ECB President Christine Lagarde said in a speech that a”wider discussion today” among central banks is whether they should “commit to explicitly make up for inflation misses when they have spent quite some time below their inflation goals.”
“If credible, such a strategy can strengthen the capacity of monetary policy to stabilise the economy when faced with the lower bound,” she said. “Promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates.”
“While make-up strategies may be less successful when people are not perfectly rational in their decisions – which is probably a good approximation of the reality we face – the usefulness of such an approach could be examined,” she added.
