The ECB'S Inflation Objective

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.European Central Bank;Price stabilization;inflation, monetary policy, price stability, inflation rates, inflation target, low inflation, central bank, inflation targeting, monetary union, relative price, monetary fund, inflation-targeting, inflation rate, average inflation, price level, real interest rate, inflation objective, rate of inflation, steady-state inflation, real exchange rates, nominal interest rates, high inflation, percent inflation, real interest rates, monetary economics, rates of inflation, gdp deflator, effects of inflation, real rates, relative prices, price mechanism, monetary transmission, wage inflation, aggregate demand, european monetary union, annual inflation, inflation stabilization, monetary policies, lower inflation, nominal interest rate, monetary policy rules, actual inflation, financial stability, inflation process, real variables, money base, national bank, inflation across countries, monetary stabilization, inflation targeting framework, retail price index, monetary policy decisions, monetary policy strategy, maximum inflation rate, monetary unions, monetary transmission mechanism, maximum inflation, average inflation rate, inflationary pressures, money growth, moderate inflation, inflation convergence, monetary policy rule, reduction in inflation, inflation preferences