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Vitor Constâncio Profile picture
@VMRConstancio
Sep 9, 2020 • 6 tweets • 2 min read • Read on X
I said that CBs, like the ECB, can still wait some time before year-end to take new decisions and assess data developments. The recessionary shock and the decrease in oil prices weakened inflation, and monetary policy cannot overcome that in the short-term./1
The recovery is continuing, w/ the latest composite PMI at 52, indicating expansion. Fiscal policy is now more effective than Mon.Pol. to help growth. The ECB has an expansionary policy w/ negative rates & still increasing balance-sheet whereas the FEB stopped temporarily /2
The FED decided on a new regime of averaging inflation-targeting(AIT) that other major CBs are likely to follow. However, the FED has not yet acted on it. AIT commits the CB to take measures to increase inflation above target after years of being below. Will the FED move now? /3
The case for a policy move to contain the exchange rate appreciation is overdone. Monitoring the exchange rate is necessary, but the level around 1.18 to USD will not hamper the recovery. The IMF considers the euro in effective terms slightly undervalued imf.org/en/Publication…
Additionally, the CA is in surplus, and the exchange rate pass-through (ERPT) is quite weak: “..the ERPT to import prices in the euro area has been weak during the very recent period and close to zero to consumer prices (ECB 2017 w.p. No 2003)” ecb.europa.eu/pub/pdf/scpwps… /5
There are many reasons for the exchange rate lower effectiveness: price to market for competition purposes, supply-chain enlarged role, increasing invoicing in euro, shifts in sectoral export composition (see VC macroviews.net/wp/2018/10/25/… p. 16) 6/6

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More from @VMRConstancio

Vitor Constâncio Profile picture
Aug 26
In Jackson Hole, Chair Powell announced the start of a new cycle of rate cuts, putting an end to the inflation episode since 2021. It is, therefore, time to draw some lessons for economics, economists and monetary policy. 1/
First, inflation has no mono-cause explanation or model and not all episodes are equal. Particularly, models that mostly rely on the role of domestic economic slack and weak labour market are not suitable. Only open economy models are meaningful. 2/
Institutions matter. The 1970s inflation process could not be repeated because wage determination became totally different with the declining power of trade unions and collective bargaining (slide). Only Firm´s expectations matter for price expectations. No price-wage spirals 3/ Image
Read 12 tweets
Vitor Constâncio Profile picture
May 8
Macron dramatic: Europe is mortal and may die. He said it in his recent speech and repeated it in an interview with The Economist. The warning was matched by his lofty rhetoric in identifying the challenges and their solutions (military, industrial, environmental, political) 1/
His vision is very ambitious. He demands a European Defence with nuclear weapons, European industrial champions duly supported and protected, a true Green Deal, Energy safety, a Union Council of Homeland Security, a dual mandate for the ECB, the doubling of the EU budget… 2/
The recent report on the Single Market by Letta is also very ambitious, as certainly it will also happen with the Draghi June report on European competitiveness. Macron quantifies the financing in between € 650 to 1000 bn of additional annual expenditures, public and private 3/
Read 5 tweets
Vitor Constâncio Profile picture
Feb 21
The ECB announced that it will take a decision in March on the very important issue regarding the future operational framework to use a policy rate to influence the interbank overnight rate. The decision is also linked to the issue of the future size of the balance sheet. 1/11
I fear a mistake may be made if the decision departs from a “floor system” that has been quite approximately followed by the ECB since 2088 and then in a full-fledged way since 2015. Instead of the volatility of the Eonia until 2008, the floor system worked perfectly (slide) 2/ Image
A few decision-makers seem to consider that market rate volatility around the policy rate are a good thing. Markets like volatility for profitability in other contexts. In this case, the deviations only show that the CB is not able to attain its targeted market rate 3/
Read 11 tweets
Vitor Constâncio Profile picture
Jul 24, 2023
Disinflation momentum in the Euro Area has broadened. That will be reflected in the future wage/price decisions, contributing to a future decrease in core inflation that, wrongly, has been taken as the proxy target of monetary policy 1/ Image
The DB index of the ECB’s Governing Council indicates an increase in divergence of views about the future, according to public statements of its members 2/ Image
The PMI composite (manufacturing and services) for Germany turned more negative, indicating a more visible negative growth in the biggest EA economy 3/ Image
Read 5 tweets
Vitor Constâncio Profile picture
Jul 6, 2023
A missed debate in the ECB’s Sintra Forum was about the desirable size of the CB’s balance sheet. The paper dealing with the issue missed the point by using as the sole criterium the maximising of the reserves supply net convenience value 1/ecb.europa.eu/pub/conference…
The convenience value is the price premium that very liquid and safe assets (e.g. AAA sovereign bonds) can get in the market. The paper took the view that the balance-sheet size doesn’t matter to MP when the policy rates are above the effective lower bound. This view is wrong 2/
As it’s known, conventional monetary policy targets the interbank market rate for 24h. In a corridor system, the CBs have a lending facility rate (the discount window in the US) and a lower deposit facility rate (the IOR in the US), and the policy should be in the middle 4/
Read 14 tweets
Vitor Constâncio Profile picture
Jun 28, 2023
The Sintra ECB Forum started this year with an excellent paper, presented by Silvana Tenreyro, on “Monetary policy in the face of supply shocks:the role of inflation expectations”. Theory and mainstream models give an exaggerated role to expectations in the inflation process 1/
Woodford (2003) wrote that monetary policy is mostly about managing expectations and that hardly anything else matters. The models made expectations endogenous with rational expectations but the mechanisms that would operate in reality were never really well explained 2/
The use of the Euler equation in the main models, implied that higher (lower) inflation expectations would reduce (increase) real interest rates and so intertemporal optimization would entail frontloading (postponing) of consumer expenditures. 3/
Read 7 tweets

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