ECB Monetary Policy and Catch-up Inflation

Question 1: To what extent do you agree with the following statement? “The European Central Bank should systematically allow for inflation to exceed its target to compensate for periods of below target inflation.”

Question 2: Which of the following policies is the most desirable to meet the ECBs objective to achieve its mandate of “price stability” as you understand this term.

Summary

Most members of the CfM-CEPR panel of experts on the European economy supports the ECB explicitly allowing inflation to exceed its target for extended periods to make up for below-target inflation in the past. This 60% majority has divided views on the optimal alternative policies, with the largest share supporting average inflation targeting and some members supporting nominal GDP targeting or hybrid policies. 40% of the panel would prefer to maintain the current policy of traditional inflation targeting. 

Background

The September 2021 CfM-CEPR survey asked the members of its European panel whether the ECB should allow inflation to exceed its target to make up for past inflation shortfalls. The panel was then asked which alternative monetary strategy they prefered.

Making up for lost inflation

On July 8th, 2021, the ECB issued its first Strategic Review since 2003. The new Review systematises policy changes that have been adopted in the light of new economic challenges, such as slower productivity growth, globalisation, digitisation, climate change, the 2008 financial crisis’ legacy and demographic changes. In addition to pursuing its traditional price stabilisation objectives, the ECB’s 2021 Strategic Review aims to tackle the broader issues of financial stability, balanced economic growth, competitive markets, employment and environmental concerns.

This survey investigates one component of the policy shift: the new definition of price stability. The Strategic Review makes explicit the ECB’s commitment to a symmetrical target around 2% inflation, as opposed to the perception that the ECB was to keep inflation consistently below 2%. There is existing evidence that the ECB has already followed such a policy, but the review formalizes this reality (Bletzinger and Wieland 2017, Hartman and Smets 2019). However, the ECB has not gone as far as the Federal Reserve did in its strategic review of last year. The Fed has not only committed to a symmetrical target, but also to a policy of “catch up” inflation, whereby inflation may be allowed to exceed its target for a time, following extended periods of below-target inflation. Some commentators, such as Reichlin et al (2021) have urged the ECB to follow the lead of its American counterpart in allowing fo a makeup element in its strategy. They write that such measures would help in “dealing with inflation shortfalls, to ensure that average inflation outcomes under its policy are in line with its numerical inflation objective.” Feld et al (2021) take a different view, whereby the Fed’s approach may lack credibility because “market participants may speculate that once inflation reaches two percent, the Fed will refrain from further raising inflation. Additionally, some things remain unclear, such as over what period the average should be at two percent. Moreover, if the inflation rate were to overshoot the target, it could be quite difficult to reverse that.”

A policy of “catch up” inflation can be viewed as a form of price level targeting. Low periods of inflation put the price level below its trend and “catch-up” policies help the price level revert to its trend as would be the case with price-level targeting. Svenson (1999) lay down the intellectual foundations for this policy. Svenson’s influential research agenda predicted that targeting the price level could lead to greater inflation stability than a policy of targeting inflation itself, when monetary policy is discretionary. Further, any inflation bias that might exist under discretion is replaced with a price-level bias that has lesser economic implications. Subsequent research has noted that Svenson’s conclusion depends on price setting behaviour (Steinsson 2003, Gaspar et al 2007), the information structure (Coenen and Wieland 2004, Ball et al 2005), and the degree of price stickiness (Minford 2004), among other factors (see Ambler 2009 for a review).  Meh et al (2010) study the distributional implications of price level targeting and find that monetary policy redistributed wealth less aggressively compared to an inflation targeting regime.

However, as Nessén and Vestin (2005) show, average inflation targeting isn’t identical to price level targeting. They formulate the conditions under which average inflation targeting outperforms both conventional inflation targeting and price level targeting (namely, when price setters are sufficiently “backward-looking”). Federal Reserve Bank of New York’s president, John Williams (2021) defended average inflation targeting in a recent speech. A natural alternative is a hybrid model that allows for a combination of average inflation targeting and price level targeting (Batini and Yates 2003, Ceccetti and Kim 2005).  

