Jean-Claude Trichet: The ECB's use of statistics and other information for
monetary policy
Keynote address delivered by Mr Jean-Claude Trichet, President of the ECB, on the occasion of the
OECD's World Forum on Key Indicators "Statistics, Knowledge and Policy", Palermo,
11 November 2004.
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Introduction
Ladies and Gentlemen,
It is a great honour and a pleasure to be invited to speak at the OECD World Forum on Key Indicators.
The links between statistics, knowledge and policy are of crucial importance for policy-makers and for
society as a whole. I can only congratulate the organisers for the impressive programme they have
drawn up and I am sure that we shall all leave Palermo full of ideas on how statistical knowledge can
be better used to face current and future economic and social challenges.
Central bankers, like all other policy-makers, operate in an environment of high uncertainty regarding
the functioning of the economy as well as its prevailing state and future development. In addition, the
second half of the 1990s and the first years of this century have been characterised by structural
changes, some of them on a global scale, others confined to Europe, all of which have added to the
"normal" sources of uncertainty. At the global level, the fall of the Soviet empire, the conversion of
emerging Asia to market economics, accelerating advances in science and innovation in information
technology and a deepening and widening of globalised financial markets have all been, or are, part of
the powerful phenomenon of globalisation. At the European level, the adoption of the euro by
12 countries, structural reforms in goods and labour markets and the enlargement of the Union are
some of the key developments in this respect. Therefore, disentangling the shocks that continually hit
the euro area economy and assessing their impact on the risks to price stability in real time remains a
very demanding task, in spite of the progress made in statistical data compilation, economic theory
and econometrics over the past decades.
In such a complex environment, a single model or a limited set of key indicators is not a sufficient
guide for monetary policy. Instead, an encompassing and integrated set of data is required. The
development of statistics for the euro area and the future priorities for further enhancements reflect
this requirement. A rich set of timely statistical data is a necessary but insufficient precondition for
sound monetary policy-making. Only if the information is structured and analysed in a consistent way
will monetary policy makers be in a position to take the most appropriate decisions to obtain their
policy goals.
Let me elaborate a bit more on these three themes: the need for an encompassing and integrated set
of data, the achievements of, and outlook for, euro area statistics and the ECB's framework for
analysing this information.
Monetary policy and the need for an encompassing and integrated set of data
If we lived in the world of macroeconomic textbooks, a few simple models with a limited set of
variables would be a sufficient basis for monetary policy-making and the statistical requirements could
be kept to a minimum. As we all know, the real world is much more complex and, therefore,
information needs are much more elaborated. In such a world, a rich and integrated set of data is
needed because macroeconomic models, synthetic indicators and unconnected statistical indicators
are often too rough a guide to the current and likely future development of the economy.
As mentioned before, central banks have to take decisions under conditions of constant uncertainty.
The economy is never at rest. A multitude of disturbances of diverse nature affect the economy all the
time: financial shocks, demand shocks, supply shocks etc., and these cannot easily be distinguished
in real time, let alone foreseen.
In their attempts to identify disturbances and track how they spread through the economy, central
banks are assisted by models. But too often, existing models are not sufficiently sophisticated
instruments to identify shocks. For one thing, their focus may be too narrow, in a way that makes them
unduly selective. A partial representation of the economic structure can only partially help in monetary
policy decision-making, notably in real time. For instance, it is very difficult to find empirical models
that allow for an integral view of both non-financial ('real') and monetary-financial phenomena. So, it
may be impossible to arrive at a convincing explanation of the origin and propagation of a significant
financial shock, say, on the basis of sets of equations that do not elaborate on the role of the financial
sector or account for only tenuous links between that sector and the rest of the economy.
Another example is provided by the many pitfalls that come with using "synthetic" indicators of
inflationary pressure. The most famous of these "synthetic" indicators is the so-called "output gap".
The "output gap" can be defined as a measure of the deviation of the aggregate output of an economy
from the maximum level that would be consistent with price stability. This maximum level is then the
"potential output". When current output is above potential, the pressure on the scarce resources
should then translate into an increase in prices, that is, inflation.
In the real world, the monetary authority constantly faces the challenge of observability and
measurement. Unfortunately, we cannot "assume" to know the "potential output". The best we can do
is to try to "estimate" the output gap by using observations of many other correlated variables. We all
know how imprecise and model-dependent this "estimated" measure can be. It would then be
dangerous to derive monetary policy decisions from such an indicator. In my view, the example of the
"output gap" demonstrates that theoretical economic models and monetary policy practice are, at
times, quite far apart.
