ECB faces gaps in understanding new realities: Draghi

Unconventional monetary policy is a success, but gaps in understanding the relatively new tools remain, European Central Bank President Mario Draghisaid on Aug. 23, cautioning against hasty policy responses to the new reality.

Emphasizing the need for rigorous research, 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.

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."

"We must be aware of the gaps that still remain in our knowledge," Draghi said in Lindau, Germany, in a speech that did not discuss current monetary policy.

The ECB is not alone. The minutes the U.S. Federal Reserve's last meeting showed 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...