What Role for the ECB during the Great Recession?

Giuseppe De Arcangelis DiSSEc

Plan of the talk

•  Organization of the ECB •  The decision making mechanism •  Monetary Policy in the Eurozone •  Changes in monetary policy making during

the Great Recession •  Some considerations on the current

monetary environment

Decision-making bodies of the ECB •  Governing Council:

– ECB President or Vice-President – Four other members of the Executive Board – Governors of the euro area NCBs

•  Executive Board: – ECB President or Vice-President – Four other members of the Executive Board

•  General Council: – ECB President or Vice-President – Governors of all EU-members’ NCBs

Summarizing: Independence and Accountablity

•  Independence: –  from any political influence

•  Accountability: – To the citizens of the EU, formally to the

European Parliament –  Includes transparency in all ECB actions –  Includes effective communication – Both transparency and timely communication

make monetary policy more effective

Some considerations •  The problem is the fragmentation of the

national money mkts: is this the right monetary policy?

•  From competitive devaluations to competitive relaxed monetary policies?

•  We are living in a world of low interest rates: what consequences?

•  PS: The revenge of the Mundell-Fleming model and the Poole model

“Six years of low interest rates in search of some growth”

•  from The Economist (April 6, 2013)

This is great! •  Mortgages more affordable to more people à more «liquid» housing mkt à more people mobility

•  Easier consumption credit, however positive signs only from the US (automobile mkt)

•  Big bonanza for all debtors – including (some) sovereign debtors «instead of offering risk-free return they offer return-free risk» (Jim Grant)

Are we sure? •  Cheap credit has consequences also on

other financial mkts •  Savers dislike low rates of return (hate

negative real RoR) and new derivatives are (re)created and moving to more riskier investment

•  Companies may engage in more riskier project and banks may be willing to lend

•  Bubbles again

Something is not working right

Conclusions

•  Cheap credit from central banks may not help

•  The transmission mechanism may be broken

•  Large amounts of liquidity are not igniting growth

•  Careful not to ignite a new bubble! •  Back to the inital point?