A Review of First Monetary Policy Overburdened Essay

1575 Words 7 Pages
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, …show more content…
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 by the apparent benefit of implementing monetary policy to combat high unemployment and missed the potential negative side effects this will have on CB. However, he didn’t thoroughly explain the situations the governments were facing after the crisis such as their fiscal position in implementing long term fiscal policies and the reasons behind their high

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