We are thus able to shape the new institutions accordingly. Let me first explain what I mean by the current consensus about the role of monetary policy among macroeconomists. Economic growth depends on the productivity and the supply of factors of production such as labour and capital. No central bank in the world is able to increase its country's growth rate permanently by printing money or even by reducing the nominal interest rate to zero. The reason being that any excess demand over the production of goods and services will sooner or later be reflected in inflation.
Persistent inflation is always a monetary phenomenon.
Although monetary policy action can exert a temporary influence on the level of real economic activity - due particularly to sluggish adjustment of wages and prices. 2 Expectations of market participants such as trade unions and employers are of crucial importance for the effect of any policy measure, and the expected reaction pattern of the central bank affects current decisions by the private sector. Let me give you an example. If the central bank is known to react to excessive wage demands by raising interest rates, thereby stabilising prices and temporarily reducing output, instead of by lowering rates to dampen the burden on firms affected by the wage shock, excessive wage demands may not occur in the first place. Thus, if the goal of price stability is evident and credible, stable monetary policy will become much easier to implement.