Mr Cœuré, Member of the Executive Board of the ECB, provides in his speech a simple yet comprehensive description of the ECB's actions during the crisis.
Mr Cœuré starts by presenting a simplistic model of monetary policy transmission. This is the sequence of events through which central banks’ decisions transmit to economic magnitudes which have an impact on people’s welfare. He then reviews the effectiveness of ECB’s monetary policy prior to the financial crisis, when the transmission mechanism was functioning according to the textbook definitions. This period was tranquil, economically speaking, although macro-economic imbalances were quietly building up beneath the surface.
Then he portrays the crisis as a creating a break in the transmission mechanism. The crisis however was more than that: at some point it was feared that the whole financial system would stop functioning. But he analyses it from the perspective of its implications for the chain of events on which monetary policy action depends. Here, he argues that the standard tool of central banks – changes to the short-term interest rate – can lose some of its potency if the sudden unravelling of imbalances threatens financial stability and impairs the transmission mechanism. But Mr Cœuré also claims that new untested instruments were deployed which largely replaced standard monetary policy interventions. This is perhaps the most relevant lesson we can draw from the crisis.
The most important link in the long chain is the monetary policy strategy. Clarity about the objective and about the key indicators can anchor expectations and empower monetary policy decisions. As is well known, adjustments to expectations can amplify any action taken by a credible central bank.
ECB’s strategy has supported this mechanism in normal times. In crisis times, as markets ceased to transmit price signals, its tools had to change. The Eurosystem’s response has been timely; all non-standard measures have been temporary and tailored to the special features of the euro area. ECB’s tools have changed but ECB’s strategy has not – it is in fact supporting a gradual process of normalisation.
The euro area is an economic and monetary union (EMU). Its monetary pillar has performed well so far and will continue its work in the future. The economic pillar is now being considerably strengthened. The new fiscal framework should now be promptly ratified and forcefully implemented under the leadership of the European Commission; as a complement, growth initiatives will be welcome, insofar as they address the long-term growth potential.
Full speech
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