Panicos Demetriades's picture
Affiliation: 
University of Leicester
Credentials: 
Professor of financial economics
Former Governor, Central Bank of Cyprus and ECB Governing Council member

Voting history

ECB Monetary Policy and Catch-up Inflation

Question 2: Which of the following policies is the most desirable to meet the ECBs objective to achieve its mandate of “price stability” as you understand this term.

Answer:
Inflation targeting
Confidence level:
Extremely confident
Comment:
For the reasons stated above an abandonment of inflation targeting by the ECB is likely to de anchor inflation expectations and could undermine the foundations of the monetary union - which we should not forget is a political project, a project for peace in Europe, and not an optimal currency union.

Question 1: To what extent do you agree with the following statement? “The European Central Bank should systematically allow for inflation to exceed its target to compensate for periods of below target inflation.”

Answer:
Strongly disagree
Confidence level:
Extremely confident
Comment:
This idea could undermine the very foundations of the monetary union, not least because it could lead to inflation expectations becoming de-anchored. If so, it could fuel further hostility against the ECB in Germany and a rise of the far right in future elections. Whatever the economic merits of this idea, they are detached from political realities. Average inflation targeting is likely to be perceived as abandonment of price stability by the ECB. The ECB has already been under fierce political attack in Germany for its accommodative monetary policy. Although these attacks are not fully justified - QE was very much needed to reduce deflation risk and this was vindicated in the European court - it is still true that it has indirectly helped governments finance fiscal deficits and reduced their borrowing costs, notwithstanding the fact that this was not the purpose of the exercise (they also financed the private sector, which is what saved the ECB case in court). Average inflation targeting, however defined, is too vague. Without specifying a target horizon it’s by definition vague, and is likely to de anchor inflation expectations in the short run. Even if a target horizon is specified, this is likely to be arbitrary and that can reduce central bank credibility, which, once again would de anchor inflation expectations. In fact, this may already be happening in the US - although the jury is still out on that experiment. It would, therefore, be premature and politically irresponsible for the ECB to follow the Fed on this occasion without waiting for evidence that would support such a move. In my honest opinion, such evidence is unlikely to be forthcoming. Very wise of the ECB Governing Council to steer clear of average inflation targeting at this juncture.

Monetary Policy and Inequality

Question 2: What role should inequality play in the monetary policy decisions (interest rate policy and quantitative easing)?

Answer:
No role
Confidence level:
Extremely confident
Comment:
If monetary policy includes inequality in its remit, that will make the mandate of the central bank muddled, which could de anchor inflation expectations. The fewer the objectives of monetary policy, the easier it is to achieve them and to maintain clarity and transparency of the policy process. In fact, if you are to expand the remit, why stop at inequality, you can also add the environment, jobs and much more besides, all of which would almost certainly interfere with delivering on price stability! That does not mean that central banks shouldn’t attempt to analyse any effects of their policies on inequality. They should understand all the unintended consequences of their policies.

Question 1: How large is the impact of monetary policy on the joint distribution of income and wealth?

Answer:
Small
Confidence level:
Very confident
Comment:
There’s no doubt that monetary policy has unintended consequences, however these are likely small, partly because they are working in opposite directions. For example, loose monetary policy may well increase e ployment opportunities which benefit the unemployed and the least well off. It at the same time raises asset prices, more so if it involves quantitative easing.

Central Bank Digital Currency for the UK

Question 2: What effect will the introduction of a CBDC have on UK banks?

Answer:
No or little effect
Confidence level:
Very confident
Comment:
For the reasons, alluded to above CBDC will not displace but complement financial intermediation and will not be a major source of competition for funds. CBDC could benefit banks, if they end up providing the infrastructure and clearing system of this new form of payment.

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