A second reason why models - and the synthetic theoretical constructs that accompany them - may
often be elusive guides for policy lies in the fact that they are subject to rapid obsolescence as the
structure of the economy is subject to permanent change. We, central bankers, like private agents,
need to learn constantly about the environment in which we operate.
In the face of structural changes we are like "sailors in uncharted seas". Under these conditions we
cannot afford to rely on a few sources of information nor can we simply use the "old navy maps" that
are incorporated in existing models - even those that provided valuable information in the past. What
used to be a key indicator under the "old regime" might not be so useful under the "new regime". What
used to suffice in order to describe the old data-generating process might be insufficient for an
accurate description of the new environment.
If this is of the essence for all central banks, this is particularly true for the ECB, which has been put in
charge of the monetary policy of a totally new economic entity.
The creation of EMU represents a major structural change for the European economy and a great
challenge to policy-makers. Nobody could tell, at the outset, to what extent the introduction of the
single currency would affect the functioning of the single market of goods and services, or the very
nature of financial markets or price and wage-setting behaviour across the euro area. Indeed, times of
institutional change are arguably times in which private expectations may fail to converge on a focal
point. The widely-held assumption has been that the statistical patterns emerging from an aggregation
of pre-EMU data may not reveal much about the structure of the new economic entity, and any
inference drawn on its basis may - in extreme cases - even be misleading. This is all the more likely
when we consider the fact that, as far as monetary and financial convergence in the future euro area
was concerned, it was based upon a concept of "benchmarking", namely convergence towards the
best performers, which suggests that aggregation of the EMS data might be even less predictive. Such
a situation has called for a cautious interpretation of model results and, even more importantly, for a
broad information basis in order to cross-check the interpretation of various pieces of information. This
implies a need for detailed and high-quality statistics for the euro area.
The construction of a comprehensive statistical support has confronted the ECB with a number of
practical issues, to which I now turn.
Statistics for the euro area: achievements and outlook
Over the past ten years, major progress has been achieved in developing statistics for the euro area.
Less than a decade ago, we did not even have the statistical requirements for the Monetary Union, let
alone the statistics themselves for the euro area. Today, euro area statistics compare favourably with
those of other major countries in many respects. A concrete example is the monthly balance of
payments for the euro area and the availability of a timely, flash estimate of the euro area Harmonised
Index of Consumer Prices (HICP). Moreover, the ECB compiles an elaborate and timely set of monthly
statistics on monetary developments in the euro area and interest rates.
Statistical preparations had to start early, due to the long lead times involved. On average, it takes
around 18 months from inception to delivery of a new set of statistics that involves the collection of
additional information from economic agents.
While there is still room for improvement, which I will explain later on, I feel confident that the ECB has
now at its disposal a solid set of statistics of sufficient quality for the conduct of monetary policy. Let
me share with you some of the success factors and 'lessons to learn' from this development process.
First and foremost, the achievements have been possible thanks to the intensive and fruitful
cooperation and coordination with other statistical agencies. In particular, the efficient and effective
coordination between the statistical departments of the ECB and of the national central banks within
the ECB's Statistics Committee has been very conducive to the development of the comprehensive
set of euro area statistics that is disseminated by the ECB. Equally, the cooperation between Eurostat
and the ECB's Directorate General Statistics is very intensive and fruitful, and is based on the
allocation of tasks laid down in the Memorandum of Understanding signed in March 2003.
Secondly, I would like to stress the importance of close cooperation with users, which should
guarantee that the statistics are "fit for purpose". At the same time, with the right institutional
arrangements in place, responsiveness to user needs in the design and accessibility of statistics
should not undermine the independence of statistics and statisticians, which is an essential factor.
A third important "success factor" in the design of statistical systems is a strong legal basis. Article 5 of
the Statute of the ESCB and of the ECB states that "in order to undertake the tasks of the ESCB, the
ECB ... shall contribute to the harmonisation, where necessary, of the rules and practices governing
the collection, compilation and distribution of statistics within its fields of competence". As a
consequence, the ECB developed a legal framework for the collection of statistics and for ensuring
compliance with these legal acts. Legal instruments are necessary to achieve satisfactory standards
and equal treatment across Member States.
Fourthly, the setting-up of euro area statistics from scratch has required an intensive process of
harmonisation of the methodologies used by the various countries for the collection and production of
statistics. This enables us, for example, to compile meaningful area-wide aggregates. The need for the
harmonisation of statistical concepts also applies at an international level. The application of the
international standards is, first of all, a way to ensure that the statistics remain independent of the
policy users. Secondly, application of the international standards allows for meaningful comparisons
and aggregation. Given that cross-country comparability of official statistics is key to their usefulness
and credibility, all countries across the globe should want to implement worldwide standards in their
statistics.
