ECB: When monetary policy involves exploration

And assuming it has not, why would it be difficult for it to do what other central banks in Japan, the United States and Britain have been doing for years?

Let’s take these questions in turn. The answer to the first one is straightforward: The ECB is seriously undershooting its own 2 percent inflation target. The year-on-year price increase in the euro area is 0.7 percent, and it is expected to remain below target for the quarters to come.

The ECB, International Monetary Fund and Organization for Economic Cooperation and Development all forecast that the 2 percent threshold will remain out of reach in 2014 and 2015. The IMF even reckons that there is a 25 percent probability of negative inflation by the end of 2015.

Too-low inflation is rarely a healthy development. It is especially unwelcome in the euro area for two reasons. First, public and in some cases private debts are already too high and represent a drag on growth. In Spain, private companies are heavily indebted and the government’s debt is approaching 100 percent of GDP.

The lower the inflation rate, the more past debt continues to weigh and act as a burden. Second, there is still a need for internal price rebalancing within the euro area. Spain must continue to regain competitiveness vis-à-vis Germany, and so does France. The lower the aggregate inflation rate, the more painful this process is because it pushes countries in search of competitiveness into extremely low or even negative inflation territory. For these two reasons at least, the euro area would be much better off with inflation around 2 per cent.

The second question is more subtle. At first sight, it seems that the ECB is already acting unconventionally and has been behaving this way for many years. It is true indeed that since August 2007, it has broadened its toolkit considerably and that its balance sheet has ballooned.

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