The European Central Bank Was Facing A Difficult Act

Although recovery from the pandemic shock is still incomplete. And inflationary expectations are still somewhat below target. Between looking through temporary price hikes and addressing the inflationary threats. The confrontation with Russia implies a more pronounced and longer-lasting shock. Which will seriously aggravate the prevailing policy dilemma. The standard rulebook when facing a commodity price shock is that the central bank should essentially tackle the second-round effects and avoid a potential escalation of inflationary expectations.

It should not embark on a futile attempt to control the immediate impact of price rises on aggregate inflation (on which increases in the policy rate have very limited bearing, if any), and it should accommodate permanent relative price changes. In the very short term, the ECB is likely to wait and see until it takes a decision. But it may soon be forced to make a politically difficult choice between tolerating headline inflation remaining above target for longer, and weakening the economy in the midst of a geopolitical confrontation.

An Important Issue Is Whether The Eu

Its action will be further South Africa phone number by the risk that the spreads on government bond markets might widen. As argued by Olivier Blanchard. In this situation a case can be made for a partial fiscal offset of the shock. In most EU countries. Governments have introduced. A raft of measures to contain the rise in prices and to support vulnerable households. But the question is whether governments should rely primarily on transfers. Which can be target but do not contribute to limiting inflation. Or should also intervene through across-the-board tax cuts. And administer price controls.

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Which affect the consumer price index. And therefore facilitate the task of the central bank. But are much more costly budget-wise and obliterate the price signal). In some EU countries at least. Both types of measures are being implement. The war context will push governments toward implementing. More direct price interventions than they would normally consider. An important issue is whether the EU will revise the mechanism. That leads to electricity being price on the basis of the cost of the marginal energy source. Which acts as a powerful transmitter of shocks.

National States To Depart From Standard Policy Assignments

To the price of gas and creates massive rents for electricity producers. Some governments, for example in Spain, have introduced clawbacks. Others, like in France, have capped price rises. Whatever the discussion on the intrinsic merits of the electricity-pricing system in place in the EU, there is now a case for a rethink in a context in which inflation acceleration is a major concern. Unplugging this mechanism temporarily (for, say, six months) would alleviate pressing macroeconomic policy trade-offs. More generally, the war will inevitably lead the EU and national states to depart from standard policy assignments.

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