This makes it all the more essential to assess the appropriateness of the Bank’s policy with a strict focus on the target for inflation. To do this, the present paper analyses the effectiveness of monetary policy through its various transmission channels. It shows that the current environment of falling unemployment and solid growth yet low inflation is partly the result of the supply side effects of monetary policy. These effects loom large because, as a result of the banking and sovereign debt crisis, the influence of monetary policy through the demand-side channels is currently limited. For banks, for example, balance sheet adjustment today takes precedence over lending, while for companies it has priority over new investments. This means that cheap finance is keeping the cost pressure on companies with substantial debt low. However, growth in the Eurozone will accelerate the normalisation of these transmission channels, with the result that the inflation rate can also be expected pick up again. The obvious conclusion to be drawn is that the ECB should interpret its inflation target less strictly and not wait too long before reverting to its normal monetary policy.
Is the European Central Bank’s Monetary Policy Still Appropriate?
The monetary policy of the European Central Bank is under fire from two sides. While one side regards the ECB’s monetary policy as too expansionary, the other holds it responsible for keeping the measured inflation rate below target.
- Markus Demary / Michael Hüther ·
- IW-Trends No. 1 ·
- 3 Apr 2018