“Rules versus Flexibility and the Future of European Monetary Policy”, Ewald Nowotny (ÖGFE)

European monetary policy is strongly influenced by the “battle of ideas” between a tradition of rule-based politics and of individual liability on the one hand and a policy approach of flexible cost-benefit considerations on the other hand. Regarding interest rate policy, the tendency for long-run low interest rates is basically due to economic developments, and outside the reach of central bank policy. But central bank policy may have substantial additional effects. This is the case with respect to the low interest rate policy which the European Central Bank (ECB) has been pursuing to achieve price stability. However, the present definition of price stability needs to be more flexible to avoid negative economic side effects. The most dramatic monetary policy intervention were Mario Draghi’s famous words “that saved the euro.” Then, the euro had been threatened because, unlike, for instance, in the U.S.A., the U.K. or Japan, for every euro area country, public debt – also in euro – is debt in a foreign currency. So, at least in theory, every euro area country is exposed to the risk of sovereign default. Thus, for the euro area, there is a potential divergence between a set of rules, designed to prevent “moral hazard” on the one hand, and a need for intervention on the other hand. Especially a severe crisis would call for closer rule-based cooperation between monetary and fiscal policy. In this context, the concept of a “standing emergency fiscal facility” is discussed.

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