Take, for example, balance of payments statistics. Countries will only be able to achieve a common
analysis of their bilateral economic and financial relationships if their mutual external statistics mirror
each other. A recent study by the ECB comparing the mirror data for direct investment between the
euro area, the UK, the US and Japan shows that, in all cases, sizeable asymmetries in these data still
exist. Eliminating these asymmetries requires not only an adherence to international standards, but
also good worldwide cooperation between the statisticians involved and probably an exchange of
micro-data for statistical purposes.
Finally, perhaps the most important lesson of all, the independence of statistical institutes is key to the
quality and integrity of the underlying statistics. Recent incidents involving government finance
statistics have demonstrated this very clearly. The compilation and reporting of statistics must not be
vulnerable to political and electoral cycles. Countries should consider the quality and integrity of their
statistics as a priority matter, to ensure that a proper system of checks and balances is in place when
compiling these statistics, and should apply minimum standards, reinforcing the independence,
integrity and accountability of national statistical institutes.
Despite the significant achievements and the good quality of euro area statistics in general, further
improvements and enhancements are planned. Ongoing economic transformation has to be
accommodated in a forward-looking manner and statistical gaps identified by users inside and outside
the ECB have to be filled in as far as possible. Given the long lead times which characterise statistical
projects, the Directorate General Statistics of the ECB has established medium-term priorities in this
field. Important items on this agenda are: a full system of euro area quarterly accounts for each
institutional sector1, more comprehensive statistics for the monitoring and analysis of financial stability,
the further development of external statistics, promoting the compilation of Principal European
Economic Indicators, including the application of the first-for-Europe principle, and an increasing focus
on the various quality dimensions of European statistics. Let me elaborate a bit more on the first two
items. Progress in these areas is expected to have a major influence on policy analysis.
The work currently undertaken by the ECB and Eurostat on quarterly euro area accounts aims at a
fully integrated system of sectoral financial and non-financial accounts. Having such a system in place
may lead over time to major progress in both the structural analysis of the euro area and the
assessment of the current economic situation. Fully integrated sectoral accounts provide the ideal
framework for analysing the structure of the economy and its changes over time as well as the
propagation of shocks through the system. This helps to gain further insights into the monetary policy
transmission mechanism and the relative importance of the various transmission channels. At the
same time, monitoring a wide range of key indicators in a single macroeconomic accounting
framework provides a coherent picture of the current economic situation. This is particularly important
in the context of the ECB's monetary policy strategy, which takes into account a broad range of
indicators.
Integrated financial and non-financial sector accounts provide a framework for analysing the link
between the financial and the real economy - an issue notoriously difficult to analyse on the basis of
the currently available analytical framework. An integrated system of quarterly sector accounts would
also provide a powerful information basis for forecasting, allowing what is nearly impossible today,
namely the integration of monetary and financial variables in macro-econometric models. Of course,
many of these uses will only be possible once an integrated system of sectoral accounts has been
available for quite a number of years and with an appropriate timeliness. But being forward-looking
and developing visions is of great importance in the field of statistics.
Another highly relevant area of statistical work for central bankers concerns statistics and indicators for
financial stability analysis. In the aftermath of the Asian crises, which brought to the fore the
importance of financial stability analysis, the related conceptual framework was strengthened and
progress in understanding the genesis and propagation of financial instability was made.
Central banks have an interest in financial stability issues particularly, but not exclusively, because
financial stability supports sustainable price stability in the medium and long run. This implies that
financial stability indicators - whether in the form of key balance sheet ratios for monetary financial
institutions or leverage indices for non-financial corporations - may acquire an important status in the
data set on which the central bank bases its assessment of the risks to price stability over extended
horizons. The forward-looking nature of the ECB's monetary policy strategy allows an extension of the
policy-relevant horizon sufficiently into the future to factor in the likely effects of financial imbalances
that may be forming. At the same time, obtaining a comprehensive and timely statistical view of the
financial system helps to identify the sources of such risks.
This is the rationale for central banks' keen interest in financial stability analysis. But financial stability
analysis is complex and, hence, information-intensive. Data are needed not only on the financial
situation of banks, but also on that of other financial corporations, such as insurance corporations.
Moreover, the financial position of non-financial corporations and households has to be carefully
assessed. Finally, not only financial markets but also other asset markets, such as real estate
markets, have to be monitored closely.
