Mandate Most economists would agree that the core task is ensuring price stability. This consensus rests on the conviction that in the long term, when all the lag effects have come to an end, monetary policy only determines the price level, not, however, output or employment. Thus the primary obligation of a central bank to maintain price stability does not imply that priority is given to price stability in preference to full employment. Rather, it is in the economic nature of monetary policy instruments that they are suited for influencing price level trends, not, however, growth or employment trends. Yet in the short term, ie within the monetary policy transmission process, monetary policy does have real effects. The problem can easily be illustrated if one tries to picture a shock, eg a massive rise in oil prices. The immediate consequence will be an increase in the price level and a fall in production. This constellation confronts the central bank with a trade-off between price stability and growth. If the bank’s sole concern is a quick restoration of price stability, it will raise interest rates and consequently exacerbate the loss of output. If, on the contrary, it reacts solely to the production effect, it will strengthen the shock-induced deviation from the goal of price stability by lowering interest rates. Reacting to shocks may lead to a trade-off between the variability of output and the variability of the price level (King 1999, p 12). This trade-off in itself is an extremely complex phenomenon.
If, however, the central bank still harbours an uncertainty and - for example - still wishes to await the disclosure of figures, it should refrain from making a prior announcement as it would then find itself under a constraint. For if, in response to a signal received, the markets anticipate the interest rate move, the central bank will hesitate, out of concern for its credibility, not to implement the signalled move. This may well result in an endogenous interest rate policy: the central bank becomes, through its own fault, the prisoner of market expectations - an absurd notion. A central bank should inform openly about its long-term designs. At the same time, it should not hesitate to make interest rate decisions, if necessary, which come as a surprise to the majority of market participants. 4. The “new economy” - fact or fiction? The term “new economy” is certainly vague, which may be the very reason why it is popular. Coined in the United States, it is used as a label for several hypotheses which strive to explain the performance of the US economy in the second half of the 1990s. Poorly explained by most conventional macroeconomic models, this economy is characterised by continued high growth rates, unexpectedly robust productivity, and long-running low unemployment, combined with very little inflationary pressure. These attempts to explain the phenomenon termed “new economy” refer to two prominent areas of change.