Should the European Central Bank do more and go negative?

The European Central Bank is torn between those who say that it is already doing too much, mostly in Germany, and those who say it should do more. One of the actions the ECB should pursue, in the opinion of the latter group, is to bring the deposit rate into negative territory. 

Is the price stability target of the ECB at risk?

Get me right. I am not fearing, for the time being, that inflation will move above the 2.0 per cent ECB target. Of course, it would be wrong to assume that inflation is dead and can never come back and the central bank must be symmetrically alert to all deviations from price stability. Too high inflation is not, however, the risk against which to guard in the foreseeable future. The issue I want to explore here is whether there is a risk of inflation remaining too low for too long. This issue is germane to the risk of "Japanification", which has started to be discussed in the market.

…and what about the other side of the pond?

While on this side of the Atlantic the ECB was reacting more quickly than expected to the much weaker inflation prospects, I was in the US trying to better understand what is happening over there in the monetary area.

On the basis of the talks I had, I came back with a number of thoughts, which were not necessarily shared by my interlocutors but were stimulated by the discussions I had with them.

Forget the € and demand management!

The title of this post is a bit exaggerated, yet it helps stressing the gist of the point I want to make: policy makers, market participants and ordinary citizens should start devoting less attention to the € and to demand management and should concentrate, instead, on supply issues.

Let me expand a little this basic idea.

Who said what on the euro?

The euro and Nobel prizes

The contemporaneous award of the Economics Nobel prize to Eugen Fama and Robert Shiller, who have reached quite opposite conclusions on the ability of financial market to always generate prices consistent with economic fundamentals, has, in some quarters, raised doubts about the wisdom of those who decide the Nobel prizes. These doubts are at least late and probably wrong.

Don´t supply more when there is no demand!

Over the last few weeks the words uttered by the ECB President, first in front of the European Parliament and then in the latest press conference,  according to which the ECB is: "ready to use all available instruments, including a LTRO (longer-term refinancing operation), to ensure that developments in short-term money market rates are in line with our medium-term assessment of price stability." have attracted a lot of market attention.

German elections ‘positive for the euro’

Whatever the coalition outcome, Germans back the single currency

[Published today in  the OMFIF Bulletin]

Has Bernanke provided a helping hand to Draghi?

In a previous post I stressed the tug of war between the Governing Council of the ECB and the money market: the former has a unanimous intention to keep the monetary policy stance constant or looser, the latter seems well poised to increase interest rates.

In this tug of war, Bernanke has been seen by some as having started to pull on the ECB side with the utterly surprising Federal Open Market Committee (FOMC) decision not to "taper" the 85 billion of monthly purchases of bonds by the FED.

Upward bias vs. downward bias: who will win?

ECB President Draghi confirmed, at the last press conference on September 5th, the unanimous view of the Governing Council: “we wanted to make it clear that we have a downward bias in interest rates for an extended period of time.“ He also said that “The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time. “

A China-USA monetary Union?

Much has been made, while discussing the euro-area crisis, of the fact that countries using the euro have lost the ability to correct their imbalances through changes in nominal exchange rates. So, taking the most extreme example, Greece could not devalue its exchange rate towards Germany to deal with its imbalances. The statement is of course correct, but needs three qualifications.