Stegeman, H. (2014) “The ill-advised rigidity of the 2% inflation target“, Pieria Network, 16 Ιουνίου.
Our macroeconomic policy is largely based on the theory mainly developed in the post-war years, and more particularly at the time of the Great Moderation. This was the period of steady, reasonably predictable economic growth from the beginning of the 1980s until the crisis of 2007/2008 and the subsequent Great Recession. As a result of the financial crisis and its aftermath, much of this macroeconomic consensus has come under fire. This also applies to the inflation target set by the central banks (Blanchard et al, 2010). So far the ECB has chosen to ignore this and the 2% inflation target remains sacrosanct, even though anyone with any knowledge of the history of monetary policy is well aware that this target has a very flimsy empirical foundation. Continuing to target 2% inflation has now become ill-advised and dogmatic, and is making the process of adjustment in the eurozone unnecessarily lengthy and painful.
Inflation as price stability
The explicit target of the European Central Bank (ECB) is price stability. In practice, price stability is interpreted to mean “medium-term inflation of less than, but close to 2%”. Inflation is currently falling, and the average rate in the eurozone is now close to zero, having reached 0.5% in May 2014 (figure 1).
Furthermore, it looks highly likely that inflation will remain low in the next few years (Claeys et al., 2014) as a result of the moderate growth outlook and the negative output gap in nearly all the eurozone countries.
With this in mind, one could argue that discussion of the ECB’s inflation target is perhaps not that relevant. After all, the current target is not even being met. But it is relevant, for two reasons at least: firstly, raising inflation expectations by adjusting the target would increase inflation over time. Secondly, this would give the ECB a clearer mandate in the near future to deploy unconventional policy measures in order to increase inflation faster over time.
Σχετικές αναρτήσεις:
- Krugman, P. (2014) “Inflation Targets Reconsidered“, Draft paper for ECB Sintra conference, Μάιος 2014.
- Hatcher, N. & Minford, P. (2014) “Inflation targeting vs price-level targeting: A new survey of theory and empirics“, VoxEU Organisation, 11 Μαΐου.
- Pisani-Ferry, J. (2013) “Europe’s real inflation problem”, Project Syndicate, 30 Νοεμβρίου.