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

Economics Working Paper Archive from Levy Economics Institute, The

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 formerÕs flexibility and capacity to adjust rigidity, and the latterÕs extreme caution, and obsession with low inflation. In looking at the foundations of the two banksÕ 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 areasÕ differences must be explained by considering other factors among which the most important is fiscal policy.

New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-pke
Date: Written 2005-11
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Working Paper: Monetary Policy Strategies of the European Central Bank and the Federal Reserve Bank of the U.S (2005)
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