Robert Holzmann: The central bank of the future - opportunities and
challenges
Opening remarks by Dr Robert Holzmann, Governor of the Oesterreichische
Nationalbank, the Austrian central bank, at the Oesterreichische Nationalbank (OeNB)
Economics Conference and SUERF Conference Colloquium, Vienna, 11 June 2024.
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Distinguished guests,
Welcome to this year's OeNB Economics Conference and SUERF Colloquium.
Let me start by thanking you all for joining us, both virtually and in person. I would also
like to extend my sincere gratitude to the distinguished speakers, panelists and
researchers who have agreed to honor us with their contributions to this event. And last
but not least, a heartfelt "thank you" also goes to the to all the people involved in the
organization of this event.
Last year, we celebrated the 60th SUERF Anniversary and the 50th OeNB Economics
Conference, but in a different venue. As a belated gift, we are privileged to be back in
this beautifully refurbished cashier hall - our Kassensaal.
As we gather once again for this conference, let's take a moment of reflection and
anticipation. Last year, our discussions centered around the theme Monetary policy in
uncertain times: Towards robustness and resilience. It was an exploration of the
challenges facing our economies amidst the backdrop of unpredictability. In my
introductory remarks at last year's conference, I spoke about the "propheticcapacities"
of OeNB-SUERF conferences. This year, I plan to harness this prophetic power as we
embark on a journey to discuss and design the central bank of the future - a central
bank that is not only reactive but one that is well-equipped to navigate the complexities
and uncertainties that lie ahead.
Some reflections on current challenges
As we reflect on the first 25 years of the euro, we cannot overlook the challenges we
faced. Many of these challenges have left legacies that will continue to shape our future
journey:
One of these challenges stems from the necessity of employing unconventional
monetary policies that arose when we found ourselves at the effective lower bound. The
consequence of these policies is the accumulation of vast balance sheets, which now
exert pressure on central bank profits. This puts central banks in a delicate position.
While our balance sheets now consist of assets yielding low interest rates, commercial
banks enjoy a substantial 3.75% interest payment through our deposit facility. This
differential has led many central banks in developed countries to report losses, some of
them significant.
Though these losses may not immediately harm the functionality of central banks, they
do raise some questions. Scenarios may emerge where central bank independence
may come under threat due to financial strains. The crucial question whether central
bank finances are relevant for fulfilling our mandate will be rigorously debated in
tomorrow's policy session. We are at a pivotal moment that demands careful
consideration and collective engagement.
Second, while we will listen to some new ideas during this conference, also concepts
that were treated somewhat neglectfully during the past episode of very low interest
rates, are welcome. As an example, I refer to the link between money growth and
inflation, which was found to be virtually non-existent in the very low inflation period. But
recent research by the BIS (Borio et al., 2023) finds that in high-inflation regimes, it is
indeed helpful to incorporate money growth in inflation forecasts as it improves them
substantially. Moreover, our own research suggests that money growth has leading
indicator properties and can therefore be helpful for identifying inflation regime changes
(Ringwald and Zörner, 2023).
I think this is an excellent example how we would have delivered better forecasts in the
post-pandemic inflation surge by simply acknowledging the importance of certain
factors in different economic regimes. Overall, this highlights the regime dependency
we face in the conduct of monetary policy. We should therefore be open to concepts
that are probably of less importance today but might be helpful after a regime change in
the near future.
The central bank of the future: coping with an ever-changing
environment
As we delve deeper into our discussions, I would like to highlight two key topics that
warrant our attention: unconventional monetary policies and the concept of r-star.
The response of central banks to the effective lower bound through the adoption of
unconventional monetary policies marked a paradigm shift in policymaking. These
measures expanded our toolkit, enabling us to navigate through challenging economic
landscapes with greater flexibility and potency. However, as time has passed and more
data have become available, it is imperative that we assess whether these measures
have indeed achieved their intended objectives. Moreover, dedicated research has
delved into the potential side effects of these policies, providing valuable insights into
their efficacy and impact.
To shed light on these crucial questions, my team has undertaken a rigorous systematic
literature review of the empirical literature surrounding unconventional tools, which will
become available soon. Through an exhaustive analysis of approximately 130
academic papers published since 2008, we have gained valuable insights into the
effects of various unconventional measures on key economic dimensions such as price
stability and financial stability (Stelzer, Spisso and Zörner, 2024). Our findings indicate
strong evidence that many of these measures, including quantitative easing policies,
have successfully achieved their intended goal of boosting inflation and growth.
However, the picture becomes less clear when examining the effects of quantitative
easing on financial stability. While some studies suggest positive effects, others raise
concerns about potential risks and unintended consequences. It is very important that
we take these findings seriously as we move forward. Learning from both successes
and potential errors of the past will be instrumental in shaping our future policy
decisions.
