ECB CONFERENCE ON MONETARY
POLICY: BRIDGING SCIENCE AND
PRACTICE
Pablo Hernández de Cos
Governor, Banco de España
Frankfurt am Main
8 October 2019
2
IN THE LAST DECADE ADVANCED ECONOMIES HAVE BEEN EXPOSED TO PERSISTENT DISINFLATIONARY PRESSURES
SOURCE: Eurostat, Thomson Reuters Datastream. Last observation: 2019 August.
-3
-2
-1
0
1
2
3
4
5
6
7
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
EURO AREA UNITED STATES UNITED KINGDOM JAPAN
INFLATION%
European Stability Mechanism
First EBA stress test
Lehman failure
US taper tantrum
European Financial Stability Facility
Greece requests financial assistance
UK Brexit referendum
2 %
LOW INFLATION PERSISTS IN SPITE OF UNPRECEDENTED MONETARY POLICY STIMULUS
SOURCES: Datastream, European Central Bank and Banco de España.
Last observations: Rates,19 Sep 2019; Balance sheet: Eurosystem,12 Sep 2019; FED, 11 Sep 2019; BoJ, 09 Sep 2019; BoE.
-1
0
1
2
3
4
5
6
07 08 09 10 11 12 13 14 15 16 17 18 19
EUROSYSTEM
FEDERAL RESERVE
BANK OF JAPAN
BANK OF ENGLAND
%
POLICY INTEREST RATES
0
20
40
60
80
100
120
0
10
20
30
40
50
60
08 09 10 11 12 13 14 15 16 17 18 19
EUROSYSTEM
FEDERAL RESERVE
BANK OF JAPAN (right scale)
BANK OF ENGLAND
% of GDP 2017
CENTRAL BANKS BALANCE SHEET
% of GDP 2017
3
4
UNCONVENTIONAL MEASURES HAVE BEEN EFFECTIVE AT EASING FINANCIAL CONDITIONS, SUCH AS YIELD CURVES…
SOURCE: Rostagno, Altavilla, Carboni, Lemke, Motto, Saint-Guilhem, Yiangou (2019), forthcoming.
Notes: The chart shows the impact of ECB non-standard measures on the GDP-weighted
aggregate of euro area sovereign bond yields.
UPWARD PRESSURES ON EURO AREA SOVEREIGN BOND YIELDS
IN ABSENCE OF ECB’s NON-STANDARD MEASURES 2014-2018
% per annum
NEGATIVE INTEREST RATE POLICY (NIRP) FORWARD GUIDANCE (FG) APP
0.0
0.4
0.8
1.2
1.6
0.0
0.4
0.8
1.2
1.6
2y 5y 10y 2y 5y 10y 2y 5y 10y 2y 5y 10y 2y 5y 10y
2014 2015 2016 2017 2018
5
…AND AVERTING THE RISKS OF DEFLATIONARY SPIRALS AND STIMULATING GROWTH AND INFLATION
CONTRIBUTION OF ECB NON-STANDARD
MEASURES TO REAL GDP GROWTH
2014-2018
% per annum
Source: Rostagno, Altavilla, Carboni, Lemke, Motto, Saint-Guilhem, Yiangou (2019), forthcoming.
Notes: The chart shows the impact of ECB non-standard measures on macro variables based on a macroeconomic model with
financial variables conditioning on their estimated impact on the yield curve.
% per annum
CONTRIBUTION OF ECB NON-STANDARD
MEASURES TO HICP INFLATION
2014-2018
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2014 2015 2016 2017 2018
TLTRO NIRPFG APPReal GDP growth Counterfactual
-0.5
0.0
0.5
1.0
1.5
2.0
-0.5
0.0
0.5
1.0
1.5
2.0
2014 2015 2016 2017 2018
TLTRO NIRPFG APPHICP inflation Counterfactual
6
RESEARCH BASED ON MICRO DATA HAS YIELDED VALUABLE LESSONS ABOUT UNCONVENTIONAL MONETARY POLICY MEASURES
For instance, they enable us to document that:
• Refinancing programs have contributed to enhancing funding conditions and to
stimulating credit (e.g., Andreeva and Garcia-Posada, 2019; and Garcia-Posada and
Marchetti, 2016).
• Central bank asset purchase programs had positive effects on the cost of financing
and the supply of credit (e.g., Arce, Gimeno and Mayordomo, 2019).
• Negative interest rates: the effect on credit conditions is more difficult to assess as it
occurs through different channels (e.g., Arce, García-Posada, Mayordomo and Ongena,
2019, Heider, Saidi, and Schepens, 2019, and Demiralp, Eisenschmidt and Vlassopoulos, 2017).
7
GOING FORWARD, LOW/NEGATIVE RATES ARE LIKELY TO PERSIST, DUE TO A LOW ‘NATURAL’ INTEREST RATE
SOURCE : Banco de España Annual Report 2018, based on the model of Fiorentini, Galesi, Pérez-Quirós and
Sentana (2018). The bands for the euro area refer to confidence levels of 68% and 90%.
