This discussion paper written by Athanasios Orphanides, raises the issue of whether or not governments have too high an expectation on monetary policy to achieve long-term public policy 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 end result of compromising its independence and credibility, hence diminishing its effectiveness in achieving its primary goal of price stability.
Price stability via 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. This single objective practice allowed CBs to respond flexibly and aggressively during the GFC in 2007, which helped the global economy to avoid another Great Depression. However, major CBs around the world had to introduce extremely low interest rates and generous liquidity provisions to tackle the disappointing growth followed the GFC. This let governments become 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. However, since this unemployment problem hasn’t been corrected before the crisis in economies like US, Japan, UK and the Euro area, it has became a liability of the CBs after the crisis because 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 “incentives for job creations and investment” as well as enhancing “the flexibility and efficiency of labour markets” by structural reform. 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 criticising the government being short sighted and blinded...