Currently, financial stability issues in the euro area are analysed on the basis of existing data collected
for monetary policy or supervisory purposes. Evidently, the coverage and definitions of data collected
for monetary policy purposes do not always fulfil the needs of financial stability analysis. In addition,
the data from supervisory sources are not harmonised across countries.
The development of harmonised bank profitability, asset quality and capital adequacy data is a big
challenge for a multinational economy such as the euro area. The same applies to the much needed
enhancement and harmonisation of information on insurance corporations and on the financial
situation of firms and households. Moreover, this work should exploit synergies with the initiatives of
other international organisations, in particular the work of the IMF on financial soundness indicators.
The need for a comprehensive analytical framework
Statistics as well as additional information such as synthetic indicators, model forecasts and anecdotal
evidence provide economic analysts with the raw material to derive a consistent and timely judgment
about the true prevailing economic circumstances and the position of the economy in its business
cycle. At the same time, just as a good meal not only requires high-quality ingredients but also an
excellent cook and recipe, high-quality monetary policy analysis also requires excellent staff and an
appropriate analytical framework. The importance of the latter can hardly be overstated. While central
bankers around the world are "data fiends" in their heroic attempts to minimise errors of inference and
to make robust decisions amidst uncertainty about the true structure of the economy, the availability of
a vast wealth of raw data from diverse sources may mean that policy-makers become constantly
bombarded by conflicting signals. Amidst such a flood of information, policy runs the risk of losing its
bearings and of over-reacting to the latest indicator.
It is against this background that the ECB decided to adopt an analytical framework within which all
possible sources of information - statistical as well as judgemental - can be brought together in a
coherent fashion while at the same time allowing for alternative and diverse models and perspectives
of the workings of the economy. In our view, this framework enables a wealth of information to be
"digested" routinely without compromising the ultimate objective: to maintain a clear sense of direction.
In order to give a structure to the diverse sources of information, a structure that is consistent with our
view of the monetary policy transmission mechanism, we have organised our analytical framework into
"two pillars". These consist of two complementary perspectives on the determination of price
developments.
One perspective, which we refer to as the "economic analysis", is grounded on the belief that price
developments over the short to medium term are largely influenced by the interplay of supply and
demand in the goods, services and factor markets.
As a means of cross-checking, we have equipped ourselves with another perspective, which we refer
to as the "monetary analysis" and that is grounded on the belief that medium to long-run price
developments can be attributed to the growth rate of the stock of money.
Each of these "pillars" is, in turn, characterised by a rich and comprehensive analysis of a large
amount of data. For example, within the "economic analysis" we monitor the developments in prices
and unit costs, overall output, aggregate demand and its components, government finance accounts,
capital and labour market conditions, exchange rates, financial markets, balance sheets of households
and firms, etc. The ECB's "economic analysis" has been significantly extended and enriched over
time. This is largely thanks to the progress made in the production of euro area general economic and
financial statistics and in the analytical processing of such information. As mentioned above, the
inaugural publication of integrated financial and non-financial quarterly accounts for the euro area,
hopefully in 2006, will be another milestone.
The ECB and the national central banks use a variety of models for macroeconomic analysis and
forecasting. The macroeconomic projections by Eurosystem staff constitute an important input into the
monetary policy decisions, because they are a way of organising a large amount of information and
they help to create a consistent picture of possible future developments. However, the economic
projections cannot encompass or even reflect all the complexities, conditioning factors, nuances and
the multi-dimensional nature of a comprehensive assessment of the risks to price stability on which
monetary policy decisions need to be based. While the information synthesised from various indicators
serves as an important input into the decision-making process, the Governing Council of the ECB
does not take decisions only on the basis of projections. The Governing Council's "judgement" must
eventually come into play in order to assess the likelihood of the alternative scenarios suggested by
the economic analysis. This is particularly important when it is quite unclear how a certain situation will
evolve, as is the case sometimes with sharp movements in asset prices.
Related to this, attempts to base monetary policy decisions solely on inflation forecasts would involve
significant limitations. Notably, they would entail an inefficient use of information, since every forecast,
or any composite index of indicators, is based on one possible scenario and one combination of
assumptions. In the end, monetary policy requires judgement on the part of the policy-maker to assess
not only the plausibility of all possible scenarios, but also the nature of the shocks and the best policy
reaction in order to deal with this uncertain environment. Just focusing on one or a few forecast figures
would make it difficult for policy-makers to transmit the complexity of monetary policy deliberations to
the public in a precise and transparent manner.
