The two-pillar strategy of the ECB : ready for a review : monetary dialogue papers, December 2019.
Date: 2019-12-11
Institutions: Directorate-General for Internal Policies of the Union
Subjects: European Central Bank, economic policy, inflation, monetary policy

IN-DEPTH ANALYSIS 
Requested by the ECON committee 

Monetary Dialogue Papers, December 2019 

The Two-pillar 
Strategy of the ECB: 
Ready for a Review 

Policy Department for Economic, Scientific and Quality of Life Policies  
Directorate-General for Internal Policies 
Authors: Daniel GROS, Angela CAPOLONGO 
PE 642.362 - November 2019 

EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
The Two-pillar 
Strategy of the ECB: 
Ready for a Review 

Monetary Dialogue Papers 
December 2019 

Abstract 

Inflation has remained below the ECB’s own target of ‘below, but 
long  time  despite  massive  doses  of 
close  to  2%’  for  a 
unconventional policies, suggesting that the present ‘two pillar’ 
strategy  does  not  work.  A  review  of  the  strategy  will  be  useful 
only if it is entrusted to independent experts. Otherwise, it is likely 
to result in the finding that only marginal changes to the existing 
strategy are needed and that larger doses of the present policy 
will be sufficient to achieve the inflation target. 

This  document  was  provided  by  Policy  Department  A  at  the 
request  of  the  Economic  and  Monetary  Affairs 
(ECON) 
Committee. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
This document was requested by the European Parliament's Committee on Economic and Monetary 
Affairs. 

AUTHORS 
Daniel GROS, CEPS 
Angela CAPOLONGO, CEPS and ECARES-Université Libre de Bruxelles 

ADMINISTRATOR RESPONSIBLE  
Drazen RAKIC 
Dario PATERNOSTER 

EDITORIAL ASSISTANT  
Janetta CUJKOVA 

LINGUISTIC VERSIONS 
Original: EN 

ABOUT THE EDITOR 
Policy  departments  provide  in-house  and  external  expertise  to  support  EP  committees  and  other 
parliamentary  bodies  in  shaping  legislation  and  exercising  democratic  scrutiny  over  EU  internal 
policies. 

To contact the Policy Department or to subscribe for updates, please write to:   
Policy Department for Economic, Scientific and Quality of Life Policies 
European Parliament 
L-2929 - Luxembourg 
Email: Poldep-Economy-Science@ep.europa.eu  

Manuscript completed: November 2019 
Date of publication: November 2019 
© European Union, 2019 

This document is available on the internet at: 
http://www.europarl.europa.eu/supporting-analyses 

DISCLAIMER AND COPYRIGHT 
The  opinions  expressed  in  this  document  are  the  sole  responsibility  of  the  authors  and  do  not 
necessarily represent the official position of the European Parliament.  
Reproduction  and  translation  for  non-commercial  purposes  are  authorised,  provided  the  source  is 
acknowledged and the European Parliament is given prior notice and sent a copy. 
For citation purposes, the study should be referenced as: Gros, D., Capolongo, A., The Two-pillar Strategy 
of  the  ECB:  Ready  for  a  Review,  Study  for  the  Committee  on  Economic  and  Monetary  Affairs,  Policy 
Department for Economic, Scientific and Quality of Life Policies, European Parliament, Luxembourg, 
2019. 

 
 
 
 
 
 
 
 
 
 
 
The Two-pillar Strategy of the ECB: Ready for a Review 

CONTENTS 

LIST OF ABBREVIATIONS 

LIST OF BOXES 

LIST OF FIGURES 

EXECUTIVE SUMMARY 

  BACKGROUND: THE CONUNDRUM FACING THE ECB 

  THE ECB’S TWO-PILLAR STRATEGY: HAS IT BEEN IMPLEMENTED? 

2.1.  The official two-pillar strategy 

2.2.  Two pillars in external communication 

  LEARNING FROM OTHERS’ EXPERIENCES 

3.1.  Transatlantic differences in communication 

3.2.  Experiences of past reviews 

  CONCLUDING REMARKS 

REFERENCES 

QUESTIONS FOR MEPS 

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LIST OF ABBREVIATIONS 

ECB 

FED 

European Central Bank 

Federal Reserve Bank 

FOMC 

Federal Open Market Committee 

GC 

GDP 

HICP 

QE 

RHS 

US 

IMF 

Governing Council 

Gross Domestic Product 

Harmonised Index of Consumer Prices 

Quantitative Easing 

Right-hand side 

United States of America 

International Monetary Fund 

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The Two-pillar Strategy of the ECB: Ready for a Review 

LIST OF BOXES 

Box 1: 

The 2003 ‘review’ 

LIST OF FIGURES 

Figure 1: 

Unemployment Rate for Euro Area, percentage, annual, (including forecast for 2019-
2021) 

