Martha Curi, Kelsey Spencer, Eric Oringer, Deniz Kavak, Amelia Strauss In this debate we will be arguing in favor of the dual mandate, based on the arguments below: Inflationary Targeting is Limiting The 2008 crisis has challenged the notion that the role of central banks should limited to inflationary targeting practices. This is evident by the mixed policy results in Europe partly due to the lack of response from the ECB, which chose to stick with its institutional mandate instead of practicing discretionary policies in view of the exceptional circumstances witnessed during the crisis. The inflationary targeting paradigm has been outdated, and it is clear that new tools are needed to respond to future crises and to ameliorate the lasting effects of the recent crisis. For this argument I will provide figures on inflation, GDP, and unemployment in both the European Union and the United States during this time. From these, it is evident that the Fed’s policies, which centered on both flexible inflationary policy and on low unemployment targets, highlighted the limits of an inflationary targeting mandate in the EU. Finally, I will discuss specific discretionary policies adopted by the United States, like acting as a buyer of last resort for example, which was only made possible by the wider scope of the mandate of the Federal Reserve and was key in helping the US manage the crisis more effectively. Assigning macroeconomic policy and bringing back coordination between fiscal and monetary policy The limits of inflation targeting as witnessed during the crisis reveal the broader problem of assignment in the Eurozone. On the one hand , the EU lacks the possibility to implement fiscal policies at supranational level given the non existence of a real European Budget. Fiscal policies find themselves confined to national borders without a real coordination between them, leaving the EU as a whole without counter-cycle tools ( apart from the automatic stabilizers) and therefore vulnerable to shocks. On the other hand, monetary policy is legally bound to a rigid inflation target of 2 % ( Art 2 of the statute of the ECB), depriving the ECB the possibility to play an active part in addressing the crisis. Therefore, no authority has the task nor the tools for dealing actively with the crisis. In other words, no one is responsible for it and no one wants to be responsible for it ( assignment problem). During the crisis, the ECB took the bold step to go beyond its ‘comfort zone ‘ ( El Erian, 2014) under Draghi’s presidency by extending its mandate in order to alleviate the effects of the crisis. However, this new activism brought up opposition doubting the legitimacy of the new actions. Undoubtedly, the framework in which the ECB is currently acting is strongly restricted from a legal and political view. By implementing a dual mandate, the ECB will have an explicit legal mandate necessary to ensure that urgent problems like unemployment are addressed effectively and in advance while at the same time not losing sight of price stability ( see point 4 for further information). A dual mandate would be a big leap forward by assigning a macroeconomic policy to this EU institution.

Last but not least, the dual mandate can set the grounds for a better coordination between fiscal and monetary policy in order to be more efficient in addressing macroeconomic shocks. With the existence of a dual mandate, a common objective is created between monetary and fiscal policy, namely the objective of fighting unemployment. Transparency and Integrity The Central Bank in any capacity, dual mandate or strict inflation targeting, poses the unique benefit of being a political institution not run by politicians but technocrats. This is vital because it means that lobbyists cannot influence monetary policy, nor can politicians who are up for re-election that want to impress their constituents. This ensures that price stability remains a priority and protected. While this line of reasoning highlights the value of having an independent central bank, how does it demonstrate that a dual mandate is preferable to a mandate focused solely on inflation? The method of inflation targeting was widely acclaimed until the 2008 financial crisis at which point alternative solutions began to be tested. The inflation-centric mandate limits the scope of the work the central bank can do and is not an efficient use of power and resources. A dual mandate utilizes the central bank’s ability to problem solve in a way that is immune to election cycles or lobbyists dollars. Additionally the objective nature of the central bank allows prioritization of other inflation targeting or unemployment regulation depending on the economic climate, which would prove to be an approach just as firm as the original mandate of the central bank but now with more flexibility to adapt. This means that although at a point in time it may become more urgent to focus on inflation or unemployment, the less urgent matter will not take up precious focus but at the same time will not fall by the wayside. Transparency: Managing Expectations Since the 1970s the actions and objectives of the central bank depend on its capacity to manage private sector expectations and maintain accountability through price stability through inflation targeting practices.For example, the lower expected inflation is, the smaller the economic cost required to contain the consequences of a shock will be. In addition, price setters will likely set higher prices if they expect inflation to be higher in the future. Finally, if people expect inflation to be high, the cost to contain the consequences of a shock will be higher. Because there are many combinations of interest rate and inflation changes such as these, expectations matter. Following the 2008 crisis, the transparency and communication practices of banks like the ECB have been put into question. Managing expectations is critical to maintaining accountability but the extraordinary challenges that central banks faced during the crisis called for further action. Inflation targeting central banks have been forced to choose between strictly following their mandate (and making insufficient progress) and being unable to explain the actions they took outside of the mandate to deal with crisis. The dual mandate removes the latter issue because it allows the central bank to more efficiently manage its expectations through transparent communication. The scope of the dual mandates specifically allows for greater conditional predictability, in which private investors, firms, works, and individuals can use expectations to make more efficient decisions. Price stability still exists under the dual mandate

