JEL-Keywords: Inflation, International Monetary Arrangements and
Institutions, Central Banks and their Behaviour.
JEL-Classification: E31, E58, F33.
Policy preferences have changed over the last 20 years. Price stability
is today an objective of common concern. The countries have learned to
live in an environment of low inflation. How does Monetary Union sustain
such a behaviour?
The European Central Bank - Guarantor for price stability
- The Treaty on European Union clearly establishes a preference for
price stability over other objectives.
- The Maastricht Treaty provides institutional backing together with
constraints on budget policies.
- The European Central Bank (ECB) is the institution charged
to pursue price stability and it has one of the highest degrees of political
independence in the world in order to do so.
- Over the past 20 years there has been an emerging consensus among
central bankers. Throughout the world, central bankers agree today on
price stability as the primary goal of monetary policy. This will also
be the case for the ECB. In Europe this commitment is expressed by the
significant convergence in price stability, and the simultaneous reduction
in nominal interest rates since the 1980s is a manifestation of this
Wage development to support price stability and rise employment
- Price stability can only be guaranteed if all economic agents behave
in line with the central banks stability commitment. This applies
in particular to wage bargainers.
- Excessive wage growth raises domestic production costs and
translates into general price inflation. When the central bank refuses
to accommodate inflation, the fixed amount of nominal money balances
will restrict real economic growth and cause unemployment.
- To keep inflation low and prevent unemployment from rising, unit labour
costs, i.e. money wages adjusted for differences in productivity levels,
must not rise.
In conclusion, the report reveals that, despite famous structural rigidities,
the development of labour costs in countries eligible for EMU membership
does not pose an obvious danger for the new currencys sustainability.