Beware of Pitfalls in the European Central Bank's Review of Monetary Policy Strategy

Abstract

The long-awaited Review of Monetary Policy Strategy of the European Central Bank has been released. According to the Governing Council, "price stability is best maintained by aiming for 2% inflation over the medium term", with "symmetric commitment"to this target. "Symmetry means that the Governing Council considers negative and positive deviations from this target as equally undesirable". This orientation seems contrarian to the view, expressed by some dissenting scholars, that 2% should be set as a ceiling, and that persistent inflation below 2% observed over the last decade was to be adopted as the "new normal". The aim of this paper is not to examine and assess the new policy strategy of the ECB per se, but to warn about pitfalls in detecting undesirable (expectation-driven) deviations of inflation from target versus permanent changes in the ouput-inflation relationship.