ignazio visco : divergence in monetary policies across the atlantic? remarks by mr ignazio visco, deputy director general of the bank of italy, at the policy panel of the ceders – 3rd meeting on open macroeconomics and development “ the euro area, the euro and the world business cycle ”, aix - en - provence, 3 - 4 july 2008. i am grateful to sergio nicoletti altimari for comments and suggestions while remaining solely responsible for the views here expressed. * * * in my remarks, i will first start with the basic question raised to the panel : are there differences in the fed's and ecb's behaviour? i will then tackle two issues that have probably become more pressing in light of the current financial turmoil : i ) are there obvious limitations in the monetary frameworks and how should they be addressed?, and ii ) do we need some form of monetary policy coordination? 1. fed – ecb divergences a popular belief is that the dual mandate of the fed, as opposed to the overriding price stability objective of the ecb, is the major source of policy differences across the atlantic. in this respect, if we take a medium - to long - term view, and we agree that over those horizons money cannot affect potential output ( the phillips curve is vertical ), then the different mandate should not be relevant. indeed : • the track record of the fed in the past 20 years, as well as the positions expressed repeatedly by its executives, speak by themselves of the centrality the fed attributes to the price stability objective ( see figure ). • an important difference is of course that, contrary to the ecb, the fed has not announced a quantitative definition of its goal : this may give the ecb some ( slight ) advantage in anchoring expectations, as some recent studies appear to suggest, 1 and thus perhaps a more favourable shorter - run trade off. it is at the shorter horizons, in the strategic conduct of monetary policy by the two central banks, that we may more likely find some differences : • a starting point in this respect is the observation that since the start of the euro in 1999 the volatility of policy interest rates in the us has been two times larger than in the euro area ( see figure ). 2 • understanding why this is the case is not easy, as the difference may reflect differences in the conduct of policy, in the structures of the economy, in the size and nature of

economic shocks. indeed, the few analyses that have tried to address the m. j. beechey, b. k johannsen and a. levin ( 2007 ), “ are long - run inflation expectations anchored more firmly in the euro area than in the united states? ”, cepr discussion papers no. 6536. the standard deviation of the ( target ) fed fund rate since 1999 is 1, 83 percentage points, compared with 0, 89 percentage points of the policy rate of the ecb. the average policy rate has been 3, 6 for the fed and 3, 1 for the ecb. issue in a systematic way give some hints that all of these factors may have played a role. 3 in particular : o shocks : differences in the type and intensity of shocks ( especially productivity shocks ) have probably played a major role in the last decade. o structure : higher wage and price flexibility may explain part of the higher volatility of policy rates in the united states. o policy : the ecb may have, at least according to some estimates, a higher degree of policy inertia, which may grant it with more leverage on long - term interest rates. there is however no crystal clear evidence of a significantly different response to measures of economic slackness, which may indicate that the different mandates do not impinge too much even in the shorter term. besides this, we have to be very careful in judgement as we are far from being in a position to state how close to optimal is any of the two policies, given structure and preferences in the two economies. the recent financial turmoil and the different policy responses across the atlantic have once again spurred a debate ( particularly in europe ) on whether the different mandate is the source of divergence ( and political calls on the ecb to adopt a fed - like response ). again it is likely that a combination of factors are at play : • if we compare, for example, the change in the forecasts of the two central banks in the last year, we see that the fed has changed its forecasts of growth for 2008 by much more than the ecb ( - 2 % vs. - 0, 5 % ), while the reverse is true for inflation ( + 0, 4 % vs. + 0, 9 % ). these changes in the respective outlook go some way towards explaining a different policy response : after all, and notwithstanding the strict financial linkages, we should not forget that the sub - prime crisis originated in the