ECB faces communications challenges as headline inflation will lag interest rate changes, according to Larry Summers.
The European Central Bank faces communications difficulties as it raises interest rates due to the time lag before tighter monetary policy affects headline inflation, leading economists Larry Summers and Paul Krugman told ECB Executive Board member Isabel Schnabel Tuesday.
Speaking at the central bank's 2022 Annual Research Conference, the two told Schnabel, one of the more hawkish members of the Executive Board, that there was a very strong chance policymakers would make mistakes, either by over or under-tightening due to the lags on policy outcomes. "I use the analogy of a shower faucet in an old hotel," Summers told Schnabel in answer to a forum question. "Any adjustment of temperature comes with a lag and you risk freezing or getting scalded."
Earlier, Summers had questioned whether or not the forces driving secular stagnation -- a condition of little or no economic growth in the economy and in which interest rates are lower than the norm -- would reassert themselves in a post-pandemic world, saying he was now 'agnostic'. Into the Covid crisis, Summers was a leading advocate of the condition.