NEWS Release - The ECB's operational framework in post-crisis times
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Speech by Benoît Cœuré, Member of the Executive Board of the ECB, at the Federal Reserve Bank of Kansas City’s 40th Economic Policy Symposium, Jackson Hole, 27 August 2016
I would like to make some comments this morning on the challenges that lie ahead for central banks and how our monetary policy frameworks should adapt to them. I will admittedly be asking more questions than giving answers.
I won’t be giving any definitive guide to the future shape of the ECB’s monetary policy framework. What I will offer is my view on some of the key issues on this topic and pose some questions of relevance to policymakers.
Monetary policy operational frameworks concern the intermediate targets of central banks and how they meet them. This is distinct from monetary policy strategies, which concern the quantitative definition of policy objectives, the horizon over which they should be delivered as well as the organisation and weighting of incoming information.
Operational frameworks can be designed along two main dimensions: (i) the operational target for monetary policy; and (ii) the measures used for implementing that target, which include the mode of liquidity provision or absorption, the counterparties that are eligible to take part in those operations and facilities, and the choice of collateral which is accepted in reverse repo operations. Where central banks position themselves along these dimensions is clearly path-dependent but it depends, among other things, on institutions and financial structures. A comparison between the pre-crisis frameworks of the Federal Reserve and the ECB illustrates the different possible constellations.
While both central banks had similar operational targets – de facto one or more very short-term interest rates – the asset side of the Fed’s balance sheet consisted mainly of outright holdings of US government bonds, considered as a safe asset. The Fed also steered liquidity conditions, at the margin, via repos, whereby the collateral set was narrow and again dominated by that safe asset. By contrast, the ECB, lacking a single fiscal counterpart and operating across multiple jurisdictions, injected liquidity mainly through repos with banks and deployed a wider collateral and counterparty framework (albeit with appropriate credit safeguards). Credit was provided to around 1,800 counterparties, against a set of collateral that comprised many different asset classes.
The ECB’s operational framework proved flexible when the crisis hit, helping cushion the initial financial turbulence. And as the crisis unfolded in successive "waves" and materially altered our market environment, we adopted further measures to meet the new challenges we faced. We are thus now presented with an important question– should we treat these changes as temporary imperatives that should be withdrawn as soon as conditions permit, or should they form a permanent part of our operational framework?
To answer this, we need to ask: of all the challenges we have faced during the crisis, which ones are likely to persist? And which measures should we retain to deal with them? In my view, there are two challenges that stand out. The first is how monetary policy should adapt to structural shifts in financial intermediation. The second is how to cope with the constraints imposed on central banks by the effective lower bound of interest rates.
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