Euro Monetary Policy

Quite unlike the possibilities for future private currencies, I find traditional governmental monetary policy generally uninteresting. The 20th Century taught us that the most economically and politically stable monetary policy is one in which money supply and interest rates are gently tweaked only to maintain price stability. The US Federal Reserve and the now the ECB have held to this fairly well thus making them the World's reserve currency. A stable money supply also promotes economic activity with participants confident in the future value of their long term contracts.

Price stability really is a one-size fits all solution. Countless models have been able to show circumstances where deviation from this policy could be beneficial. Despite the painful inflationary lessons many countries learned in the last century, there are always some who wish to manipulate the money supply to take advantage of the short term benefits of the Phillips Curve in lowering the rate of unemployment. Sarkozy has been among those calling for monetary policy to target job creation rather than price stability. For the specific case of France, Sarkozy's suggestion likely would be a net benefit since their labour market is so completely bureaucratic, over-regulated and backwards. Some inflation would act like a lubricant on rusted metal. Tyler Cowen explains it a bit better. However, France's focus really should be on firing its State employees, eliminating labour market regulations, and cutting back on welfare benefits. Just because inflationary monetary policy would be politically acceptable amelioration in France does not mean the rest of Europa should have to suffer.

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