Tuesday, February 4, 2020

ECB historical policy review - An institution in two regimes



Happy 20th birthday the EMU and the ECB. Not clear whether we should treat this birthday as a celebration. It has gone through significant growing pains and a large personality change. An institutional review is presented in the ECB working paper, "A tale of two decades: the ECB's monetary policy at 20". This is a long piece, over 300 pages, and may be a little biased given it is an ECB working paper, but it lays-out the significant changes in the thinking and policy responses of the central bank.

It will pay for all investors to think about the ECB as being two different institutions or having shifted personalities. In the first decade it acted like a traditional central bank with a 2% inflation ceiling, (not a target). A second shorter period is when it moved to be an activist disinflation fighter. This is not the central bank first envisioned, but it is the central that the EMU has now. 



The question going forward is whether the second decade tale will continue or whether ECB President Lagarde will find a new third decade path. The activist ECB is the current bias, but it is not a long-term monetary strategy but an increasingly complex set of policies to find a solution to a problem that does not seem to go away. 

Investors will be hard pressed to make strong decisions without a clear policy direction and a mandate for what the ECB wants to achieve. This institution needs a clarifying strategy.   

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