Monetary policy strategies of the European Central Bank and the Federal Reserve bank of the United States

Abstract

In the debate on monetary policy strategies on the two sides of the Atlantic, it is now almost commonplace to contrast the Fed and the European Central Bank (ECB) by pointing out the flexibility and capacity to adjust of the former and the rigidity and extreme caution of the latter, and its obsession with low inflation. In looking at the foundations of the two banks' strategies, however, we do not find differences that can provide a simple explanation for their divergent behavior, nor, above all, for the very different economic performance in the United States and Euroland in recent years. Not surprisingly, both central banks share the same conviction that money is neutral in the long run, and even their short-term policies are based on similar fundamental principles. The two policy approaches really differ only in terms of implementation, timing, competence, and so on, but not in terms of the underlying theoretical orientation. We then draw the conclusion that monetary policy cannot represent a significant variable in the explanation of the different economic performances of Euroland and the United States. The two economic areas' differences must be explained by considering other factors, among which the most important is fiscal policy.