Figure 2:  Output gaps: deviations of actual GDP from potential GDP as % of potential GDP, for   
Euro Area and US, percentage, annual (including forecast for 2019-2021) 

Figure 3: 

Euro area annual rate of Inflation (HICP): Overall Index and Core Index (Excluding    
energy and Unprocessed Food), annual rate of change, percentage change, monthly 

Figure 4:  Words occurrences normalised by total annual number of words and multiplied by      

one thousand, annual 

Figure 5: 

Broad money aggregate (M3), annual growth rate, in percentage and core inflation   
(right axis), annual rate of change, percentage change, monthly 

Figure 6:  Words occurrences: Fed and ECB comparison, normalized by total annual number of 

words and multiplied by one thousand, annual 

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7 

7 

8 

13 

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EXECUTIVE SUMMARY  

The persistence of low inflation despite massive doses of unconventional policy by the ECB suggests 
that a fundamental review of its strategy is warranted. All aspects of monetary policy strategy, including 
the definition of price stability, the instruments of monetary policy and communications should be up 
for review. This contribution cannot deal with all these aspects. It concentrates on two sub-issues: the 
organisation of the review and the presentation of the strategy in ECB communications. 

Within this limited scope, our recommendations about the review of monetary policy of the ECB are 
the following: 

•  The  ECB  still  follows  officially  a  ‘two-pillar’  strategy.  However,  de  facto,  the  pillars  have  been 
abandoned since the financial crisis. Over the last decade, the two pillars have been used in a formal 
way to justify monetary policy decisions. In reality, one finds little trace of the essential elements of 
the monetary pillar in the speeches of members of the Governing Council.  

•  We could not find a single instance in which the ECB admitted that the two pillars, i.e. the economic 
and the monetary analysis gave different signals. This is not credible. In reality, there have been 
important instances when taking into account the different signals from the two pillars could have 
led to different decisions. 

•  The economic pillar has become an ad hoc application of basic relationships between interest rates, 
demand and prices all of which have become rather tenuous or at least contested over the last 
years. A fundamental appraisal of the current functioning of these economic mechanisms is thus 
overdue.  (However,  this  will  take  considerable  resources  and  thus  cannot  be  achieved  in  this 
limited contribution). 

•  The review should be conducted as much as possible by external experts. The 2003 review was 
conducted by the Governing Council itself and resulted merely in a confirmation of the existing 
(two-pillar) strategy.  

•  Elements of the ‘Fed Listens’ framework might be useful for the review of the ECB’s strategy. But, 
one  key  element,  namely  events  involving  the  local  public  organised  by  the  individual  District 
Federal  Reserve  Banks might  be  difficult  to  replicate.  Great  care  should  be  taken  to  ensure  that 
events organised by national central banks do not degenerate into platforms for national points of 
view. There is no need to institutionalise the review. 

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The Two-pillar Strategy of the ECB: Ready for a Review 

  BACKGROUND: THE CONUNDRUM FACING THE ECB 

The  economy  of  the  euro  area  has  by  now  recovered  from  the  deep  double  dip  recession  which 
followed the financial and euro debt crisis period starting in 2009. Employment is nearing pre-crisis 
peaks and unemployment has declined continuously over the last 6 years (and is likely to continue its 
decline according to Commission projections), Figure 1. Another measure of economic slack, namely 
the output gap, has also returned to its pre-recession average (Figure 2). 

Figure 1: 

Unemployment  Rate  for  Euro  Area,  percentage,  annual,  (including  forecast  for 
2019-2021) 

Unemployment Rate

13

12

11

10

9

8

7

6

5

4

Source: AMECO. 

Figure 2: 

Output gaps: deviations of actual GDP from potential GDP as % of potential GDP, 
for Euro Area and US, percentage, annual (including forecast for 2019-2021) 

Output Gap

4,00

3,00

2,00

1,00

0,00

-1,00

-2,00

-3,00

-4,00

-5,00

Euro area

United States

Source: AMECO. 

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These  two  activity-based  indicators  would  normally  suggest  that  inflation  should  now  also  start  to 
increase. However, this has not happened. As depicted in Figure 3, actual inflation is now declining 
towards 1 % (and has been rather variable over the last years). More stable core inflation which excludes 
the volatile components of energy and unprocessed food, has remained close to 1 %, over the last 5-6 
years. Moreover, market based indicators of inflation expectations are consistent with an inflation rate 
close to this level for the foreseeable future (Lane, 2019).  

This is the basic conundrum facing the ECB: the real economy is doing reasonably well, at least trend-
wise, while inflation remains stubbornly below target. Whether the so-called Phillips curve, which links 
inflation  to  unemployment  remains  a  useful  relationship  is  hotly  debated  in  the  literature  (see 
Blanchard , 2019  and Lane, 2019 for two different points of view).   

