Macroeconomic Policies for Full Employment and Low Inflation

What should the macroeconomic policies of the Economic and Monetary Union (EMU) look like? In trying to give an answer to this question we proceed in three stages. The first, which picks up from our discussion in chapters 4 and 5, is to consider what the objectives of economic policy should be, specifically in relation to macroeconomic policy. The second is to consider the instruments of economic policy and how they can be used to achieve the stated objectives. In this we look at the instruments of monetary policy and argue that monetary policy should be geared towards ensuring financial stability (rather than being narrowly focused on inflation) and that additional tools of monetary policy should be developed to move away from sole reliance on the central bank interest rate policy. In the case of fiscal policy we argue for such a policy that is geared towards achieving a high level of economy activity and low unemployment. For national governments this would entail setting the budget position in an appropriate manner without constraint from the Stability and Growth Pact and similar measures. At the federal level there is a need to develop a budget of some significance and one which can play a stabilising role. This can raise questions such as whether this would be a budget covering just the EMU countries or whether it should be extended to all EU countries.