The European Central Bank has consistently undershot its inflation objective of “close to, but below 2%” for over a decade, potentially threatening its credibility. To maintain credibility, the ECB should adopt a two-pronged strategy focusing on a medium-term inflation target and systematically smoothing financial cycles.
MUNICH – The upcoming change of leadership at the European Central Bank represents an opportunity – if not an obligation – to review the Bank’s policy framework. The ECB can take credit for major achievements during Mario Draghi’s presidency – most importantly, stabilizing the eurozone during the 2007-08 global financial crisis and ending speculation about the possible breakup of the single currency during the sovereign-debt crisis in 2012. But the ECB’s strategy of steering consumer-price inflation has been much less successful.
MUNICH – The upcoming change of leadership at the European Central Bank represents an opportunity – if not an obligation – to review the Bank’s policy framework. The ECB can take credit for major achievements during Mario Draghi’s presidency – most importantly, stabilizing the eurozone during the 2007-08 global financial crisis and ending speculation about the possible breakup of the single currency during the sovereign-debt crisis in 2012. But the ECB’s strategy of steering consumer-price inflation has been much less successful.