Figure 3: 

Euro area annual rate of Inflation (HICP): Overall Index and Core Index (Excluding 
energy  and  Unprocessed  Food),  annual  rate  of  change,  percentage  change, 
monthly 

Inflation

5

4

3

2

1

0

-1

Source: Eurostat. 

HICP core

HICP overall

Persistently low inflation constituted the key reason why, some years ago, the ECB introduced ‘non-
standard monetary policies’ (negative rates and asset purchases). However, inflation has not increased 
after massive doses of monetary easing (asset purchases and highly negative policy rates). Whether 
this is a sign that the policy has not worked, or whether the policy has worked, but inflation would have 
been  even  lower  in  its  absence,  constitutes  another  unresolved  issue  (see  Summers  and  Stanstead, 
2018; Cochrane, 2018; and further references in Gros, 2019).  

The ECB is not alone in not being able to reach its own inflation target. Japan and a number of other 
countries in Europe (e.g. Switzerland) are in a similar situation as inflation has not increased despite 
very expansionary policies pursued for a long time. The open issue of the effectiveness of monetary 
policy at the lower bound is thus not necessarily a problem specific to the euro area. 

The US Federal Reserve is in a different situation. Its mandate includes two objectives - price stability 
and full employment. Secondly, it can claim to have attained both, since the unemployment rate is at 
a record low and inflation is close to 2 %. The context for the review of monetary policy is thus different 
for the ECB. 

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The Two-pillar Strategy of the ECB: Ready for a Review 

This  contribution  is  organised  as  follows.  Section  2  starts  with  a  description  of  the  ECB’s  two-pillar 
strategy and critically analyses how it has been presented in ECB communications. Section 3 presents 
a brief comparison with the Federal Reserve and other reviews. Section 4 concludes and suggests some 
preliminary recommendations.  

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  THE 

ECB’S  TWO-PILLAR  STRATEGY:  HAS 

IT  BEEN 

IMPLEMENTED?  

The last formal review and presentation of the monetary policy strategy of the ECB dates back to 2003. 
This section first presents the key elements of this strategy, which is still presented as valid today. We 
then  present  a  brief  analysis  of  the  external  communication  of  the  ECB,  which  suggests  that  key 
elements of this strategy have been put aside. 

The official two-pillar strategy  

2.1. 
The website of the ECB provides a clear representation of the present (official) strategy.1 

In  essence,  the  ECB  has  defined  the  term  ‘price  stability’  (which  the  Treaties give  as  the  over-riding 
objective of monetary policy) as an inflation rate ‘below, but close to 2 %’, with inflation measured by 
the increase in the HICP. The ECB assesses risk to price stability through its ‘two pillars’: economic and 
monetary analysis.  

This section will focus on the second element, namely the ‘two-pillar approach’. This approach, with its 
monetary  pillar  was  widely  perceived  as  relict  from  the  practice  of  the  Bundesbank  to  announce 
reference  rates  for  the  growth  rate  of  money.  The  underlying  assumption  of  this  emphasis  on  the 
growth of money was that the price level could not increase at a great pace if the money supply was 
limited. This argument might have had some merit when fighting inflation was the main problem (as 
it was thought to be when the ECB was created). But the emphasis on monetary aggregates is more 
difficult to justify when the problem is to get inflation up (slightly). 

Another  reason  for  focusing  on  monetary  aggregates  could  be  that  money  and  credit  growth  are 
usually linked and credit growth can signal a danger to financial stability. This justification was indeed 
used in 2003 (see box), but the warning signs coming from relatively high rates of money (and credit 
growth) were largely overlooked during the boom years up to 2007. 

1  

See https://www.ecb.europa.eu/mopo/strategy/html/index.en.html. 

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The Two-pillar Strategy of the ECB: Ready for a Review 

Box 1: 

The 2003 ‘review’ 

The 2003 strategy of the ECB was extensively described by the new President of the ECB in a major 
speech in 2003.  The key elements were described by Trichet:  

“As you know, this is a topic which the Governing Council of the ECB discussed at great length in the 
first half of 2003, when we conducted an evaluation of our experience with the strategy. This review 
resulted in the confirmation of our strategy on 8 May 2003.” 

This  paragraph  shows  that  the  2003  review  was  conducted  internally,  with  the  result  that  the 
previous practice was confirmed. 

A first key element of the strategy was the quantitative definition of price stability, which is still 
used today: 

The May 2003 clarification: "HICP inflation below but close to 2%" 

A second key element of the strategy was the so-called two pillar approach which comprises a 
first pillar (economic analysis) and a second pillar (monetary analysis).  Trichet characterised thus:  

“The two pillars 

A further element of the strategy relates to the analyses and economic perspectives of the risks to price 
stability, which are founded on a two-pillar framework. The two-pillar approach permits conveying to 
the  public  the  notion  of  a  diversified  analysis  and  of  ensuring  robust  decision-making  based  on 
different analytical perspectives.” 

