speech monetary policy : lifting the veil of effectiveness! " # $ speech by benoit cœure, member of the executive board of the ecb, at the ecb colloquium on “ monetary policy : the challenges ahead ” held in his honour frankfurt am main, 18 december 2019 in a few days, i will leave the ecb after eight years of unprecedented challenges for the integrity and stability of our single currency, the euro. [ 1 ] throughout these years, the ecb ’ s resolve and steadiness have been the cornerstone of europe ’ s crisis response and economic recovery. i feel grateful and humbled to have been given a chance to be part of this effort. i would like to thank former president mario draghi, my executive board and governing council colleagues, and the staff of this great institution for their friendship and trust. and i would like to wish isabel schnabel and fabio panetta the best of luck. the starting point for my remarks this morning is people ’ s sense of frustration and their criticism of central banks for failing to deliver inflation consistent with their aim. this criticism has taken different forms in society. professional observers and financial market participants often criticise the inadequate size of our actions and question the effectiveness of our instruments. private citizens criticise the type of instruments we use – in particular asset purchases and negative interest rates – and the side effects they associate with them. the use of these instruments has caused persistent mistrust. while three in four euro area citizens think the single currency is good for the european union and two in three think it is good for their country, less than half of citizens trust the ecb. in my remarks this morning, i would like to make two points that speak to these concerns. the first is that there is no contradiction between inflation being low and monetary policy being effective. central banks have achieved great success in recent years. their achievements, however, and this will be my second point, are of little avail if the public does not recognise or understand them. i will argue that this “ veil of effectiveness ” creates enormous challenges for the credibility and acceptance of central banks – challenges which can only be overcome by revisiting the appropriateness of four key components at the heart of our current monetary policy frameworks : how we define price stability, how we measure inflation, how we evaluate the credibility of our intentions and the range of counterparts through which we implement monetary policy. low inflation and the effectiveness of monetary policy my first point –

monetary policy is needed more than ever. the governing council of the ecb has said that we are ready to act if new downside risks materialise. so, the policy is necessary to fulfil our mandate. but what monetary tools do you have at your disposal if you do need to act? we have used various tools up until now : the forward guidance, through which we steer monetary policy expectations ; interest rates, which are very low and which we have said we would be ready to lower further still, if necessary – and i always stress “ if necessary ” ; and the reinvestment of our securities portfolio, which ensures that the ecb has a very significant presence in the markets. and theoretically, we could also resume making net asset purchases, again if warranted by the circumstances. but what are the circumstances? there are lots of questions about the circumstances. is it the growth rate? the rate of inflation? a lack of inflation? i used something of a dirty word before when i referred to deflation. i apologise for that, but at the same time, isn ’ t it a kind of sword of damocles hanging over you? there is no deflation in the euro area ; we are not talking about a risk of deflation. inflation is well above zero. the risk is that a series of negative shocks might move us further away from our objective of 2 % – that is what we are looking at, what we are trying to understand, particularly in the light of the global economy. what some people are worried about – and we talk about a lot here – is the possibility of a financial crisis, even a financial explosion, whether in the short or medium term i don ’ t know. maybe you will give us a time scale. is there a risk of the bubble bursting or a liquidity crisis on the horizon? there are always risks in the financial sector, and as central bankers we are paid to worry about them. the role of central bankers and regulators is to worry about risks. our first conclusion is that we have to maintain and protect the system of financial regulation that has been built since the great financial crisis, since 2007 – 08. as time goes by, people are tending to forget this crisis, and the temptation returns – particularly under the pressure of different lobby groups – to relax financial regulation. this temptation must be resisted, both in terms of banking and finance more generally. then we have to identify the new risks. i see two