We thank Otmar Issing for sending a recent “Memorandum on the ECB’s Monetary Policy” in response to CFS distributions. To be sure, the broad content of the message was covered in the financial press. However, meaningful nuances and details are only apparent with a full read. Hence, it may be of interest to CFS friends.

Signed by:
Hervé Hannoun, Former First Deputy Governor, Banque de France, Paris
Otmar Issing, Former Member of the ECB-Executive Board, Würzburg
Klaus Liebscher, Former Governor Oesterreichische Nationalbank, Vienna
Helmut Schlesinger, Former President Deutsche Bundesbank, Oberursel
Jürgen Stark, Former Member of the ECB-Executive Board, Frankfurt
Nout Wellink, Former Governor De Nederlandsche Bank, Amsterdam

Judgement shared by:
Jacques de Larosière, Former Governor Banque de France, Paris
Christian Noyer, Former Governor Banque deFrance, Paris

The full memorandum is available at
www.CenterforFinancialStability.org/research/Memorand.pdf

Wishing you the best into the Holiday Season and New Year!

CFS is delighted to share Robert Hormats and Yves-Andre Istel’s personal views on “Inequality Perils from Lower Rates.” They contend that:

• Low interest rate policies have become increasingly ineffective in fostering equitable growth.
• Negative effects of ultra‐low rates have been underestimated and are greater than generally thought, especially in increasing inequality.
• Therefore, a new mix of monetary/fiscal policies with a long-term structural focus is called for.

Yves and Bob have been thoughtful and engaged with CFS. Robert Hormats is the former Undersecretary of State for Economic Growth, Energy, and the Environment. Yves‐Andre Istel is a Senior Advisor to Rothschild & Co.

The full report is available at
www.CenterforFinancialStability.org/research/Hormats_Istel_121619.pdf

I had the pleasure of presenting “Monetary Policy Paradigm Shifts” as well as delivering conference summary remarks at a discussion hosted by the Shanghai Development Research Foundation (SDRF). The conference hosts beautifully structured the inquiry regarding monetary policy across three areas. Corresponding conclusions follow:

– “Modern Monetary Theory (MMT)” is neither modern nor monetary. It is theory. CFS has avoided discussing this topic; however, threads seem to be drifting into mainstream thinking. MMT has already been tried and performed poorly. Our assessment rests on studies and empirical evidence including Gail Makinen’s “Studies in Hyperinflation & Stabilization” published by CFS in 2014.

– “Fundamental changes in theory and policy today” are a function of three policy miscalculations since 2002. Monetary mistakes in the past have paved the way for more experiments and the surfacing of ideas such as MMT.

– “The effect on global markets and economies” is to skew incentives for savers and investors, distort market signals, and limit growth.

Although tricky, a slow and careful restoration of normalcy is essential. It is today’s critical constrained maximization problem.

View the remarks at www.centerforfinancialstability.org/research/ShanghaiDRF_111819.pdf

We are delighted to share Jacques de Larosière’s latest thinking on “The Monetary Policy Challenge.” Jacques thoughtfully evaluates the 2% inflation target so prevalent in advanced economy central banks today. His assessment is based on careful examination of structural determinants of inflation as well as distortions arising from equilibrium inflation consistently falling short of its target.

He chronicles unintended consequences from excessively accommodative monetary policy – which stretch from a weakening of the banking system, deterioration of pension institutions to the proliferation of zombie companies.

“Who could reasonably believe that lowering already so low rates would strengthen growth?”

He notes that it “is not too late to act” and offers concrete solutions.

The full report is available at www.CenterforFinancialStability.org/research/de_Larosiere_MPC_112519.pdf

Jacques de Larosière is the Chairman of the Strategic Committee of the French Treasury and Advisor to BNP Paribas. He previously served as the President of the European Bank for Reconstruction and Development (EBRD), Governor of the Banque de France, and Managing Director of the International Monetary Fund (IMF).