Peter Praet gave an important speech on disinflation risks and the ECB’s reaction function (see also his slides) but it is relatively confusing both on how the ECB sees inflation risks and how it can respond to them.
The first part of his speech discusses how the ECB’s price stability mandate has been refined over the years to provide a buffer away from zero on average.
What are the […] considerations that suggested clarifying a policy aim within the price stability interval? Two main considerations led to that decision.
The first was to make sure that the steady state inflation in the euro area as a whole would incorporate a sufficient buffer away from zero. […]
Given that the buffer argument is exactly Olivier Blanchard’s case for a higher inflation target and that the need for allowing inflation differentials within a currency union only reinforces that case, we would have…
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