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Monetary Policy Strategies of the European Central Bank and the Federal Reserve Bank of the U.S

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  • L. Randall Wray

    (The Levy Economics Institute & University of Missouri, Kansas City)

  • C. Sardoni

    (University of Rome “La Sapienza)

Abstract

In the debate on monetary policy strategies on both sides of the Atlantic, it is now almost a commonplace to contrast the Fed and the ECB by pointing out the former’s flexibility and capacity to adjust rigidity, and the latter’s extreme caution, and obsession with low inflation. In looking at the foundations of the two banks’ strategies, however, we do not find differences that can provide a simple explanation for their divergent behavior, nor for the very different economic performance in the U.S. and Euroland in recent years. Not surprisingly, both central banks share the same conviction that money is neutral in the long period, and even their short-term policies are based on similar fundamental principles. The two policy approaches really differ only in terms of implementation, timing, competence, etc., but not in terms of the underlying theoretical orientation. We then draw the conclusion that monetary policy cannot represent a significant variable in the explanation of the different economic performances of Euroland and U.S. The two economic areas’ differences must be explained by considering other factors among which the most important is fiscal policy.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0511025.

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Date of creation: 23 Nov 2005
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Handle: RePEc:wpa:wuwpma:0511025

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Web page: http://128.118.178.162

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Keywords: monetary policy; federal reserve; European central bank; fiscal policy; aggregate demand; growth;

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References

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  1. Frederic S. Mishkin, 2004. "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 117-127, 03.
  2. Dimitri B. Papadimitriou & L. Randall Wray, 1994. "Flying Blind: The Federal Reserve's Experiment with Unobservables," Economics Working Paper Archive wp_124, Levy Economics Institute, The.
  3. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16.
  4. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  5. Joreg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Macroeconomics 0507017, EconWPA.
  6. Jorg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Economics Working Paper Archive wp_425, Levy Economics Institute, The.
  7. L. Randall Wray, 2004. "The Case for Rate Hikes: Did the Fed Prematurely Raise Rates?," Economics Public Policy Brief Archive ppb_79, Levy Economics Institute, The.
  8. Benjamin M. Friedman, 2004. "Why the Federal Reserve Should Not Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 129-136, 03.
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Cited by:
  1. Leonardo Becchetti & Alessandra Pelloni, . "What are we learning from the life satisfaction literature?," Working Papers 2, Department of the Treasury, Ministry of the Economy and of Finance.
  2. Angel Asensio, 2007. "Inflation targeting drawbacks in the absence of a 'natural' anchor," Post-Print halshs-00189225, HAL.

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