Comments on: The Euro Area’s Experience with Unconventional Monetary Policy

By: Cristiano Duarte

Cristiano Duarte — Tue, 24 Nov 2015 01:35:51 +0000

Pasbaxo,
Thank you for your comment. I agree with you that the limited role of “lender of last resort” provided by the ECB is an issue that should be improved in order to ensure the financial stability in the Euro area, as I pointed out in the text. Indeed, authors like De Grauwe (2013) and Arestis (2015) consider the OMT introduced in September 2012 a “lender of last resort” role for the ECB, by establishing the possibility of buying sovereign bonds in the secondary markets in order to stabilize countries’ yields. The OMT has actually avoided the most acute risks of financial collapse of the Euro area. However, the OMT has several caveats: I)The program’s complete rules were never published. One knows that the program does not allow bond purchases in primary markets, excludes countries that are under financial aid programs, and requires several previous “conditionalities”, but their details are not clear. ii) The program faced fierce opposition and legal challenges (dismissed by the ECJ, but still waiting a final ruling from the German Constitutional Court), and ended up never being activated. In addition, the ECB is not backed by an “Euro area” Treasury, like the FED or the BOE. Therefore, our point of view is that the “lender of last resort” role introduced by the ECB is still limited, and does not enjoy the same powers as other central banks.
Finally, I will just make an explanation of a point you raised in your comment. The ECB “implicit objective” to raise the balance sheet in € 1 trillion ( to € 3 trillion, level observed in early 2012) did not come with deflation in December 2014. It was announced before, in September 2014, together with the new programs (TLTRO,CBPP3, ABSPP). Although low inflation (+0.3%) was a concern then, those programs aimed primarily to restore the transmission of the monetary policy and support the provision of credit to the real economy. It was just in January 2015 the ECB realized it would not be able to fulfill its € 1 trillion balance sheet expansion objective only with the current programs and announced further stimulus, such as the PSPP. This time, the main objective of the program stated by the ECB would be to restore inflation/ inflation expectations towards the medium-term objective of below but close 2% YoY.

By: pasbaxo

pasbaxo — Sat, 21 Nov 2015 14:46:01 +0000

According to this report, at the top of this enervating history, the ECB bank decided not to enlarge its balance to 1 Eur trillion, as for leaded by fear of deflation.( dec 2014). After 14 years of struggling against the inflation the ECB saw in -0,2 % deflation a reason to stop the liquidities enlargement program. This reason seems to me a fallacy. Several times of inspection of the “adequate” monetary artcls in Treaty and Statute brought the conclusion that the financing of trading in the new instruments was badly covered. Initially those artices suggested the possibilty of furnishing the enlargement of ECB capital by means of an article permitting furnishment by means of printing banknotes, but later on this article dissapeared in a mysterious way. Several years later a new art. appeared concerning electronic multiplication of banknotes. This opened the heaven, but it was followed by a restricting protocol, leaving the buying of a new instrument (SWAP) to the existing means of the banks. Those kind of measures and contradicting followups leave the participants in an unsure field of hesitation about the furnishment of the last ressort and temper the market intensity, still abandoning the possiblity of enlargement of the ECB balance on a secure juridical monetary foundation.

By: Cristiano Duarte

Cristiano Duarte — Tue, 27 Oct 2015 19:12:26 +0000

In reply to Gerson P. Lima.

We have common grounds agreeing in the importance of fiscal policies. But fiscal policies do not serve only as “temporary remedies” to “fix messes of monetary policies”. Actually, they have a permanent role in the economy, with their main functions: i) resource allocation (efficient provision of public goods and services); ii) income redistribution (ensure equitable distribution of income); iii) macroeconomic stabilization (promotion of economic growth, lower unemployment rate and price stability). So their role is not just temporary, to correct eventual government failures. In fact, when properly done they have a permanent seat in the economy and the society, promoting more growth, social fairness, and correcting market failures (or operating where the markets do not have own incentives).
In addition, monetary policies are not just supposed to “serve to the interests of the financial industry and politicians”. Beyond the traditional targets of ensuring price stability, or in some places the level of employment/income, many central banks (mainly after the 2008 crisis) have also incorporated in their objectives the maintenance of financial stability and the promotion of financial inclusion. In order to do so, they have widened their own instruments or called into action other institutions, such as financial stability authorities and development banks. Regarding the European case, although the region is still far from a sustained recovery after the 2008 crisis, it would be surely worse without the conventional and unconventional actions just after the crisis. The provision of targeted liquidity, swap lines, etc. surely avoided a financial meltdown in the region. Following monetary measures had mixed results, but many specialists recognize that unconventional measures in other places were most effective through their signaling channel (what also seems to be true for the Euro area, who managed to avoid more acute effects in 2012 after Draghi´s “Whatever it Takes Speech” and the OMT). This points to the increasing importance of central bank´s communication strategy and transparency in objectives nowadays. Ultimately, evidences show that monetary policies matter, but cannot “save the world” alone. They must be properly coordinated with fiscal policies, financial stability and inclusion initiatives, as well as a proper legal and institutional framework, in order to reach better economic and social results.

By: Gerson P. Lima

Gerson P. Lima — Sat, 17 Oct 2015 18:41:07 +0000

As far I could understand European unconventional monetary policy did not fix and rescue the monetary policy traditionally functioning; crisis is still there. One possible reason for sovereign debt crises is that public debts normally follow explosive trends, as demonstrated in the paper Public Debt Is Economic Nonsense, presented at the previous WEA Conference Ideas towards a new international financial architecture? So, if problems remain why to insist on monetary policies alternatives?
You also propose a “coordinated” fiscal policy as a complement to the monetary policy in order to (re)create sustained growth, as if previous growth were sustained. Fiscal policy seems to be a consensus in this context; it has been called to fix messes created by monetary policy here and there and after doing its job it must go back to textbooks and stay there until the next call. Before suggesting fiscal policy one must find how to countervail, without touching democracy, the restriction given by the uber alles central bank’s target of price stability (to preserve the central bankers’ financial capital value).
The paper Economic Policy and Political Power in European Crises in this Conference brings a demonstration that fiscal policy does not cause inflation as the mainstream monetary repeatedly says without any evidence. So, why not fiscal policy without monetary policy? I would appreciate it very much if you could comment on my paper.