Closely related is a policy of nominal GDP (NGDP) targeting. This policy aims to stabilize the path of nominal GDP leading to a countercyclical inflation target that allows inflation to be higher when GDP growth is slower. This policy too implies a form of catch-up inflation because it allows inflation to exceed and fall below its average rate at different points of the business cycle. Fackler and McMillin (2019) prefer NGDP targeting to both inflation and price-level targeting because the latter can be counterproductive in face of supply shocks. In the case of a negative supply shock, an inflation targeting central bank is forced to slow down an already decelerating economy, because inflation exceeds its target (and the price level is increasing). In contrast, nominal GDP targeting allows the central bank to let inflation increase because real GDP is declining. Sheedy (2014) demonstrates a further advantage of NGDP targeting: it redistributes wealth from creditors to debtors in recessions, a desirable risk-sharing feature when contracts are incomplete and nominal. A main critique of NGDP targeting is practical: data on inflation and public expectations thereof are more readily available in real time that data on NGDP and GDP faces frequent revisions. (See Beckworth 2019 for a extended discussion of NGDP targeting and Honkapohja and Mitra 2013 for its robustness properties. Hughes Hallet 2015 investigates the applicability of NGDP targeting for the ECB.)

This month’s CfM-CEPR survey asks about catch up inflation and the best ways to implement such a policy. The first question asks whether the ECB should follow the Fed’s example and allow for catch up inflation. The question is framed in terms of catch up inflation for periods of below average inflation, but should be understood as also applying to lower than average inflation following periods of excess inflation.

Question 1: To what extent do you agree with the following statement: “The European Central Bank should systematically allow for inflation to exceed its target to compensate for periods of below target inflation.”

Thirty-seven panel members answered this question. 59% either agreed or strongly agreed with the statement displayed above. Jumana Salaheen (CRU Group), considers previous and current policies insufficient for the ECB to achieve its goals. “The ECB move to a symmetric inflation target [was] underwhelming. Since the ECB was founded in 1998, annual HICP inflation has averaged 1.6%... Moving to a 2% symmetric target does not feel like a big enough change to shift inflation expectations, which is ultimately what the ECB is trying to do. Introducing an average inflation target would be a bit more ambitious and would signal the desire for meaningful change.” In a similar vein, John Van Reenen (London School of Economics) argues that the “ECB has clearly undershot its target for too long causing a deflationary bias in Europe and generating too low a growth rate.” Patrick Minford, who supports a policy of NGDP targeting in response to the second question below, views average inflation targeting as a close substitute: “Average 'catch-up' inflation targeting, together with an output gap response in practice gets close to Nominal GDP targeting. So I think moving towards this will be beneficial.”

35% either disagreed or strongly disagreed with the question’s statement. Volker Wieland (Goethe University Frankfurt) states that “make-up strategies including price-level targeting perform well in model-based evaluations under rational expectations and full credibility. The ECB has leeway to allow over- and undershoots of inflation. To promise credibly to provide a make-up for past inflation below target is difficult, however, and subject to lack of credibility and uncertainty. Furthermore, a symmetric price level targeting that makes up for past overshoots as well as undershoots of inflation is quite a challenge to deliver. It would make it necessary to purposely tighten policy to keep inflation below the target rate of 2% to reach the price level target path consistent with a 2% trend. A purely asymmetric policy catch-up policy could overdo it and induce an upward bias.” Costas Milas (University of Liverpool) highlighted that lacking a clear definition of average inflation targeting, this policy would risk unanchoring of inflation expectations. Likewise, Robert Kollmann (Université Libre de Bruxelles) believes that “the proposed "catch-up" rule for inflation is too fuzzy, as the rule does not stipulate how long and by how much inflation would be allowed to exceed its target, after a period of low inflation. This lack of clarity would (further) undermine the credibility of the ECB. The ECB needs simple, transparent and credible rules! The ECB is rightly concerned about the persistent decline in the equilibrium interest rate and the resulting increase in the risk of hitting the interest rate effective lower bound. This concern calls for a permanent increase in the target inflation rate to, say, 2.5% or 3%.”  Fabrizio Coricelli (University of Siena and Paris School of Economics) warns against applying crisis-time targets to regular times. He argues that “prolonged periods of below-target inflation, as observed after the Global financial crisis, may reveal an instrument problem rather than a target problem. The question is why central banks were unable to boost inflation through massive increase in money supply? In such circumstances, announcing that inflation would be allowed to overshoot the target is unlikely to have effects on inflation expectations.” David Mile (Imperial College London) supports Coricelli’s claim, writing that “any monetary policy committee would be right to be very wary of actively wanting inflation to be 4% for two years after it had been close to 0 percent for two years.” Panicos Demetriades (University of Leicester) points towards potential political repercussions of the idea, which, in his view, fails to account for them. “Whatever the economic merits of this idea, they are detached from political realities, writes Demetriades. Average inflation targeting is likely to be perceived as abandonment of price stability by the ECB. The ECB has already been under fierce political attack in Germany for its accommodative monetary policy.”

