Guest Lecture

• the EU aims to keep annual inflation rates at about 2%, as a 0% interest rate is bad and may signal economic distress
• without central bank independence, price stability cannot be achieved
• Price stability is important because it preserves the purchasing power of money, as you always know what an amount of money will buy
• price stability is important because it makes it easier to understand changes in relative prices
• price stability reduces distortions in the tax systems, as higher nominal incomes have to pay more taxes, even if real wage hasn't changed
• the ECB is kept separate to the rest of the EU by not allowing governments to tell the ECB what to do, and that the ECB is not allowed to give money directly to governments
• The ECB uses a Harmonised Index of Consumer Prices (HCIP)
• The ECB changes 3 policy rates- main refinancing operations (banking liquidity); marginal lending facility (overnight credit) and deposit facility (overnight deposits)
• price stability reduces distortions in tax systems, and encourages social stability, as real pensions and wages stay more stable
• Exchange rates alter Aggregate Demand because it changes demand from the rest of the world
• Market interest rates influence real rates because in the short term prices (and inflation) is stable
• at the start of covid, Monetary policy was not changed much, as inflation stayed below target for a while
• during covid, the ECB followed the FED in timings to changes in interest rates
• the ECB didn't increase interest rates as much, because it wanted to allow the economy to recover
• Good monetary policy requires food microfoundations and data
• Good data is relevant- useful for the scope of the analysis
• Good data is accurate- representative of the full population, with no bias
• good data is timely- able to capture current events
• good data is accessible- available to the scientific/policy communtity
• good data is comparable to other data sets/sources
• good data is relevant, accurate, timely, accessible, and comparable
• survey data shows behaviours that are not shown in administrative data
• survey mode and wording can change responses to inflation expectation surveys
• there is significant heterogeneity within Europes top marginal tax rates, because tax rates are set by national governments
• gross pension replacement rate is a measure of how well you can continue your life once you retire
• fiscal policy (unemployment benefits, pensions etc) are set by national governments, causing heterogeneity
• saving for unexpected events is significantly negatively related to tax incomes, implying public and private insurance mechanisms are seen as substitutes
• Monetary policy and fiscal policy are separated, but interact and affect aggregate demand, but with different transmission mechanisms