“The post COVID-19 world could be different in a number of aspects with economies likely facing new structural changes while changes already underway may accelerate or reverse” - Governor Gabriel Makhlouf

• Evolving trends in globalisation and digitalisation will affect the transmission of monetary policy across the euro area.
• Monetary policy makers need to understand the nature of any structural shifts underway so that they continue to deliver on their mandate.
• These issues will form part of the ECB’s strategy review and anyone interested is encouraged to submit their views via the ECB’s website by the end of October.

Speaking today at a webinar hosted by Institute of International and European Affairs, Governor Gabriel Makhlouf spoke about Covid-19 and the future of monetary policy.

The Governor spoke about the ongoing review of the ECB’s monetary policy strategy, which will consider how the ECB can continue to achieve its objective in the current environment.  He said, “In times of calm and times of crisis, the mandate of the ECB Governing Council is always to maintain price stability. To fulfil this mandate, the monetary policy measures of the ECB Governing Council must transmit smoothly across the euro area.”

He pointed to the legacy of structural change left by the pandemic, noting two important and changing areas: globalisation and digitalisation which “will have implications for the way we live, work, consume and communicate and, therefore, the effective transmission of monetary policy across the euro area”   

He highlighted other factors that impede the transmission of monetary policy such as “risk aversion across national lines, an incomplete banking union and the absence of fully integrated financial, capital and credit markets all of which have been thrown into sharp relief as a result of the pandemic”.

Governor Makhlouf acknowledged noted that “monetary policy makers need to understand the nature of any structural shifts underway in the economy (as well as to the prevailing macroeconomic and institutional framework) so that they continue to deliver on their mandate”. He said that these issues will form part of the ECB’s strategy review and anyone interested is encouraged to submit their views via the ECB’s website by the end of October.

The Central Bank has also, today, published an Economic Letter “COVID-19: Monetary policy in times of crisis (PDF 323.45KB)”.  This Letter outlines the scope for monetary policy to react to the current unprecedented crisis, in the light of the extensive fiscal policy measures introduced.  The paper explores the interactions between monetary and fiscal policies and the consequent implications for sovereign debt sustainability.

The key conclusion is that while monetary policy plays a vital role in supporting fiscal policies in the current crisis, there are important legal, practical and economic issues to consider when calibrating an effective response. The Letter argues that monetary and fiscal policies can support the economy and reinforce each other in fostering a sustainable recovery but neither are unbounded so there is no substitute for carefully calibrated and considered policymaking.

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View the series of Economic Letters.