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Draghi admits to 'knowledge gaps' in face of new realities

European Central Bank (ECB) chief Mario Draghi has called the bank's ultra-loose monetary policy a success, but admitted there were gaps in understanding the effects of the "new tools" on the real economy.

European Central Bank President Mario Draghi on Wednesday cautioned against hasty policy responses to the new economic realities, emphasizing the need for rigorous research.

Speaking at a meeting of Economics Nobel laureates in Lindau, Germany, Draghi said central banks need to carefully weigh their policy steps, giving up their defense of obsolete approaches while acknowledging gaps in their knowledge of how new policies work.

Read more: Investors eye Jackson Hole as central bankers meet

Draghi's comments come as the ECB is confronted by an economy where robust growth is accompanied by anemic inflation. It is a combination that has raised questions about the validity of older doctrines on inflation, its relationship to employment, and central banks' ability to affect price growth.

"[John Maynard] Keynes is often quoted as saying, `When the facts change, I change my mind. What do you do, sir?'" Draghi said. "Well, for policymakers, it is not that simple, and research helps us to decide whether a change in the facts deserves a policy response or, as we say, we should look through it."

The ECB chief also pointed to "gaps that still remain in our knowledge," but didn't address the eurozone central bank's current monetary policy.

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Wandering in the dark

Mario Draghi is not alone in failing to understand the full effects of keeping interest rates at zero for almost a decade and purchasing massive amounts of sovereign debt. The minutes the US Federal Reserve's last meeting in June revealed that some policymakers were concerned about the validity of their models, since inflation was failing to accelerate despite near-full employment and growth above the economy's potential.

For Draghi, the dilemma will have to translate into concrete action this autumn. The ECB's asset purchases, aimed at boosting inflation, will expire at the end of the year, requiring policymakers either to extend purchases or start winding them down.

Economic growth is at its fastest since early 2011 and unemployment recently hit an eight-year low, but inflation looks set to undershoot the ECB's target - just under 2 percent - at least through 2019.

Draghi defended unconventional monetary policy, though, arguing that it has succeeded in the face of extreme shocks and proved that central banks remain potent even when interest rates bottom out.

"Policy actions undertaken in the last 10 years in monetary policy and in regulation and supervision have made the world more resilient. But we should continue preparing for new challenges," Draghi said.

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uhe/tr (Reuters, AFP, dpa)

 

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