Monetary Policy
The European Central Bank (ECB) is coming under increasing pressure. It wants to achieve its goal of long-term price stability with an inflation rate of below, but close to, 2 percent for the euro area. At the same time, it is concerned about the weak economic environment. Given how low interest rates already are, the ECB seems to have exhausted its options. What strategy will the ECB follow now? In the United States, the distinction between monetary and fiscal policy already seems to be blurring.
In July 2019, the US Federal Reserve (Fed) lowered its interest rates to a range of 2.00 to 2.25 percent for the first time since December 2008. The ECB’s corresponding key interest rate (main refinancing rate) has been 0.00 percent since March 2016. In addition to this interest rate policy instrument, both central banks have relied on quantitative easing (QE) as an instrument of unconventional monetary policy since the financial crisis (Fed: 2008–2014; ECB since 2015).
Fed on the Verge of a New Expansive Monetary Policy
While the ECB has kept the volume of securities under its bond program constant since December 2018, the Fed announced in July 2019 that it would end the curtailment of its QE program. The funds from maturing securities will then be reinvested in new assets, as the ECB is currently doing. If the Fed returns to a course of expansionary monetary policy in the medium term, it will have to start worrying about its credibility: the decisions it makes are in the crosshairs of hasty US policymaking. The more insistently Donald Trump lobbies Fed chief Jerome Powell, the more difficult it gets to justify further rate cuts on the basis of its mandate, which is to use its monetary policy resources to supplement fiscal policy and promote economic growth. However, it must not lose sight of its objectives, namely a maximum employment rate, stable prices, and moderate long-term interest rates.
Maintaining the Credibility of Central Banks
Christine Lagarde will take over as President of the ECB in November 2019, and already she, too, is confronted with ever louder calls for a continuation or even an intensification of expansive monetary policy. She acknowledges that these economic and political voices might undermine the independence of the ECB, and so she has already indicated in advance of assuming her post that the ECB will follow a new communication strategy. In contrast to the Fed, the ECB’s primary objective is price stability. As long as this is not jeopardized, the ECB is permitted to support European countries’ fiscal policy efforts to achieve balanced economic growth.
Does the ECB Also Pursue Fiscal Policy?
Compared to the Fed, the ECB faces an uphill struggle simply because it must contend with 19 euro area countries, all with different fiscal and economic growth positions. As part of its research activities, the ifo Institute also investigates the socio-political implications of the ECB’s monetary policy. For example, in their study of Target2 balances in the European System of Central Banks, ifo researcher Timo Wollmershäuser and his co-authors found that recession was mitigated by the fact that different European crisis countries took different approaches to using the opportunity to build up Target2 balances.
The Future Role of the ECB
The activities of the ECB will continue to shape the common development of the European Union. As part of its summer and winter economic forecasts, the ifo Institute also analyzes current developments in European monetary policy. For example, the summer 2019 forecast already stated that outgoing ECB President Mario Draghi had set the initial course for his successor. The first increase in the key interest rate since July 2011 has already been postponed further into the future. The ifo forecasting team expects the ECB not to initiate a turnaround on interest rates until 2021. Until then, the newly announced refinancing transactions should avert liquidity bottlenecks at individual banks. This means the ECB will continue to play the role of a financial intermediary that protects troubled credit institutions from potentially expensive refinancing on the interbank money market.
“Monetary policy has reached the end of the line. Economic and fiscal policy have to do more to deliver growth and economic momentum.”
