What ECB Watchers say about the current Monetary: Policy Challenges

The ECB’s large scale asset purchases are necessary for preventing deflationary dynamics, says Michael Hüther, director of Cologne Institute for Economic Research. They are, however, no substitutes for structural reforms in the Eurozone economies.

Do you think that additional nonstandard monetary policy measures are necessary in the current economic situation of the euro area? If so: Will the expanded asset purchase program work?

The ECB’s policy rate near the zero lower bound does not only constrain the conduct of monetary policy but it also endangers financial stability. The ECB’s large scale asset purchases are necessary for preventing deflationary dynamics; they are, however, no substitutes for structural reforms in the Eurozone economies.

How do the potential costs of the taken non-standard monetary policy measures (such as moral hazard problems for governments or increased risk-taking) compare to their (desired) benefits?

The risks arising from large scale asset purchases are real. Nevertheless, non-standard policy measures are unavoidable in the current situation. These risks can, however, be curtailed by governments sticking to their reform plans. The ECB’s possibilities to exit early from non-standard policy measures crucially depend on the fulfillment of their reform agenda.

What do you think are the largest challenges for monetary policy resulting from the new European financial regulatory architecture?

Conflicts between monetary, macroprudential and microprudential policy will challenge the ECB. To avoid this, the macroprudential mandate should be defined more narrowly. Otherwise the ECB has to continuously trade off the price stability goal against the financial stability goal.

What do you think are the largest international challenges resulting from the ECB’s expanded asset purchase program?

Ultra-expansive policy measures will weaken the Euro, especially when the Fed starts to exit from QE. Governments will be tempted to conduct beggar-thy-neighborpolicies and they will pressure their central banks to depreciate their currencies. It will be challenging for central banks to withstand political pressures.