The justification for the monetary analysis was the following: 

“As regards the analysis under the monetary pillar, the ECB decided from the outset to single out money 
from the set of selected key indicators that it would monitor and study closely. “ 

The main innovation of the 2003 review was that the ECB discontinued its annual review of the 
reference value for (the rate of growth of) M3. But formally the monetary pillar was maintained. 

As an aside, we note that one additional justification for the monetary pillar seemed prescient: 

“As an important side effect, the regular examination of monetary trends might help to detect financial 
imbalances. There is often a strong positive correlation between credit growth and rapid rises in asset 
prices  in  the  run-up  to  a  speculative  bubble.  The  emergence  of  such  long-run  disequilibria  in  the 
economy has to be taken into account in setting monetary policy. Such fundamental imbalances may 
cause problems for the economy well beyond typical inflation forecast horizons. I note that this point 
of view is increasingly also considered by other central banks. Our framework, with its emphasis on 
monitoring money and credit developments and the sustainability of macroeconomic developments, 
is in this respect well equipped to take into account the implications of exceptionally strong dynamics 
in the financial markets in terms of potential risks to price stability over the long run.” 

Unfortunately, the warning signs from rapid credit growth, which preceded indeed the financial 
crises, did not have a decisive impact on monetary policy. 

Source: ECB (2003), “The ECB’s monetary policy strategy”, press release, 8 May 2003. 

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Two pillars in external communication 

2.2. 
One way to gain an initial idea on whether the ‘two-pillar’ strategy has actually guided monetary policy 
is to analyse the external communication of the ECB, in particular how decisions were motivated. For 
this purpose, we conducted a text analysis of two kind of source:  

i)  The  Press  Conferences  following  monetary  policy  decisions.  These  press  conferences  take  place 
roughly every month, with a total of nearly 250 since the start of EMU.  

ii) Speeches by members of the Governing Council. Each year members of the Governing Council give 
dozens of speeches in which they discuss a variety of topics, typically issues pertaining to the policy of 
the ECB. The collection of these speeches made by the ECB comprises over 2 400 entries since 1997. 

All these documents are publicly available on the ECB website.  

Using Python, an open source programming language, we used web scraping techniques to retrieve 
quantitative  useful  information  to  understand  how  the  two  pillars  were  used  to  discuss  and  justify 
monetary  policy  over  the  last  two  decades.  This  text  mining  technique  is  becoming  increasingly 
popular in many fields2, however, it has not been used much for central banking (Bholat et al., 2015). 
Our results show the usefulness of this analysis to gain some insights into the key issues, which drove 
monetary policy in the euro area. 

In  concrete  terms,  we  looked  at  the  frequency3  of  certain  key  concepts  (e.g.  inflation,  economic 
analysis, monetary analysis) over time.  

The results of our text analysis is shown in Figure 4 where the black lines refer to the analysis of press 
conferences and the red line to the speeches by Governing Council members. These results suggest 
that the ‘two-pillar’ approach is followed in mainly a pro forma fashion. The economic and monetary 
analysis  represent  the  two  pillars.  The  frequency  with  which  these  terms  (‘monetary  analysis’  and 
‘economic analysis’) are mentioned shoots up after 2003 (from zero to 0.6 per thousand words). But the 
frequency then declines to about one half of its peak value for the press conferences and to zero for 
speeches.  

The difference between press conferences and speeches is revealing: when Members of the Governing 
Council (including the President) present their thoughts without being constrained by the form of a 
press  conference,  they  mention  the  two  ‘pillars’  much  less  (and  not  at  all  over  the  last  years).  This 
suggests that the two pillar strategy with its separate ‘monetary’ and ‘economic analysis have played 
little role in their thinking.  

2   See Gentzkow et al.(2018) for an extensive review on the topic. 
3   The  number  of  occurrences  of  each  individual  concept  was  then  normalised  by  the  total  annual  amount  of  words  contained  in  the 

documents examined (speeches by Governing Council members or Press Conferences after a monetary policy decision). 

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The Two-pillar Strategy of the ECB: Ready for a Review 

Figure 4: 

Words occurrences normalised by total annual number of words and multiplied 
by one thousand, annual 

Monetary Analysis

0,8

0,7

0,6

0,5

0,4

0,3

0,2

0,1

0

Economic analysis

0,7

0,6

0,5

0,4

0,3

0,2

0,1

0

7
9
9
1

9
9
9
1

1
0
0
2

3
0
0
2

5
0
0
2

7
0
0
2

9
0
0
2

1
1
0
2

3
1
0
2

5
1
0
2

7
1
0
2

9
1
0
2

Note: The plot represents the occurrence over time of two words for the Speeches (orange line) and the Press Conferences 
(black line) of the ECB. The left panel concerns the word “Monetary Analysis”, and the right one the word “Economic Analysis”. 
The sample period goes from 1997 to 2019. The search is case sensitive.  

