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The ECB Needs a New Mandate

The European Central Bank needs a more realistic and flexible mandate, defined by a broader price-stability objective. But timing is everything: If the ECB tries to move the goalpost while it is missing the shot, the blow to its already diminished credibility could be serious.

BERLIN – The European Central Bank’s decision in September to pursue more monetary-policy easing was controversial, with one board representative, from Germany, resigning over the move. But one of the most remarkable features of the ECB’s position has not gotten enough attention: the admission that inflation expectations have become de-anchored, and that without fiscal-policy support, the central bank will probably fail to fulfill its price-stability mandate for the foreseeable future.

In fact, many observers, and even several members of the ECB’s Governing Council, now argue that the bank needs to adapt its mandate with a new definition of price stability in mind. They are right – but there is one crucial caveat.

Since central-bank independence was strengthened in the 1990s, it has become clear that, in normal times, the specific mandate does not matter much. The United States Federal Reserve managed to guide expectations and achieve price stability with its dual mandate (price stability and maximum employment) just as well as the Bank of England or the ECB, with their narrower price-stability mandates.