• The natural interest rate (r*) is a key determinant of policy interest rates
• Evidence of sustained decline in recent decades, reflecting different structural factors:
• demographics (e.g. Eggertsson and Mehrotra, 2014), low productivity growth (Gordon,
2015), safe asset scarcity (Caballero and Farhi, 2017), etc.
8
HOW SHOULD MONETARY POLICY BE CONDUCTED IN AN ENVIRONMENT OF LOWNATURAL INTEREST RATES?
• A low (and falling) r* implies that the incidence of the effective lower bound (ELB) may
increase in the future.
• If the reversal rate (Brunnermeier and Koby 2018) is higher than “switch-to-cash” ELB,
conventional policy space may be smaller:
• Evidence suggests that we have not yet reached the reversal rate…
• … but if rates remain negative for long this may end up hampering bank-based
monetary transmission (e.g. Arce, García-Posada, Mayordomo and Ongena, 2019).
• Adjusting our monetary policy strategy to this challenging environment should be a
priority
9
COMMUNICATION HAS PROVED TO BE A KEY MONETARY POLICY TOOL
• Forward guidance was proposed in the academic literature as a way to address the ELB
constraint (Eggertsson and Woodford, 2003).
• A commitment to provide a monetary stimulus longer than required by the central bank
reaction function (“low for longer”).
• Forward guidance requires credibility and transparency, both of which must be
centerpiece of (revised) monetary policy strategies.
SOURCE : Banco de España
Time
Inte
rest
rate
T1 T2 T3
ELB
No ELB “Low for longer”
ELB
Inflatio
n
T1 T2 T3
“Low for longer”
No ELB
ELB
Target level (e.g. 2%)
Time
Shadow rate
10
MONETARY POLICY CANNOT BE THE “ONLY GAME IN TOWN”
• The ELB imposes limits to conventional and unconventional monetary policy
• Other policies must play a role in providing stimulus when needed and alleviating such side
effects
• Countercyclical fiscal policy may help support growth and inflation:
• Positive synergies between monetary policy, fiscal policy and structural reforms under
the ELB (Arce, Hurtado, Thomas, 2016).
• Positive fiscal spillovers (Alloza, Burriel y Pérez, 2019).
• Macroprudential policies can help to alleviate some of the negative side effects associated
with unconventional monetary policy
11
IN THE EURO AREA, THERE ARE IMPORTANT CHALLENGES TO THE EFFECTIVE IMPLEMENTATION OF COUNTERCYCLICAL FISCAL POLICY
• Many EU members face limited fiscal space to enact expansionary fiscal policies.
• Potential asymmetry of national business cycles across the euro-area
SOURCE : European Commission.
NOTE: Fiscal space is computed as structural deficit – medium term objective
-3,0
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
LU DE CY MT LT AT NL IE EE SK FI LV PT BE SI FR IT ES
FISCAL SPACE IN EURO AREA
% potential GDP
12
TOWARDS A EURO AREA-WIDE FISCAL POLICY?
• Therefore we need a euro area-wide fiscal instrument powerful enough to:
• stabilize aggregate fluctuations in the area.
• help accommodate the impact of idiosyncratic shocks to EMU members.
• Risk sharing through fiscal policy plays a more important role in other more
complete monetary unions.
• Bonus: under additional conditions, euro area (supranational) debt would become a
union-wide safe asset.
0102030405060708090
100
1999 - 2015 1998 - 2014 1961 - 2006 1995 - 2006 2003 - 2016
Euro Area United States Canada Germany Spain
CAPITAL MARKETS FISCAL CHANNEL CREDIT MARKETS NON-SHARED RISK
STRENGTH OF RISK-SHARING CHANNELS (a)INTERNATIONAL COMPARISON
As % of GDP
SOURCE: Banco de España Annual Report 2016 and Burriel (forthcoming).
a Estimated following the methodology of Asdrubali et al (1996), which approximates the percentage of shocks recorded in an economy’s GDP that pass through to that economy’s residents’
income and consumption decisions. The channels that enable the impact of the shocks to be softened are, firstly, the capital markets channel whose strength depends on the income that
residents obtain from other countries not affected by the shock because they hold shares in the companies of those countries and obtain income from labour and from other financial assets.
Secondly, the shock may be softened by public intervention through fiscal transfers from the federal budget, as in the case of the United States, or from other regions (fiscal channel). Finally,
households and firms in that economy may smooth their consumption by resorting to their savings or to the credit market (credit channel).
13
BEYOND CYCLICAL STABILIZATION, FISCAL POLICY AND STRUCTURAL REFORMS MAY HELP TO RAISE THE NATURAL INTEREST RATE
• Structural reforms can boost economic activity (Andrés, Arce and Thomas, 2017) as well as
the potential growth rate.
• Fiscal policy can achieve a more growth-friendly composition of public finances (e.g.
public investment geared towards increases in productivity).
0
20
40
60
80
100
120
140
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EMU FR DE ES IT
PUBLIC INVESTMENT AS A RATIO TO GDP
2007=100
SOURCE : Eurostat.
Thank you for your attention.