Source: ECB Press Conferences and Speeches, authors’ computations. 

We also checked separately for the occurrence of the word ‘pillar’ in speeches and found that this term 
was used for a few years after 2003, but then disappeared rather quickly.  

Another strong indication that the ‘two-pillar’ approach has been effectively discarded comes from the 
fact that the ‘cross-check’ between the two pillars has never uncovered any discrepancy between the 
economic and monetary analyses. We examined all press conferences since 2009 and did not find any 
instance  in  which  the  economic  and  the  monetary  analyses  gave  very  different  signals.  A  separate 
economic  and  monetary  analysis  make  sense  only  if  they  give,  at  least  from  time  to  time,  different 
signals.   

Over  the  last  5  years,  the  introductory  statement  for  the  press  conference  following  ECB  decisions 
contained a paragraph along these lines: 

“To sum up, a cross-check of the outcome of the economic analysis with the signals coming from 
the monetary analysis confirmed/confirms …… » 

With  two  exceptions  (September/October  2015),  this  statement  has  been  copied  and  pasted  from 
October 2014 to the present (about 40 times).  

Even before 2014, the paragraph on the cross-check (of the outcome of the economic analysis with the 
signals coming from the monetary analysis) was always accompanied by the verbs ‘confirm’, ‘support’ 
or similar expressions. According to the ECB there was never any instance of different signals from the 
economic and the monetary analysis. 

In reality, one can of course find a number of episodes when the two pillars gave different signals. To 
illustrate this Figure 5 shows the (annual) growth rate of M3 (the preferred monetary aggregate of the 
ECB).  Two  red  vertical  lines  show  two  episodes  of  different  signals:  for  example,  in  early  2011,  the 
economic analysis suggested increasing inflationary pressures while money growth (M3) stood at only 

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2 % (and had been falling until a few months beforehand). However, the press statement justifying an 
increase  in  rates  (2011  April)  stated  that  the  monetary  analysis  also  supported  a  tightening.  This 
increase had to be reversed soon and is generally considered to have been a mistake. 

Another important episode came when inflation was low, but M3 was increasing by close to 5 %. In this 
case, the ECB was aggressively easing (2015Q1). The same can be said about the last (September 2019) 
decision  by  the  ECB  to  start  an  entire  package  of  easing  measures  although  the  money  supply 
continues to increase at about 5 %. In these cases, the ECB still maintained that both the economic and 
the  monetary  analysis  supported  its  decision  because  money  growth,  while  satisfactory,  could 
otherwise fall back. 

Figure 5: 

Broad  money  aggregate  (M3),  annual  growth  rate,  in  percentage  and  core 
inflation (right axis), annual rate of change, percentage change, monthly 

14

12

10

8

6

4

2

0

-2

Announcement of QE

Policy Rate increases

5

4

3

2

1

0

-1

M3

HICP (right axis)

Note: The green line is the annual growth rate of the euro area Monetary Aggregate M3 in percentage change. The yellow line 
represents the core HICP Index (HICP excluding energy and unprocessed food), annual rate of change, percentage change, 
associated with the right axis. The vertical red lines represent two monetary policy decisions: 1) the first one in April 2011 
when the ECB increased the policy rate, 2) the second one in January 2015 when the ECB announced the Quantitative Easing. 
The data frequency is monthly and the sample considered goes from 1997/January to 2019/September.  

Source: ECB Statistical Data Warehouse.  

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  LEARNING FROM OTHERS’ EXPERIENCES 

Transatlantic differences in communication 

3.1. 
The  Federal  Reserve  announced  one  year  ago  a  review  of  its  policy  strategy.  This  review  has  been 
implemented starting from the second half of this year, and the results will be made public in 2020. As 
mentioned above, the context is different from that of the ECB in several respects. First, differently from 
the  ECB,  the  Federal  Reserve  has  a  ‘dual  mandate’  of  maximum  employment  and  price  stability. 
Secondly,  the  starting  position  of  the  Federal  Reserve’s  review  is  that  both  mandates  have  been 
achieved. This is also reflected in the announcement of the Review by the Federal Reserve (see FOMC, 
2019).  

To  analyse  differences  in  the  communication,  we  perform  a  text  analysis  of  the  Fed’s  Statements, 
calculating  the  relative  occurrence  of  certain  key  words  and  comparing  them  with  the  ECB’s  Press 
Conferences, following the same procedure explained in the previous section.  

Figure 6 shows the results of this analysis in four panels, referring to four words. From this figure we 
can draw three main conclusions.  