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Article in JournalFlorian Hartmann, Sascha Möhrleifo Institut, München, 2024ifo Schnelldienst, 2024, 77, Nr. 03, 49-51
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Article in JournalAymo Brunetti, Timo Wollmershäuser, Harm Bandholz, Niklas Becker, Yasmin Fahimi, Hagen Lesch, Gunther Schnablifo Institut, München, 2022ifo Schnelldienst, 2022, 75, Nr. 07, 03-25
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Article in JournalLena Dräger, Klaus Gründler, Niklas Potrafke, Fabian Ruthardtifo Institut, München, 2022ifo Schnelldienst, 2022, 75, Nr. 03, 35-37
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Article in JournalMarkus Demary, Timo Wollmershäuser, Gerit Vogt, Gertud R. Traud, Stefan Mütze, Thomas Mayer, Pascal Seiler, Lukas Haffert, Nils Redeker, Tobias Rommelifo Institut, München, 2021ifo Schnelldienst, 2021, 74, Nr. 09, 03-26
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ifo Viewpoint — 25 June 2021
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ifo Viewpoint — 28 May 2021
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Article in JournalSascha Möhrle, Timo Wollmershäuserifo Institut, München, 2020ifo Schnelldienst, 2020, 73, Nr. 10, 30-32
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Working PaperNikolay Hristov, Oliver Hülsewig, Timo WollmershäuserDeutsche Bundesbank, Frankfurt, 2019Discussion Paper 24
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Contribution in Refereed JournalRestoring Euro Area Monetary Transmission: Which Role for Government Bond Rates?Nikolay Hristov, Oliver Hülsewig, Thomas Siemsen, Timo Wollmershäuser2019Empirical Economics 57 (3), 991-1021
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Article in JournalProjektgruppe Gemeinschaftsdiagnoseifo Institut, München, 2019ifo Schnelldienst, 2019, 72, Nr. 07, 03-63
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Article in JournalClemens Fuest, Hans-Werner Sinnifo Institut, München, 2018ifo Schnelldienst, 2018, 71, Nr. 24, 15-25
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Article in JournalTimo Wollmershäuser, Marcell Göttert, Christian Grimme, Carla Krolage, Stefan Lautenbacher, Robert Lehmann, Sebastian Link, Wolfgang Nierhaus, Ann-Christin Rathje, Magnus Reif, Radek Šauer, Tobias Schuler, Marc Stöckli, Klaus Wohlrabe, Anna Wolfifo Institut, München, 2018ifo Schnelldienst, 2018, 71, Nr. 24, 28-82
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Article in JournalDirk Niepelt, Ulrich Stolzenburg, Alexander Rathke, Jan-Egbert Sturm, Klaus Abberger, Mathias Binswanger, Hans Gersbach, Elisabeth Springlerifo Institut, München, 2018ifo Schnelldienst, 2018, 71, Nr. 16, 03-19
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Article in JournalOliver Hülsewig, Timo Wollmershäuser, Nikolay HristovLange Verlag GmbH & Co. KG, Düsseldorf, 2018WISU – Das Wirtschaftsstudium 4/2018, 491-499
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Article in JournalCarl-Ludwig Thiele, Martin Diehl, Thomas Mayer, Dirk Elsner, Gerrit Pecksen, Volker Brühl, Jochen Michaelisifo Institut, München, 2017ifo Schnelldienst, 2017, 70, Nr. 22, 03-20
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Article in JournalChrista Hainz, Artem Marjenko, Susanne Wildgruberifo Institut, München, 2017ifo Schnelldienst, 2017, 70, Nr. 15, 38-41
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Contribution in Refereed JournalThe Interest Rate Pass–Through in the Euro Area During the Global Financial CrisisNikolay Hristov, Oliver Hülsewig, Timo Wollmershäuser2014Journal of Banking & Finance 48, 104-119
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Contribution in Refereed JournalFinancial Frictions and Inflation Differentials in a Monetary UnionNikolay Hristov, Oliver Hülsewig, Timo Wollmershäuser2014The Manchester School 82 (5), 549-595
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Article in JournalFranz-Christoph Zeitler, Marcel Fratzscher, Dietrich Murswiek, Manfred J.M. Neumann, Markus C. Kerberifo Institut, München, 2014ifo Schnelldienst, 2014, 67, Nr. 06, 03-25
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Contribution in Refereed JournalTarget-Salden und die deutsche Kapitalbilanz im Zeichen der europäischen ZahlungsbilanzkriseHans-Werner Sinn, Timo Wollmershäuser2012Kredit und Kapital 45 (4), 465-487
Working paper version available as: Ifo Working Paper 149 (PDF)
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Contribution in Refereed JournalLoan Supply Shocks During the Financial Crisis: Evidence for the Euro AreaNikolay Hristov, Oliver Hülsewig, Timo Wollmershäuser2012Journal of International Money and Finance 31 (3), 569–592
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