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The Strength of the Euro ¨C Challenges for ECB Monetary Policy

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  • Ansgar Belke

Abstract

This paper comments on the main challenges stemming from the strong Euro for ECB monetary policy. For this purpose, it starts with a detailed analysis of the current macroeconomic background and the related statements by ECB President Mario Draghi during the three most recent press conferences at the event of the monthly ECB Governing Council meetings. It then deals with a couple of challenges relating to the question whether the ECB should gear its unconventional monetary policies towards the Euro exchange rate. Does exchange rate orientation of monetary policy represent a violation of the ECB¡¯s mandate? Searching for the exchange rate benchmark: what exactly is the equilibrium rate to target? Influencing the euro¡¯s real exchange rate through changes of the nominal rate: will markets be invited speculate about the ECB¡¯s ¡°Euro bottomline¡±? Don¡¯t devaluations through unconventional monetary policies prevent necessary structural adjustment ¨C because structural reforms more effective than devaluations? What are the driving forces behind the request for a Euro devaluation - one-sided political interests? How to cope with the ineffectiveness of devaluations to fight a business cycle trough, denoted by the so-called J-curve effect? In its final part, the paper dwells extensively on the potential effects of envisaged Quantitative Easing on current and expected interest rates in the Eurozone and thus finally via the asset portfolio channel also on the external value of the euro.

Suggested Citation

  • Ansgar Belke, 2015. "The Strength of the Euro ¨C Challenges for ECB Monetary Policy," Research in World Economy, Research in World Economy, Sciedu Press, vol. 6(1), pages 72-84, March.
    • Handle: RePEc:jfr:rwe111:v:6:y:2015:i:1:p:72-84
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    References listed on IDEAS

    as
    1. Reinhart, C. M., 2012. "The return of financial repression," Financial Stability Review, Banque de France, issue 16, pages 37-48, April.
    2. Ansgar Belke & Daniel Gros, 2002. "Designing EU–US Atlantic Monetary Relations: Exchange Rate Variability and Labour Markets," The World Economy, Wiley Blackwell, vol. 25(6), pages 789-813, June.
    3. Taylor, John B., 2013. "International monetary coordination and the great deviation," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 463-472.
    4. Ansgar Belke & Florian Verheyen, 2014. "The Low-Interest-Rate Environment, Global Liquidity Spillovers and Challenges for Monetary Policy Ahead," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 56(2), pages 313-334, June.
    5. Ansgar Belke & Bernhard Herz & Lukas Vogel, 2006. "Beyond Trade – Is Reform Effort Affected by the Exchange Rate Regime? A Panel Analysis for the World versus OECD Countries," Economie Internationale, CEPII research center, issue 107, pages 29-58.
    6. Ansgar Belke & Matthias Göcke & Martin Günther, 2013. "Exchange Rate Bands Of Inaction And Play-Hysteresis In German Exports—Sectoral Evidence For Some Oecd Destinations," Metroeconomica, Wiley Blackwell, vol. 64(1), pages 152-179, February.
    7. Ansgar Belke & Matthias Göcke, 2005. "Real Options Effects on Employment: Does Exchange Rate Uncertainty Matter for Aggregation?," German Economic Review, Verein für Socialpolitik, vol. 6(2), pages 185-203, May.
    8. Ansgar Belke & Bernhard Herz & Lukas Vogel, 2006. "Exchange Rate Regimes and Reforms: A Panel Analysis for the World versus OECD Countries," International Finance, Wiley Blackwell, vol. 9(3), pages 317-342, December.
    Full references (including those not matched with items on IDEAS)

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