Question A:
If the European Central Bank changed its inflation target from 2% to 3%, the long-run costs of inflation for households would be essentially unchanged.
Responses
Responses weighted by each expert's confidence
Question B:
There is a substantial benefit to having higher average inflation and by implication a higher nominal interest rate so as to avoid hitting the zero lower bound.
Responses
Responses weighted by each expert's confidence
Question C:
The fact that the Eurozone encompasses 20 countries – and thus the European Central Bank has 20 masters rather than one like the US Federal Reserve – eliminates the risk of fiscal dominance.
Responses
Responses weighted by each expert's confidence
Question A Participant Responses
| Participant | University | Vote | Confidence | Bio/Vote History |
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 Franklin Allen |
Imperial College London | Bio/Vote History | ||
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It's an interesting question. I'm not sure there is much empirical evidence concerning this. If the target was 4%, would the same argument hold? There may be an optimal target and it may well be 2% since that is what so many central banks focus on.
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 Pol Antras |
Harvard | Bio/Vote History | ||
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 Olivier Blanchard |
Peterson Institute | Bio/Vote History | ||
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I have been arguing for it for some time. I initially argued for 4%, but concluded from the salience evidence that 3% was more prudent.
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 Richard William Blundell |
University College London | Did Not Answer | Bio/Vote History | |
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 Maristella Botticini |
Bocconi | Bio/Vote History | ||
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 Agnès Bénassy-Quéré |
Paris School of Economics | Did Not Answer | Bio/Vote History | |
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 Elena Carletti |
Bocconi | Bio/Vote History | ||
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 Jean-Pierre Danthine |
Paris School of Economics | Bio/Vote History | ||
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 Paul De Grauwe |
LSE | Bio/Vote History | ||
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 Jan Eeckhout |
UPF Barcelona | Bio/Vote History | ||
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 Nicola Fuchs-Schündeln |
Goethe-Universität Frankfurt | Bio/Vote History | ||
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Heterogeneity in the effects of inflation (on households of different income levels, regional heterogeneity, etc.) plays a role and becomes more substantial with higher inflation rates.
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 Jordi Galí |
Barcelona GSE | Bio/Vote History | ||
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 Luis Garicano |
LSE | Did Not Answer | Bio/Vote History | |
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 Yuriy Gorodnichenko |
Berkeley | Bio/Vote History | ||
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 Rachel Griffith |
University of Manchester | Bio/Vote History | ||
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 Veronica Guerrieri |
Chicago Booth | Did Not Answer | Bio/Vote History | |
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 Luigi Guiso |
Einaudi Institute for Economics and Finance | Bio/Vote History | ||
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 Sergei Guriev |
London Business School | Bio/Vote History | ||
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 Patrick Honohan |
Trinity College Dublin | Bio/Vote History | ||
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But moving to a new target without destabilising expectations for the short run would be tricky. Best if other leading central banks were also converging on 3%.
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 Beata Javorcik |
University of Oxford | Bio/Vote History | ||
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 Jan Pieter Krahnen |
Goethe University Frankfurt | Bio/Vote History | ||
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Costs of inflation will likely change because people will have learned that inflation targets are a matter of discretion, and can no longer be taken for granted. Thus, long term expectations will reflect an additional (moral) risk of inflation target change.
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 Botond Kőszegi |
Central European University | Did Not Answer | Bio/Vote History | |
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 Eliana La Ferrara |
Harvard Kennedy | Did Not Answer | Bio/Vote History | |
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 Christian Leuz |
Chicago Booth | Bio/Vote History | ||
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 Thierry Mayer |
Sciences-Po | Bio/Vote History | ||
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 Costas Meghir |
Yale | Bio/Vote History | ||
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 Marco Pagano |
Università di Napoli Federico II | Bio/Vote History | ||
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 Lubos Pastor |
Chicago Booth | Bio/Vote History | ||
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3% is quite a bit more noticeable than 2%.
