. this proposal is not novel ; it is, in fact, the strategy that we have followed successfully for most of the past century and a strategy that we now should embrace with renewed commitment. over the long sweep of american generations and waves of economic change, we simply have not experienced a net drain of jobs to advancing technology or to other nations. since the end of world war ii, the unemployment rate in the united states has averaged less than 6 percent with no apparent trend ; and as recently as 2000, it dipped below 4 percent. moreover, real earnings of the average worker have continued to rise. over the past century, per capita real income has risen at an average rate of more than 2 percent per year, declining notably only during the great depression of the 1930s and immediately following world war ii. incomes trended higher whether we had a trade deficit or a trade surplus and whether international outsourcing was large or small. the reason for this positive long - run trend in living standards appears to be that more fundamental economic forces are determining real incomes, irrespective of the specific jobs in which they are earned and irrespective of the proportion of domestic consumption met by imports. intensive research in recent years into the sources of economic growth among both developing and developed nations generally point to a number of important factors : the state of knowledge and skill of a population ; the degree of control over indigenous natural resources ; the quality of a country ’ s legal system, particularly a strong commitment to a rule of law and protection of property rights ; and yes, the extent of a country ’ s openness to trade with the rest of the world. for the united states, arguably the most important factor is the type of rule of law under which economic activity takes place. when asked abroad why the united states has become the most prosperous large economy in the world, i respond, with only mild exaggeration, that our forefathers wrote a constitution and set in motion a system of laws that protects individual rights, especially the right to own property. nonetheless, the degree of state protection is sometimes in dispute. but by and large, secure property rights are almost universally accepted by americans as a critical pillar of our economy. while the right of property in the abstract is generally uncontested in all societies embracing democratic market capitalism, different degrees of property protection do apparently foster different economic incentives and outcomes. someone who owns a piece of land, but is restricted to a specific use, does not have unequi

between stock, bond and foreign exchange markets. 6. finally, ever more research is devoted to non - fundamental causes of exchange rate instability. the “ overshooting hypothesis ” helps explain why unstable foreign exchange markets can be efficient. yet, looking at the microstructure of foreign exchange markets, individually rational behavior might generate complex dynamics in which bubbles and crashes can occur. so far the debate on determinants of currencies seems to be far from being conclusive. alan greenspan 1 once noted that “ forecasting exchange rates has a success rate no better than that of forecasting the outcome of a coin toss ”. i wonder whether we can derive valuable insights from hindsight. getting answers about the consequences of exchange rate movements for the economy seems to be by no means easier. the impact of the exchange rates changes depends on a set of interrelated transmission channels, of which 1. the trade channel probably is the most obvious way in which currency developments can impact the economy. an appreciation is likely to entail a negative trade balance, as the prices of foreign currency - denominated exports increase while import prices fall. 2. apart from that, there are financial market channels through which currency movements have an impact on the economy : a trend increase in the exchange rate raises the relative attractiveness of assets denominated in that currency while it results in the loss of value of investment abroad. 3. currency fluctuations are also transmitted through the consumer prices channel, according to which exchange rate appreciation would lower consumer prices. in this sense the “ strong euro ” has cushioned our economies from recent crude oil shocks. 4. finally, the confidence channel completes the list. however, consumers and firms can react asymmetrically, since appreciation dampens inflation pressure on the one side but challenges the competitiveness of firms on the other. if exchange rates and their impact on the economy are apparently so difficult to explain, let alone predict, should monetary policy interfere? as for the euro area, the ecb has no exchange rate target. a key implication of flexible exchange rate system is that the external value of the currency is determined by financial markets and hence cannot be an instrument of economic policy. the primary objective of the eurosystem, that is the ecb and the national central banks of the euro area, is to maintain price stability in the medium term. however, when analyzing the economic situation and taking monetary policy decisions the governor council of the ecb considers all parameters – including exchange rates