Klaas Knot: Monetary policy responses to the corona crisis
Introductory remarks by Mr Klaas Knot, President of the Netherlands Bank, at the Eurofi Financial
Forum, Berlin, 11 September 2020.
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A framework for central banks to assess the appropriateness of their policy decisions usually
has three dimensions: necessity, effectiveness and side effects. It is important to view these
dimensions in conjunction, as there are usually trade-offs involved, which may differ over time. In
my introduction, I will elaborate on the dimensions and trade-offs in the current monetary policy
setting.
The necessity of continued monetary policy support follows from the mandate of the ECB, which
states that price stability is the primary objective. It is beyond doubt that the extended monetary
policy measures since mid-March have been needed to support monetary transmission and help
the economy establish a foothold in the lockdown. This has contributed to avoid worst case
scenarios and deflationary threats.
The monetary policy responses to the corona crisis have clearly been effective. The ECB
responded forcefully by employing a multitude of instruments, including the new Pandemic
Emergency Purchasing Program. This has been effective in limiting the fall-out from the financial
market stress and preserve the loose monetary conditions. Moreover, the targeted LTROs have
been effective in safeguarding banks' funding liquidity. Thereby, the emergency monetary policy
measures have been an effective circuit-breaker to prevent bad equilibria.
As we have moved to the recovery phase, the focus of the monetary measures has shifted to
supporting inflation, by maintaining accommodative monetary and financial conditions. However,
broad and encompassing policy response is important to ensure that we don't rely overly on
individual measures that could be subject to unintended side effects if they are kept in place for
too long. For example, if central bank support remains in place for a prolonged period of time,
debts accumulate and asset prices are further stimulated, posing risks to financial stability.
Instead, a sustainable recovery from the crisis also requires sufficiently productive public and
private sector investments. And structural reforms that foster the creation of new firms, while
non-viable firms are wound-down in an orderly fashion. Though this can be a painful process for
some sectors, the economy has to adjust to a world that might have structurally changed.
Monetary policy can maintain appropriate financial conditions to help the economy adjust, but
other policy authorities will have to set the adjustment in motion. The EU Recovery Fund has the
potential to contribute to this, if it is invested well and accompanied by supply-side reforms.
For continued monetary policy support with asset purchases, it is important that the benefits of
our interventions - i.e. the contribution to price stability - remain outweighing the potential
sideeffects. For central banks the key challenge then is to assess in which circumstances - or
states - specific monetary policy instruments are most effective and side effects are most
limited. Such considerations are an important element of the ECB strategic review, which will
benefit from an evaluation of the monetary policy measures taken in the corona crisis.