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

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  • Joreg Bibow

    (The Levy Economics Institute)

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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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    File URL: http://128.118.178.162/eps/mac/papers/0507/0507017.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 0507017.

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    Length: 23 pages
    Date of creation: 15 Jul 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpma:0507017

    Note: Type of Document - pdf; pages: 23
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    Web page: http://128.118.178.162

    Related research

    Keywords: Monetary policy; European Central Bank; inflation targeting; inflation persistence; tax-push inflation; antigrowth bias.;

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    References

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    1. Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
    2. 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.
    3. 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.
    4. Willem Thorbecke, . "Inflation Targeting and the Natural Rate of Unemployment," Economics Policy Note Archive 04-1, Levy Economics Institute.
    5. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown A Structural Policy Bias Coming Home to Roost?," Macroeconomics 0407026, EconWPA.
    6. 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.
    7. Lars E.O. Svensson & Stefan Gerlach, 2001. "Money and inflation in the Euro Area: A case for monetary indicators?," BIS Working Papers 98, Bank for International Settlements.
    8. Willem Thorbecke, . "A Dual Mandate for the Federal Reserve, The Pursuit of Price Stability and Full Employment," Economics Public Policy Brief Archive ppb_60, Levy Economics Institute.
    9. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    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. Ben S. Bernanke & Ilian Mihov, 1996. "What Does the Bundesbank Target?," NBER Working Papers 5764, National Bureau of Economic Research, Inc.
    12. 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.
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    Citations

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    Cited by:
    1. 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.
    2. Joerg Bibow, 2006. "Inflation Persistence and Tax-Push Inflation in Germany and in the Euro Area: A Symptom of Macroeconomic Mismanagement?," IMK Studies 01-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Jorg Bibow, 2005. "Europe’s Quest for Monetary Stability: Central Banking Gone Astray," Macroeconomics 0508029, EconWPA.
    4. Giuseppe Fontana & Alfonso Palacio- Vera, 2005. "Are Long-Run Price Stability and Short-run Output Stabilization All that Monetary Policy Can Aim For?," Macroeconomics 0511024, EconWPA.
    5. Jorg Bibow, 2005. "Europe's Quest for Monetary Stability: Central Banking Gone Astray," Economics Working Paper Archive wp_428, Levy Economics Institute.

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