Sabine Lautenschläger: How innovative should central banks be? Keynote speech by Ms Sabine Lautenschläger, Member of the Executive Board of the European Central Bank, at the Wirtschaftsgipfel 2014 “Wirtschaft neu denken – die Kraft der Innovation”, organised by Süddeutsche Zeitung, Berlin, 29 November 2014. *  *  *  Tradition and innovation in monetary policy More than six years after the start of the global financial crisis, monetary policy in the euro area still faces major challenges: Monetary policy, the ECB, faces a challenge – perhaps more than ever before. It faces a challenge because inflation rates are too low. At 0.4% for the whole euro area, the inflation rate is well below our target of nearly 2%. The prospects for economic growth and further price developments in the medium term are subdued. Monetary growth and lending are weak. Geopolitical risks are adding to the uncertainties which are causing investor appetite to continue to fall. Expectations of the ECB are high, from markets and from politicians. Every month people give us good advice, often referring to actions taken by other central banks. And they do so despite the fact that our monetary policy decisions from June and September haven’t yet been able to fully take effect. So what else can a central bank do in the current situation? How innovative may central banks be?
On the other hand, financial globalisation may have reduced the natural rate of interest by increasing global demand for safe assets. With regard to all these factors, it is worth considering whether globalisation affects inflation via structural changes in markets, pricing behaviour or mark-ups. Its impact is ambiguous. On the one hand, as discussed above, trade and participation in global value chains could increase competition and generate strategic complementarities. On the other hand, it has been argued that the interplay between globalisation, digitalisation and the increase in importance of intangible assets may give rise to high-margin firms with considerable market power, lower pass-through of costs to prices 21 and implications for inflation volatility, the transmission of monetary policy and the natural interest rate. 16  Fo rbes, K. (2019). “Inflatio n dynamics: dead, do rmant o r determined abro ad? ”. Bro o kings Papers o n Eco nomic Activity, Fall. 17  In highly interlinked financial markets, lo ng-term interest rates and risky asset prices are expected to be increasingly affected by glo bal facto rs. 18  Geo rgiadis, G. and A. Mehl (2015). “Financial glo balisation and monetary po licy effectiveness”. Jo urnal o f International Eco no mics, 103, pp. 200-212. 19  Fo r example, as the exchange rate depreciates in respo nse to mo netary po licy lo osening, imported inputs used in the pro ductio n o f expo rts beco me mo re expensive, inducing expo rters to raise their ho me currency price.