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Different Strokes

The CEPR Monitoring the European Central Bank team has an independent pan-European perspective and brings the research of distinguished academic economists to bear on the issues facing the ECB, while retaining the incisive edge of a more policy-oriented outlook.

James Morgan, interviews Jordi Galí, one of the authors of MECB 3. Some of the issues they discussed:

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Questions and Answers

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1. One important talking point this year has been Irish inflation and the criticism directed at Irish spending plans by the Commission and Ecofin. But you say inflation is not the problem in Ireland, it’s the answer [James Morgan]
... Ireland needs an adjustment policy…has budget surplus, falling debt/GDP ratio … current account surplus, rising productivity. Ireland is right to adjust by raising the real exchange rate ... [Jordi Galí]

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2.  Would that solution be appropriate for Spain? [James Morgan]
Might not apply to Spain. No surpluses ... productivity flat ... need for fiscal measures ... [Jordi Galí]

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3. You attack coordination also. Why should there not be coordination between the fiscal and monetary authorities in Europe? [James Morgan]
... Coordination at best unnecessary, at worst harmful ... means of putting pressure on ECB at around election times to accommodate over-expansionary policies ... ECB has to target inflation ... [Jordi Galí]

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4. But people say coordination makes things work better. Adjustment becomes easier [James Morgan]
Exchange of information is good ... we say central bank has duty to keep output at its potential ... fiscal authorities are responsible for demand, taxation and redistribution ... and supply side policies ... [Jordi Galí]

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5. But you have misgivings about the ECB and its two pillars approach [James Morgan]
... Maastricht Treaty introduced monetary aggregates as first pillar …this prominent role is unnecessary ... ECB should adopt explicit inflation targets as does bank of England ... [Jordi Galí]

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6. And you’re not happy with the way the ECB presents its forecasts [James Morgan]
The forecasts have been downplayed…and the range of uncertainty is not presented in a conventional manner ... [Jordi Galí]

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7. Has the ECB suffered from what has been perceived to be the weakness of the euro? [James Morgan]
... Don’t think so ... ECB has adopted right approach to euro ... benign neglect except insofar as it impacts price level ... [Jordi Galí]

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8.  But on that point has not the ECB suffered problems because inflation has been above target levels? [James Morgan]
... Not a big problem ... HICP is affected by temporary problems ... it needs to look at core inflation ... one or two years out as well ... unfortunately downplayed core inflation ... other presentational errors too ... poor at explaining to public what it has been doing ... [Jordi Galí]

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9.  But won’t the public be more confused by being confronted with an index which strips out all the factors that have made prices rise? [James Morgan]
At beginning of EMU core inflation was above the headline rate ... [Jordi Galí]

Monitoring the European Central Bank 3: Defining a Macroeconomic Framework for the Euro Area and MECB Update: September 2001 - Report Details

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CEPR’s Monitoring the European Central Bank series brings an independent pan-European perspective to bear on key issues facing the Bank. The latest Report examines whether inflation differentials within the euro area matter, and defines a macroeconomic framework for the monetary union - Read more in "European Economic Perspectives"
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