Is There a Need for Additional Monetary Stimulus? Insights from the Original Taylor Rule

CEPS Policy Brief, No. 342

10 Pages Posted: 19 Apr 2016

See all articles by Cinzia Alcidi

Cinzia Alcidi

CEPS; Graduate Institute of International and Development Studies (IHEID)

Matthias Busse

Centre for European Policy Studies (CEPS)

Daniel Gros

Centre for European Policy Studies, Brussels; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: April 15, 2016

Abstract

Central banks in the developed world are being misled into fighting the perceived dangers of a ‘deflationary spiral’ because they are looking at only one indicator: consumer prices.

This Policy Brief finds that while consumer prices are flat, broader price indices do not show any sign of impending deflation: the GDP deflator is increasing in the US, Japan and the euro area by about 1.2-1.5%. Nor is the real economy sending any deflationary signals either: unemployment is at record lows in the US and Japan, and is declining in the euro area while GDP growth is at, or above potential. Thus, the overall macroeconomic situation does not give any indication of an imminent deflationary spiral.

In today’s high-debt environment, the authors argue that central banks should be looking at the GDP deflator and the growth of nominal GDP, instead of CPI inflation. Nominal GDP growth, as forecasted by the major official institutions, remains robust and is in excess of nominal interest rates.

They conclude that if the ECB were to set the interest rate according to the standard rules of thumb for monetary policy, which take into account both the real economy and price developments of broader price indicators, it would start normalising its policy now, instead of pondering over additional measures to fight deflation, which does not exist. In short, economic conditions are slowly normalising; so should monetary policy.

Keywords: consumer prices, ECB, deflationary spiral

Suggested Citation

Alcidi, Cinzia and Busse, Matthias and Gros, Daniel, Is There a Need for Additional Monetary Stimulus? Insights from the Original Taylor Rule (April 15, 2016). CEPS Policy Brief, No. 342, Available at SSRN: https://ssrn.com/abstract=2766263

Cinzia Alcidi (Contact Author)

CEPS ( email )

1 Place du Congres
Brussels, 1000
Belgium

Graduate Institute of International and Development Studies (IHEID) ( email )

132, Rue de Lausanne
Geneva, 1211
Switzerland

Matthias Busse

Centre for European Policy Studies (CEPS) ( email )

1 Place du Congres, 1000
Brussels, 1000
Belgium

Daniel Gros

Centre for European Policy Studies, Brussels ( email )

1 Place du Congres
B-1000 Brussels, 1000
Belgium

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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