Similarities in ECB and Fed inflation targets?

Both ECB and Fed do not call themselves as inflation targeting central banks.

ECB has set itself with a quantitative definition of price stability – maintaining inflation rates below but close to 2% over the medium term. Despite this it does not call itself an inflation targeter. Issing pointed  the reasons for the same. First there was no full economic model of Europe needed for an inflation targeter. Second and more importantly ECB believed in money’s role in inflation and inflation targeters did not.

Fed does not even have a quant target. Though some Fed members have discussed their preferred inflation targets around 1.5% – 2.0%.

Antonio Fatas has a nice post showing how Bernanke’s recent mention of preferred inflation target is similar to ECB’s:

The exact words that he is using are

“FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below.”

It is interesting that the expression “2 percent or a bit below” happens to be almost identical to the way the ECB currently refers to its mandate for price stability.

Some history about the ECB mandate: Originally, the ECB was given the mandate of maintaining “price stability”. This mandate was later (October 1998) made precise by the governing council of the ECB as “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%”. At that point there was also a reference to this target, or to price stability more generally, a a mandate “to be maintained over the medium term”.

This initial definition of price stability by the ECB received some criticism because it was leaving too much room for interpretation: Is any inflation rate below 2% consistent with price stability? Is deflation consistent with price stability or even desirable? This led to a redefinition of “price stability” by the governing council of the ECB in May 2003. At that point, the mandate of price stability was defined as “maintaining inflation rates below but close to 2% over the medium term”. So 2% becomes a ceiling (for the medium term) and the goal is to be close enough to the ceiling. Clearly, in this definition there is a sense of asymmetry: 2.1% inflation is worse than 1.9%.

 The words chosen by Ben Bernanke are almost identical to the words chosen by the governing council of the ECB where “below but close” has been replaced by “or a bit below”.

Fatas then looks at the overall ECB record. He says inflation has remained many more months above than below 2%. So it is more right to say “inflation above but close to 2%” and not “inflation below but close to 2%”.



One Response to “Similarities in ECB and Fed inflation targets?”

  1. Tweets that mention Similarities in ECB and Fed inflation targets? « Mostly Economics -- Says:

    […] This post was mentioned on Twitter by Timur Coban, Rahul Deodhar. Rahul Deodhar said: Similarities in ECB and Fed inflation targets? […]

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