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ECB and Federal Reserve monetary policy is more similar than they look…

Summary:
All these years, ECB policymakers have told us us how their policy is different from Federal Reserve. Fed has a dual mandate of inflation and unemployment (actually triple but the third objective of “moderate long-term interest rates” is often forgotten). ECB on the other hand has prided itself on single mandate of price stability. This is changing as Federal Reserve is seen as doing more for US economy compared to ECB. This criticism has become even stronger with Federal Reserve adopting Flexible Inflation targeting. François Villeroy de Galhau, Governor of Banque De France in this speech says both Fed and ECB have more similar policy than they look: Let me now turn to the ECB’s strategic review, on which work has restarted. It is more extensive than the FOMC’s as it will cover,

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All these years, ECB policymakers have told us us how their policy is different from Federal Reserve. Fed has a dual mandate of inflation and unemployment (actually triple but the third objective of “moderate long-term interest rates” is often forgotten). ECB on the other hand has prided itself on single mandate of price stability.

This is changing as Federal Reserve is seen as doing more for US economy compared to ECB. This criticism has become even stronger with Federal Reserve adopting Flexible Inflation targeting.

François Villeroy de Galhau, Governor of Banque De France in this speech says both Fed and ECB have more similar policy than they look:

Let me now turn to the ECB’s strategic review, on which work has restarted. It is more extensive than the FOMC’s as it will cover, among many things, structural changes: climate change, financial stability; and the effects of digitalisation. The Eurosystem will take its time, as the Fed did, to consider the different alternatives. But we can already today shed some light on three key points, especially after the excellent “ECB Watchers” conference in Frankfurt on 30 September:

    1. A dual mandate like the Fed’s and the ECB’s two-tiered mandate are actually more similar than they look.
    2. There is some room for clarification in our inflation objective.
    3. We should look again at the “second pillar” of the ECB and its possible link with the so-called “secondary” objectives.

1/ Our mandate puts a clear priority on price stability, and is not a dual mandate. But neither is it merely a single one: I would characterise it as a two-tiered mandate that includes at least two other objectives without prejudice to price stability: on the one hand “to support the general economic policies in the Union” contributing among other aims to a “social market economy, aiming at full employment and social progress”1; and on the other hand “to safeguard the stability of the financial system”2

Furthermore, I would argue that there is still less of a difference between a dual mandate and flexible inflation targeting in the present economic context :  notably, the measures we have taken to offset the effects on inflation of negative shocks such as the global financial crisis or the health crisis have a direct effect on growth and employment.

Hmm..

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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