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Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?

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  • Jorg Bibow
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    Abstract

    Challenging the conventional wisdom that structural problems are to blame for the euro area's protracted domestic demand stagnation, this paper sets out to shed some fresh light on the role of the ECB in the ongoing EMU crisis. Contrary to the widely held interpretation of the ECB as an inflation targeter and a rather soft one, too -- it is argued that the key characteristic of the ECB is the pronounced asymmetry in its policy approach and mindset. Curiously, this asymmetry has not only given rise to an antigrowth bias, but to upward price pressures and distortions as well. There is a link between stagnation and inflation persistence that owes to the ECB's failure to internalize the euro area's fiscal regime. This raises the question as to whether inflation targeting would have led to better results, or could do so in future.

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    Bibliographic Info

    Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_425.

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    Date of creation: Jul 2005
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    Handle: RePEc:lev:wrkpap:wp_425

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    1. Gerlach, Stefan & Svensson, Lars E O, 2002. "Money and Inflation in the Euro-Area: A Case for Monetary Indicators?," CEPR Discussion Papers 3392, C.E.P.R. Discussion Papers.
    2. Bernanke, Ben S. & Mihov, Ilian, 1997. "What does the Bundesbank target?," European Economic Review, Elsevier, vol. 41(6), pages 1025-1053, June.
    3. Jorg Bibow, 2002. "The Markets versus the ECB, and the EURO's Plunge," Eastern Economic Journal, Eastern Economic Association, vol. 28(1), pages 45-57, Winter.
    4. Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers 1511, C.E.P.R. Discussion Papers.
    5. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    6. Jeffrey C. Fuhrer, 1994. "Goals, guidelines, and constraints facing monetary policymakers: an overview," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-15.
    7. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
    8. Willem Thorbecke, 2002. "A Dual Mandate for the Federal Reserve: The Pursuit of Price Stability and Full Employment," Eastern Economic Journal, Eastern Economic Association, vol. 28(2), pages 255-268, Spring.
    9. Willem Thorbecke, . "Inflation Targeting and the Natural Rate of Unemployment," Economics Policy Note Archive 04-1, Levy Economics Institute.
    10. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown: A Structural Policy Bias Coming Home to Roost?," Economics Working Paper Archive wp_409, Levy Economics Institute.
    11. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown A Structural Policy Bias Coming Home to Roost?," Macroeconomics 0407026, EconWPA.
    12. Jörg Bibow, 2004. "Reflections on the current fashion for central bank independence," Cambridge Journal of Economics, Oxford University Press, vol. 28(4), pages 549-576, July.
    13. Issing, Otmar, 1997. "Monetary targeting in Germany: The stability of monetary policy and of the monetary system," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 67-79, June.
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    Cited by:
    1. Jorg Bibow, 2005. "Europe's Quest for Monetary Stability: Central Banking Gone Astray," Economics Working Paper Archive wp_428, Levy Economics Institute.
    2. Jorg Bibow, 2005. "Europe’s Quest for Monetary Stability: Central Banking Gone Astray," Macroeconomics 0508029, EconWPA.
    3. Giuseppe Fontana & Alfonso Palacio-Vera, 2005. "Are Long-run Price Stability and Short-run Output Stabilization All that Monetary Policy Can Aim For?," Economics Working Paper Archive wp_430, Levy Economics Institute.
    4. L. Randall Wray & C. Sardoni, 2005. "Monetary Policy Strategies of the European Central Bank and the Federal Reserve Bank of the U.S," Macroeconomics 0511025, EconWPA.

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