Friday, April 11, 2014

Is Deflation Looming for the Euro Area?

The signs are increasingly ominous. Here is Menzie Chinn's comment:

At this juncture, the distinction between the US as a monetary and fiscal union with high interstate factor mobility, the euro area as a monetary union with relatively low inter-country factor mobility, becomes important. While inflation is negative in the periphery countries, the deviation from the trend line is negative for the core (and large) euro area countries of Germany and France. The German deviation is about 5% in log terms. While the French deviation is smaller in absolute value, it contrasts with the pre-crisis value of essentially nil. If nominal debt had been accumulated with the expectation of the two percent trend in the price level, the very fact that the price level is lagging implies higher than expected debt burdens and hence more binding collateral constraints.
The IMF concludes:
Macroeconomic policies should stay accommodative. In the euro area, additional demand support is necessary. More monetary easing is needed both to increase the prospects that the ECB’s price stability objective of keeping inflation below, but close to, 2 percent will be achieved and to support demand. These measures could include further rate cuts and longer-term targeted bank funding (possibly to small and medium-sized enterprises). …

1 comment:

PF said...

The ECB board's political strategy has always seemed to be to wait until after the EP elections or after the fall bank stress test announcements, unless there were un-ignorable member-state pushback. There hasn't been -- the governments of France, Italy, and Spain have been either wrapped up in their own domestic dramas or been resigned to the ECB's inclinations. So the strategy proceeds.

And monetary policy, for the board, is still viewed more as a tactical means of leverage against member-states' fiscal policy decisions than as a locus of macroeconomic management with its own obligations.