The ECB’s Policy Target

The only centralised macroeconomic policy target in the Eurozone is the ECB’s 2% inflation number. Today’s flash estimate from Eurostat shows a price decline of 0.2% over twelve months. The index for the Eurozone has in fact been flat now for eighteen months – today’s number of 117.70 compares to 117.61 in June 2013.

The undershoot would be a concern in a proper monetary union operating at the ZLB: real rates are too high. In the Eurozone, which is not a proper monetary union, just a common currency area with heavily indebted states, it creates two additional problems.

The real burden of debt is not eroding at the advertised rate. If the ECB had delivered a 2% rate since December 2008, at which point debt build-up in the periphery was already manifest, the index today would be 121.6 rather than 117.7. If the ECB fails to get the rate of inflation up to 2% for another couple of years as QE-pessimists fear, the failure to hit the inflation target could add 5% or 6% to real debt burdens of sovereigns which have already had to resort to official lenders.

The second problem is the absence of any other centralised macro policy instrument, if you discount, as you should, Jean Claude Juncker’s leverage wheeze. The instrument that has fallen short is the only one available.

The inflation target should now be Olivier Blanchard’s 4% rather than the ECB’s 2%, if only to make up lost ground. If you believe that the ECB cannot or will not deliver on the inflation rate, the alternative is illegal: a fiscal expansion financed by the central bank, the kind of thing they do in real monetary unions.

TCD Policy Institute Event: Barry Eichengreen, “Hall of Mirrors”

Barry Eichengreen will talk about this new book in the Ed Burke Theatre (TCD Arts Block), 9am-10am on Tuesday January 20th.  All welcome!


  • First and only systematic comparative analysis of the two great economic and financial crises of the last 100 years
  • Provides an integrated account of experience in the US and Europe, which together constituted the epicenter of the recent crisis and were similarly at the center of the Great Depression
  • Economic analysis is leavened by anecdote and personalities, with key figures in both crises introduced and humanized
  • Shows how the history of the Great Depression shaped how policy makers perceived and responded to the Global Credit Crisis, but equally how the recent crisis will in turn re-shape how we see the Depression



SSISI Event: The Funding of the Irish Domestic Banking System During the Boom

I will present a paper on this topic to SSISI on Thursday January 15th at 6pm at the Royal Irish Academy (discussants – Greg Connor and Dermot Coates). All welcome!

To start 2015

Some observations on some recent issues are below the fold:

  1. The NTMA’s purchase and cancellation of €500 million of FRNs from the Central Bank
  2. The passing in the US of The Tax Increase Prevention Act of 2014 which extends the “look-through” rule
  3. The recent falls of the price of motor fuel which mean the pre-tax price of petrol is below 40 cent/litre

Not Quite Checkmate for the Bundesbank Germany Appears Defeated Over QE, But Might Still Dictate Terms of Surrender

This WSJ article provides an overview of the current situation – here.