"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

224 Unemployment and Monetary Policy in the European Union
has no resources to spend, and the European Central Bank (ECB) is to concern
itself exclusively with price stability.
The solution we are advocating, by contrast, requires coordination of policies
of EU member states. Indeed, if any country were to engage in a demand side
expansion alone, then, as is well known, its effect on unemployment would be
much smaller than under a coordinated policy approach, because much of its beneficial
impact would be lost to it and would spill over to others, through higher
imports. The resulting deterioration of the current account could be so severe as
to make the expansion inadvisable. But when the expansion is simultaneous and
symmetric, then the increased imports will be offset by an increase in exports
resulting from the increased imports of the other countries, and this will both help
the current account balance and restore the potency of the expansion of investment.
In short, in a simultaneous expansion, countries would be helping each
other.
The Role of the European Central Bank
In addition to the supply side measures illustrated in section 5.2 below, our proposed
plan advocates a significant revival of aggregate demand and that revival
in turn is expected to come from a strong and long lasting inversion of the persistently
declining or stagnant trend of private investment activity. We expect that
some of this inversion may come from the supply measures below; but most of
it, especially in the early stages, must come from the long acknowledged, classical
tool of investment control: monetary policy. But this policy is the prerogative
of the central banks, which, hereafter, means essentially the new European
Central Bank (ECB).
This has one very basic implication: if Europe really intends to achieve a rapid
reduction in unemployment, it is necessary to give a broader and more constructive
interpretation to the statutes that define the role of the ECB than that which
is currently widely accepted. According to that interpretation, the Bank has but
one target (one single front on which to do battle), namely preventing inflation.
We urge a fundamental broadening of that interpretation—analogous to that of
the U.S. Federal Reserve—to include, on an equal footing, another target: keeping
unemployment under control. And we are confident that it can do so without
renouncing or sacrificing its commitment against inflation.
There are three major considerations that support this view of the proper role
of the ECB on the path of return to high employment. In the first place, making
price stability the overriding target at this time is much like using all your military
budget to fight the last war, an enemy that is no longer there. Inflation has
been a most serious problem because of, and during, the two oil crises and their
aftermath (including German reunification). But since 1991 inflation has been