Guardians of the euro like to keep lid on transparency

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Series Details Vol 7, No.10, 8.3.01, p12
Publication Date 08/03/2001
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Date: 08/03/01

THE European Central Bank likes to keep its transparency quiet.

Frankfurt's euro-guardians would hate to be accused of providing guidance on policy-making to the press, investors and political overseers. It might harm their image as inheritors of the German Bundesbank's hardman mantle.

So, when the bank published details of the model it uses to assess how variables such as interest-rate changes, currency volatility or oil-price shocks will affect the euro-zone economy and over what timescale, the news was kept to handful of MEPs and monetary economists.

"It's excellent news," says British Liberal MEP Christopher Huhne, a professional economist and now a member of the European Parliament's economic and monetary affairs committee, which monitors ECB policy-making. "This will help the committee understand how the ECB views developments in the euro area."

It has taken the bank's economists more than three years to build, test and refine the model - essentially a collection of assumptions expressed as mathematical equations - to a standard they trust enough to publish.

Since nothing like the creation of a single currency zone for 12 advanced states had ever happened before, they could not use precedent to judge how quickly policy changes would feed through into the real economy (the 'transmission mechanism').

Details of the model, published by ECB economists in a 29-page working paper, include two standard simulation exercises: the impact on the economy of an unexpected and permanent increase in government spending by 1% of gross domestic product, and a sudden and temporary 1-percentage-point hike in short-term interest rates.

Interestingly, the model reveals that the impact of the interest-rate increase would be stronger than would have been expected by just aggregating the 12 economies. Inflation drops immediately by around 0.2 point because a rising euro - made more attractive by higher interest rates - depresses the price of imported goods and services. The rate hike has a gradual effect on GDP growth - depressing it by a maximum 0.15 point.

Huhne asked ECB chief economist Otmar Issing to make the model available to the Parliament committee in CD-ROM format, so that the only body with powers of scrutiny over the bank could run such simulations and test the bank's assumptions.

This, says the ECB, will be impossible. "This is a commercial programme on sale to the general public so we wouldn't be able to copy and distribute it," said spokesman Manfred K├Ârber. "The Parliament can take the model off the Internet and run it through the programme."

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