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Monetary Theory and Central Banking

It is a privilege to present these comments at a symposium that honors Otmar Issing. I join those who have congratulated him on the guidance and leadership that he gave to the introduction of the euro and its establishment as a stable currency. I am one of those who was skeptical about a single currency for Europe. I did not oppose the idea. Skepticism concerned the wisdom of eliminating exchange and interest rate changes to adjust differences between countries. The system put too much emphasis on labor and product price adjustment, the principal and practically speaking the only market adjustment left. Along with many others, I argued that the new system would only achieve full employment and price stability if countries substantially modified their costly welfare and regulatory systems. Otmar’s rejoinder was that these structural changes had to occur in any case and that removing monetary policy responses would focus attention on the need for structural changes. Otmar Issing and others at the ECB deserve credit for maintaining price stability despite the slow pace of structural reform and high unemployment rates in the principal member countries. Some reforms have occurred. I believe it remains a matter of judgment whether the euro members will develop an adequate adjustment mechanism. The topic of this panel is about the relative importance of economic science and art or judgment in monetary policy. In his Stone lecture (Issing, 2005), Otmar Issing explained why both science and judgment are important. More than any top central banker, he actively participated in discussions with academics and tried to apply new analytic developments in his policy work and the work of his research staff. But he recognized, too, that important differences remain between the analytic models developed by researchers and the tools that he used in practice.