Christine Lagarde Begins to Chart a Course at the E.C.B.



The strategy review, of uncertain duration, is likely to focus on the central bank’s approach to inflation. By law, the European Central Bank is required to guard price stability. But it has discretion to define what that means.

Since the last strategy review, in 2003, the monetary policymakers based in Frankfurt have promised to keep the annual inflation rate “below, but close to, 2 percent.” Some inflation is considered a good thing because it provides a comfortable buffer against deflation, a downward spiral of prices that can lead to economic depression.

Modest inflation also encourages individuals and companies to invest and spend, because otherwise their money slowly loses value.

Some economists, such as Otmar Issing, the European Central Bank’s former chief economist, say the bank should give up trying to hit the 2 percent target, which it never succeeded in doing consistently under Mr. Draghi. Fear of deflation is overblown, Mr. Issing and others argue, and there is nothing wrong with low inflation.

Another group, whose most prominent member is Olivier Blanchard, former chief economist of the International Monetary Fund, argue for an inflation target as high as 4 percent in boom times. The theory is that a higher target would encourage companies to raise prices, while giving the central bank more space to cut interest rates in bad times.

Carsten Brzeski, the chief economist at ING Germany, suggested that the central bank could buy itself more flexibility by simply promising to keep inflation “around 2 percent.” That may seem like an insignificant change, but it would allow the central bank to overshoot the target when necessary to compensate for a long period of meager inflation.

Where Ms. Lagarde stands in this debate is not clear. But those who scrutinize central bankers’ utterances detect signs that she is concerned about pernicious consequences from measures to push up the inflation rate.


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