The ECB’s price stability framework: past experience, and current and future challenges

Occasional Paper Series

Work stream on the price stability objective The ECB's price stability framework:

past experience, and current and future challenges

No 269 / September 2021

Disclaimer: This paper constitutes staff input into the Governing Council's deliberation in the context of the ECB's monetary policy strategy review. This paper should not be reported as representing the views of the Eurosystem. The views expressed are those of the authors and do not necessarily reflect those of the Eurosystem.

Acknowledgements

This report has been jointly produced by the Eurosystem work stream on the price stability objective comprising staff from the European Central Bank (ECB) and the national central banks (NCBs) of those countries that have adopted the euro. The report fed into the Governing Council's deliberations on the monetary policy strategy review for 2020-21.

Co-leads of the work stream
Martina Cecioni1	Hervé Le Bihan
Banca d'Italia	Banque de France
email: [e-mail]	email: [e-mail]
Günter Coenen	Roberto Motto
European Central Bank	European Central Bank
email: [e-mail]	email: [e-mail]
Rafael Gerke
Deutsche Bundesbank
email: [e-mail]
Contributors
Pablo Aguilar	Rafael Gerke (author of Chapter 2, Boxes 4 and 5)
Banco de España	Deutsche Bundesbank
Viktors Ajevskis	Sebastian Giesen
Latvijas Banka	Deutsche Bundesbank
Ugo Albertazzi	Niels Gilbert
European Central Bank	De Nederlandsche Bank
Alexander Al-Haschimi	Sandra Gomes
European Central Bank	Banco de Portugal
Friederike Bornemann	Gavin Goy
European Central Bank	De Nederlandsche Bank
Claus Brand	Adriana Grasso (author of Chapter 3)
European Central Bank	Banca d'Italia
Giacomo Carboni (author of Box 3)	Christoph Grosse-Steffen
European Central Bank	Banque de France
Martina Cecioni (author of Chapter 3)	Markus Haavio
Banca d'Italia	Suomen Pankki - Finlands Bank
Lena Cleanthous	Felix Hammermann (author of Box 7)
Central Bank of Cyprus	European Central Bank
Günter Coenen (author of Chapter 4, Boxes 9 and 11)	Mathias Hoffmann (author of Box 6)
European Central Bank	Deutsche Bundesbank
Agostino Consolo	Jonas Hölz
European Central Bank	European Central Bank
Giuseppe Corbisiero	Samuel Hurtado
Central Bank of Ireland	Banco de España
Luca Dedola (author of Box 2)	Patrick Hürtgen (author of Box 6)
European Central Bank	Deutsche Bundesbank
Desislava Andreeva	John Hutchinson (author of Chapter 2)
European Central Bank	European Central Bank
Michael Dobrew	Michael Ioannidis
Deutsche Bundesbank	European Central Bank
Stéphane Dupraz	Geoff Kenny (author of Box 10)
Banque de France	European Central Bank
Michael Ehrmann	Stephen Kho
European Central Bank	De Nederlandsche Bank
Stephan Fahr	Daniel Kienzler (author of Box 4)
European Central Bank	Deutsche Bundesbank
Erwan Gautier	Malte Knüppel
Banque de France	Deutsche Bundesbank
Dimitris Georgarakos (author of Box 10)	Christoffer Kok
European Central Bank	European Central Bank

1 Alberto Locarno represented Banca d'Italia in the initial phase of the work stream activities.

Jarmo Kontulainen

Suomen Pankki - Finlands Bank

Mika Kortelainen

Suomen Pankki - Finlands Bank

Hervé Le Bihan (author of Chapter 2)

Banque de France

Ana Isabel Lima

European Central Bank

Alberto Locarno (author of Chapter 3) Banca d'Italia

Adriana Lojschova

Národná banka Slovenska

Matjaž Maletič

Národná banka Slovenska

Alberto Martin

European Central Bank

Julien Matheron

Banque de France

Magali Marx

Banque de France

Falk Mazelis (author of Box 11)

