Adam Tooze | September 10 | Social Europe
As they waited for the European Central Bank press conference, market actors and financial commentators held their collective breath. The eurozone sovereign-debt markets were calm, the Pandemic Emergency Purchase Programme has ample headroom and the euro-area economy was showing signs of recovery. Yet the anxious question hanging over the event was whether ECB officials would mention the euro’s recent appreciation against the dollar—and, if so, what words would they use?
It may sound odd, but for a central bank to talk about exchange rates is at odds with the prevailing model of central banking in advanced economies. The central focus of that regime is price stability, which is to be achieved by inflation-targeting. Originally, the aim of the central bank was to keep inflation, as measured by a battery of domestic price indices, below 2 per cent per annum. Fear of inflationary overshooting is increasingly obsolete, though it lingers in some parts of Europe. The main concern today is to ensure that inflation stays reasonably close to 2 per cent, so there is not a slide into deflationary territory.
The exchange rate is left to be decided by the daily flux of trillions of dollars in the foreign-exchange markets. If a central bank is doing its job in stabilising domestic prices, it ought to have nothing to fear from the currency markets—or so the theory goes. If all central banks adopt similar price-stability targets, then there should be even less reason for destabilising currency movements.
Originally published in Social Europe. Read the full article here.