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 Richard Portes |
London Business School | Bio/Vote History | ||
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 Canice Prendergast |
Chicago Booth | Bio/Vote History | ||
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 Carol Propper |
Imperial College London | Did Not Answer | Bio/Vote History | |
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 Imran Rasul |
University College London | Did Not Answer | Bio/Vote History | |
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 Lucrezia Reichlin |
London Business School | Bio/Vote History | ||
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 Ricardo Reis |
London School of Economics | Bio/Vote History | ||
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Workers must engage in costly search and bargaining to have their wages keep up, and the increase in the inflation risk premium on the large stock of government bonds would ultimately fall on the taxpayer.
-see background information here |
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 Rafael Repullo |
CEMFI | Bio/Vote History | ||
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 Hélène Rey |
London Business School | Did Not Answer | Bio/Vote History | |
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 Antoinette Schoar |
MIT | Bio/Vote History | ||
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 Kjetil Storesletten |
University of Minnesota | Bio/Vote History | ||
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For (expected) inflation close to zero, the costs are small. The difference between 2% and 3% is negligible
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 Daniel Sturm |
London School of Economics | Bio/Vote History | ||
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While a move from 2% to 3% is neutral in theory, I worry that the public perception of a 3% traget could be quite different from a 2% target.
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 Silvana Tenreyro |
LSE | Bio/Vote History | ||
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The cost from moving to 3% is not negligible. It is easy for people to ignore 2% inflation; but as the target moves to 3% or above, it is harder to ignore. A move from 2 to 3 could be more acceptable if all central banks were to move in tandem.
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 Rick Van der Ploeg |
Oxford | Bio/Vote History | ||
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 John Vickers |
Oxford | Bio/Vote History | ||
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Inflation is likely to be more stable at 2%, and inflation expectations better anchored.
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 Hans-Joachim Voth |
University of Zurich | Bio/Vote History | ||
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 Karl Whelan |
University College Dublin | Did Not Answer | Bio/Vote History | |
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 Charles Wyplosz |
The Graduate Institute Geneva | Bio/Vote History | ||
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Question B Participant Responses
| Participant | University | Vote | Confidence | Bio/Vote History |
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Franklin Allen |
Imperial College London | Bio/Vote History | ||
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This is not clear to me. With a 3% target there may be more volatility in inflation rates and as a result the zero lower bound could conceivably be hit more often.
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Pol Antras |
Harvard | Bio/Vote History | ||
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Olivier Blanchard |
Peterson Institute | Bio/Vote History | ||
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I still believe that there is a decent probability that we reach the zlb again. 1% more than the current target would give more room.
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Richard William Blundell |
University College London | Did Not Answer | Bio/Vote History | |
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Maristella Botticini |
Bocconi | Bio/Vote History | ||
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Agnès Bénassy-Quéré |
Paris School of Economics | Did Not Answer | Bio/Vote History | |
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Elena Carletti |
Bocconi | Bio/Vote History | ||
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Jean-Pierre Danthine |
Paris School of Economics | Bio/Vote History | ||
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Paul De Grauwe |
LSE | Bio/Vote History | ||
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Jan Eeckhout |
UPF Barcelona | Bio/Vote History | ||
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Nicola Fuchs-Schündeln |
Goethe-Universität Frankfurt | Bio/Vote History | ||
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Jordi Galí |
Barcelona GSE | Bio/Vote History | ||
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This is exactly what we found in our paper with Andrade, Le Bihan and Matheron using a DSGE model estimated for the euro area:
-see background information here |
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Luis Garicano |
LSE | Did Not Answer | Bio/Vote History | |
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Yuriy Gorodnichenko |
Berkeley | Bio/Vote History | ||
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Rachel Griffith |
University of Manchester | Bio/Vote History | ||
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Veronica Guerrieri |
Chicago Booth | Did Not Answer | Bio/Vote History | |
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Luigi Guiso |
Einaudi Institute for Economics and Finance | Bio/Vote History | ||
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Sergei Guriev |
London Business School | Bio/Vote History | ||
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Patrick Honohan |
Trinity College Dublin | Bio/Vote History | ||
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Even though r-star may tend to creep up in the years ahead.
