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FILE PHOTO: The logo of the European Central Bank (ECB) is pictured outside its headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach/File Photo - RC143BCA6DD0
BPEA Article

The first 20 years of the European Central Bank: Monetary policy

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Editor's Note:

This paper is part of the Fall 2018 edition of the Brookings Papers on Economic Activity, the leading conference series and journal in economics for timely, cutting-edge research about real-world policy issues. Research findings are presented in a clear and accessible style to maximize their impact on economic understanding and policymaking. The editors are Brookings Nonresident Senior Fellow and Northwestern University Economics Professor Janice Eberly and James Stock, Brookings Nonresident Senior Fellow and Harvard University economics professor. Read summaries of all five papers from the journal here.

Abstract

On 1 May 2018, the ECB delebrated its 20th anniversary. This paper provides a comprehensive view of the ECB’s monetary policy over these two decades. The first section provides a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, going through four cyclical phases “conditioning” ECB monetary policy. We describe the monetary policy decisions from the ECB’s perspective and against the background of its evolving monetary policy strategy. We also highlight a number of the key critical issues that were the subject of debate at the time. The second section contains a partial assessment. We first analyze the achievement of the price stability mandate and developments in the ECB’s credibility. Next, we investigate the ECB’s interest rate decisions through the lens of a simple empirical interest rate reaction function. This is appropriate until the ECB hits the zero-lower bound in 2013. Finally, we present the ECB’s framework for thinking about non-standard monetary policy measures and review the evidence on their effectiveness. One of the main themes of the paper is how ECB monetary policy responded to the challenges posed by the European twin crises and the subsequent slow economic recovery, making use of its relatively wide range of instruments, defining new ones where necessary and developing the strategic underpinnings of its policy framework.

Citations

Hartmann, Philipp, and Frank Smets. 2018. “The First 20 Years of the European Central Bank: Monetary Policy” BPEA Conference Draft, Fall.

Conflict of Interest Disclosure

The authors did not receive financial support from any firm or person for this paper or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper. No outside party had the right to review this paper before circulation.

Authors

Frank Smets

Director General Economics - European Central Bank

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