The ECB Under the Threat of Fiscal Dominance - The Individual Central Banker Dimension

This paper examines the threat of fiscal dominance for central banks with a focus on the individual dimension. A general symptom of fiscal dominance is a feedback loop from sovereign debt developments to monetary policy decisions. Our theoretical reasoning clarifies under which assumptions the individual members in a federal central bank system should pay particular attention to their home regions' public debt situation. We present empirical evidence for the existence of such a repercussion in the context of the ECB Council. Based on public statements regarding the Pandemic Emergency Purchase Programme (PEPP), we classify the governors of the euro area national central banks (NCB) and the ECB board members as "hawks", "neutrals," and "doves". We correlate the resulting classification with their home countries' debt level. The resulting pattern is consistent with what can be expected for a regime of fiscal dominance. Whereas the doves tend to come from high-debt countries, the average debt level of the hawks' home countries is significantly lower. As expected, this pattern is even more pronounced for the NCB presidents than for board members.