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Rethinking central banking

This report lays out a framework for rethink­ing central banking in light of lessons learned in the lead-up to and aftermath of the global financial crisis. By the early 2000s, a growing number of central banks, in advanced countries and emerging mar­kets alike, had converged on a policy framework, flexible inflation targeting, which seemed capable […]

By: , , , , , , , , , , , , , , and Date: September 13, 2011 Topic: European Macroeconomics & Governance

This report lays out a framework for rethink­ing central banking in light of lessons learned in the lead-up to and aftermath of the global financial crisis.

By the early 2000s, a growing number of central banks, in advanced countries and emerging mar­kets alike, had converged on a policy framework, flexible inflation targeting, which seemed capable of achieving price stability and delivering mac­roeconomic stability at the national and interna­tional levels. This framework had many practical achievements, including bringing price stability to many emerging markets. Now, however, there is growing recognition that the conventional ap­proach to central banking needs to be rethought.The relationship between price stability and the broader goals of macroeconomic and financial sta­bility clearly needs to be redefined. Moreover, the evolution of monetary and exchange rate regimes has resulted in incompatibilities among the poli­cies of some key countries. Central banks are also being pulled into new roles by the post-crisis envi­ronment, which features high levels of public and private debt in advanced economies and concerns about capital inflows and currency appreciation in emerging markets. While some aspects of these roles are not new, they are risky, as central bank actions can inflict collateral damage on domestic financial systems and have the potential of raising new domestic and international tensions.

The report analyzes these issues from academ­ic and practical policy-oriented perspectives. Drawing on this analysis, it recommends changes to the dominant framework guiding central bank­ing practice.

The first recommendation is that central banks should go beyond their traditional emphasis on low inflation to adopt an explicit goal of financial stability. Macroprudential tools should be used alongside monetary policy in pursuit of that ob­jective. Mechanisms should also be developed to encourage large-country central banks to inter­nalize the spillover effects of their policies. Spe­cifically, we call for the creation of an International Monetary Policy Committee composed of repre­sentatives of major central banks that will report regularly to world leaders on the aggregate conse­quences of individual central bank policies.

There is substantial pressure on central banks to acknowledge the importance of still other issues, such as the high costs of public debt management and the level of the exchange rate. Central banks are more likely to safeguard their independence and credibility by acknowledging and explicitly addressing the tensions between inflation target­ing and competing objectives than by denying such linkages and proceeding with business as usual. Central banks should make clear that mon­etary policy is only one part of the policy response and cannot be effective unless other policies—fis­cal and structural policies, financial sector regula­tion—work in tandem.

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Blog Post

An uncompromising budget

Apart from decisive European Central Bank measures, the EU-wide response to the COVID crisis had been rather weak until the Commission put on the table a drastically new proposal: the creation of a new recovery facility, ‘Next Generation EU’, that would borrow money in the name of the EU to finance EU-wide expenditures. The changes to the proposed standard seven-year budget that primarily focuses on long-term structural issues are however generally small, and funding reductions are compensated by new funds from the recovery instrument, suggesting that an opportunity is missed to reform the EU budget.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: May 29, 2020
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Past Event

Past Event

The new EU budget: from COVID-19 remedies to green goals

Can we rescue the economy after COVID-19 and reach the environmental goals?

Speakers: Zsolt Darvas, Maria Demertzis, Karolina Ekholm and Miguel Otero-Iglesias Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 29, 2020
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Past Event

Past Event

The Covid Crisis and European State Aid Rules: The Case for a Rational Approach

Considering a new approach to find the way out of the Great Financial Crisis.

Topic: European Macroeconomics & Governance Date: May 27, 2020
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Upcoming Event

Jun
10
14:30

Insuring for pandemic-related losses, in this crisis and future ones

What remedies and lessons for the insurance sector in the time of pandemic?

Speakers: Frederic de Courtois and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
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External Publication

European Parliament

A Just Transition Fund – How the EU budget can help with the transition

On 14 January 2020, the European Commission published its proposal for a Just Transition Mechanism, intended to provide support to territories facing serious socioeconomic challenges related to the transition towards climate neutrality. This report provides a comprehensive analysis of how the EU can best ensure a ‘just transition’ in all its territories and for all its citizens with the tools at its disposal. It provides an overview and a critical assessment of the Commission's proposal, and suggests possible amendments based on best practices from other just-transition initiatives.

By: Aliénor Cameron, Grégory Claeys, Catarina Midões and Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance, European Parliament Date: May 26, 2020
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Opinion

An equity fund for a zombie-free and EU-wide recovery

Four guiding principles can help ensure a well designed EU equity fund.

By: Julia Anderson, Simone Tagliapietra and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: May 26, 2020
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Book/Special report

Bruegel annual report 2019

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Date: May 20, 2020
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Blog Post

The European Union’s SURE plan to safeguard employment: a small step forward

The new EU instrument to mitigate unemployment risks during an emergency (SURE) is too modest to have a significant impact the COVID-19 crisis beyond being a first step in the overall recovery plan.

By: Grégory Claeys Topic: European Macroeconomics & Governance Date: May 20, 2020
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Policy Contribution

European Parliament

The European Central Bank in the COVID-19 crisis: whatever it takes, within its mandate

To keep the euro-area economy afloat, the European Central Bank has put in place a large number of measures since the beginning of the COVID-19 crisis. This response has triggered fears of a future increase in inflation. However, the ECB's new measures and the resulting increase in the size of its balance sheet, even if it were to be permanent, should not restrict its ability to achieve its price-stability mandate, within its legal obligations.

By: Grégory Claeys Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: May 20, 2020
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Opinion

How will COVID-19 impact Brexit? The collision of two giant policy imperatives

The United Kingdom left the European Union on Jan. 31, 2020. Now, the U.K. must decide whether and how to extend the transition period, currently set to expire at the end of 2020.

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: May 19, 2020
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Podcast

Podcast

Rebooting Europe: a framework for post COVID-19 economic recovery

COVID-19 has triggered a severe recession and policymakers in European Union countries are providing generous, largely indiscriminate, support to companies. As the recession gets deeper, a more comprehensive strategy is needed. This should be based on four principles: viability of supported entities, fairness, achieving societal goals, and giving society a share in future profits. The effort should be structured around equity and recovery funds with borrowing at EU level.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: May 15, 2020
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Past Event

Past Event

Rationale and limitations of SURE

This event will discuss SURE, a new European Union instrument for temporary ‘Support to mitigate Unemployment Risks in an Emergency'

Speakers: Roel Beetsma, Elena Carletti, Grégory Claeys and Gilles Mourre Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 15, 2020
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