The second question asks for the type of policy that should be adopted.

Question 2: Which of the following policies is the most desirable to meet the ECBs objective to achieve its mandate of “price stability” as you understand this term.

Thirty-seven panel members answered this question. 40% support the status quo of inflation targeting, while the remaining 60% support alternatives, which include Average Inflation Targeting, Nominal GDP Targeting, and hybrid policies. Jorge Braga de Macedo (Nova School of Business and Economics, Lisbon), argues in favour of Average Inflation Targeting, saying that given the status quo, this policy is “the least complicated to adjust to”, although “other policies targeting the “price level” or the “nominal GDP” or a “hybrid” [policy] may be more appealing in theory.” In contrast, Patrick Minford (Cardiff Business School) supports NGDP targeting, underlining that it “creates a powerful stabilising influence from monetary policy. I found this gave the highest welfare under conditions of fixed price stickiness, based on simulations on US data [in my 2016 paper].” Finally, some respondents argued in favour of hybrid policies. Simon Wren-Lewis (University of Oxford) writes that “because of the interest rate lower bound, there are good reasons to aim for a price level catch up policy after recessions. There is nothing equivalent after booms, when you want bygones to bygones. So an asymmetric policy makes sense, where a price level catch up is used after lower bound recessions, but otherwise we have inflation targeting.”

40% expressed support towards the status quo, arguing for continued inflation targeting. Jagjit Chadha (National Institute of Economic and Social Research) writes that “a clear point target of 2% or perhaps 2.5% seems pretty much consistent with price stability. We can adopt a margin of error or range and ask the ECB's President to explain deviations of more than 1% on either side and outline the reason for the miss and when we will return back to target range.” Others argue that alternatives are either infeasible or too unclear. Costas Milas states that “any other policy [that inflation targeting] is arguably (much) more difficult to understand, let alone explain to market participants and the public.” Similarly, Volker Wieland writes that “While symmetric price level targeting is better based on model evaluations, I am still sceptical it can be implemented effectively.” He supports traditional inflation targeting and suggests that “a good way to implement a make-up strategy is to use a Taylor rule with make-up factor in communication.”

