yves mersch : necessity, proportionality and probity – central bank independence in unconventional times speech by yves mersch, member of the executive board of the european central bank, at the conference “ the ecb and its watchers xx ”, frankfurt am main, 27 march 2019. * * * introduction the benefits of central bank independence have been established and demonstrated time and again. inflation is costly. 1 history shows that governments lack the credibility to commit to timeconsistent monetary policy, and often subordinate it to other priorities. 2 faced with elections, governments are tempted to boost short - term growth by stoking unexpected inflation. but in the long run, this just raises inflation expectations without any benefit to growth. by delegating monetary policy to an independent, accountable central bank with a narrow mandate for price stability, democracies have found a way to reduce costly inflation without incurring output losses over the medium term. 3 despite this successful track record – or perhaps because of it – central bank independence has been recently questioned. in particular, it is argued that central bank independence is only justified if distributional effects are comparatively small. critics claim that unconventional measures have large distributional effects across households, industrial sectors and even countries, and thus stray into the realms of economic and fiscal policy. this debate has led to a wealth of academic literature being published on the ideal conditions for delegating powers and coordination between policies. 4 to be clear from the outset : it is the task of safeguarding the purchasing power of the currency that requires shelter from political influence. the same degree of independence is not necessarily justified for other policy areas entrusted to central banks that lie beyond this mandate. 5 that is why i have repeatedly encouraged a functional approach to the concept of independence. 6 given my audience today, i will not discuss microprudential supervision or financial stability considerations. instead, i will focus on practical advice on how we should act in the current environment to best achieve our primary mandate and preserve independence – independence that remains necessary to ensure long - run price stability. in this vein, i believe there are three watchwords that should guide our actions : necessity, proportionality and probity – as several judicial reviews have confirmed. necessity to put these watchwords in context, let me recall the economic conditions at the time the ecb decided to implement unconventional measures. the euro area economy had undergone a double - dip recession. inflation outcomes flirted with deflation, and there were signs that

it has changed, and how this helps us to fulfil our mandate. reaching deeper into the monetary policy toolbox at the time of the last watchers ’ conference policy rates were already moving towards zero and we had reached a point where there was little room for manoeuvre with the standard instrument of monetary policy. we did eventually reach the effective lower bound later in the year by lowering incrementally the corridor of policy rates in june and september. when a central bank ’ s ability to steer the overnight rate is limited, it can still alter its monetary stance by means of directly influencing expectations. this is the context in which the ecb introduced forward guidance in 2013. our forward guidance was effective in flattening the bis central bankers ’ speeches money market curve and decoupling it from the curve in the united states. but its power becomes more limited, as the horizon over which the policy rate is intended to be at the effective lower bound extends beyond the forecast horizon. moreover, forward guidance by the ecb was not and could not, in paul krugman ’ s words, “ credibly promise to be irresponsible ”. what this means is that when the need for additional monetary stimulus arose, the ecb could no longer rely solely on acting in the money market, counting on transmission from the money market to other market segments, and from those to the real economy. like other major central banks, we therefore had to intervene directly in markets beyond the money market to have a more direct impact on the various channels of monetary policy transmission. and the way to do that was to purchase assets in those other markets. unconstrained monetary policy is key asset purchases are nothing new. they have been available and have been routinely used by central banks ever since these institutions came into existence, and that was long before the crisis started. incidentally, asset purchases have formed part of the ecb ’ s toolkit from the start : outright purchases of marketable instruments – which include government bonds – have always been listed in our statute as part of our monetary policy toolbox. and the legitimacy of using public sector bond purchases in the pursuit of medium - term price stability was unanimously confirmed by the governing council on 22 january. asset purchases are unconventional, but they are not unorthodox. they are in fact eminently orthodox. and they are in a central bank ’ s toolbox for a reason. independence is essential for the central bank ’ s credibility. but