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Monday, March 2

2nd Mar - Random thoughts: ECB

I often start writing an article, and something else comes up, or space is limited, and I never publish the draft. Here are couple of such texts:

The ECB, its mandate and unconventional monetary policy
While the ECB is bound by the treaties and is not allowed to finance member states directly, it could take the "ensuring proper transmission of monetary policy, buying in the secondary markets"-route. It has done this with SMP. It can go off-balance-sheet, Enron-style, and buy bonds issued by the European Stability Mechanism or the European Investment Bank, which could funnel money to governments or alternatively finance infrastructure projects directly and bypass the governments. I doubt much good would follow from another mammoth EU-project. The track record of Brussels is appalling.

But as Draghi hinted, much like Bernanke has previously, if fiscal policy is tight, structures are inelastic and a common budget to alleviate asymmetrical shocks is missing, monetary policy becomes a blunt weapon – though still effective, it requires more force, which could have unwanted consequences.

Could even more dovish and unconventional monetary policy be supported with macro-prudential policies? Experiences with shadow banks, self-regulation and too-big-to-fails suggest that it would probably not work

I am siding with the NGDP-targeting crowd and market monetarists here. The easiest thing to do would be to end the 2%-target. It is not listed in the treaties, it is only a result of a consensus of the executive board. If they voted and agreed to a target of 4% with caveats, it would become reality.