POLICY BRIEF 14-5
Is the European Central Bank Failing Its Price Stability Mandate?
by Angel Ubide, Peterson Institute for International Economics
Inflation in the euro area is too low, and the European Central Bank (ECB) is at risk of missing its price stability mandate. With the market forecasting average inflation in the euro area over the next five years in the 1.25 to 1.5 percent range, the ECB must prepare to act forcefully to push inflation higher. The ECB should (1) update the definition of price stability as inflation at 2 percent over 2 to 3 years to eliminate the ambiguity over the inflation objective; (2) reduce risk premia in the yield curve via a program of quantitative easing, making clear that this is a monetary policy operation—and thus legal under the Maastricht Treaty; and (3) ease the quantitative credit shortages to small and medium enterprises (SMEs) via a well-designed lending program, offering long-term funds at the policy rate to banks who lend to SMEs. These actions would restore price stability and encourage sustainable growth.
Data disclosure: The data underlying this analysis are available here [xlsx].
View full document [pdf]
Testimony: Banking Union in Nine Questions September 30, 2014
Book: Managing the Euro Area Debt Crisis June 2014
Book: Inside the Euro Crisis: An Eyewitness Account June 2014
Testimony: European Banking Union: Current Outlook and Short-Term Choices February 26, 2014
Book: Responding to Financial Crisis: Lessons from Asia Then, the United States and Europe Now October 2013
Policy Brief 13-17: A Realistic Bridge Towards European Banking Union June 2013
Op-ed: Five Myths about the Euro Crisis September 7, 2012
Article: Why the Euro Will Survive: Completing the Continent's Half-Built House August 22, 2012
Testimony: Challenges of Europe's Fourfold Union August 1, 2012
Policy Brief 12-18: The Coming Resolution of the European Crisis: An Update June 2012
Book: Transatlantic Economic Challenges in an Era of Growing Multipolarity July 2012
Book: Resolving the European Debt Crisis March 2012
Policy Brief 12-20: Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups August 2012
Policy Brief 12-5: Interest Rate Shock and Sustainability of Italy's Sovereign Debt February 2012
Policy Brief 12-4: The European Crisis Deepens January 2012
Policy Brief 11-13: Europe on the Brink July 2011
Working Paper 11-2: Too Big to Fail: The Transatlantic Debate January 2011
Book: Transforming the European Economy September 2004