Monetary policy, strategy and implementation

A core strand of research at the ECB relates to the design and implementation of monetary policy, both conventional and unconventional, and to its transmission to the real economy and financial markets. At a very general level, the aim of this work is to enhance our understanding of the transmission channels through which monetary policy affects the rest of the economy and to devise the most appropriate policy response to possible economic contingencies.

Monetary policy transmission

General area of interest: gaining a better understanding of the monetary policy transmission channels.

Selected areas of focus:

• implications of heterogeneity across economic agents (households, firms or banks) for aggregate outcomes and for the transmission and effects of monetary policy
• use of survey data to gauge households’ expectations and their response to monetary policy
• use of bank-level data to understand how monetary policy decisions translate into changes in bank lending conditions for households and firms
• implications of climate change for the transmission of monetary policy

Side effects of monetary policy

General area of interest: the ECB’s monetary policy stance has been accommodative since the global financial crisis, and although this has supported the economic recovery, its potential undesirable side effects are giving cause for concern.

Selected areas of focus:

• main costs and benefits of maintaining negative interest rates on the deposit facility
• effects of accommodative monetary policy on asset prices, wealth and income inequality
• effects of persistently accommodative monetary policy on financial stability

Forward guidance

General area of interest: central banks usually conduct monetary policy by raising or lowering short-term interest rates, but in recent years they have started to use the important policy tool of “forward guidance”, i.e. a commitment to keep future rates at certain levels.

Selected areas of focus:

• determinants of the effectiveness of forward guidance in theory, i.e. in the type of economic model most used by central banks
• empirical evidence regarding the effectiveness of forward guidance in practice
• desirability and optimal design of forward guidance

Monetary policy implementation

General area of interest: gaining a better understanding of various issues related to monetary policy implementation.

Selected areas of focus:

• impact of money markets and their proper functioning on the implementation of monetary policy
• implications of recent financial regulations, such as the Basel III liquidity and leverage requirements, for monetary policy implementation
• implications of climate change for the implementation of monetary policy
• main effects of the ECB’s collateral framework, including its effects on collateral eligibility premia, on banks’ asset holdings

The new normal

General area of interest: the natural rate of interest has declined significantly over the last few decades. If it remains at such low levels going forward, it is likely that monetary policy will often be constrained by the effective lower bound (ELB), i.e. by the difficulties entailed in shifting interest rates significantly into negative territory.

Selected areas of focus:

• addressing the adverse implications of the ELB by adopting alternative approaches to setting interest rates
• using non-standard monetary policy measures to avoid the ELB altogether

Policy normalisation

General area of interest: the ECB’s monetary policy stance has been accommodative since the global financial crisis, and although this has supported the economic recovery, it may soon be time to start thinking about normalisation going forward.

Selected areas of focus:

• determinants of the desirable pace and combination of interest rate and balance sheet normalisation
• impact of banking and financial conditions on the desired path of interest rates during the normalisation phase