Weber at Shadow Open Market Committee Symposium: "Monetary policy after the crisis: A European perspective"

Monetary policy after the crisis: A European perspective

Remarks at Shadow Open Market Committee Symposium, presented by e21

Ladies and gentlemen

It is a pleasure to be here and to speak to such a distinguished audience. Hence, I would like to thank the organisers for their kind invitation.

The Shadow Open Market Committee, founded by Allan Meltzer and Karl Brunner in 1973, can look back on a long and impressive history. The Committee has also served as a role model for establishing similar bodies in Europe.

Karl Brunner was a visiting professor at the University of Konstanz from 1969 to 1973. Regrettably, I missed his lectures at the time since I did not start my economic studies at the University of Konstanz until a few years later. Both his teachings and his research established the reputation of Konstanz as the German centre for monetary research and as an “incubator of German monetarism”. The “Konstanz Seminar on Monetary Theory and Policy”, which he also founded and where I met him later, has maintained its status as an exclusive forum for promising young economists and attracts a constant flow of very distinguished monetary experts; it celebrated its 40th anniversary last year. I have enjoyed attending the seminars for more than 30 years. Beyond that, Karl Brunner’s work has had a major impact on policy in Germany – something which is strikingly illustrated by the introduction of monetary targets by the Deutsche Bundesbank in 1973.

In the Konstanz scientific manifesto of 1972, Karl Brunner wrote on the division of “monetary theory” and “monetary policy” as distinct academic subjects: “… theory without application to our environment is useless and policy discussion or judgements not based on analysis are dangerous”. Over the past four decades, fortunately, both subjects have converged to a large extent, and modern monetary policy has become unthinkable without a state-of-the-art theoretical background.

Having said that, I would like to focus on current und future challenges facing monetary policy, in particular as regards the euro area...

The challenge facing monetary policymakers now and in the near future is to get the timing and sequencing of the exit from stimulus measures right. This applies to both the non-standard measures as well as the monetary policy stance, and therefore, key interest rates, as the two dimensions of the exit. While we are far from declaring the crisis over, it would be unwise to postpone relevant considerations to the end of the crisis. As regards the Eurosystem’s set of non-standard policy measures, these were designed with exit considerations in mind. The overwhelming majority of measures can therefore be easily withdrawn whenever we deem it necessary…

While it would be misleading to blame the financial crisis on monetary policy, it has to be acknowledged that monetary policy has a significant influence on the financial cycle, including booms and busts. Before the crisis, policymakers neglected the impact of their decisions on the risk-taking behaviour of financial market players. Yet once market participants recognise that expansionary monetary policy reactions are much stronger during downturns than the moves in the opposite direction during upswings, adverse incentives are created...

For full remarks, click here to visit the Deutsche Bundesbank site.