The Science and Art of Monetary Policy
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- The Science and Art of Monetary Policy
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Bibliographic details
- Authors: MAHMOOD PRADHAN
- Published: September 2, 2021
Overview
- Review by MAHMOOD PRADHAN, nonresident fellow at the European economic think tank Bruegel.
- Publication: F&D Magazine, September 2021.
- Subject: Review of Monetary Policy in Times of Crisis: A Tale of Two Decades of the European Central Bank (Massimo Rostagno, Carlo Altavilla, Giacomo Carboni, Wolfgang Lemke, Roberto Motto, Arthur Saint Guilhem, and Jonathan Yiangou).
- Book publication details as presented: Oxford University Press; Oxford, UK, 2021; 448 pp.; $115.
Major findings and analysis
- The book is described as a "unique exposition" of the analysis that draws from theory and models to inform ECB governing council deliberations, providing transparency "more than by any other advanced economy central bank."
- It offers a "masterful analysis" of the ECB’s challenges in its first two, "unusually eventful and crisis-prone, decades" and how it managed a monetary union still in the making.
- The review highlights lesser-known ECB actions:
- Early behind-the-scenes effort in pushing for the creation of the European Stability Mechanism.
- Making the (never used) Outright Monetary Transaction instrument effective in resolving the euro area crisis.
- Contribution to the creation of a unified banking supervision system that reduced fragmentation and improved monetary policy transmission.
Instruments, complementarity, and transmission
- ECB policy instruments enumerated in the review:
- negative interest rates
- asset purchases
- subsidized loans to banks for onlending
- forward guidance on policy rates
- The book provides "strong empirical evidence on the complementarity between these instruments in delivering an accommodative monetary stance."
- Key analytical point: these instruments together "contain pressure on longer-term borrowing costs" and help stem declines in longer-term inflation expectations.
- The review notes a relevant nuance: operating in a currency union with "very diverse financial imbalances among sovereigns and banks across the euro area" motivates a broader toolbox—e.g., subsidized lending to ensure low interest rates are transmitted across the entire euro area.
Price stability and policy stance
- The ECB’s continued difficulty in meeting its price stability objective is described as a concern that "argues for continuing its accommodative stance."
- The review argues persuasively that the ECB’s instrument set has "stemmed the decline in longer-term inflation expectations" and that "the counterfactual would have been worse."
Relevance for COVID-19 and broader audience
- Although the book’s analysis covers the period "to the end of 2018," the authors make a convincing case that the policy tools developed over the past decade "have been instrumental in enabling the ECB to respond quickly and forcefully to the COVID-19 pandemic."
- The review asserts the "wealth of analysis here will appeal to a much wider audience than just the experts."
Source: IMF F&D Magazine page overview — "The Science and Art of Monetary Policy" (September 2021).
Content in this bundle
- Book Review: The Science and Art of Monetary Policy - IMF F&D
- Arte y ciencia de la política monetaria ● Finanzas y Desarrollo ● Septiembre de 2021
- La science et l'art de la politique monétaire
- Книжное обозрение – Финансы и развитие – Нельзя терять время– сентябрь 2021 года