Does a Less Active Central Bank Lead to Greater Economic Stability? Evidence from the European Monetary Union
2006, The Cato Journal
Elham Mafi-Kreft, Russell S. Sobel
Substantial disagreement exists among economists about the degree to which central banks should pursue discretionary stabilization policy. Activists believe that central banks can promote greater macroeconomic stability through the use of discretionary policy, while nonactivists (such as the monetarists) do not. In particular, monetarists believe that lags and
timing problems will result in even the best-intentioned discretionary policy actually resulting in less (rather than more) macroeconomic stability. The formation of the European Monetary Union provides a unique opportunity to test whether a shift to a less active central bank has resulted in more or less macroeconomic stability for these countries.
Mafi-Kreft, Elham and Russell S. Sobel (2006), “Does a Less Active Central Bank Lead to Greater Economic Stability? Evidence from the European Monetary Union,” The Cato Journal, Vol. 26, No. 1, Winter.