Over a medium to long-term horizon, inflation forecasts based on statistical analysis become very
inaccurate. Yet, medium to long-run inflation expectations are crucial in guiding the consumption and
investment decisions of private agents. In order not to lose sight of the low frequency developments
that may influence inflation over longer horizons than are used in the forecasts, the ECB has
reinforced its analytical framework with a monetary perspective. This 'pillar' looks at price formation
from a medium to long-term standpoint and is intended to purge monetary policy from the risk of
becoming unduly short-sighted and overreacting to the latest economic news. By constantly reminding
the central bank that in the long run prices and money stock increases are correlated, the monetary
pillar is a standing support to the ECB's commitment to price stability at all horizons that are relevant
for economic decisions.
Taking decisions and evaluating their consequences on the basis not only of the shorter-term
indications from the analysis of economic and financial conditions, but also of money and liquidity
considerations, allows a central bank to see beyond the transient impact of the various shocks and to
maintain a more steady policy course. Looking back over our first six years of operations, monetary
analysis has helped to underpin the medium-term orientation of our monetary policy conduct.
Allow me also to stress that the analysis of monetary indicators at the ESCB consists of an articulated
process, whereby a detailed study of all the components and counterparts of M3 provides a detailed
picture of the latest monetary developments, alongside the broad picture of the underlying trends.
As I said, a world in which policy is conducted in a "data-rich environment" - to quote an article by Ben
Bernanke2 - can be one in which both central bankers and other economic agents become captive to
the latest macroeconomic indicator and may lose direction. In such a world, a central bank will only be
successful in delivering price stability if it provides an anchor for the inflation expectations of the public
and if it is as transparent as possible about its ultimate policy objective.
For this reason, the ECB decided to be fully transparent about the numerical definition of its goal, price
stability, that the Treaty on European Union assigned to it. As you know, in 1998, when taking up its
monetary policy tasks, the Governing Council of the ECB defined price stability as a year-on-year
increase in the euro area Harmonised Index of Consumer Prices of below 2% and close to 2%.
The definition of price stability not only has the advantage of helping to anchor inflation expectations
and to enhance the transparency and accountability of the European Central Bank. It has also been
very instrumental in preserving continuity during the transition from the national currencies to the euro.
The euro was given the same definition of price stability as the one attributed to the most credible
national currencies, which benefited from the lowest market interest rates at the time. As a
consequence, from day one onwards, the euro was given the best yield curve available in the
economies of the euro area.
The European Central Bank has played a leading role in the general trend towards greater
transparency and openness. It has in fact set standards of transparency in the practice of monetary
policy. The ECB was the first major central bank to display its diagnosis immediately after its decisions
and to hold regular press conferences after each of its monetary policy meetings. It is still the only one
that does so. In those press conferences, we give a full and detailed explanation of our analysis and of
the reasons underlying our policy decisions. In addition, the ECB's Monthly Bulletin gives the public
the full set of detailed assessments and data underlying our policy decisions only a few days after they
are taken.
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To sum up, I trust that the success of the ECB and of the Eurosystem in firmly anchoring medium and
long term inflation expectations at a level below 2% and close to 2% from day one of the existence of
the euro is due to the careful gathering of all necessary conditions for such a prowess.
I see at least six such necessary conditions: the institutional independence of the ECB; the clarity of its
Treaty mandate - price stability; the accountability vis a vis public opinion, including through the
hearings before the European Parliament; the comprehensive nature of its monetary policy concept,
with an economic and a monetary pillar; its medium term perspective and, last but not least, its
transparency.
We are displaying publicly our monetary policy concept. Not all central Banks do that. We are
displaying our definition of price stability. Not all central Banks do that. We were the first important
central Bank, in January 1999, to publish in quasi real time after our decisions our diagnosis and the
reasons for our action and to hold a press conference. Not all central banks do that, even today. We
are making public the quarterly projections of the staffs of the ECB and of the Eurosystem. And I
profoundly trust that it is this substantial level of transparency which has also contributed to make the
ECB's policy decisions highly predictable for the market as academic research has documented.
A last remark. As already mentioned, all what I have said presupposes that data are reliable and
credible. It is absolutely imperative that figures are not influenced by political interference and by
electoral cycles. The ECB's Governing Council strongly encourages countries to tirelessly improve the
professionalism and independence of the relevant institutions. It would also strongly support the
European framework to be further enhanced with full capacity to check without restrictions facts and
figures including through missions on the spot.
I thank you for your attention.