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How the experts responded

Question 1

Participant Answer Confidence level Comment
Paul De Grauwe's picture Paul De Grauwe London School of Economics Disagree Confident
Roger Farmer's picture Roger Farmer University of Warwick Agree Confident
David Cobham's picture David Cobham Heriot Watt University Agree Confident
Sir Charles Bean's picture Sir Charles Bean London School of Economics Disagree Confident
Wendy Carlin's picture Wendy Carlin University College London Disagree Confident
The ECB's problem for a decade has been how to get inflation up to 2%. By making this explicitly its target, it may help anchor expectations more successfully. To the extent it has been successful, inflation targeting has worked because the objective is easy to measure and to communicate. A more complex objective would make it more difficult to communicate success or failure, and just as importantly, to explain why some changes in inflation should be 'looked through'. For these reasons, a higher inflation target is a better change than switching to AIT.
Jumana Saleheen's picture Jumana Saleheen CRU Group Agree Extremely confident
I found the ECB move to a symmetric inflation target underwhelming. Since the ECB was founded in 1998, annual HICP inflation has averaged 1.6%: that is closer to 1.5 than it is to 2. Moving to a 2% symmetric target does not feel like a big enough change to shift inflation expectations, which is ultimately what the ECB is trying to do. Introducing an average inflation target would be a bit more ambitious and would signal the desire for meaningful change.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Disagree Confident
Imagine after a positive temporary but persistent inflation surprise that the central bank now seeks to tighten monetary policy sufficiently to bring about a disinflation of equal magnitude to offset the temporary inflation shock. It strikes as pretty hard to run policy in order to cancel out the positive and negative differences and may be quite difficult for people to understand why we are engineering a such a disinflation, which may also run the risk of hitting the zero lower bound again and may therefore lack credibility. We seem to have in mind offsetting previous errors in policy but I am kind of happy with bygones being bygones. For planning purposes knowing the target is clearly specified at 2% or something like 2.5% is enough.
Philippe Bacchetta's picture Philippe Bacchetta Université de Lausanne Agree Very confident
Wouter Den Haan's picture Wouter Den Haan London School of Economics Agree Not confident
I find the arguments for average inflation targeting compelling but I am worried on whether it can work in practice. Specifically, I wouldn't be surprised if central banks would take low inflation observed in the recent past into account (for example as a reason not to respond to current or expected inflationary pressures) but would ignore let high past inflation. I am also worried about the lack of transparency in how past inflation is taken into account.
Volker Wieland's picture Volker Wieland Goethe University Frankfurt and IMFS Disagree Very confident
Make-up strategies including price-level targeting perform well in model-based evaluations under rational expectations and full credibility. The ECB has leeway to allow over- and undershoots of inflation. To promise credibly to provide a make-up for past inflation below target is difficult, however, and subject to lack of credibility and uncertainty. Furthermore a symmetric price level targeting that makes up for past overshoots as well as undershoots of inflation is quite a challenge to deliver. It would make it necessary to purposely tighten policy to keep inflation below the target rate of 2% to reach the price level target path consistent with a 2% trend. A purely asymmetric policy catch-up policy could overdo it and induce an upward bias.
Francesca Monti's picture Francesca Monti Kings College London Agree Very confident
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Disagree Confident
Average inflation targeting is like having a growth path for prices. The latter has the merit of being more transparent for the public. Average inflation targeting is very vague. The advantages of both are that they smooth interest rates, have less output volatility than strict inflation targeting and when they look further ahead. The disadvantages of both are when a sharp correction is applied and the average is backward looking. The problem for inflation targeting is separating permanent changes in inflation (bad) from relative price adjustments which impact inflation in the short term (good). The aim should be to smooth price paths over the medium term.
Michael McMahon's picture Michael McMahon University of Oxford Agree Confident
Harris Dellas's picture Harris Dellas University of Bern Strongly disagree Very confident
Another back door to discretion
Jean Imbs's picture Jean Imbs Paris School of Economics Agree Confident
John VanReenen's picture John VanReenen London School of Economics Strongly agree Very confident
ECB has clearly undershot it's target for too long causing a deflationary bias in Europe and generating too low a growth rate
Evi Pappa's picture Evi Pappa European University institute Agree Very confident
Antonio Fatás's picture Antonio Fatás INSEAD, Singapore Agree Confident
Patrick Minford's picture Patrick Minford Cardiff Business School Agree Confident
I think that the best policy is nominal GDP targeting because this creates a powerful stabilising influence from monetary policy. I found this gave the highest welfare under conditions of fixed price stickiness, based on simulations on US data- see my 2016 paper at 10.1016/j.intfin.2016.04.011. Similarly, when backed by a fiscal backstop preventing the zero lower bound, I found the policy was optimal for the US under more general conditions of state-dependent pricing that best modelled full US post-war experience- see my 2019 paper athttps://authors.elsevier.com/a/1dn3wxUDJvki7. Average 'catch-up' inflation targeting, together with an output gap response in practice gets close to Nominal GDP targeting. So I think moving towards this will be beneficial.
