This dimension of the ECB’s monetary policy strategy is not always appreciated, but is important. When inflation pressures are absent or negative and positive shocks to aggregate supply feed financial buoyancy – the conditions which prevailed in the late 1990s and for a good part of the 2000s – having a range definition of price stability, rather than, say, a point target, is essential.
The possibility of letting inflation temporarily drift down within its price stability range when faced with clear signs of financial exuberance increases the chances of hitting the inflation objective over the long run. The latter type of discretion – related to the time horizon – is crucial in the presence of transitory negative supply shocks and demand shocks.