There is this view, particularly among economists, that a central bank’s commitment to an inflation target is a sufficient benchmark for its accountability and institutional independence. A view along those lines is expressed by Lucrezia Reichlin in her recent opinion piece for Project Syndicate:1
While some central banks have more flexibility than others in managing price stability, they have all publicly committed to numerical targets. Without such accountability (and transparent communication), their independence would be hard to justify.
In the following sections I explain why this approach needs to account for the specifics and why it remains inadequate in its current form.
Difference between price stability and inflation
In the European Union—and insofar as the European Central Bank (ECB) is concerned—there is an important distinction to be made between (i) price stability and (ii) the actual inflation target. The Treaties define monetary policy as an exercise in controlling the aggregate price level, so that over time money becomes constant or ‘neutral’, or so the thinking goes.
The mandate given to the ECB is to guarantee “price stability”, without any further qualifications as to what that may actually entail. No temporal horizon is envisaged. No methodology. No conditions of any sort.
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