IMFS Interdisciplinary Studies in Monetary and Financial Stability 1/2020 Contributions to the Strategy Review of the European Central Bank Edited by Volker Wieland IMFS 2 About the IMFS About the IMFS The Institute for Monetary and Financial Stability (IMFS) is an academic center of Goethe University Frankfurt, Germany. The Institute serves as a hub for interdisciplinary research in economics that is dedicated to improve our understanding of conditions and policies that are supportive of both price stability and financial stability. It is supported by theStiftung Geld und Währung (Foundation of Monetary and Financial Stability). Apart from its focus on excellent research, the Institute’s scholars are committed to know- ledge exchange between the academic world and decision-makers in politics, administration, financial industry, and central banks. The research areas of the IMFS comprise Monetary Economics, Financial Markets and Macroecono- mics, and Public Law, Economic and Currency Law, Financial Markets Regu- lation and Legal Theory. About the IMFS Interdisciplinary Studies in Monetary and Financial Stability With this series, launched in 2012, the IMFS aims to present interdisciplinary work crossing the boundaries between monetary economics, financial eco- nomics and central bank and financial law. It serves as a first outlet for joint work by IMFS faculty and researchers. The series is open to contributions to basic research as well as writings providing new policy advice. Importantly, it also provides a vehicle for disseminating the results of IMFS research and policy conferences that are joint initiatives of IMFS faculty. Copyrights remain with the authors. The series is edited by Volker Wieland. Previous Issues 1/2017, Quantitative Easing in the Euro Area: Its Record and Future Prospects Over the past years, the ECB’s expansionary monetary policy has reached an unprecedented scale. The aim of the study is to shed some light on the risks and a possible exit strategy. It contains contributions by Peter Praet (ECB), Julian Callow (Element Capital), David Folkerts-Landau and Stefan Schneider (Deutsche Bank), Alex Cukierman (formerly Tel Aviv University) as well as Günter Beck and Volker Wieland. About “The ECB and Its Watchers” At “The ECB and Its Watchers,” central bankers, financial market participants, and academics discuss current issues of monetary policy and financial stability. Since 1999, when the European Central Bank took up its mandate, about 400 ECB watchers from all over Europe, North America, and Asia regularly come to the conference to get first-hand information and to debate with ECB Gover- ning Council members, representatives of international organizations, market professionals and renowned academics. The conference series was initiated by Axel Weber during his time as Director of the Center for Financial Studies (CFS) in cooperation with Otmar Issing, then Member of the ECB Executive Board. Volker Wieland has organized “The ECB and Its Watchers” since 2004, first as CFS Director and then, from 2012, as Managing Director of the IMFS. It is supported financially by donations from the Foundation of Monetary and Financial Stability and the Circle of Friends of “The ECB and Its Watchers.” Contributions to the ECB Strategy Review 3 Introduction Introduction In January 2020, the European Central Bank (ECB) and the To bring together a diversity of views for discussion was the nineteen national central banks of the euro area, which reason why “The ECB and Its Watchers” was initiated in together form the Eurosystem, launched a review of their 1999 by Axel Weber, then a Professor at Goethe University, monetary policy strategy. This review aims to make sure and Otmar Issing, then the ECB’s Chief Economist. Since that the strategy is fit for purpose, both today and in then, it has served as a platform for ECB watchers to review the future and we are pleased to have an opportunity to the central bank’s decisions and strategies, talk about contribute to it. new research findings, and provide recommendations to improve policymaking in the euro area. In 2003, Otmar In a comprehensive approach, the ECB invited citizens, Issing presented the results of the ECB’s first strategy review academics, Members of the European Parliament, and at the conference. Continuing this tradition, we hope that civil society organizations from across Europe to share you will find the contributions in this report useful and their opinions. At IMFS, we were delighted to be invited to illuminating. solicit expert views on the ECB’s strategy at the 21st edition of our conference series “The ECB and Its Watchers” on September 30, 2020. The conference was organized in the form of three debates. ECB President Christine Lagarde Yours