Former ECB Chief Economist Peter Praet on What's Next For Central Banks

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

So Tracy, we talk a lot about monetary policy on the podcast. We talk a lot about central banking, what the future of central banking looks like in the post-crisis era.

But for all we talk about it, it's like we probably, we never talk about it enough. There's always more to discuss.

Tracy Alloway (0:36)

Well, I feel like this is one of the big themes of 2020, right? So we've had this economic crisis, and we've seen various responses to it from central banks, and we've seen various government responses to it as well.

And now we're sort of waiting to see what the combination of those two things actually looks like and how monetary policy interacts with fiscal policy. I feel like that's the thing we're all watching, right?

Joe Weisenthal (1:02)

Yeah, I think that's fair to say. And I think, you know, and again, this is sort of for people who've listened to several episodes, it's at this point is a retread, but I always think it's important that a lot of these debates were happening already going into this crisis about the sort of limits to monetary policy, even in recent years, whether central bankers needed new tools, whether there needs to be a greater emphasis on fiscal policy and so forth to accelerate growth. These were already big debates that were happening pre-crisis. And like many other things, this crisis has really accelerated them.

Tracy Alloway (1:38)

Yeah, absolutely. It's funny how the crisis is doing that, really accelerating trends that were already in play. But I feel like the other big question around central banking has to be the continued misses on inflation targets as well. So we've now had many, many years of central banks around the world missing their inflation target. No one quite knows why. And that's why even before 2020, we were starting to see that discussion about whether or not something else was needed besides pure monetary policy.

Joe Weisenthal (2:10)

Yeah, exactly right. And this is a pretty profound issue for central banks because I think everyone agrees it's a little more complicated, but on some level, the premise of a lot of monetary policy, at least traditionally, or sort of interest rate policy is that there is this sort of a give and take or balance between inflation and full employment or inflation and robust growth.

And so I think if there is some question about what it takes to hit the inflation target or why inflation doesn't pick up even when the unemployment rate drops to historically low levels, I do think to some extent that really calls into question a lot of the traditional models.

Tracy Alloway (2:53)

Yeah, absolutely. And I feel like this has been a long running theme on Odd Lots now, absolutely.

Joe Weisenthal (2:59)

So I'm very excited. And today we're going to be speaking to a huge, important guest in the world of central banking, monetary policy, economics, someone who's really just a big name, someone very excited to talk to, we're gonna be speaking with Peter Praet.

He is the former chief economist of the European Central Bank. He was on the executive committee of the bank, crucial decision maker for eight years from 2011 through June 2019 So has been right in the middle of things up until very recently, sort of almost right up against the current era.

And currently he's a senior fellow at the University of Brussels. And we're going to be digging into these topics, the ECB, the future of central banking, macro policy overall. Very excited about this conversation. Peter, thank you very much for joining us.

Peter Praet (3:53)

Yes, hi.

Joe Weisenthal (3:54)

So Peter, thank you so much for coming on. I mean, you know, Tracy and I introed, we've been really picking apart these topics for a long time. Before we dive into the sort of bigger theoretical questions facing central banks, I'm just curious your perspective right now on the recovery in Europe, are the existing set of policies enough to make the recovery from the crisis self-sustaining? Can you get back, can Europe get back to pre-crisis levels?

Or does there need to be something further yet, either from fiscal authorities or the European Central Bank to return to trend?

Peter Praet (4:36)

I think you have to distinguish a little bit the short term and the medium term here. I think it's always the case, but I mean, it's particular that is in the situation because you have the second wave, which has been very strong actually, and has led to lockdowns in different countries at different degrees.