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Beata Javorcik |
University of Oxford | Bio/Vote History | ||
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Jan Pieter Krahnen |
Goethe University Frankfurt | Bio/Vote History | ||
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The zero lower bound is an illusion, no? People can learn dealing with rates in negative territory - thereby invalidating the argument pro higher inflation target. Because higher inflation target means higher social costs of price level changes.
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Botond Kőszegi |
Central European University | Did Not Answer | Bio/Vote History | |
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Eliana La Ferrara |
Harvard Kennedy | Did Not Answer | Bio/Vote History | |
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Christian Leuz |
Chicago Booth | Bio/Vote History | ||
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Thierry Mayer |
Sciences-Po | Bio/Vote History | ||
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Costas Meghir |
Yale | Bio/Vote History | ||
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Marco Pagano |
Università di Napoli Federico II | Bio/Vote History | ||
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Lubos Pastor |
Chicago Booth | Bio/Vote History | ||
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Richard Portes |
London Business School | Bio/Vote History | ||
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Canice Prendergast |
Chicago Booth | Bio/Vote History | ||
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Carol Propper |
Imperial College London | Did Not Answer | Bio/Vote History | |
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Imran Rasul |
University College London | Did Not Answer | Bio/Vote History | |
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Lucrezia Reichlin |
London Business School | Bio/Vote History | ||
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Ricardo Reis |
London School of Economics | Bio/Vote History | ||
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Yes, but conditional on (i) the value of r* affecting the chance of hitting the ZLB and (ii) the large costs on the other side form the previous question
-see background information here |
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Rafael Repullo |
CEMFI | Bio/Vote History | ||
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Hélène Rey |
London Business School | Did Not Answer | Bio/Vote History | |
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Antoinette Schoar |
MIT | Bio/Vote History | ||
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Kjetil Storesletten |
University of Minnesota | Bio/Vote History | ||
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Two benefits of a slightly larger inflation target: (1) slightly lower probability of hitting the zero lower bound; (2) downward nominal wage rigidity would be a slightly smaller problem because inflation would lower the real wage for firms that cannot lower nominal wages
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Daniel Sturm |
London School of Economics | Bio/Vote History | ||
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Silvana Tenreyro |
LSE | Bio/Vote History | ||
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As economies become more digitalised, the effective lower bound falls, creating more monetary policy space for central banks, and reducing the benefits of a higher inflation target.
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Rick Van der Ploeg |
Oxford | Bio/Vote History | ||
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John Vickers |
Oxford | Bio/Vote History | ||
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That benefit could be outweighed by costs, including for inflation expectations.
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Hans-Joachim Voth |
University of Zurich | Bio/Vote History | ||
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Karl Whelan |
University College Dublin | Did Not Answer | Bio/Vote History | |
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Charles Wyplosz |
The Graduate Institute Geneva | Bio/Vote History | ||
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Question C Participant Responses
| Participant | University | Vote | Confidence | Bio/Vote History |
|---|---|---|---|---|
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Franklin Allen |
Imperial College London | Bio/Vote History | ||
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I wouldn't say the multitude of countries eliminates fiscal dominance but it may make it less likely. It presumably depends on the debt structure and how much of EU debt is a joint liability, among other things.
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Pol Antras |
Harvard | Bio/Vote History | ||
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Olivier Blanchard |
Peterson Institute | Bio/Vote History | ||
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Richard William Blundell |
University College London | Did Not Answer | Bio/Vote History | |
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Maristella Botticini |
Bocconi | Bio/Vote History | ||
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Agnès Bénassy-Quéré |
Paris School of Economics | Did Not Answer | Bio/Vote History | |
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Elena Carletti |
Bocconi | Bio/Vote History | ||
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Jean-Pierre Danthine |
Paris School of Economics | Bio/Vote History | ||
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Paul De Grauwe |
LSE | Bio/Vote History | ||
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I would have agreed had you written that the risk of fiscal dominance is reduced, rather than eliminated
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Jan Eeckhout |
UPF Barcelona | Bio/Vote History | ||
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Nicola Fuchs-Schündeln |
Goethe-Universität Frankfurt | Bio/Vote History | ||
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It might slighlty weaken that risk, but certainly doesn't eliminate it.
