2012年-CEPS欧洲政策研究中心_A_New_Two_12页_229kb

Summary of "A New Two-Pillar Strategy for the ECB"

Core Content

The document discusses the need for the European Central Bank (ECB) to reconsider its monetary policy strategy in light of the 2007-08 financial crisis. It argues that while the ECB has traditionally focused on price stability as its primary objective, the crisis highlighted the importance of financial stability as a complementary objective. The authors propose a new two-pillar strategy, where the ECB maintains its focus on price stability through interest rates while using additional instruments to ensure financial stability.

Main Viewpoints

• Price Stability is Not the Only Objective: The financial crisis showed that maintaining price stability does not necessarily prevent financial instability. Central banks must therefore consider financial stability as a key objective.
• Trade-offs Exist: There is a trade-off between price stability and financial stability, especially in the context of technological shocks or "animal spirits" driving asset bubbles.
• Central Bank Responsibility: While supervisors and regulators are primarily responsible for financial stability, central banks may also need to play a role, especially when they inadvertently contribute to financial instability through monetary policy.
• Need for New Instruments: The ECB needs more instruments than just interest rates to address financial stability, such as legal reserve requirements and macro-prudential controls.

Key Information

1. Trade-off Between Price Stability and Financial Stability

• Technology-Driven Bubbles: A technological shock can lead to a shift in both supply and demand, resulting in a lower price level. Central banks, aiming for price stability, may respond with monetary stimulus, which can lead to asset price bubbles.
• Animal Spirits: Optimistic investor beliefs and excessive credit creation can also lead to financial instability. The ECB failed to recognize these risks during the 2003-07 period, leading to a financial crisis.
• Consequences of Bubbles: Bubbles can lead to crashes and financial instability. Central banks must be aware of these risks and adjust their policies accordingly.

2. Defining and Monitoring Financial Stability

• Definition: Financial stability is defined as the absence of financial instability, which occurs when asset prices diverge from fundamentals, credit availability is distorted, and aggregate spending exceeds the economy's ability to produce.
• Indicators: Asset prices and credit growth are key indicators of financial stability. The ECB should monitor these to detect potential threats.
• Evidence: During 2003-07, both euro area and US stock prices experienced significant increases, coinciding with rapid credit growth. This led to a bubble that eventually burst, causing a financial crisis.

3. Policy Instruments for Financial Stability

• Legal Reserve Requirements: The ECB has the authority to impose reserve requirements on banks. Increasing these can raise the cost of credit and reduce its expansion.
• Macro-Prudential Control: This involves setting rules for banks to manage risk, such as loan-to-value ratios and leverage ratios. The ECB could implement such controls without changing its statutes.
• Systemic Banks: Macro-prudential control should be applied to systemic banks that operate across the eurozone. These banks are more likely to affect financial stability.

4. The Two-Pillar Strategy

• Separation of Instruments: The ECB should separate its instruments for price stability (interest rates) and financial stability (reserve requirements and macro-prudential tools).
• Advantages: This approach allows the ECB to manage trade-offs more effectively and maintain price stability without excessively raising interest rates.
• Implementation: The ECB could have used this strategy during 2003-07 to control credit growth and prevent asset bubbles. It would have allowed the ECB to keep inflation close to its target while managing financial risks.

Conclusion

The document concludes that the ECB should adopt a two-pillar strategy to better address financial stability alongside price stability. This would involve using interest rates for inflation control and additional instruments like legal reserve requirements and macro-prudential controls for financial stability. The failure to implement such a strategy during the 2003-07 period contributed to the financial crisis. The authors emphasize that central banks must be more proactive in monitoring and managing financial risks, even if it means overriding their traditional focus on price stability.