Inflation targets as focal points: Revising the ECB’s monetary framework

The toughest job central banks face in the next five years is managing uncertainty. In the euro area, inflation is persistently low and the ammunition available to raise it is minimal. Meanwhile, structural changes, including the rise of the digital economy and its effects on productivity, and the threat to global open trade, imply that we do not know how the economy will work. At the very least, the European Central Bank will have to design policy not just for specific circumstances but for as many circumstances as possible.

The first guiding principle in revising the ECB monetary policy framework should be to reduce the degree of uncertainty the bank itself brings to the system. In other words, the ECB policy framework should be clarified to minimize self-generated policy uncertainty, and the starting point here will be to have a clear focal point to anchor expectations of...

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