First, given that the Federal Reserve has a dual target, as one would expect, we find a much higher 
frequency of the word ‘employment’ for the Fed, as displayed in the fourth panel of Figure 6.   

Second, we find rather similar trends, over the last decades, for both the Fed’s Statements and the ECB 
Press Conferences for the frequency of the words ‘inflation’ and ‘price stability’. However, while the 
former tends to increase over time, the latter decreases on both sides of the Atlantic. It is surprising that 
both these terms appear more often in Federal Reserve statements than in those of the ECB (the scale 
of the RHS is different for the ECB)4, even if the Fed has achieved its inflation target.    

Third, one finds that the Federal Reserve mentions ‘financial stability’ in its motivations for monetary 
policy  decisions  only  during  two  years  (2009  and  2010).  The  ECB,  by  contrast,  seems  to  have  been 
concerned about financial stability even before the crisis, and continues to mention financial stability 
even after the crisis abated. This points to another inconsistency: as mentioned above, the monetary 
analysis had been motivated, at least partially, by concerns about financial stability. However, we also 
showed that one cannot find a single instance in which the signal from the monetary analysis was seen 
to deviate from the economic analysis. We also could not find a single instance in which concerns about 
financial stability were used to justify a monetary policy decision. 

Despite  these  crucial  differences  among  the  frameworks  in  which  the  ECB  and  the  Fed  currently 
operate, it is very important to look at the Fed’s experience in terms of reviewing its monetary policy 
conduct to learn how to implement a potential future ECB’s review. However, since the review is still 
ongoing we could only highlight the broad procedure that has been announced on their website. 

One needs to keep in mind the purpose of the Fed’s review. The attainment of Fed’s objectives shows, 
in its own view, that the monetary policy strategy has worked well so far, thus the final aim of their 
review, would be to analyse if the current framework would still be sufficient to face future challenges 
or if it could be improved.  

4  

For the ECB, the relative frequency is calculated including the questions and answers part of the press conference. The Federal Reserve 
does  not  hold  such  press  conference,  resulting  in  a  much  lower  overall  length  of  the  material.  We  performed  a  robustness  test  by 
concentrating for the ECB only on the introductory statement.  This gave qualitatively very similar results.   

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Therefore, the review is announced to have broad-scope, with no prior idea of the possible outcomes. 
However,  there  are  limits.  The  review  is  to  look  at  the  best  strategies  to  achieve  the  existing  given 
inflation target (over the long run). The Federal Reserve is not planning to revise the target itself. 

The review should thus focus mainly on how to improve the tools, the communication and the overall 
strategy of monetary policy. The Fed is seeking external points of view, through the Fed Listens events, 
where participants have a very broad and varied background (it is not required that they have a deep 
knowledge  of  monetary  policy).  This  is  crucial  for  the  effectiveness  of  the  review  and  we  believe  it 
would be important to take it as an example for the ECB case.    

Key elements of the review in the US have been events organised by each individual regional Federal 
Reserve Bank in which a wide variety of participants, not only academic economists or financial market 
specialists, were asked to air their views. This approach can work well in a ‘political union’ like the US 
where  views  on  monetary  policy  are  not  so  strongly  influenced  by  national  perceptions  and 
preferences as in the euro area. In the US, the concerns of various interest groups and the general public 
are not as regionally concentrated and differentiated as in Europe. 

The outcome would be predicable if each national central bank in the euro area were to hold a separate 
event. The contributions from academic economists might be varied because they could be invited 
from all over Europe (or even globally). However, the local public and local interest groups (e.g. banks, 
but also SMEs, etc.) would have sharply different opinions from country to country. Much care would 
have to be taken that a ‘the ECB listens’, for example in Germany, does not degenerate in generalised 
ECB bashing.   

A last important element concerns the fact that, differently from the ECB, the Fed enunciated for the 
first time its strategy only very recently, in 2012, i.e. after the crisis, by publishing the Statement on 
Longer-Run Goals and Monetary Policy Strategy. Hence, the ECB would have a much longer time frame 
to review and it would also have more of a reason to adapt its strategy given that the macroeconomic 
environment has changed so much. 

In the next section, we briefly analyse the reviews that have been undertaken by the Reserve Bank of 
New Zealand and the IMF. Our aim is to focus on the procedure that have been followed by these two 
institutions, so that we can learn from their experiences. 

