Home > Uncategorized > The ECB shadow council on the ideal ECB. Inflation targeting: out. Financial cycle: in.

The ECB shadow council on the ideal ECB. Inflation targeting: out. Financial cycle: in.

Some years ago, Cladio Borio from the BIS introduced the ‘financial cycle’. Here, a Borio/Lowe paper from 2002. What’s the financial cycle? From the twenties of the twentieth century onwards Wesley Mitchell and the NBER (National Bureau of Economic Research) perfected the (monthly) measurement of the classical business cycle (a still ongoing project). The concept of this business cycle of the ‘flow’ economy was and is the cornerstone of much macro-economic theorizing. ‘Chicago style economists’ rationalized the idea that low and stable inflation (1) could be engineered by the central bank and (2) was enough to control this business cycle. The idea of Borio (and others) is that, next to this cycle, there also is a financial cycle related to credit and assets, mainly houses which can not be tamed by low and stable inflation. This idea, while not entirely new (Minsky!), seems to have gotten traction when we look at responses of members of the Handelsblatt ‘Shadowcouncil’ of the ECB. See about this also Willem Buiter, Richard WernerThomas Mayer  and Mike Konczal and Josh Mason

Shadow ECB Council Sees Changes to ECB Mandate Shadow ECB Council favors sweeping changes to the ECB’s mandate to account for some of the mistakes in the policies of the past. Some members favor a dual mandate that includes employment, but most pushed for upgrading the importance of financial stability in the ECB’s policymaking. Many members mentioned the need to take better account of the financial cycle in cases where it diverges from the business cycle. Related to the dual-mandate debate, a number of members pushed for other institutions in the euro zone to take on more responsibility, which would either complement or, in some cases, reduce the ECB’s role in managing the economy’s business and financial cycles. This included, for one member, removing the task of bank supervision from the ECB purview altogether, as this had only muddied the waters for monetary policy. Another suggested a different EU institution should take a more active role in managing financial stability, leaving the ECB to focus on a dual mandate of price stability and employment. Shadow Council members were divided on the extent to which the Euro System should be further centralized. Some members said the current division of labor between the ECB and national central banks is workable and should be left untouched. Those calling for further centralization argued that some of the functions currently done by the national central banks are inefficient. Overall staff levels could thereby be reduced. A number of members called for reducing the size of the ECB’s governing council. A few members suggested a weighted voting system, with one member calling for this to be based on the ECB’s capital key.

  1. Muhammad Ali Nasir
    December 14, 2017 at 11:48 am

    I am sympathetic to the idea of voting based on capital key, responsibility shall come with authority.


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