“Central banks’ battle against inflation: Implications for monetary policy” was the title and topic of a lecture held by Benjamin M. Friedman, the William Joseph Maier Professor of Political Economy at Harvard University. This was at the invitation of the Bundesbank’s Research Centre, whose director, Falko Fecht, hosted the proceedings. 

Analysis of euro area monetary policy: forward guidance, inflation and market volatility

In his remarks, Professor Friedman illuminated the challenges currently facing central banks and monetary policy, especially in the United States and the euro area. He addressed the relationship between employment and inflation, the risks of a price-wage spiral and the effectiveness of “forward guidance”, a monetary policy instrument used by central banks to communicate their future monetary policy intentions. Friedman cited a study showing that, under certain circumstances, forward guidance does not reduce market volatility but even increases it.

He also stressed that monetary policy actions needed to be directed at the drivers of inflation as, for instance, demand-side or supply-side inflation drivers could have differing effects on price dynamics and employment. Inflation expectations also play a key role in the fight against inflation, as expectations regarding the future trajectory of inflation were, in his view, a key indicator in assessing the effectiveness and credibility of monetary policy. If households, for example, expect inflation to be high in the future, they mostly demand higher wages and salaries, which could fuel inflation further. Each month, the Bundesbank publishes the results of its own household survey on expectations regarding future inflation rates and Germany’s economic development. 

Given the high inflation worldwide, Professor Friedman said that the US Federal Reserve’s current average inflation targeting framework was, for all practical purposes, dead. This was because it was virtually infeasible to set temporary inflation targets of below 2% in order to offset the currently excessive inflation. In this context, Friedman also endorsed calls by some economists for central banks to adapt their inflation targets to the current situation. 

Bundesbank President stresses shared monetary and fiscal policy objectives in the fight against inflation

The lecture was followed by a panel discussion featuring Bundesbank President Joachim Nagel, Fritzi Köhler-Geib (Chief Economist, KfW Group) and Jens Ulbrich (Director General Economics, Deutsche Bundesbank). The questions posed by Falko Fecht regarded, for instance, the interaction between monetary and fiscal policy. Here, Joachim Nagel emphasised the current importance of the two policy areas’ joint effort to fight against high inflation. There shouldn’t be a situation where fiscal policy and monetary policy work against each other, according to the Bundesbank President. Europe needs robust fiscal rules. This will help central banks in their fight against inflation, Mr Nagel said. This is a cause he is promoting.

Some 80 interested guests, including faculty members, students and journalists, were then given the opportunity to ask the panellists questions. Professor Friedman provided answers regarding his view of inflation, the labour market in Europe and the future of monetary policy. The event was held in English. The panel discussion is available for on-demand viewing.