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The Two-pillar Strategy of the ECB: Ready for a Review 

Figure 6: 

Words occurrences: Fed and ECB comparison, normalized by total annual number 
of words and multiplied by one thousand, annual 

Price stability

Inflation

7,0

6,0

5,0

4,0

3,0

2,0

1,0

0,0

1

0,9

0,8

0,7

0,6

0,5

0,4

0,3

0,2

0,1

0

4,5

30,0

4

3,5

3

2,5

2

25,0

20,0

15,0

1,5

10,0

1

0,5

0

5,0

0,0

Financial Stability

Employment

0,5

0,5

0,4

0,4

0,3

0,3

0,2

0,2

0,1

0,1

0,0

10,0

9,0

8,0

7,0

6,0

5,0

4,0

3,0

2,0

1,0

0,0

9,0

8,0

7,0

6,0

5,0

4,0

3,0

2,0

1,0

0,0

1,4

1,2

1,0

0,8

0,6

0,4

0,2

0,0

Note: The plot represents the occurrence over time of four words for the ECB’s Press Conferences (orange line, on the right 
axis)  and  the Federal  Reserve’s Press  Statements  (black  line).  The  upper  left  panel concerns  the  word  “Price stability”,  the 
bottom left the word “Financial Stability”, the upper right “Inflation” and the bottom right “Employment”. The sample period 
goes from 1998 to 2019. The search is case sensitive.  

Source: ECB Press Conferences and Fed Statements, Authors’ computations.  

Experiences of past reviews 

3.2. 
There  are  only  rather  few  examples  of  external  reviews  of  policymaking  institutions’  strategies.  The 
Central (Reserve) Bank of New Zealand and the IMF provide two instructive cases. 

Concerning  the  case  of  New  Zealand,  in  2000  the  Minister  of  Finance  invited  an  external  expert,  a 
reputed economist specialising in monetary policy, Prof. Lars Svensson, to review the central bank’s 

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IPOL | Policy Department for Economic, Scientific and Quality of Life Policies 

monetary policy operations. The review was thus performed outside the central bank itself, following 
a  simple  procedure.  First,  the  external  expert  was  provided  with  very  precise  terms  of  references, 
concerning the central bank’s monetary policy conduct to achieve its inflation target, its instruments, 
the information set used by the bank to take decisions, its governance and accountability structure, its 
coordination with other policies, and finally its communication. Second, the expert personally visited 
the bank for some time (two weeks) to observe monetary policy operations and collect material and 
held  discussions  with  other  monetary  policy  experts  from  different  countries.  Third,  the  expert 
published a final report.  

The Reserve Bank and the Minister of Finance, after consultation with parliamentary parties, publicly 
released their responses to these recommendations.  

The advantages of having one expert conducting the entire review were speed and transparency. The 
drawback is that different experts have often very different opinions about how monetary policy works 
and what the best strategy might be to achieve price stability. In the early 2000s this disadvantage was 
not so pronounced as there was much less disagreement than today. However, today’s situation when 
there is sharp disagreement about many basic elements of monetary policy (is there still a link between 
unemployment and inflation, does unconventional policy work, where is the effective lower bound?) it 
would seem that a team of independent experts would be needed to encompass the opinions of the 
profession. 

The  International  Monetary  Fund  (IMF)  is  another  institution  which  has  undergone  a  fundamental 
review. In July 2001, the Executive Board of the Fund established the Independent Evaluation Office 
(IEO). The goal of this office is to systematically provide evaluations on relevant issues in light of the 
IMF’s  mandate,  in  an  objective  and  independent  fashion.  Moreover,  starting  from  2006  periodical 
external evaluations of the evaluator have been conducted by the Fund’s Executive Board to assess its 
effectiveness and determine if its work should be improved. One key element of the work of the IEO is 
that it regularly solicits inputs from outside the official community. 

The IEO of the IMF is a permanent institution, headed by outside experts, but with a substantial staff of 
its  own.  This  is  of  course  different  from  the  once-off  review  which  the  ECB  has  in  mind.  Another 
difference  to  the  IMF  is  that  the  ECB  reports  regularly  to  the  European  Parliament,  to  which  it  is 
accountable.  The European Parliament, in turn, has at its disposal a pool of external experts, which can 
provide its members with a range of opinions on all aspects of monetary policy.  It would thus not seem 
appropriate to create a permanent review body inside the ECB.   

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The Two-pillar Strategy of the ECB: Ready for a Review 

  CONCLUDING REMARKS 

The ‘two-pillar’ strategy of the ECB might have been useful when fighting inflation was the key task. 
Today the key concerns are financial stability and low inflation.  This means that the strategy should be 
radically rethought. The monetary pillar has been effectively discarded, as shown above. However, the 
economic pillar also faces problems since it has become an ad hoc analysis of economic developments, 
in which it is generally assumed that higher demand will lead to price pressures. Nevertheless, this has 
not been the case. Decisions on monetary policy then rely on an assumed link between instruments 
and inflation (the desired outcome); a link which involves a number of intermediate steps.  

1. 

2. 

3. 

4. 

Monetary policy instruments, whether conventional or not, aim to affect ‘economically relevant’ 
interest rates (and, more in general, financial conditions throughout the economy). E.g. lowering 
policy rates should lower the refinancing costs of banks, which should then result in lower rates 
on loans.  

