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The Ecb's Price Stability Framework: Past Experience, and Current and Future Challenges

2021; RELX Group (Netherlands); Linguagem: Inglês

10.2139/ssrn.3928290

1556-5068

Martina Cecioni, Günter Coenen, Roberto Motto, Hervé Le Bihan, Viktors Ajevskis, Ugo Albertazzi, Niels Gilbert, Alexander Al-Haschimi, Sandra Gomes, Friederike Bornemann, Claus Brand, Adriana Grasso, Giacomo Carboni, Christoph Große Steffen, Markus Haavio, Lena Cleanthous, Felix Hammermann, Agostino Consolo, Jonas Hölz, Giuseppe Corbisiero, Samuel Hurtado, Luca Dedola, Patrick Hürtgen, Michael Dobrew, Stéphane Dupraz, Geoff Kenny, Michael Ehrmann, Stephen Kho, Stephan Fahr, Daniel Kienzler, Dimitris Georgarakos, Christoffer Kok, Jarmo Kontulainen, Ansgar Rannenberg, Annukka Ristiniem, Joost Röttger, Arthur Saint-Guilhem, Adriana Lojschová, Matjaž Maletič, Sebastian Schmidt, Julien Matheron, Guido Schultefrankenfeld, Ifigeneia Skotida, Falk Mazelis, Michel Soudan, Aidan Meyler, Emanuel Moench, Michael Sturm, Carlos Montes-Galdón, Dominik Thaler, Kalin Nikolov, Oreste Tristani, Galo Nuño, Lora Pavlova, Raf Wouters, Giordano Zev, Massimiliano Pisani,

Economic theories and models

The ECB’s price stability mandate has been defined by the Treaty. But the Treaty has not spelled out what price stability precisely means. To make the mandate operational, the Governing Council has provided a quantitative definition in 1998 and a clarification in 2003. The landscape has changed notably compared to the time the strategy review was originally designed. At the time, the main concern of the Governing Council was to anchor inflation at low levels in face of the inflationary history of the previous decades. Over the last decade economic conditions have changed dramatically: the persistent low-inflation environment has created the concrete risk of de-anchoring of longer-term inflation expectations. Addressing low inflation is different from addressing high inflation. The ability of the ECB (and central banks globally) to provide the necessary accommodation to maintain price stability has been tested by the lower bound on nominal interest rates in the context of the secular decline in the equilibrium real interest rate. Against this backdrop, this report analyses: the ECB’s performance as measured against its formulation of price stability; whether it is possible to identify a preferred level of steady-state inflation on the basis of optimality considerations; advantages and disadvantages of formulating the objective in terms of a focal point or a range, or having both; whether the medium-term orientation of the ECB’s policy can serve as a mechanism to cater for other considerations; how to strengthen, in the presence of the lower bound, the ECB’s leverage on private-sector expectations for inflation and the ECB’s future policy actions so that expectations can act as ‘automatic stabilisers’ and work alongside the central bank.