Dawn Holland's picture Dawn Holland NIESR Agree Confident
If individuals form forward-looking, rational expectations, a commitment to offset periods of low inflation with a looser monetary stance can ease the borrowing conditions faced by households and firms in the short-term, stimulating investment and economic recovery.
Jorge Braga de Macedo's picture Jorge Braga de ... Nova School of Business and Economics, Lisbon Agree Very confident
As this remains a more controversial issue in the euro area than elsewhere I hesitated on whether I agree or strongly agree
Robert Kollmann's picture Robert Kollmann Université Libre de Bruxelles Disagree Confident
The proposed "catch-up" rule for inflation is too fuzzy, as the rule does not stipulate how long and by how much inflation would be allowed to exceed its target, after a period of low inflation. This lack of clarity would (further) undermine the credibility of the ECB. The ECB needs simple, transparent and credible rules! The ECB is rightly concerned about the persistent decline in the equilibrium interest rate and the resulting increase in the risk of hitting the interest rate effective lower bound. This concern calls for a permanent increase in the target inflation rate to, say, 2.5% or 3%.
Maria Demertzis's picture Maria Demertzis Bruegel Agree Confident
Only like that the inflation rate will be on average equal to the target. The trouble with this over what period should we consider this?
Cédric Tille's picture Cédric Tille The Graduate Institute, Geneva Strongly agree Very confident
Ugo Panizza's picture Ugo Panizza The Graduate Institute, Geneva (HEID) Agree Very confident
In a sense, this is equivalent to using a longer window for the inflation target which seems a desirable thing to do
Natalie Chen's picture Natalie Chen University of Warwick Agree Not confident
Fabrizio Coricelli's picture Fabrizio Coricelli University of Siena and Paris School of Economics Disagree Confident
I believe one has to distinguish normal from exceptional times (crisis episodes). Prolonged periods of below-target inflation, as observed after the Global financial crisis, may reveal an instrument problem rather than a target problem. The question is why central banks were unable to boost inflation through massive increase in money supply? In such circumstances, announcing that inflation would be allowed to overshoot the target is unlikely to have effects on inflation expectations.
Ricardo Reis's picture Ricardo Reis London School of Economics Strongly agree Very confident
https://voxeu.org/article/ecb-strategy-2021-review-and-its-future
David Miles's picture David Miles Imperial College Disagree Confident
If you buy a large range of assumptions - central to which is the rational, forward-looking behaviour of all agents in a world of nominal rigidities and limits to policy options at low interest rates - it may in theory be sensible to aim for overshoots after undershoots on inflation. In practice I think it is very hard to imagine this working well and any monetary policy committee would be right to be very wary of actively wanting inflation to be 4% for two years after it had been close to 0 percent for two years.
Philip Jung's picture Philip Jung University of Dortmund Disagree Not confident
Costas Milas's picture Costas Milas University of Liverpool Disagree Confident
Since March 2013, inflation has (with a few exceptions) being (well) below the 2% target. This idea of compensation is rather questionable. Recently, for instance, inflation reached -0.3%, that is, 2.3 percentage points below the target. Will they compensate for this by allowing inflation to hit 4.3%? And how long for?
Panicos Demetriades's picture Panicos Demetriades University of Leicester Strongly disagree Extremely confident
This idea could undermine the very foundations of the monetary union, not least because it could lead to inflation expectations becoming de-anchored. If so, it could fuel further hostility against the ECB in Germany and a rise of the far right in future elections. Whatever the economic merits of this idea, they are detached from political realities. Average inflation targeting is likely to be perceived as abandonment of price stability by the ECB. The ECB has already been under fierce political attack in Germany for its accommodative monetary policy. Although these attacks are not fully justified - QE was very much needed to reduce deflation risk and this was vindicated in the European court - it is still true that it has indirectly helped governments finance fiscal deficits and reduced their borrowing costs, notwithstanding the fact that this was not the purpose of the exercise (they also financed the private sector, which is what saved the ECB case in court). Average inflation targeting, however defined, is too vague. Without specifying a target horizon it’s by definition vague, and is likely to de anchor inflation expectations in the short run. Even if a target horizon is specified, this is likely to be arbitrary and that can reduce central bank credibility, which, once again would de anchor inflation expectations. In fact, this may already be happening in the US - although the jury is still out on that experiment. It would, therefore, be premature and politically irresponsible for the ECB to follow the Fed on this occasion without waiting for evidence that would support such a move. In my honest opinion, such evidence is unlikely to be forthcoming. Very wise of the ECB Governing Council to steer clear of average inflation targeting at this juncture.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Agree Very confident
Lucio Sarno's picture Lucio Sarno Cambridge University Agree Confident
Gino A. Gancia's picture Gino A. Gancia Queen Mary University of London Neither agree nor disagree Not confident
Linda Yueh's picture Linda Yueh London Business School Neither agree nor disagree Confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Agree Not confident

