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A New Two-Pillar Strategy for the ECB

Author

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  • Paul De Grauwe
  • Daniel Gros

Abstract

The ECB has been arguing in the past that since there is no trade-off between price stability and financial stability, the pursuit of price stability is the best a central bank can do to also maintain financial stability. We argue that there is a potential trade-off between price stability and financial stability. In order to make this trade-off less constraining we propose that the two-pillar strategy of the ECB should be reformed. In this new two-pillar strategy, the ECB should pursue two objectives, i.e. price stability and financial stability. In this new strategy the interest rate should be used to achieve the inflation objective, while other instruments (minimum reserve requirements and macro prudential control) should be used to achieve financial stability.

Suggested Citation

  • Paul De Grauwe & Daniel Gros, 2009. "A New Two-Pillar Strategy for the ECB," CESifo Working Paper Series 2818, CESifo.
    • Handle: RePEc:ces:ceswps:_2818
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    References listed on IDEAS

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    More about this item

    Keywords

    inflation targeting; financial stability; two pillar strategy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance

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