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Jordi Galí |
Barcelona GSE | Bio/Vote History | ||
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I'd say the number of fiscal masters is not as important as the independence of the Governing Council members
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Luis Garicano |
LSE | Did Not Answer | Bio/Vote History | |
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Yuriy Gorodnichenko |
Berkeley | Bio/Vote History | ||
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Rachel Griffith |
University of Manchester | Bio/Vote History | ||
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Veronica Guerrieri |
Chicago Booth | Did Not Answer | Bio/Vote History | |
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Luigi Guiso |
Einaudi Institute for Economics and Finance | Bio/Vote History | ||
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Sergei Guriev |
London Business School | Bio/Vote History | ||
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Patrick Honohan |
Trinity College Dublin | Bio/Vote History | ||
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Multi-country setup helps but does not wholly eliminate the danger.
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Beata Javorcik |
University of Oxford | Bio/Vote History | ||
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Jan Pieter Krahnen |
Goethe University Frankfurt | Bio/Vote History | ||
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In fact, the opposite claim is more likely to be true: Fiscal dominance may be the outcome of free-riding on monetary stability by independent fiscal authorities in the European Union , e.g., by issuing government debt at the national level without observing appropriate limits.
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Botond Kőszegi |
Central European University | Did Not Answer | Bio/Vote History | |
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Eliana La Ferrara |
Harvard Kennedy | Did Not Answer | Bio/Vote History | |
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Christian Leuz |
Chicago Booth | Bio/Vote History | ||
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Eliminates is probably too strong, hence uncertain. It definitely mitigates.
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Thierry Mayer |
Sciences-Po | Bio/Vote History | ||
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Costas Meghir |
Yale | Bio/Vote History | ||
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Marco Pagano |
Università di Napoli Federico II | Bio/Vote History | ||
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Lubos Pastor |
Chicago Booth | Bio/Vote History | ||
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Given the substantial fiscal needs of the 20 countries in the coming years, and the lack of fiscal coordination among them, the threat of fiscal dominance seems quite significant.
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Richard Portes |
London Business School | Bio/Vote History | ||
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Canice Prendergast |
Chicago Booth | Bio/Vote History | ||
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Carol Propper |
Imperial College London | Did Not Answer | Bio/Vote History | |
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Imran Rasul |
University College London | Did Not Answer | Bio/Vote History | |
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Lucrezia Reichlin |
London Business School | Bio/Vote History | ||
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Ricardo Reis |
London School of Economics | Bio/Vote History | ||
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Eliminates is much too strong, yes if the question said attenuates. Also the weight/dominance of each country is not 1/20.
-see background information here |
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Rafael Repullo |
CEMFI | Bio/Vote History | ||
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Hélène Rey |
London Business School | Did Not Answer | Bio/Vote History | |
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Antoinette Schoar |
MIT | Bio/Vote History | ||
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Kjetil Storesletten |
University of Minnesota | Bio/Vote History | ||
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The ECB seemed beholden to political influence during the Greek debt crisis. This suggests that fiscal dominance might be bigger problem in EU
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Daniel Sturm |
London School of Economics | Bio/Vote History | ||
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Silvana Tenreyro |
LSE | Bio/Vote History | ||
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Rick Van der Ploeg |
Oxford | Bio/Vote History | ||
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John Vickers |
Oxford | Bio/Vote History | ||
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It certainly reduces the risk but does not eliminate it
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Hans-Joachim Voth |
University of Zurich | Bio/Vote History | ||
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Karl Whelan |
University College Dublin | Did Not Answer | Bio/Vote History | |
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Charles Wyplosz |
The Graduate Institute Geneva | Bio/Vote History | ||
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