The ECB'S Inflation Objective

Mads Kieler

No 2003/091, IMF Working Papers from International Monetary Fund

Abstract: The ECB's objective of medium-term inflation below 2 percent has been portrayed by critics as ambiguous, asymmetric, and excessively stringent. This paper attempts a comprehensive evaluation of the trade-offs for the euro area and finds that: (1) in terms of guiding inflation expectations and policymaking, the current definition has functioned much as would an inflation target centered on 1 1/2-1 3/4 percent; (2) the absence of a specific (point) target for medium-term inflation has encumbered the communication of monetary policy; and (3) a target toward the upper end of the ECB's price-stability range would seem, at least with the current membership of EMU, to strike a judicious balance between the benefits of price stability, on the one hand, and the need to assist relative price and wage adjustment across EMU and safeguard against deflation, on the other hand.

Keywords: WP; real interest rate; rate of inflation; monetary policy; nominal wage; Price stability; European Monetary Union; European Central Bank; utility function; ECB official; Phillips curve; GDP deflator; base pay; inflation expectation; economics profession; ECB policy decision; ECB target; stochastic model; Inflation; Inflation targeting; Price stabilization; Deflation; Sticky prices; Europe; Eastern Europe; Global (search for similar items in EconPapers)
Pages: 50
Date: 2003-04-01
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Citations: View citations in EconPapers (5)

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