Jumana Saleheen's picture
Affiliation: 
CRU Group
Credentials: 
Chief Economist

Voting history

Post Covid-19 Potential Output in the Eurozone

Question 2: How much lower will the potential growth rate of GDP in the Eurozone in 2025 be due to Covid-19 relative to pre-Covid forecasts?

 

Answer:
½ percentage point or less
Confidence level:
Very confident
Comment:
In previous crisis we have seen an impact on the level of potential GDP but not on its growth. There is no reason to expect anything different this time.

Question 1: How much lower will the potential level of GDP in the Eurozone in 2025 be due to Covid-19 relative to pre-Covid forecasts?

 

Answer:
Between 2% and 5%
Confidence level:
Very confident

Should the ECB Reformulate its Inflation Objective?

Question 1: Which of the following best reflects your opinion on the following statement? “The ECB should explicitly state that it will allow inflation to temporarily exceed the 2% target following extended periods of low inflation.”

Answer:
Disagree
Confidence level:
Very confident
Comment:
The only good argument for the ECB to follow the Fed, in announcing an average inflation targeting framework, is to harmonise policy frameworks on both sides of the Atlantic. Such harmonisation makes it easier for financial markets to make calls on the euro/$ - a benchmark currency for global trade. I am critical of the success of such an average inflation targeting framework for many reasons. (1) It is not tried and tested (2) It is less transparent - if like the Fed the ECB are not explicit about the period over which they seek the average inflation target to be met. (3) (2) means it would be harder to evaluate the success of the ECB in meeting its remit, and thereby it would weaken the accountability of the ECB Governing Body.

Question 2: Would you support increasing the ECB’s inflation target to a higher rate of inflation than the current 2% target?

Answer:
Support
Confidence level:
Extremely confident
Comment:
The ECB has persistently undershot its inflation target of "below but close to 2%": Euro Area inflation averaged ~1.4% since 2010, and 1.2% since 1999. There are many explanations for this performance and may solutions have been suggested - including raising the inflation target. There are pros and cons to raising the inflation target (e.g. see Gagnon and Collins, December 2019). The cons include costs of higher inflation (if we get there) and confusion if the EU has a different target to other major economies. The pros are that it grants the central bank more policy space, which it can then draw on to stabilise business cycle fluctuations in output. On balance I think the benefits outweigh the costs.

Question 3: Which of the following best reflects your opinion on the following statement? “The ECB should explicitly recognize unemployment and/or economic growth as a secondary aim, secondary to its price stability mandate.”

Answer:
Strongly agree
Confidence level:
Extremely confident
Comment:
The EU is a large open economy, with a flexible exchange rate. That means that in response to a negative demand shock, one might see a negative output gap with no weakness in inflation. This arises because of a fall in the exchange rate (in response to the demand shock), which in turn pushes up on import prices and headline inflation rates. It is for this reason that standard RBC models (e.g. Clarida, R, J Gali and M Gertler (1999)) include a traditional Taylor Rule - where optimal policy is determined by the neutral rate of interest and the deviation of inflation from target, and the deviation of output from potential (the output gap).

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