to not have to react overhastily to everychange in the data,and it thus affords mo

44、netary policymakers the flexibility that is needed.17.Shin,H.S.(Seite),Central banks and the new world of payments,speech delivered on 30 June 2020.18.King,M.,Monetary policy:Theory in practice,speech delivered on 7 January 2000.The current strategy is forward-looking only.Whether the inflation rate

45、 in the past has diverged fromthe target is of no direct consequence.This would be different under history-dependent strategies,which are being discussed as a possible alternative.For example,the US Federal Reserve has changedits strategy to a flexible form of average inflation targeting.8The thrust

46、 of this approach is to achieve the desired inflation rate on average over a number of years.If,for example,inflation has previously undershot the target,the central bank will aim for a rateabove the target value for a while to compensate for this.Provided the central bank credibly commits in this r

47、egard,households and enterprises will also expecthigher inflation.Interest rates will thus fall in real terms without having to be lowered in nominalterms,giving the economy a boost.This way,average inflation targeting provides an additionalstabilising advantage,particularly when inflation is being

48、dampened by weak demand and nominalinterest rates are already close to their effective lower bound.Thats the theory,at least.However,a strategy should not just produce good results in economicmodels it needs to work in practice as well.Average inflation targeting is a big ask not just for financial

49、market agents but for households andfirms,too.They need to grasp this concept and update their inflation expectations if wages andprices are intended to respond accordingly.However,studies show that thus far central banks havebarely been able to fine-tune the expectations of households and firms in

50、such a way.9The concept also raises further questions.What happens following a period of excessively highinflation?Would the central bank really go ahead and hit the brakes so hard that inflation drops notonly to the target level,but below it potentially into a range they currently perceive to bedan