What Kind Of Inflation Targeting Is Considered The Most Accepted In The Eu Economies?

Аннотация

This study aims to identify the optimal inflation target for the European Central Bank (ECB). It will argue that the current definition of price stability and thus, the target of 2% yearly increase in HICP is not relevant according to our macroeconomic projection in Eurozone. This study argues that very low inflation rates for the last years may signify a threat of deflation. Specifically, the study argues for asymmetric inflation targeting and recommend the ECB to reformulate its inflation target as “close to 2.5% from below and above”. This has to be done in order to counter possible deflation, lower unemployment, avoid the liquidity trap, and give more room for the ECB to conduct its macroeconomic policy under the threat of recession. It is also briefly illuminated some other benefits of higher inflation, such as the option of negative interest rates, seigniorage and money illusion, and the corresponding of the costs associated with higher inflation of 2.5%, such as shoe leather costs, menu costs, tax distortions and uncertainty due to price variability. It is assumed that the outcome of Cost-Benefit analysis for a 2.5% inflation target is not very different from that for a 2% level, while a greater increase in inflation target would produce unclear results. KEYWORDS Inflation targeting, central banks, the ECB, euro, optimal inflation rate, money illusion, negative interest rates, liquidity trap, deflation, monetary policy, inflation-targeting regimes. The US A Journals Volume 03 Issue 01-2021 61 The American Journal of Management and Economics Innovations IMPACT FACTOR (ISSN – 2693-0811) 2021: 5. 562 Published: January 31, 2021 | Pages: 61-69 Doi: https://doi.org/10.37547/tajmei/Volume03Issue01-13 INTRODUCTION many years could not escape the fate of falling prices. Inflation target rate in most industrialized countries ranges from 1% to 3% (i.e. annual In practice targeted inflation of all central growth rate of inflation). This reflects a banks is always positive, ranging from very low coherent interpretation of long-term inflation rates (1-2%) to comparatively high values (6-8%). rate, not hindering achievement of price How to explain this discrepancy between stability in those countries. That is why for the theory and practice? In Hammond’s words Central Banks of these countries it would be (2012, p.6): “low inflation is a social good”. One difficult to set a higher target for inflation, as reason to have a positive target could be this would undermine their credibility. Thus, simply due to difficulty of measuring inflation even if the target is set only by Central Banks in and the errors associated with it. As it will be practice in industrialized countries freedom of discussed later, predicted inflation rates (and the Central Bank in establishing an operational the targeted one) usually exceed the actual definition of price stability is extremely limited. realized inflation rates. Thus, it may be that when the target is set slightly above zero, the Given such limitations, what should the right Central bank actually targets a zero level of level of inflation target be? Theories suggest inflation, taking into account measurement different optimal inflation rates ranging from error. Most importantly, positive inflation zero to any positive values like 2-4%, or even seems to be more desirable, as it does not negative rates (known as Friedman rule) hinder economy activity as much as negative (Hammond, 2012, p.8). Zero inflation rate inflation rates do. As long as the rate of seems to have reasonable grounds: constant inflation is predictable, as announced and prices mean people are able to make rational eventually met by the Central Bank, it should consumption, spending or investment not have large economic costs due to money decisions without being hindered by illusion. As stated by Hammond (ibid., p.8), uncertainty. In fact, zero inflation is the best to having a positive inflation target, the correspond to the definition of “price probability of achieving low zero bound stability”, so strived by all Central Banks, rather decreases, as it was the case during the period than 2% inflation by which it is usually defined. of the global economic crises in 2008-2009 Proponents of zero inflation target often argue years. Moreover, if there is a risk of falling into that inflation creates so-called “money deflation, setting a positive inflation target can illusion”, which makes economic agents make be a solution, as the costs of deflation on the wrong decisions thereby negatively affecting economy are higher than those of inflation the economy (we will come back to the issue of (ibid.). Another argument for a positive “money illusion” later in the study). Negative inflation is related to the structural labor inflation (i.e. deflation) characterized by falling rigidities common in many developed prices seems to be even more attractive. countries, especially in Europe. The common However, it is so only at first