The European Central Bank (ECB) is the central bank of the 19 European Union countries which have adopted the euro. Our main task is to maintain price stability in the euro area and so preserve the purchasing power of the single currency.
Itamar Drechsler, Alexi Savov, Philipp Schnabl
A low-inflation trap is a situation where both actual and expected inflation are firmly below the central bank’s target and nominal interest rates are close to or at their lower bound. The concept is often used to characterise Japan’s quarter-century of very low, and often negative, inflation (e.g. Krugman 1998). More recently, persistent inflation shortfalls across the industrialised world have raised concerns that other jurisdictions, too, may be on the verge of getting caught in a Japanese-style low-inflation trap. Our new research shows how fiscal policy can help guard economies against this fate.
(Bloomberg) Central banks can better control inflation expectations if they use a range for price growth rather than a precise goal, according to a European Central Bank study that could have implications for the institution’s strategic review.The working paper by Michael Ehrmann, head of the monetary policy research division and a former Bank of Canada official, looked at inflation-targeting strategies in 20 advanced and emerging-market economies.It found that defining a band within which consumer-price growth is considered acceptable bolsters the central bank’s credibility because it is less likely to miss the goal.“The evidence therefore favors the adoption of some sort of interval, be it in the form of a range or a tolerance band around a point target,” Ehrmann said.The ECB is debating whether its inflation goal of “below, but close to, 2% over the medium term” should be changed, as part of wide-ranging review of its policies. While multi
Asli Demirgüç-Kunt, Bálint Horváth, Harry Huizinga
International trade and financial globalisation have made economies more interdependent and more exposed to each other’s domestic shocks. Economic theory suggests that globalisation affects the transmission mechanism of monetary policy and that its spillovers could strengthen the international dimension of monetary policy (e.g. Dedola et al. 2017, Gerko and Rey 2017, Iacoviello and Navarro 2019). When monetary policy actions spill over abroad, this might at times complement policy choices in other countries and thus be a welcome externality. But at other times this might confront these countries with unfavourable policy choices. For example, they may find it harder to reconcile macroeconomic and financial stability without resorting to an enlarged set of policy tools. Only by exploring data can we shine a light on the extent to which monetary policy has acquired a global dimension.
Can consumers’ inflation expectations help stabilise the economy?
By Ioana Duca-Radu, Geoff Kenny and Andreas Reuter
Economists have argued that when interest rates set by policymakers cannot go any lower, the economy can be stabilised if consumers expect the rate of inflation to increase. Yet, the evidence for this stabilising effect has been very mixed. In this article we review new evidence from a monthly survey of over 25,000 individual consumers across the euro area showing that consumers are indeed more ready to spend if they expect inflation to be higher in the future. While generalised in the population, the stabilising effect is stronger when nominal interest rates are constrained at the lower bound.