John Muellbauer's picture
Affiliation: 
Nuffield College, University of Oxford
Credentials: 
Professor of Economics

Voting history

The Future of Central Bank Independence

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Question 3: More generally, do you agree that it is desirable to maintain central bank independence? Again focus on the near future, say next 48 months.

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Answer:
Agree
Confidence level:
Very confident
Comment:
I agree for reasons broadly on the grounds set out by Barro and Gordon. Given the deep problems of the Eurozone, with populist pressures for a break-up increasing, subjecting the ECB to even greater pressures from particular governments, is unlikely to lead to good outcomes. That said, better co-ordination between the most powerful government – Germany, the European Commission and the ECB to try to defuse these break-up pressures will be needed. A strong ECB voice that reflects the broader welfare of the countries in the monetary union need not detract from its independence.

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Question 2: Do you agree that the traditional argument that less central bank independence leads to higher inflation will (still) be relevant over the next 48 months in Western economies?

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Answer:
Disagree
Confidence level:
Confident
Comment:
Given the ECB’s limited mandate, which is unfortunately unlikely to change, I do not see much change in independence of the ECB. Assuming policy remains accommodative in the new international environment, inflation should rise towards the target. However, there are different counterfactuals, and the answer would then depend very much on the nature of the reduction in central bank independence. For example, if the ban on monetary finance of the fiscal authorities were removed, this might change the long term inflation outlook. But if an independent ECB remained the guardian of when such monetary finance were offered, I see little reason why worries about inflation should increase.

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Question 1: Do you agree that central bank independence in the Eurozone and the UK will decline over the next 48 months?

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Answer:
Disagree
Confidence level:
Confident
Comment:
The election of Donald Trump and the dramatic shift in US fiscal policy expected in 2017 have changed the situation. ECB monetary policy had become largely ineffective (except for some periphery economies) as argued in http://voxeu.org/article/helicopter-money-and-fiscal-rules. The exchange rate channel and the US aggregate demand-spill-over channel should boost growth in Europe, though with some offset from higher commodity prices. However, inflation will rise. The steeper yield curve should help bank profitability. This removes two of the problems Eurozone monetary policy had faced. Central bank ineffectiveness in meeting its inflation target (or indeed in supporting aggregate demand) does not destroy central bank independence. After all, the ECB could (quietly) admit to the national governments that it had done what it could, given its mandate, and that it was now their turn to step up to the plate. However, the new international environment does reduce its embarrassment.

German Council of Economic Experts' view of ECB policy

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Question 2: Do you agree that the ECB's monetary policy masks structural problems of member states?

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Answer:
Strongly disagree
Confidence level:
Very confident
Comment:
the structural problems are all too obvious: the huge gap in competitiveness between Germany on the one hand and Italy, Portugal and France on the other; and the lack of structural reforms to address this issue, particularly in Italy. It is true that ECB QE has pushed the spread of Italian sovereign bonds a little below what economic fundamentals would suggest. But there is not much evidence that high values of these spreads in the past led to systematic reforms in Italy. as far as Spain, Portugal and Ireland are concerned, ECB policies in recent years have helped those economies grow, given high private debt levels, and have reduced imbalances in the EZ as far as those countries are concerned. The German Expert Council's endorsement of extremely counter-productive fiscal policies which are holding back growth in Europe is a problem. At the very least, they should be urging major fiscal expansion in Germany. The negative 'forward guidance' of current fiscal policies is a huge brake on economic expansion, see http://voxeu.org/article/helicopter-money-and-fiscal-rules

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Question 1: Do you agree that exceptionally loose monetary policy by the European Central Bank is no longer appropriate?

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Answer:
Strongly Agree
Confidence level:
Very confident
Comment:
current policies are stimulating growth in high private debt countries such as Ireland and Spain, but may even be counter-productive in core EZ countries like Germany, France and Italy. In Germany and France, higher house prices contract consumer spending (given income etc): home equity withdrawal is expensive or impossible so the US-type channel which also operated in Ireland and (to a lesser extent) in Spain is missing. Prospective first time buyers need to save more for the large cash deposit needed to get mortgage. Renters worry about higher housing rents in future and are more cautious. The mechanism is explained in: “Credit, housing collateral and consumption in the UK, U.S., and Japan”, with Janine Aron, John Duca, Keiko Murata and Anthony Murphy, Review of Income and Wealth, 58(3), 397–423, 2012. France (Chauvin and Muellbauer, 2013), Germany (Geiger, Muellbauer & Rupprecht, ECB wp, 2016) In Germany, France and Italy, savers’ liquid assets greatly outweigh household debts: lower real returns therefore reduce aggregate household spending. Low rates affect not only the interest income and hence consumption of those already retired, but if expected to continue, should raise the saving rate of those saving for retirement. Low returns imply more has to be put aside from current income to achieve a given retirement income. Other reasons why conventional Euro Zone QE is not working include the following: 1) defined benefit pensions are hugely in deficit using lower discount rates, so companies need to put aside profits, try to reduce benefits or raise contributions. 2) Higher house prices are socially divisive: mainly the affluent or their children can overcome down-payment constraints. Overvaluation of house prices raises stability risks for the future. 3) Negative rates hurt bank profits and bank equity and reduce credit flows – hence the ECB's TLTRO-2 subsidy wheeze but this was more of a sticking plaster than a cure. 4) Long-term insurers’ business model is under threat and if people lose confidence in these saving products they may increase precautionary saving. 5) Retaliation by other central banks, in current circumstances, weakens QE’s beggar-thy-neighbour exchange rate stimulus. So, to the extent that current ECB policies lead to the perpetuation of negative real rates, they are counter-productive. If the ECB were permitted to engage in monetary finance of the fiscal authorities or in direct 'helicopter drops', monetary policy would be far more effective.