Question 2

Participant Answer Confidence level Comment
Paul De Grauwe's picture Paul De Grauwe London School of Economics Inflation targeting Confident
Roger Farmer's picture Roger Farmer University of Warwick NGDP targeting Confident
David Cobham's picture David Cobham Heriot Watt University Average inflation targeting Confident
Sir Charles Bean's picture Sir Charles Bean London School of Economics Inflation targeting Confident
Wendy Carlin's picture Wendy Carlin University College London Inflation targeting Confident
The reasons given above support an inflatin target. Price level targeting is attractive in some ways for the central bank in a common currency area because it is the real exchange rate (and hence changes in price levels across members) that affects member countries but may not be on the radar of wage-setters oriented to an inflation target. But price level targeting is difficult to implement when it requires cuts in nominal wages.
Jumana Saleheen's picture Jumana Saleheen CRU Group Inflation targeting Extremely confident
There are many different policy regimes that can deliver the price stability mandate. Previously the conventional wisdom was that the best regime for that was inflation targeting. Under that regime interest rates were set today with an aim to deliver the inflation target in the medium term (recognising that there were lags in policy). What we know today is that the previous inflation targeting framework has not been working. it suggests it might be time to try a different regime to deliver the same objective.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Inflation targeting Very confident
A clear point target of 2% or perhaps 2.5% seems pretty much consistent with price stability. We can adopt a margin of error or range and ask the ECB's President to explain deviations of more than 1% on either side and outline the reason for the miss and when we will return back to target range. Essentially the BoE model would work well here. The question then is to whom would such a report be written and how often e.g. every month we were outside the range. Which implies some mechanisms for reporting to the European Parliament, Governing Council and the National Central Banks.
Philippe Bacchetta's picture Philippe Bacchetta Université de Lausanne Average inflation targeting Confident
Volker Wieland's picture Volker Wieland Goethe University Frankfurt and IMFS Inflation targeting Not confident
Inflation targeting has its own problems. While symmetric price level targeting is better based on model evaluations I am still sceptical it can be implemented effectively. I am sceptical of asymmetric policies. They can make up for a downward bias in inflation due to the lower bound on nominal interest rates. A good way to implement a make-up strategy is to use a Taylor rule with make-up factor in communication. The Fed publishes such a rule in its policy report regularly. This can help to avoid a downward bias if it is given weight in public communication, because it relates directly to the policy instrument. At the same time, defining this more loosely at the level of target variables such as inflation rates or a price-level target path makes it quite a bit more dificult in my view. I remain sceptical there.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Average inflation targeting Not confident
Francesca Monti's picture Francesca Monti Kings College London Average inflation targeting Confident
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Inflation targeting Confident
The aim should be to smooth the expected future path of prices over the medium term but not to do this by sharply changing inflation in order to hit the price path and not to react to relative price changes that affect inflation in the short term. This means that targeting the price LEVEL and short term strict inflation targeting are the wrong choices.
Michael McMahon's picture Michael McMahon University of Oxford Average inflation targeting Confident
Harris Dellas's picture Harris Dellas University of Bern Inflation targeting Very confident
Jean Imbs's picture Jean Imbs Paris School of Economics Average inflation targeting Not confident
Mirko Wiederholt's picture Mirko Wiederholt Science Po Average inflation targeting Confident
Evi Pappa's picture Evi Pappa European University institute Hybrid policies Very confident
