Our analytical framework and the strategy review
Our analysis acts as a window into the economy. Through it, we can see how the economy is evolving. That helps us make the right monetary policy decisions. As the world around us is changing, our analytical framework must also stay up to date.
The world is changing
Our job is to keep prices stable. To do this well, we need to understand how our economy works. But the economy works very differently today than back in 2003. That was when we last carried out a review of our strategy. For instance, nowadays people can do most of their shopping online instead of in actual shops. They can pay with their smartphones instead of using cash. And they can stream movies on mobile devices, with new technology replacing the old video rental shops.
Our window to see what is going on in the economy
To help us make informed decisions, we need a window through which to see what is happening in the economy. Our analytical framework is that window into the world. How well our economy is doing depends on the countless decisions that businesses and people make every day. Our analytical framework provides a way of seeing what all these different decisions, together, mean for price stability. We then base our monetary policy decisions on what our analytical framework shows us. But if the economy is changing, we need to ensure that our analytical framework is still fit for purpose. That is why the Governing Council discussed it as part of our strategy review.
Keeping a close eye on developments
Several big changes have been transforming the way economies around the world work. These changes include globalisation, digitalisation and climate change. They all affect how our monetary policy influences the wider economy. That is why we need to keep a close eye on them.
Making sure there are no blind spots
These big changes in the way our economies work interact with one another too. There is a risk that these changes could create blind spots in our knowledge of how the economy works. That may mean we overlook important developments as they unfold.
Learning through experience
We have already been improving our analysis over time and learning from experience. The quality of our data is better than it used to be. More powerful computers and additional sources of information about the economy allow us to better understand a complex world.
We have also learned from events such as the financial crisis of 2008. That crisis showed how important the stability of the financial system is for price stability. And because our monetary policy works through the financial system, the crisis also highlighted the importance of understanding better the channels through which our monetary policy reaches businesses and people. Not only can these channels become disrupted, they can also change over time. We have drawn greatly on these experiences.
Our revised analytical framework
We have revised our analytical framework as a result of our strategy review. Our new framework reflects a changing world. And it takes in the insights we have gained and the new approaches we have developed.
Our new analytical framework has two branches: an economic analysis and a monetary and financial analysis. The first looks at how the economy, employment and prices are doing, as well as where they may be heading. The second examines those channels through which our monetary policy reaches the wider economy. Given that financial stability is a precondition for price stability, this analysis also looks at whether there are developments in the economy that could leave it vulnerable to future crises. While these branches focus on different things, they both examine the same economy and so they are connected with each other. We take both into account when making our decisions.
We are still learning too
The window through which we see the economy has become larger over time. And, just as importantly, it also provides a much clearer and more detailed view. That said, we are always working to reduce any potential blind spots in our analysis. By improving our understanding of the world and ensuring that our analysis is as sound as possible, we can make the right decisions for the economy and, ultimately, for price stability.
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24 March 2022
Proportioning policy action to the evidence: making the monetary policy strategy of the ECB concrete