European Central Bank

Aidan Meyler

European Central Bank

Emanuel Mönch

Deutsche Bundesbank

Carlos Montes-Galdón (author of Boxes 8 and 11) European Central Bank

Roberto Motto (author of Chapter 2 and Box 11) European Central Bank

Kalin Nikolov

European Central Bank

Galo Nuño

Banco de España

Dimitris Papageorgiou

Bank of Greece

Lora Pavlova

Deutsche Bundesbank

Adrian Penalver

Banque de France

Massimiliano Pisani

Banca d'Italia

Ansgar Rannenberg

Nationale Bank van België/Banque Nationale de Belgique

Annukka Ristiniemi (author of Box 11) European Central Bank

Joost Röttger

Deutsche Bundesbank

Arthur Saint-Guilhem(author of Chapter 2)

European Central Bank

Sergio Santoro

Banca d'Italia

Alexander Scheer (author of Boxes 4 and 5)

Deutsche Bundesbank

Sebastian Schmidt

European Central Bank

Jan David Schneider

European Central Bank

Guido Schultefrankenfeld

Deutsche Bundesbank, European Central Bank

Ifigeneia Skotida

Bank of Greece

Michel Soudan

European Central Bank

Arnoud Stevens

Nationale Bank van België/Banque Nationale de Belgique

Michael Sturm European Central Bank

Dominik Thaler

Banco de España

Andrea Giorgio Tosato

Bank Ċentrali ta' Malta/Central Bank of Malta

Oreste Tristani

European Central Bank

Maria Teresa Valderrama

Oesterreichische Nationalbank

Henning Weber

European Central Bank, Deutsche Bundesbank

Raf Wouters

Nationale Bank van België/Banque Nationale de Belgique

Giordano Zevi (author of Box 1)

Banca d'Italia

This report is part of a set of papers within the ECB's Occasional Paper Series, related to the ECB's Strategy review 2020-21. This set includes the following papers:

Set of Occasional Papers related to the ECB's Strategy review 2020-21

No 263, "The implications of globalisation for the ECB monetary policy strategy". No 264, "Inflation expectations and their role in Eurosystem forecasting".

No 265, "Inflation measurement and its assessment in the ECB's monetary policy strategy review". No 266, "Digitalisation: channels, impacts and implications for monetary policy in the euro area".

No 267, "Review of macroeconomic modelling in the Eurosystem: current practices and scope for improvement". No 268, "Key factors behind productivity trends in EU countries".

No 269, "The ECB's price stability framework: past experience, and current and future challenges".

No 270, "Non-bank financial intermediation in the euro area: implications for monetary policy transmission and key vulnerabilities". No 271, "Climate change and monetary policy in the euro area".

No 272, "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area".

No 273, "Monetary-fiscal policy interactions in the euro area".

No 274, "Clear, consistent and engaging: ECB monetary policy communication in a changing world". No 275, "Employment and the conduct of monetary policy in the euro area".

No 276, "The mandate of the ECB: Legal considerations in the ECB's monetary policy strategy review". No 277, "Evolution of the ECB's analytical framework".

No 278, "Assessing the efficacy, efficiency and potential side effects of the ECB's monetary policy instruments since 2014".

No 279, "The need for an inflation buffer in the ECB's price stability objective - the role of nominal rigidities and inflation differentials". No 280, "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers".

Contents

Abstract	3
1	Overview and reasons for reviewing the ECB's price stability
	framework	4

1.1 The formulation of the ECB's price stability framework: the

		1998 and 2003 decisions	4
	Box 1 Numerical interpretation of the ECB's inflation aim by Italian
		firms	8
	1.2	Reviewing the price stability objective: an overview of the
		report	14
2	The long-run level of inflation based on optimality considerations	17

2.1 Overview of the early literature on the optimal long-run level

	of inflation	18
2.2	Conclusions from the 2003 strategy evaluation	22
2.3	New theoretical insights and empirical evidence since 2003	23
Box 2 Open-economy implications of trend inflation	27
2.4	Reassessment of the arguments for positive inflation
	identified in 2003	34
Box 3 Perceived inflation target and the central bank's credibility	39

2.5 Non-standard measures: stabilisation properties at the lower

		bound and implications for the optimal level of inflation	42
	Box 4	Selective findings in the literature on the impact of selected
		non-standard measures	43
	Box 5	A quantitative illustration of threshold-based forward guidance	46
	Box 6	Inflation expectations and the effectiveness of forward
		guidance	48
	2.6	Conclusions	52
3	Formulation of price stability and the medium-term orientation	54

3.1 The formulation of the price stability objective: point target

	versus range	54
3.2	The medium-term horizon	67

ECB Occasional Paper Series No 269 / September 2021

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