DP15320 The German Federal Constitutional Court Ruling and the European Central Bank's Strategy

Author(s): Lars P Feld, Volker Wieland
Publication Date: September 2020
Keyword(s): central bank independence, Monetary institutions, monetary law, Monetary policy strategy, Policy Rules, Proportionality, Quantitative easing
JEL(s): E52, E58, K10
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15320

The ruling of the German Federal Constitutional Court and its call for conducting and communicating proportionality assessments regarding monetary policy have been the subject of some controversy. However, it can also be understood as a way to strengthen the de-facto independence of the European Central Bank. This paper shows how a regular proportionality check could be integrated in the ECB's strategy that is currently undergoing a systematic review. In particular, it proposes to include quantitative benchmarks for policy rates and the central bank balance sheet. Deviations from such benchmarks can have benefits in terms of the intended path for inflation while involving costs in terms of risks and side effects that need to be balanced. Practical applications to the euro area are provided.