Sebastián Edwards analyzes the relationship between inflation targeting and exchange rates in three areas: the exchange rate’s effectiveness as a shock absorber, the exchange rate’s volatility and the role of parities in the conduct of monetary policy. Stephen Cecchetti and Stefan Krause examine the optimality and the practice of weighting inflation rate targets and price level targets, providing evidence from countries with and without inflation targets. Frederic Mishkin and Klaus Schmidt-Hebbel present evidence on the macroeconomic and monetary policy effects in all inflation targeting countries, and compare them with earlier times and with non-inflation-targeting developed economies. Refet Gürkaynak, Andrew Levin and Eric Swanson present evidence for Canada and Chile, on the contribution of inflation targets to the anchoring of long-term inflation expectations, in comparison with a country that has no explicit target, the United States. The Conference’s fifth and last session will analyze the relationship between the optimal monetary policy and inflation targeting. Athanasios Orphanides and John Williams, using a model estimated for the US, show how under conditions of imperfect information the optimal policy rules are modified and how a monetary scheme based on the key elements of an inflation targeting regime seems to contribute to a higher macroeconomic equilibrium. Carl Walsh analyzes the relationship between inflation targeting and transparency, showing how the quality of central bank projections and their public communication can affect the outcome of monetary policy.
It is of the utmost importance that the entire euro area and Europe as a whole maintain and consolidate their cost competitiveness position. Since the introduction of the single currency, it is more important than ever that we closely monitor the production cost indicator, as it determines to a large extent the competitiveness of goods and services produced in our economy and, therefore, the current level of employment. It also acts as a “leading indicator” of future employment because it gives a measure of the attractiveness of an inward investment compared with investment outside the euro area or outside Europe. Embarking in bold structural reforms: In this context, we also need to pursue and step up bold structural reforms, aimed at increasing the flexibility of the economy as a whole and fostering the progress of science and technologies. This is crucial if we wish to enhance the potential growth of European economies and to continue to promote sustainable growth and enduring job creation. The European Council meeting held in Luxembourg in 1997 explicitly mentioned structural policies among the items selected for reinforced co-ordination. The Lisbon and Stockholm European Councils, held in 2000 and 2001, further enhanced the medium term strategy necessary for structural reforms in the Union. This strategy aims at raising the potential growth and strengthening the competitiveness of the EU economies.