Euro: Monetary Reach Has Its Limits – Commerzbank

A greater international role for the euro could reinforce monetary policy transmission by broadening its effects overseas and limiting exchange rate pass-through, according to an argument from ECB Chief Economist Lane examined by Commerzbank’s Thu Lan Nguyen. Nguyen warns, however, that effective monetary policy cannot secure price stability on its own: structural, fiscal and external factors also influence inflation.

Euro’s global reach could strengthen policy transmission

"Ahead of next week’s meetings, ECB and Fed officials are, inevitably, keeping a low profile. That does not mean, however, that they have nothing interesting to say beyond the short- to medium-term monetary policy outlook. Yesterday, for example, ECB Chief Economist Lane discussed the benefits of a growing international role for the euro."

"More specifically, he argued that broader international use of the single currency could help the ECB fulfill its price stability mandate. Its monetary policy would then influence not only domestic demand but, increasingly, demand abroad as well, thereby amplifying its impact."

"Moreover, greater use of the euro as an invoicing currency could reduce the exchange rate pass-through on inflation and make the euro area less vulnerable to external shocks."

"The bottom line should be clear: More effective monetary policy in theory is not enough on its own to safeguard a central bank’s credibility in delivering price stability."

"Inflation is shaped by numerous other factors, including the structure of the economy, fiscal policy and external shocks."

"A stronger role for the euro in the global financial system may improve monetary policy transmission, but it is certainly no panacea for price stability or monetary policy credibility."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)