Price stability does not suffer under the dual mandate, so to focus only on inflation is limiting the scope of monetary policy. Economists in favor of the dual mandate are not saying to forget about inflation, but that it is important that the central bank has flexibility in its decision-making because at times inflation is not the major threat to an economy. Recently, Chicago Fed President Charles Evans exclaimed “if 5% inflation would have our hair on fire, so should 9% unemployment”. Inflation should not be considered the only threat to an economy at all times, and the dual mandate gives the Federal Reserve the tools to address other threats such as unemployment. The Fed has to find a balance when trying to adhere to the dual mandate so they adjust the Fed Fund Rate in accordance with Taylor’s rule, which is a method of calculating a recommended rate, assigning equal weight to deviations of output from its potential level and to deviations of inflation from its target. Basically, the Fed will increase the funds rate if they feel they need to bring inflation down, and will lower it if they want economic expansion. This policy allows them to practice monetary policy based on the circumstances, rather than strictly adhering to keeping inflation down even if the economy is in a downturn could use expansionary policy. Having the dual mandate, allows the Fed flexibility in its monetary policy in trying to help the economy in the most appropriate way. This approach does not harm price stability; it just allows the central bank to also tackle weak economies. The Federal Reserve has shown to be an example of being able to accomplish this feat. In the 1980s, the Fed under Paul Volcker was able to lower the inflation rate (reaching below 3% by 1983) while keeping unemployment low. In addition, in the U.S., unemployment dropped below 5 percent in early 1997 and fell steadily to 4.2 percent in May 1999. Inflation was below 2 percent in all but two months between November 1997 and May 1999. The Fed helped reach these numbers by focusing on stimulating the economy as it continuously had a policy of lowering the fed funds rate during the early 1990s. Greenspan stated, the “expansion has enabled many in the working age population, a large number of whom would have remained out of the labor force or among the longer-term unemployed, to acquire work experience and improved skills” which would lead to an increase in long term productivity due to an increase in skills, and thus contributes to price stability. In addition, once unemployment dropped, the Fed raised the federal funds rate to make sure high inflation would not occur with the drop in unemployment. This practice of finding a middle ground shows how the dual mandate does not forgo price stability in pursuit of lowering unemployment.

Sources: 1. Saraceno, F. (2015).The Case For A Dual Mandate: Lessons From The European Central Bank. Forum on Macroeconomic Policy, Employment, and Inclusive Growth, 5-12. 2. Friedman, B. (2008) Why a Dual Mandate is Right for Monetary Policy

3. Centre for Economic Policy Research (CEPR) Is Inflation Targeting Dead? Central Banking 4. http://www.levyinstitute.org/pubs/ppb60.pdf 5. https://www.chicagofed.org/publications/speeches/2011/09-07-dual-mandate