COVID-induced uncertainty in money and capital markets has led to large-scale central bank interventions in these markets. While quantitative and qualitative changes have been made to particular tools, by and large central banks have “followed the 2008 playbook”. However, these tools have contributed to increased leverage throughout the system, and have either caused further climate risks and entrenched inequality, or are insensitive to these issues.

One way of addressing these problems without treaty change starts from the following observation: The Maastricht Treaty mandates the European Central Bank to achieve price stability throughout the Eurozone; but defining what this means in practice is left to the central bank itself. Currently, the ECB has defined this as an annual increase in the Harmonized Index of Consumer Prices (HICP) of close to but slightly below 2%. In order to help prevent austerity, allow for ‘brown’ inflation, and fight income inequality, the ECB could substantially alter its definition of ‘price stability’.

Besides taxes, growth and debt monetisation, moderately higher inflation is an available option to reduce the post-Covid public debt burden. While wealth taxes, better tax enforcement, and a limited amount of debt monetisation are feasible and reasonable options, it would be naive to assume that such policies will be enacted and implemented on a sufficient scale and at sufficient speed. Moreover, using an average inflation target may increase long run prosperity without endangering long term price stability, by preventing premature rates increases like in 2011.

Further, in its current version, the HICP does not consider the carbon footprint of products. In light of the desirability of higher prices for ‘brown’ consumer goods and services (e.g. petrol, air travel, or meat), ‘greening’ the HICP would be one way to take the bite out of the price stability mandate, while at the same time making it more consistent with the ECB’s secondary objective.

To strengthen household balance sheets, and thus increase their resilience in the face of future shocks, a shift from consumer price inflation targeting towards wage bill flooring can also be contemplated, in line with similar proposals advanced in the US.

This proposal links to Strengthening the Secondary Mandate and Democratically Embedded Central Banking.