EMU Reform and the New Normal for Monetary Policy: Challenges and Perspectives

This paper assesses the scope for monetary policy in the euro area as it returns to normal financial conditions without support from easy money but with a financial stability objective (whether legislated or not). We find that both financial stability and traditional monetary objectives can be achieved without one limiting the achievement of the other because, in the new normal, the ECB can use new policy tools derived from the regulatory metrics required under the post-crisis macro-prudential framework. Whether they offer large improvements depends on how a clear mandate for financial stability is defined and whether coordination with traditional monetary or fiscal policies is needed. Risks to monetary policy in the new normal are mainly external and depend on the transmission of monetary policies not aligned with ECB policies. This document was provided by Policy Department A at the request of the Economic and Monetary Affairs Committee.