A monetary policy framework for the European Central Bank to deal with uncertainty

03-12-2018

We argue that monetary policy faces different challenges to those faced during the period of the great moderation. Greater uncertainties over the ability of monetary policy to control inflation, the instruments that should be used and their effects on financial stability imply that we need to rethink whether the current framework is appropriate. We recommend a few adaptions to the current framework that would provide greater flexibility to the European Central Bank without departing very far from current practices (to avoid risking the credibility that the ECB has acquired since its inception). This document was provided by Policy Department A at the request of the Committee on Economic and Monetary Affairs.

We argue that monetary policy faces different challenges to those faced during the period of the great moderation. Greater uncertainties over the ability of monetary policy to control inflation, the instruments that should be used and their effects on financial stability imply that we need to rethink whether the current framework is appropriate. We recommend a few adaptions to the current framework that would provide greater flexibility to the European Central Bank without departing very far from current practices (to avoid risking the credibility that the ECB has acquired since its inception). This document was provided by Policy Department A at the request of the Committee on Economic and Monetary Affairs.

External author

Grégory Claeys, Maria Demertzis, Jan Mazza