Monetary Policy at the Zero Lower Bound: The European Central Bank in the Realm of Politics

  • Abstract:

    This paper reviews how the ECB’s exceptional monetary accommodation to fight persistent low inflation during 2013-2018 may trigger political intervention and a populist backlash. First, the wide range of non-standard monetary stimulus measures taken after its key interest rates had reached the zero lower bound caused substantial allocative, financial and distributional side effects. These unintended consequences are politically highly controversial and raise serious accountability questions. Second, the extended period of far-reaching monetary easing spurred a strong output recovery while making over-indebted borrowers and leveraged investors vulnerable to higher interest rates and falling asset prices. This constellation could have created a political constituency which may be willing to revolt against a monetary exit. Third, the non-standard methods of providing monetary accommodation have become part of the new standard of monetary policymaking. However, the repeated application of these tools of financial repression is viewed as belonging to the domain of political control. These three political challenges to the ECB’s statutory independence can be interpreted as the endogenous outcome of the fiscalisation of monetary policy at the zero lower bound. As a solution, euro area governments could start managing the aggregate economic policy mix alongside and in dialogue with the independent ECB and give political backing to the ECB implementing a constrained set of exceptional measures that aim to preserve its monetary capacity at the zero lower bound.