The Dual Mandate Kaitlyn Lannan, Camille Darko, Jess Zawadzki, Ariane Dalarun

Introduction/History ● Single Mandate System vs. Dual Mandate System o

o

Dual mandate  Targeting price stability and employment  Federal Reserve Act Single Mandate  Targeting price stability  Maastricht Treaty

Introduction/History cont. ● Different intellectual environments o o

Dual mandate system a result of Keynesian influence Single mandate system a result of Walrasian theory

● History has shown the dual mandate system to be more effective at maintaining a stable economy

Counterarguments ● Argument I: Neoclassical school of thought: Markets left to their own devices will reach equilibrium The only job of the central bank should be to remove barriers to free competition Defense:  Neoclassical theory ignores the numerous possible trajectories of the economy  Because of desire for little government involvement, the ECB’s action and reaction are compromised  

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Counterarguments cont. ● Argument II o

Two objectives is too much to handle and causes the Central Bank to fall short on both

● Defense: o o o

Job creation can often face political obstructionism Steep social costs of unemployment Over the last 20 years, the US Federal Reserve has controlled inflation more successfully than central banks operated under a single mandate

Arguments ● Argument I: Dual mandate allows ECB to react efficiently to economic shocks o Example: global financial crisis of 2007 o The Fed’s dual mandate allowed the US economy to be repaired much more quickly, but the ECB struggled and used roundabout methods such as depending on the private sector to restore growth and employment ● Argument II: Flexible authority o Dual mandate would allow the ECB to fight unemployment and inflation as necessary, but an inflationary mandate alone does not allow for action on unemployment o Too much reliance on neoclassical theories is not appropriate for modern economic situations

Arguments ● Argument III : Communication and Transparency ○ ○ ○

sometimes the ECB actually supports growth and employment being clear about the politics makes it more effective could encourage more investment

Conclusion

ECB needs dual mandate !