Today I would like to briefly compare monetary policy in the euro area and in the US. Of course there are differences between the two areas, but there are also important similarities. This comparison can help us understand the reasons behind their differences and may provide some useful insights into the institutional implications for euro area monetary policy in the future. I will structure my remarks around three themes: the policy goals of the two monetary unions, their organization, and the monetary policy decision-making process in each system.
Goals and philosophy
Let’s begin by comparing the goals or mandates of the Eurosystem and the Federal Reserve System. In Europe the primary focus of monetary policy is to maintain price stability. In contrast, the Fed has multiple objectives for monetary policy. Their goals are to achieve maximum employment, stable prices and moderate long-term interest rates. An important explanation for their different mandates can be found by looking at their economic histories. In Europe, monetary union is the most recent step in an ongoing process of political and economic integration. The hyperinflation experienced in the first half of last century in some European countries, in particular in Germany, has played an important role in ensuring that European monetary policy is focussed on price stability. Their experiences in Europe contrasts with those in the US. A key US event that commentators frequently refer to is the Great Depression. Monetary policy is often blamed for adding to the severity of the Great Depression in the US. That is a reason why employment and interest rate objectives remain in the Fed’s mandate, and why policy makers there react so quickly to signs of slowing economic growth. Under normal circumstances, policy makers on both sides of the Atlantic are likely to take similar decisions. However, around the time that the economic cycle is changing and growth is slowing...
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