Abstract
Abstract The long-awaited Review of Monetary Policy Strategy of the European Central Bank has been released. According to the Governing Council, “price stability is best maintained by aiming for 2% inflation over the medium term”, with “symmetric commitment” to this target. “Symmetry means that the Governing Council considers negative and positive deviations from this target as equally undesirable”. This orientation seems contrarian to the view, expressed by some dissenting scholars, that 2% should be set as a ceiling, and that persistent inflation below 2% observed over the last decade was to be adopted as the “new normal”. The aim of this paper is not to examine and assess the new policy strategy of the ECB per se, but to warn about pitfalls in detecting undesirable (expectation-driven) deviations of inflation from target versus permanent changes in the ouput-inflation relationship.
Highlights
After taking office on November 1, 2019, the President of the European Central Bank (ECB) Christine Lagarde announced the long-awaited official Review of the policy strategy
This orientation seems contrarian to the view, expressed by some dissenting scholars, that 2% should be set as a ceiling, and that persistent inflation below 2% observed over the last decade was to be adopted as the “new normal”
The announcement of the new strategy by the ECB, with the commitment to correcting deviations of inflation above as well as below 2% symmetrically, sounds contrarian to the view that 2% should be set as a ceiling, and that persistent inflation below 2% observed over the last decade was to be adopted as the “new normal”
Summary
After taking office on November 1, 2019, the President of the European Central Bank (ECB) Christine Lagarde announced the long-awaited official Review of the policy strategy (the last one dates back to 2003). After suspension due to the pandemic emergency, in July 2021 the ECB released an early statement outlining the new policy strategy (ECB 2021a) together with a background paper (ECB 2021b). The kernel of the revised strategy in the Governing Council’s early statement of last July (ECB 2021a) can be summarised in two points:. I wish to thank two anonymous reviewers of this Journal for their valuable comments. I remain fully responsible for this paper
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