Slide 1: Monetary policy in times of crisis
1 Rostagno, Altavilla, Carboni, Lemke, Motto, Saint Guilhem, Yiangou Monetary policy in times of crisis
Slide 2: Why a book on the ECB's monetary policy?
Why a book on the ECB’s monetary policy? • Twenty‐year anniversary of the ECB • Inside perspective of ECB staff • Blend of narrative and selected in‐depth analytics • Analysis of ECB’s unconventional measures • Background analysis for 2020‐21 ECB’s strategy review The views expressed in the book and
Slide 3: Content of the book
Content of the book 1. The Foundations 2. The ECB Strategy and Its Critics 3. Strategy in Action 4. The Crisis 5. The Second Regime: Deflation Risks 6. A Combined Arms Strategy 3 Rostagno, Altavilla, Carboni, Lemke, Motto, Saint Guilhem, Yiangou Monetary policy in times of crisis
Slide 4: 1998: Price stability range with hard ceiling of 2%
1998: Price stability range with hard ceiling of 2% … locking in low inflation after decades of high inflation in many euro area countries 6 6 5 5 4 4 3 3 2 HICP 2 Inflation “[...] “below 2%” clearly delineates the maximum 1 rate of inflation deemed to be consistent with 1 price stability” (ECB Pres
Slide 5: 2003: Price stability definition supplemented with aim of below, but close, to 2%
2003: Price stability definition supplemented with aim of below, but close, to 2% … creating a safety margin above zero 6 6 5 5 4 4 3 3 2 HICP 2 “below, but close, to 2%” Inflation 1 1 0 0 -1 -1 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Notes: Annual % change. 5 Rostagno, Alta
Slide 6: 2003: Price stability definition supplemented with aim of below, but close, to 2%
2003: Price stability definition supplemented with aim of below, but close, to 2% … may have given rise to (perceived) asymmetry 6 6 5 5 4 4 3 3 2 HICP 2 Inflation 1 1 0 0 -1 -1 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Notes: Annual % change. 6 Rostagno, Altavilla, Carboni, L
Slide 7: 1st regime: prevalence of one-sided cost-push shocks
1st regime, coinciding with 1st decade: prevalence of one‐sided cost‐push shocks … driving inflation to the 2% edge 6 20 5 15 Energy 4 Component 10 (RHS scale) 3 5 2 HICP 0 Inflation 1 -5 0 -10 -1 -15 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Notes: Annual % change. 7 Rostagno
Slide 8: The framework acted as stabilising mechanism
The framework acted as stabilising mechanism … expectations of strong policy reaction, which allowed actual policy to be patient Cumulated change in EA near‐ References to inflation risks in ECB term rates and inflation overruns communication and inflation overruns (percentage points) (p.p. lhs and
Slide 9: The framework acted as stabilising mechanism
The framework acted as stabilising mechanism … inflation expectations remained strongly anchored 6 6 5 5 4 4 5year‐5year inflation 5year‐5year inflation compensation, 3 compensation adjusted for risk 3 premium 2 HICP 2 Inflation 1 1 0 0 -1 -1 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 20
Slide 10: Core inflation had to adjust downward
But, over time, core inflation had to make space and adjust downward Rubric … such that overall inflation could remain close to 2% Price stability range 6 6 5 5 4 Range of 4 Range of underlying underlying measures of 3 measures of 3 inflation inflation 2 HICP 2 Inflation Core Core 1 1 Inflation Infl
Slide 11: The euro appreciation played a significant role in the adjustment of EA inflation
The euro appreciation played a significant role in the adjustment of EA inflation Rubric … reflecting monetary restriction relative to the US 6 140 Nominal USD/EUR 5 exchange rate, (RHS, 130 2003Q2=100) 4 120 3 110 2 HICP 100 Inflation 1 90 0 80 -1 70 1994 1996 1998 2000 2002 2004 2006 2008 2010 201
Slide 12: 1st regime: econometric analysis supports our narrative
1st regime: econometric analysis supports our narrative … expectations of strong policy reaction, little change in inflation expectations, decline in core Impulse response functions to cost‐push shock in the two regimes 0.15 0.10 0.1 Interest rate forward Inflation-linked swaps Core inflation 0.10 0
Slide 13: 2nd regime: prevalence of disinflationary shocks
2nd regime, largely crisis period: prevalence of disinflationary shocks Rubric … ceiling ceased to bind, lack of clear floor in price stability definition, lower bound on policy rate Price stability range 6 6 5 5 4 4 3 3 2 HICP 2 Inflation 1 1 0 0 -1 -1 1994 1996 1998 2000 2002 2004 2006 2008 2010 2
Slide 14: 2nd regime: econometric analysis supports our narrative
2nd regime: econometric analysis supports our narrative … expectations of weak policy reaction, decline in inflation expectations, core follows headline Impulse response functions to cost‐push shock in the two regimes 0.15 0.10 0.1 Interest rate forward Inflation-linked swaps Core inflation 0.10 0.0
Slide 15: By 2014, deflation risks
By 2014, deflation risks … as reflected in broad‐based assessment of inflation indicators Latest (with December 2014 BMPE) Median since 1999 4.0 4.0 Euro area inflation dashboard as of end‐2014 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 -0.5 HICP HICPex GDP Comp. per (B)MPE
Slide 16: ECB's strong policy response became necessary: a combined arms strategy
ECB’s strong policy response became necessary: a combined arms strategy … a combination of policy measures highly complementarity among them • Negative rate policy (NIRP) • Alleviating the lower bound on policy rates and shifting down interest rates at all maturities • Purchases of private‐ and publ
Slide 17: ECB's policy measures have lowered interest rates at all maturities
ECB’s policy measures have lowered interest rates at all maturities Rubric Impact of ECB policy measures on interest rates of different maturities (percentage points per annum) NIRP FG PSPP 0.0 0.0 -0.2 -0.2 -0.4 -0.4 -0.6 -0.6 -0.8 -0.8 -1.0 -1.0 -1.2 -1.2 -1.4 -1.4 -1.6 -1.6 2y 5y 10y 2y 5y 10y 2y
Slide 18: Economic growth would have been weaker and inflation lower
Economic Rubric growth would have been weaker and inflation would have been lower … without ECB’s measures Contribution of ECB’s policy measures 2014‐2018 TLTRO NIRP TLTRO NIRP FG APP FG APP Real GDP growth Counterfactual HICP inflation Counterfactual 3.0 3.0 2.0 2.0 Real GDP growth HICP inflation 2
Slide 19: The ECB's new monetary policy strategy
The ECB’s new monetary policy strategy 19 Rostagno, Altavilla, Carboni, Lemke, Motto, Saint Guilhem, Yiangou Monetary policy in times of crisis
Slide 20: The ECB's monetary policy strategy statement
The ECB’s monetary policy strategy statement 1. Changes since 2003 7. The medium‐term orientation 2. The Treaty basis 8. Monetary policy instruments 3. The appropriate price measure 9. The integrated analytical framework 4. The importance of an inflation buffer 10.Climate change 5. The quantitative
Slide 21: Broader lessons
Price stability Broader lessonsframework Price stability is best maintained by aiming for 2% symmetric inflation target over the medium term • Persistent decline in equilibrium real interest rate over last decades • Safety margin above zero while minimising costs of inflation • Removes any possible
Slide 22: Monetary policy in times of crisis
22 Rostagno, Altavilla, Carboni, Lemke, Motto, Saint Guilhem, Yiangou Monetary policy in times of crisis