The European Central Bank must adapt to an environment of inflation volatility

Lucrezia Reichlin, Jeromin Zettelmeyer

The European Central Bank faces three major challenges in the short and medium terms. The first is to conduct monetary policy in an environment of much tighter fiscal policy, meaning that European Union governments may be constrained in supporting the ECB’s price stability objective if interest rates fall back to the zero lower bound (Darvas and Zettelmeyer, 2023). The second is the perennial problem of conducting monetary policy in the presence of fragmentation risk, a problem that the euro area has still not overcome and is unlikely to fully overcome in the medium term. Third, the ECB must adapt its monetary strategy to an environment of inflation volatility driven by supply shocks and structural changes on the supply-side of the economy. 

Πηγή: www.bruegel.org

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