Making sure that policies and tools are fully functional, rather than mere paper tigers

50^th OeNB Economics Conference and 60^th SUERF Anniversary Conference starts on May 22, 2023

OeNB Governor Robert Holzmann opens this year’s conference to discuss the robustness and resilience of monetary policymaking in uncertain times.

Addressing the audience of this year’s Economics Conference, OeNB Governor Robert Holzmann noted that the conference theme “Monetary policy in uncertain times: Towards robustness and resilience” could not be more topical given the significant turmoil on financial markets earlier this spring. The OeNB Governor kicked off the conference by arguing for a clear and common understanding of the terms “resilience” and “robustness” in the context of policymaking. “Careful definitions and wordings can make a huge difference when it comes to communicating our policies,” Governor Holzmann said.

“I would call a policy robust if it continues to work well in the presence of shocks or under different conditions. In contrast, I think of resilient policies as policies that safely guide the system for which they were designed back to its pre-shock equilibrium,” Holzmann stated. Based on these definitions, conventional monetary policy proved neither sufficiently robust, nor sufficiently resilient during the last decade. The effective lower bound on nominal interest rates reduced the ability of conventional monetary policy to achieve its price stability goal and complicated the recovery of the euro area back to its pre-shock equilibrium.

In his statement, the OeNB Governor discussed the downsides of a potential trend toward over-emphasizing resilience at the expense of robustness in policymaking. In particular, Governor Holzmann stressed that “the successful return to a prior equilibrium point alone does not guarantee that the sources of instability or risk that characterized the pre-shock equilibrium are sufficiently resolved.” While unconventional monetary policies may have partly enhanced the resilience of the euro area, the OeNB Governor warned that “these policies do not address the underlying weaknesses that caused the predicament for our conventional tools in the first place.” Governor Holzmann invited participants to “openly discuss new remedies such as asymmetric reaction functions, makeup strategies, structural policies to raise the equilibrium real rate, r*, and relevant measures that create a genuine capital markets union.”

Given the events earlier this spring, the OeNB Governor also discussed the pitfalls of resilience in the context of financial stability policies. Holzmann pointed out that “well-intentioned policy responses to financial turmoil can be a hotbed for future financial stability risks,” in particular if they do not address the underlying vulnerability to shocks. When “push comes to shove,” policies that are both resilient and robust are needed. Policymakers should be able and willing to use the full arsenal of tools ranging from regulation and stress tests to orderly resolution. Governor Holzmann concluded his opening remarks with the words: “Reneging on such policies would only fuel moral hazard”.