Maritta Paloviita, Markus Haavio, Pirkka Jalasjoki, Juha Kilponen, (2017), “Two percent or not two percent? Interpreting the ECB’s definition of price stability”,VoxEu, 24 Οκτωβρίου
In 1998, the ECB’s Governing Council defined price stability as “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%”. In 2003, the Governing Council clarified that “in the pursuit of price stability it aims to maintain inflation rates below, but close to, 2% over the medium term”. In a new paper, we shed light on this definition by estimating a large number of competing specifications of the ECB’s reaction function (Taylor 1993) (Paloviita et al. 2017). Our analysis makes use of quarterly Eurosystem/ECB staff macroeconomic projections of inflation and real GDP growth over the 1999Q4-2016Q4 period. Our results are largely based on reaction function specifications including a so-called monetary policy credibility loss term, which accounts for a possible credibility loss due to persistent deviations of inflation from the target.
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