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Archive » February 2023 » The monetary normalization of the Ecb: from Ulysses to Pythia

The monetary normalization of the Ecb: from Ulysses to Pythia

Donato Masciandaro
February 2023 - n. 2
Keywords: Bce, politica monetaria europea
Jel codes: G21, G28, E50

Monetary normalization: easy to say, much harder to do. Since last year, the economy has changed unpredictably and the Ecb, after a long and systematic error in forecasting inflation trends, has found itself at a crossroads between two routes. On the one hand: to continue with the policy of monetary announcements, to trigger a virtuous circle between credibility and expectations (Ulysses effect). On the other hand, to move to unconditional discretion, the opacity of which prevents the Central bank from making further forecasting errors but produces uncertainty and volatility (Delphi effect, or Pythia). The Ecb abandoned the first monetary route and chose the second one. This choice produces two possible risks. First: to destabilize expectations, increasing the real costs of a necessary disinflationary policy. The second risk is to increase political pressure not only to influence monetary policy, but also questioning the independent institutional set-up of the Ecb.

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