De Nederlandsche Bank published a speech by Klaas Knot for the inaugural Klaas Knot Lecture at the University of Groningen, reflecting on monetary policy-making during his nearly 14 years as a member of the European Central Bank’s Governing Council. He argued that, under “fundamental” or Knightian uncertainty, central banks should design policy choices that are robust across outcomes and be prepared to change course quickly when circumstances shift. Knot used the euro area sovereign debt crisis, the low-inflation period and the post-pandemic inflation surge to illustrate these lessons. He pointed to shortcomings in the original Economic and Monetary Union architecture and described how the European Stability Mechanism and the ECB’s Outright Monetary Transactions programme helped stabilise markets, noting that OMT’s announcement effect proved sufficient and it has never been used. He reviewed the effective lower bound and the resulting reliance on unconventional tools, including forward guidance, negative rates, longer-term bank lending operations and the 2015 asset purchase programme, arguing that quantitative easing can help counter deflation risks but is less suited to “fine-tuning” inflation and carries side effects. On the pandemic response, he cited an initial EUR 120 billion expansion of purchases followed by the Pandemic Emergency Purchase Programme to address transmission risks, alongside fiscal measures including activation of the Stability and Growth Pact’s general escape clause and the NextGenerationEU programme. For the tightening cycle that followed the inflation spike, he described the July 2022 Transmission Protection Instrument as a way to contain unwarranted spread dynamics to preserve policy transmission, adding that it, like OMT, has not been used. Looking ahead, Knot argued against discarding unconventional instruments, while cautioning that forward guidance should avoid overly specific, unconditional commitments and that large-scale asset purchases should be subject to proportionality and ongoing cost-benefit assessment, with a preference for using QE forcefully when needed but not overly persistently. He also highlighted fiscal space and the practical difficulty of euro area-wide fiscal coordination, noting that the new European fiscal framework’s effectiveness will depend on compliance and enforcement.
De Nederlandsche Bank 2025-01-31
De Nederlandsche Bank’s Klaas Knot urges robust monetary policy design under fundamental uncertainty in reflections on 14 years on the ECB Governing Council
De Nederlandsche Bank published a speech by Klaas Knot reflecting on his nearly 14 years in the ECB’s Governing Council, emphasizing robust policy design under uncertainty. Knot discussed the euro area sovereign debt crisis, low-inflation period, and post-pandemic inflation surge, highlighting the European Stability Mechanism and ECB’s Outright Monetary Transactions programme. He advocated cautious use of unconventional tools like quantitative easing and forward guidance, stressing proportionality and cost-benefit assessment, while noting challenges in euro area fiscal coordination.