is monetary policy still regulatory policy today? speech at the university of lucerne, reichmuth & co lecture no 19 23. 09. 2022 | lucerne | joachim nagel 1 introduction 2 understanding regulatory policy 3 price stability is what matters 4 the maastricht regulatory framework 5 non - standard monetary policy measures 6 current environment in the fight against inflation 1 introduction dear thomas jordan, dear professor schaltegger, ladies and gentlemen, thank you very much for inviting me to this distinguished series of events. you are in an enviable position here in switzerland! not just because of the glorious scenery here at lake lucerne, but also because of the country ’ s inflation rate, which is admittedly also too high, at 3. 5 % in august. i would be happy, though, if we had that rate in the euro area right now, instead of 9. 1 %. yet my counterpart thomas jordan and i won ’ t be focusing, like we often do, on economic activity and price developments today. i am pleased to be speaking on a subject that is of a fundamental nature but is nonetheless topical and of practical relevance at the same time. 2 understanding regulatory policy is monetary policy still regulatory policy today? that is a question that is almost impossible to answer without delving first into what regulatory policy means and how it originated. but i will keep the backstory brief, i promise. in some quarters these days, regulatory policy has a bad reputation, is couched in negative terms, and is sometimes seen as “ typically german ”. [ 1 ] properly interpreted, though, it is neither a matter of harping on about principles nor dogmatic. i would like to show you that it offers important insights and serves as the backbone, so to speak, of a welfare - oriented economic policy – and that it also sets suitable guidelines for monetary policy. the theoretical roots of regulatory policy can be traced back to walter eucken and other co - founders of the freiburg school, who shaped german ordoliberalism. one hugely important aspect for ordoliberals is competition. but for them, it is not about a laissez - faire, unregulated interplay between market forces. rather, the rationale is to design a framework competitive order in such a way that decentralised decisions yield the best possible outcomes for the economy as a whole. for this to be possible, economic power, for example, also needs to be kept in check

because it means that, because hong kong's currency is linked to the us dollar, hong kong also becomes more competitive. this larger point may have been overlooked in all of the fuss about the somewhat less significant strengthening of the hong kong dollar against the us dollar. with regard to the mainland's currency, the political pressures from outside for an appreciation of the renminbi exchange rate have been prompted by the considerable attention that is being given in the us to the bilateral trade imbalance between the mainland and the united states. the arguments for appreciation are that, from the us perspective, chinese exports are undervalued and therefore unfairly competitive, and, from the chinese perspective, the substantial capital inflow into the mainland might carry long - term risks. leaving aside the arguments about trade, let us look a little more closely at the question of capital inflow and how to manage it. first, to put things in perspective, it should be noted that the mainland's current account surplus is really very small by international standards perhaps something around one per cent of gdp in the first half of 2003. this is much lower than the corresponding figures for many other economies. nevertheless, it is true that there has been substantial capital inflow into the mainland, leading to a very rapid accumulation of foreign reserves. the mainland authorities are well aware of the risks of this, in terms, for example, of an asset price bubble that could be quite destabilising to the financial system when it burst. they have, in fact, made quite intense efforts to deal with the inflow through a number of strategies. under the mainland's present exchange rate system, the accumulation of foreign reserves is matched by an increase in the renminbi monetary base, which needs to be sterilised if the undesirable consequences of credit expansion are to be contained. the people's bank of china has been carrying out sterilisation quite actively both through the recently introduced programme of issuing central bank bills and through reducing lending to government and financial institutions. there is scope for securitisation of these loans to produce more financial instruments for money market operations. another tool available to the authorities is to change the reserve requirement for banks, and indeed this requirement was raised in august from six per cent to seven per cent. further options include making changes to interest rates to discourage further capital inflow ( though obviously this may have undesirable effects on the asset markets ) and opening up relief valves in the capital