The ECB’s Path Not Taken

It is now clear that the European Central Bank views higher interest rates as the right response to rising oil prices. As a result, the ECB risks painting itself into a corner, for the logic behind this week’s interest-rate hike implies that more increases will follow – a series of policy mistakes that will cost the Eurozone economies heavily.

Despite statements to the contrary, no central bank, including the ECB, can simply focus on inflation and ignore what happens to economic activity. Suppose, for the sake of argument, that stabilizing prices came at the cost of a 30% unemployment rate. Surely nobody would want that.

The ECB’s defenders would say that such an outcome is purely hypothetical – and irrelevant – for there is no conflict between stabilizing inflation and sustaining the appropriate level of economic activity. Price stability, according to this view, reduces uncertainty, thereby enabling firms and individuals to take the right decisions, so it is good, not bad, for economic activity.

To continue reading, please log in or enter your email address.

To read this article from our archive, please log in or register now. After entering your email, you'll have access to two free articles every month. For unlimited access to Project Syndicate, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/IaKvpgU;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.