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The ECB’s price stability framework: past experience, and current and future challenges

Author

Listed:
  • Cecion, Martina
  • Coenen, Günter
  • Gerke, Rafael
  • Le Bihan, Hervé
  • Motto, Roberto
  • Aguilar, Pablo
  • Ajevskis, Viktors
  • Giesen, Sebastian
  • Albertazzi, Ugo
  • Gilbert, Niels
  • Al-Haschimi, Alexander
  • Gomes, Sandra
  • Bornemann, Friederike
  • Goy, Gavin
  • Brand, Claus
  • Grasso, Adriana
  • Carboni, Giacomo
  • Grosse-Steffen, Christoph
  • Cecioni, Martina
  • Haavio, Markus
  • Cleanthous, Lena
  • Hammermann, Felix
  • Hoffmann, Mathias
  • Consolo, Agostino
  • Hölz, Jonas
  • Corbisiero, Giuseppe
  • Hurtado, Samuel
  • Dedola, Luca
  • Hürtgen, Patrick
  • Andreeva, Desislava
  • Hutchinson, John
  • Dobrew, Michael
  • Ioannidis, Michael
  • Dupraz, Stéphane
  • Kenny, Geoff
  • Ehrmann, Michael
  • Kho, Stephen
  • Fahr, Stephan
  • Kienzler, Daniel
  • Gautier, Erwan
  • Knüppel, Malte
  • Georgarakos, Dimitris
  • Kok, Christoffer
  • Kontulainen, Jarmo
  • Rannenberg, Ansgar
  • Kortelainen, Mika
  • Ristiniemi, Annukka
  • Röttger, Joost
  • Lima, Ana Isabel
  • Locarno, Alberto
  • Santoro, Sergio
  • Lojschová, Adriana
  • Scheer, Alexander
  • Maletic, Matjaz
  • Schmidt, Sebastian
  • Martin, Alberto
  • Schneider, Jan David
  • Matheron, Julien
  • Schultefrankenfeld, Guido
  • Marx, Magali
  • Skotida, Ifigeneia
  • Mazelis, Falk
  • Soudan, Michel
  • Meyler, Aidan
  • Stevens, Arnoud
  • Mönch, Emanuel
  • Sturm, Michael
  • Montes-Galdón, Carlos
  • Thaler, Dominik
  • Tosato, Andrea Giorgio
  • Nikolov, Kalin
  • Tristani, Oreste
  • Nuño, Galo
  • Valderrama, Maria Teresa
  • Papageorgiou, Dimitris
  • Weber, Henning
  • Pavlova, Lora
  • Wouters, Raf
  • Penalver, Adrian
  • Zev, Giordano
  • Pisani, Massimiliano
  • Saint Guilhem, Arthur

Abstract

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. JEL Classification: E31, E52, E58

Suggested Citation

  • Cecion, Martina & Coenen, Günter & Gerke, Rafael & Le Bihan, Hervé & Motto, Roberto & Aguilar, Pablo & Ajevskis, Viktors & Giesen, Sebastian & Albertazzi, Ugo & Gilbert, Niels & Al-Haschimi, Alexander, 2021. "The ECB’s price stability framework: past experience, and current and future challenges," Occasional Paper Series 269, European Central Bank.
  • Handle: RePEc:ecb:ecbops:2021269
    Note: 241047
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    2. Ignazio Visco, 2023. "Inflation Expectations and Monetary Policy in the Euro Area," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 51(2), pages 111-129, September.
    3. Corbisiero, Giuseppe & Lawton, Neil, 2021. "The ECB’s Review of its Monetary Policy Strategy," Quarterly Bulletin Articles, Central Bank of Ireland, pages 70-103, October.
    4. Gerdesmeier, Dieter & Reimers, Hans-Eggert & Roffia, Barbara, 2023. "Investigating the inflation-output-nexus for the euro area: Old questions and new results," Wismar Discussion Papers 01/2023, Hochschule Wismar, Wismar Business School.
    5. Hans-Eggert Reimers & Dieter Gerdesmeier & Barbara Roffia, 2023. "Investigating the Inflation–Output Nexus for the Euro Area: Old Questions and New Results," Economies, MDPI, vol. 11(11), pages 1-15, October.
    6. Benigno, Pierpaolo & Canofari, Paolo & Di Bartolomeo, Giovanni & Messori, Marcello, 2023. "The ECB’s new inflation target from a short- and long-term perspective," Journal of Policy Modeling, Elsevier, vol. 45(2), pages 286-304.
    7. Gerke, Rafael & Kienzler, Daniel & Scheer, Alexander, 2022. "On the macroeconomic effects of reinvestments in asset purchase programmes," Discussion Papers 47/2022, Deutsche Bundesbank.
    8. Stéphane Dupraz & Hervé Le Bihan & Julien Matheron, 2022. "Make-up Strategies with Finite Planning Horizons but Forward-Looking Asset Prices," Working papers 862, Banque de France.
    9. Brand, Claus & Obstbaum, Meri & Coenen, Günter & Sondermann, David & Lydon, Reamonn & Ajevskis, Viktors & Hammermann, Felix & Angino, Siria & Hernborg, Nils & Basso, Henrique & Hertweck, Matthias & Bi, 2021. "Employment and the conduct of monetary policy in the euro area," Occasional Paper Series 275, European Central Bank.
    10. Dobrew, Michael & Gerke, Rafael & Kienzler, Daniel & Schwemmer, Alexander, 2023. "Monetary policy rules under bounded rationality," Discussion Papers 18/2023, Deutsche Bundesbank.
    11. Debrun, Xavier & Masuch, Klaus & Ferrero, Guiseppe & Vansteenkiste, Isabel & Ferdinandusse, Marien & von Thadden, Leopold & Hauptmeier, Sebastian & Alloza, Mario & Derouen, Chloé & Bańkowski, Krzyszto, 2021. "Monetary-fiscal policy interactions in the euro area," Occasional Paper Series 273, European Central Bank.
    12. Edouard Djeutem & Mario He & Abeer Reza & Yang Zhang, 2022. "Household Heterogeneity and the Performance of Monetary Policy Frameworks," Staff Working Papers 22-12, Bank of Canada.
    13. Lucian Briciu & Stefan Hohberger & Luca Onorante & Beatrice Pataracchia & Marco Ratto & Lukas Vogel, 2023. "The ECB Strategy Review - Implications for the Space of Monetary Policy," European Economy - Discussion Papers 193, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    14. Eleni Argiri & Ifigeneia Skotida, 2021. "The 2021 review of the monetary policy strategy of the Eurosystem: an economy of forces," Economic Bulletin, Bank of Greece, issue 54, pages 23-57, December.

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    More about this item

    Keywords

    effective lower bound; euro area; European Central Bank; monetary policy strategy; price stability;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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