sincerely, gave the opening speech. Governors Pablo Hernández de Cos, François Villeroy de Galhau and Jens Weidmann Volker Wieland chaired the three sessions and ECB Chief Economist Philip Organizer of the conference “The ECB and Its Watchers” Lane concluded the event. This IMFS Interdisciplinary Study Endowed Chair of Monetary Economics and Managing presents the written contributions of the economists, legal Director at the Institute for Monetary and Financial scholars and former central bankers who discussed the Stability (IMFS) ECB’s mandate, instruments, and monetary policy strategy at the conference. When no stone is supposed to be left unturned, as President Lagarde put it, there is a lot of room for debate. Should the ECB’s raise its inflation aim? What kind of inflation should the ECB take into account, and how should inflation be measured? Does it have the right instruments to achieve its objective? And what is the mandate of the ECB in the legal sense? These and other questions are addressed from a variety of perspectives in this conference volume. Contributions to the Strategy Review of the European Central Bank A Report from The ECB and Its Watchers XXI Conference* Summaries Debate 1: The ECB's Mandate: Does It Need to Summary President's Address The Monetary Policy Strategy Review: Be Modified to Be Fit for the Future? Some Preliminary Considerations 6 Jens Weidmann, President, Deutsche Bundesbank Summaries Debate 1 Introductory Statement 29 The ECB’s Mandate: Does It Need to Be Modified to Be Fit for the Future? 7 Christian Noyer, Banque de France Some Thoughts About the ECB’s Mandate 32 Summaries Debate 2 The ECB’s Instruments for Crises and Normal Times 12 Jordi Galí, CREI, Universitat Pompeu Fabra, and Barcelona GSE Summaries Debate 3 Remarks on Four Changes in the ECB Strategy 38 The ECB’s Monetary Policy Strategy: Lessons from the Financial Crisis, Debt Crisis, Helmut Siekmann, and Double Recession 18 Institute for Monetary and Financial Stability The ECB’s Mandate: Does It Need to Be Modified to Be Fit for the Future? 42 Welcome Q&A: Birgitta Wolff, President, Goethe University Frankfurt Lead Questions: Welcome 21 Thomas Möllers, University of Augsburg Elga Bartsch, Blackrock Jörg Zeuner, Union Investment 45 President's Address Video Debate 1: Christine Lagarde, President, European Central Bank https://www.youtube.com/watch?v=FEz4lqHgUKg The Monetary Policy Strategy Review: Some Preliminary Considerations 22 Video: https://www.youtube.com/watch?v=kBGNOBWslqI * This study brings together contributions from The ECB and Its Watchers XXI conference on September 30, 2020 at Goethe University Frankfurt, which was organized by the Institute for Monetary and Financial Stability. This conference served as one of the listening events with academics by the European Central Bank ( ECB Press Release, February 24, 2020). https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200224~752f11038e.en.html Contributions to the ECB Strategy Review 5 Program Debate 2: Debate 3: The ECB's Instruments for Crises The ECB's Monetary Policy Strategy: and Normal Times Lessons From the Financial Crisis, Debt Crisis, and Double Recession Pablo Hernández de Cos, Governor, Banco de España Introductory Statement 50 François Villeroy de Galhau, Governor, Banque de France Introductory Statement 76 Lucrezia Reichlin, London Business School Non-Standard Monetary Policy Instruments: Otmar Issing, Center for Financial Studies Effectiveness and Risks 51 The Two-Pillar Strategy 77 Athanasios Orphanides, MIT Sloan School of Management Petra Geraats, University of Cambridge Considerations for the Policy Strategy Review 59 The ECB’s Monetary Policy Strategy: Lessons from the Financial Crisis, Debt Crisis, and Coronavirus Crisis 79 Claudio Borio, Bank for International Settlements When The Unconventional Becomes Conventional 69 John B. Taylor, Hoover Institution, Stanford University The ECB’s Monetary Policy Strategy Going Forward 92 Q&A: Lead Questions: Q&A: Katharina Utermöhl, Allianz Lead Questions: Ulrich Kater, DekaBank Dirk Schumacher, Natixis Jari Stehn, Goldman Sachs 73 Julian Callow, Element Capital Sylvain Broyer, S&P Global Ratings 98 Video Debate 2: https://www.youtube.com/watch?v=jW6SHmFAuxA Video Debate 3: https://www.youtube.com/watch?v=lFgv2ws2cRY Conference Wrap-Up Philip R. Lane, Member of the Executive Board, European Central Bank Concluding Remarks 103 Video Conference Wrap-Up: https://www.youtube.com/watch?v=4_an_xiAuiw 6 Contributions to the ECB Strategy Review Summaries Summary President's Address The Monetary Policy Strategy Review: Some Preliminary Considerations employment and growth. However, she suggested that a “persistent failure” to achieve the inflation target may well call for shorter policy horizon