Antonio Fatás's picture Antonio Fatás INSEAD, Singapore Average inflation targeting Confident
Patrick Minford's picture Patrick Minford Cardiff Business School NGDP targeting Confident
My answer above deals with this. It is worth adding that the substantial power of NGDP targeting to stabilise comes from the long ahead commitment it implies for future interest rates under rational expectations.
Dawn Holland's picture Dawn Holland NIESR Hybrid policies Confident
If agents form adaptive expectations, price level or average inflation targeting may amplify cycles.
Jorge Braga de Macedo's picture Jorge Braga de ... Nova School of Business and Economics, Lisbon Average inflation targeting Very confident
While other policies targeting the "price level" or "nominal GDP" let alone a "hybrid" may be more appealing in theory this one is the least complicated to adjust to
Robert Kollmann's picture Robert Kollmann Université Libre de Bruxelles Inflation targeting Confident
If the natural real interest rate were to change persistently in the future, the ECB would need to adjust its inflation target, at the next "strategy review."
Maria Demertzis's picture Maria Demertzis Bruegel Average inflation targeting Very confident
The trouble with average inflation targeting is that it also needs either a specified term (like average of, say, 4 years) or it needs explicit tolerance bands around. By itself, Average IT is not easily operational.
Cédric Tille's picture Cédric Tille The Graduate Institute, Geneva Average inflation targeting Very confident
Ugo Panizza's picture Ugo Panizza The Graduate Institute, Geneva (HEID) Hybrid policies Confident
Natalie Chen's picture Natalie Chen University of Warwick Average inflation targeting Not confident
Fabrizio Coricelli's picture Fabrizio Coricelli University of Siena and Paris School of Economics Hybrid policies Confident
In exceptional times (crises) achieving desired rates of inflation may require complementing traditional monetary policy tools with unorthodox policies (incomes policies or direct intervention on controlled prices). In normal times, inflation targeting is likely to work relatively well.
Ricardo Reis's picture Ricardo Reis London School of Economics Average inflation targeting Confident
Not a big difference between price level targeting and average inflation targeting in practice. https://voxeu.org/content/ecb-strategy-2021-review-and-its-future
David Miles's picture David Miles Imperial College Inflation targeting Confident
Flexible inflation targeting - by which I mean having a flexible and contingent desired horizon to return inflation to target when it has deviated from it - is likely to be the best one can do to create a nominal anchor. Simple but flexible is the key to decent policy.
Philip Jung's picture Philip Jung University of Dortmund Inflation targeting Not confident
Costas Milas's picture Costas Milas University of Liverpool Inflation targeting Confident
Inflation targeting. Any other policy is arguably (much) more difficult to understand (the "hybrid" one in particular), let alone explain to market participants and the public.
Panicos Demetriades's picture Panicos Demetriades University of Leicester Inflation targeting Extremely confident
For the reasons stated above an abandonment of inflation targeting by the ECB is likely to de anchor inflation expectations and could undermine the foundations of the monetary union - which we should not forget is a political project, a project for peace in Europe, and not an optimal currency union.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Hybrid policies Confident
Because of the interest rate lower bound, there are good reasons to aim for a price level catch up policy after recessions. There is nothing equivalent after booms, when you want bygones to by bygones. So an asymmetric policy makes sense, where a price level catch up is used after lower bound recessions, but otherwise we have inflation targeting.
Lucio Sarno's picture Lucio Sarno Cambridge University Average inflation targeting Confident
Gino A. Gancia's picture Gino A. Gancia Queen Mary University of London Average inflation targeting Confident
Linda Yueh's picture Linda Yueh London Business School Inflation targeting Not confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Inflation targeting Not confident