In the meantime, most European governments have become more sensitive in their public statements with respect to the external value of the euro. Awareness has grown, as one finance minister recently put it, that “we are all sitting in one boat”.
Under certain circumstances, the action of a central bank may be vulnerable to dynamic inconsistency, thus distorting inflation upwards. The literature provides a variety of solutions ranging from strict rules for money supply growth to the introduction of ‘constitutional’ constraints to specify the purposes of central bank action and protect its independence. These issues are well-known and need not be discussed here.