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The ECB's new inflation target from a short- and long-term perspective

Author

Listed:
  • Pierpaolo Benigno
  • Paolo Canofari
  • Giovanni Di Bartolomeo
  • Marcello Messori

Abstract

This study examines the European Central Bank's revised inflation target, which specifies that the 2% inflation-rate threshold should be applied symmetrically and with a medium-term orientation. The paper discusses the strengths and weaknesses of the new strategy in both short- and long-term perspectives, with particular attention to the euro area's current phase of high inflation and increasing stagnation risk. It compares the ECB's strategy with that of the Federal Reserve, analyzes the rationale for an inflation buffer in a context of declining natural interest rates and zero-lower-bound constraints, and evaluates the implications for monetary policy. The study argues that monetary policy alone cannot address supply-driven inflation and that an effective policy mix, including a centralized fiscal capacity and the provision of appropriate European public goods, is needed to control excessive inflation while supporting sustainable medium-term growth.

Suggested Citation

  • Pierpaolo Benigno & Paolo Canofari & Giovanni Di Bartolomeo & Marcello Messori, 2023. "The ECB's new inflation target from a short- and long-term perspective," CIMEO Working Paper Series 163, Centre for Investigation and Modelling of Experimental Observations (CIMEO).
    • Handle: RePEc:ter:wpaper:00163
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    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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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