Lower  interest  rates,  or  more  generous  financial  conditions,  should  then  foster  increases  in 
expenditure  (mainly  investment  and  consumption,  but  possibly  also  in  exports  via  a  lower 
exchange rate).  

This increase in demand should lead to higher employment.  

Higher employment (or lower unemployment, lower slack in general) should then lead to higher 
wages and finally higher prices.  

All the links in this chain of mechanisms deserve close scrutiny because they do not seem to work as 
intended.  

Any  review  of  the  monetary  policy  strategy  of  the  ECB  will  thus  have  to  put  into  doubt  many 
fundamental issues and might thus implicitly criticise present policies. This is unlikely to be allowed in 
an internal process. Reviews of the last 20 years by high ranking ECB staff tend to conclude that the 
strategy of the ECB is entirely appropriate (e.g. Hartmann and Smets 2019).  It is thus important to have 
an external review. 

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REFERENCES 

• 

• 

• 

• 

• 

• 

• 

Bholat,  D.,  Hansen,  S.,  Santos,  P.,  &  Schonhardt-Bailey,  C.  (2015).  Text  mining  for  central 
banks. Available at SSRN 2624811. 

Blanchard,  O.  (2019).  What’s  (not)  up  with  inflation?  So  what  are  the  implications  for  policy?, 
Brookings event, October 3, 2019. 

Cochrane, J. H. (2018) “Michelson- Morley, Fisher, and Occam: The Radical Implications of Stable 
Quiet Inflation  at  the  Zero  Bound”,  Chapter in NBER  book NBER Macroeconomics  Annual  2017, 
volume 32 (2018). 

ECB (2003), “The ECB’s monetary policy strategy”, press release, 8 May 2003. 

ECB, Press Conferences and Speeches, https://www.ecb.europa.eu/press/html/index.en.html. 

FOMC (2019), “Review of Monetary Policy Strategy, Tools, and Communications”, announcement 
of review, 25 June 2019.  

FOMC, Statements, https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm. 

•  Gentzkow, M., Kelly, B., & Taddy, M. (2019). Text as data. Journal of Economic Literature, 57(3), 535-

74. 

•  Gros,  Daniel  (2019)  “Global  trends  in  inflation:  are  central  banks  barking  up  the  wrong  tree?” 

Contribution to the European Parliament,   
http://www.europarl.europa.eu/thinktank/en/document.html?reference=IPOL_IDA(2019)638422 

•  Hartmann,  Philipp,  and  Frank  Smets.  2018.  “The  First  20  Years  of  the  European  Central  Bank: 
Monetary Policy” BPEA Conference Draft, Fall, https://www.brookings.edu/bpea-articles/the-first-
20-years-of-the-european-central-bank-monetary-policy/  also  ECB  Working  Paper  Series,  No. 
2219, European Central Bank.  

• 

• 

• 

Lane,  P.  (2019).  50th  Anniversary  Conference  of  the  Money,  Macro  &  Finance  Research  Group. 
London, London School of Economics, 4 September 2019. 

Summers,  L.  H.  and  Stansbury,  A.  (2019)  “Whither  Central  Banking?”  Project  Syndicate,  August 
2019. 

Svensson,  L.  (2001).  Independent  review  of  the  operation  of  monetary  policy  in  New  Zealand, 
Reserve Bank of New Zealand Bulletin, Volume 64, No. 1.  

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The Two-pillar Strategy of the ECB: Ready for a Review 

QUESTIONS FOR MEPS 

1)  Should inflation and price stability be measured using a different price index; for example, wages, 

the GDP deflator and, possibly asset price inflation? 

2)  The ECB aims at inflation ‘below, but close to 2 %’. Such a narrow target is difficult to reach when 
inflation reacts so sluggishly to monetary policy measures.  Should the target range be widened? 

3)  Ever  more  negative  rates, or further  asset  purchases  might,  according  to  many  experts,  now  be 
counter-productive.  Should the ECB consider just leaving its very expansionary stance where it is, 
even if inflation remains below target? 

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Inflation has remained below the ECB’s own target of ‘below, but close to 2%’ for a long time despite 
massive doses of unconventional policies, suggesting that the present ‘two pillar’ strategy does not 
work. A review of the strategy will be useful only if it is entrusted to independent experts. Otherwise, 
it is likely to result in the finding that only marginal changes to the existing strategy are needed and 
that larger doses of the present policy will be sufficient to achieve the inflation target. 

This document was provided by Policy Department A at the request of the Economic and Monetary 
Affairs (ECON) Committee. 

PE 642.362 
IP/A/ECON/2019-51 

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ISBN 978-92-846-6062-9 | doi:10.2861/356042 | QA-03-19-909-EN-N