As a last point here, I would like to turn our attention to the concept of the neutral or
equilibrium real interest rate, commonly known as r-star as a guidepost for monetary
policy. In recent years, there has been growing interest in understanding the dynamics
of r-star, which is the equilibrium rate that neither stimulates nor contracts the economy.
Estimates indicate a declining trend of r-star, which might even reach or fall below zero
in some cases, although more recent estimates suggest a slight increase. While some
may view r-star as a "blurry guidepost for monetary policy," as stated by BIS research
(Benigno et al., 2024), I believe there is intellectual value in this ongoing debate. If we
were able to engineer a re-rise in r-star, we could potentially revert to a less
distortionary conventional monetary toolbox while simultaneously enhancing welfare.
So, the question arises: How can we increase r-star, and what structural policy
interventions are necessary? From my perspective, there are three main avenues for
this. First, an increase in total factor productivity, facilitated by initiatives such as
digitalization, artificial intelligence, and policies aimed at mitigating climate change -
perhaps best in a disruptive way in the vein of Schumpeter - may increase r-star.
Second, it could be beneficial to enhance the labor market participation rate, ensuring
that a larger portion of the population is actively engaged in the workforce. And finally,
facilitating capital flows from the Global North to the Global South could help by
fostering economic development and investment opportunities in emerging economies.
My paper on these ideas is under preparation but unfortunately not fully ready for this
conference.
Communication is key
I would like to address a final, yet crucial aspect: the communication of complex
monetary policy concepts to the broader public. Effectively communicating such
complex matters not only fosters accountability and trust but also plays a pivotal role in
shaping inflation expectations - an essential component of monetary policy
transmission. As we navigate through uncharted territory and confront the potential
challenges facing the central bank of the future, it is imperative to reiterate the
paramount importance of communication. Effective communication is and always will be
key to our success. I am delighted to announce that our opening keynote presentation
today will be delivered by Professor Orphanides from MIT, who will illuminate the critical
role of central bank communication. His insights promise to enrich our understanding
and provide valuable guidance as we endeavor to communicate with clarity and
transparency.
Central bank strategy reviews as a pivotal element
Let me once again ask the question: How can we equip the central bank of the future to
effectively navigate unforeseen challenges?
I would like to highlight a best-practice example for a forward-looking approach - the
strategy review of the ECB in 2021. This comprehensive review examined the suitability
of our monetary policy strategy for both present circumstances and the future. While its
primary focus was on addressing the effective lower bound constraints, it also laid the
groundwork for potential challenges that may arise in the future. Indeed, while the
effective lower bound may not be our primary concern at present, it would be imprudent
to dismiss the possibility of encountering similar constraints again.
At the recent retreat of the Governing Council in Ireland, we started to discuss the form
and content of our mid-term strategy review, to be completed in 2025. This review will
provide a further possibility for a forward-looking exercise that explicitly considers
recent challenges.
Allow me to conclude my introductory remarks by highlighting additional topics that I
deem highly relevant for the future conduct of monetary policy. While unconventional
methods have proven effective in times of very low interest rates, they have also left
long-term effects that can complicate policy in the current high inflation regime. Thus, it
is imperative that we discuss and develop more robust approaches to monetary policy
to avoid such challenges in the future. Furthermore, we must not overlook neglected
relationships, such as the link between money growth and inflation, as they may offer
valuable insights in different economic regimes.
Lastly, I want to emphasize the importance of considering structural change, which can
significantly impact inflation developments. Whether it's the productivity slowdown I
previously mentioned in my remarks on r-star, or shifts in wage dynamics -
understanding these structural changes is essential for informed policy decisions.
I am confident that many of the topics discussed here today and throughout the
conference will resurface in one form or another during the ECB's next strategy review.
I wish us all an interesting conference with many ideas to share and take home. Thank
you!
I want to thank Thomas Zörner (OeNB, Monetary Policy Section) for his excellent
research and support in putting together these opening remarks.
Bibliography
Blinder, Alan, Ehrmann, Michael, de Haan, Jakob and Jansen, David-Jan (2022):
Central Bank
communication with the general public: promise or false hope?, No 2694 Working
Paper Series, European Central Bank.
Benigno, Gianluca, Hofmann, Boris, Nuño, Galo and Sandri, Damiano (2024): Quo
vadis, r*?
The natural rate of interest after the pandemic, BIS Quarterly Review March 2024, Bank
for International Settlements.
Borio, Claudio, Hofmann, Boris and Zakrajsek, Egon (2023): Does money growth help
explain the recent inflation surge?, BIS Bulletin No 67, Bank for International
Settlements.
Ringwald, Leopold and Zörner, Thomas O. (2023): The money-inflation nexus revisited,
Journal of Empirical Finance, Vol. 73, pp 293-333.
Stelzer, Anna, Spisso, Karen and Zörner. Thomas O. (2024): Central banking beyond
2021: Analyzing unconventional policies and preparing for future challenges, OeNB
Occasional Paper (forthcoming).