Report
How high should the ECB’s inflation target be?
The right level of the ECB’s inflation target (currently 2%) depends on: Growth in the relative prices of services and industrial products in the euro zone, as industry must be prevented from slipping into deflation. This requires an inflation target above 1%; The degree of nominal wage stickiness . If the nominal wage is very sticky, an excessively low inflation target does not allow the real wage to fall, which may be necessary in the event of a negative supply shock. An inflation target of at least 1.3% is needed to enable the real wage to fall; The need to be able to sufficiently lower interest rates in the event of a recession, which is easier if inflation and therefore nominal interest rates are high before the recession. Altogether, it seems that the ECB’s inflation target should not be lower than 2%. It remains to be seen whether the ECB is capable of lifting inflation to this level.
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Natixis
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Patrick Artus
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