The article written by Athanasios Orphanides raises the issue of whether or not governments have too high expectation on monetary policy to achieve long-term goals which can only be accomplished “by the appropriate policy mix and the cooperation of other public institutions.” Orphanides focused on three major goals burdened on Central banks (CB) which are full employment, fiscal sustainability and financial stability; and developed his arguments using four typical economies, US, Japan, UK and Euro area. He claimed that especially after the GFC, monetary policy is compelled to achieve these goals which are beyond its traditional responsibility with the possible end result of compromising its independence and credibility, thus diminishing its effectiveness in achieving its primary goal of price stability.
Price stability by Inflation targeting (IT) was emphasised to be the only objective of CBs in the late 20th century as the multiple-objective approach failed to address many economies’ high inflation problem at that time. Orphanides stated that it is due to this single objective practice that allowed CBs to respond so flexibly and aggressively during the GFC in 2007, which helped the global economy to avoid another Great Depression. However, there was disappointing growth following the GFC, hence major CBs around the world introduced extremely low interest rates and generous liquidity provisions to tackle it, whereas governments were reluctant to adjust their policies after the crisis and abused monetary policy as it was understood to be ‘the only game in town’.
However, Orphanides pointed out that, factors behind “the lack of satisfactory growth in the aftermath of the GFC” are often outside the control of CBs. One of them is the low employment growth post GFC, which is a major concern in Greece and Spain and has its roots in historical high unemployment rates among young adults. But because this unemployment problem hasn’t been corrected before the crisis in economies like US, Japan, UK and the Euro area; hence it is past to CBs after the crisis as other policies were believed to be ineffective in this matter. Orphanides argued that based on historical experience, though monetary policy can temporarily increase employment through its effect on aggregate demand, fiscal and labour policies should be seen as more effective to resolve unemployment in the long run by providing tax and other incentives for investments associated with human capital expansion as well as enhancing the efficiency of labour markets through structural reforms. Orphanides emphasised that monetary policy “cannot ensure the sustainable creation of high-quality jobs…cannot generate sustainable growth and increase the level of potential GDP.”
I agree with Orphanides in his view that monetary policy is only a short term solution for high unemployment rates as long as the underlying problem stays unresolved. Orphanides had made a good point in claiming the government being...