Author(s): Sylvain Broyer
Date published: Nov 2019
SUERF Policy Note, Issue No 112
by Sylvain Broyer, S&P Global Ratings
JEL-codes: E31, E52, E58, R3.
Keywords: Inflation targeting, monetary policy, housing prices, financial stability.
This note argues that a new measure of inflation with greater focus on the non-tradable sector should be high on the ECB’s agenda. Including the prices of owner-occupied housing would add 0.3 percentage point to the current inflation rate and contribute to a sustainable rise in inflation expectations. The inclusion of prices for owner-occupied housing in the HICP would also rebalance the ECB’s monetary policy from the need for preemptive easing towards the need for financial stability. Actually, three central banks that target inflation including owner-occupied housing have been able to raise rates during the past economic upturn. Should the ECB have targeted such prices in the past, monetary policy might have been different: more accommodation would have been necessary in 2012, 2013 and less accommodation from the mid-2017. Other alternatives to the current ECB strategy like price level targeting, nominal GDP targeting, a higher inflation target without changing the inflation measures present many caveats. The question of symmetry, i.e. flexibility in inflation targeting is certainly a necessity, but it would not give the ECB sufficient policy space to cushion a recession.
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