of the stability objective is determined by the government ; and there are much more rigorous requirements for transparency of the mpc process and public accountability for mpc decisions. i am convinced that our arrangements are wholly appropriate to our particular circumstances. but the essence of what we and the ecb governing council are mandated to do is very much the same. it involves in effect aiming to keep overall, aggregate demand in the economy ( as a whole ) more or less continuously in line with the underlying overall capacity of the economy ( as a whole ) to – 2 – meet that demand. effective price stability is essentially a measure of our success in achieving economic stability in that much broader sense. it is a limited role. neither we nor the ecb can do very much directly to affect the underlying supply side of the economy which depends upon its structural characteristics, and above all, in today ’ s world, on the efficiency and flexibility of goods, capital and labour markets. monetary policy cannot substitute for supply - side reform, but by maintaining price stability we can, indirectly, help markets to function more effectively. nor can either the mpc or the ecb do much directly to influence the pressures on particular firms or particular sectors or regions of the economy ; we and they can only influence the monetary situation in the economy of our respective currency areas, as a whole. we have essentially one instrument : the short - term interest rate. but, again, if we are successful in achieving overall stability, that will also contribute over time to a more rather than less favourable operating environment for the different component parts of the economy. but that is the most that either we in the mpc or the governing council of the ecb can hope to do. the fact that we both have essentially the same objective – and are subject to the same limitations – does not, of course, mean that we can adopt the same policy stance – the same level of short - term interest rates, as some commentators have recently, and oversimplistically, suggested. we start from different positions, and our respective economies are subject to many different, as well as many of the same, influences. that was an important economic reason why the government decided, rightly in my view, not to participate in the first wave of monetary union – despite the attraction, in the right circumstances, of nominal exchange rate certainty across the european continent. it was, i know, a matter of regret to many of our european partners ; but there was also a sense of

also assists in diluting the effect of shocks by spreading them across the union. if one part of the union imports a large share of what it consumes from other parts, changes in demand will be quickly transmitted. this helps to align economic cycles and makes a common monetary policy more appropriate. 16, 17 the classic early contribution on this point was made by mckinnon ( 1963 ), who argued that the more open the economy, the more flexible would be domestic prices and wages so that movements in the exchange rate would have little impact on competitiveness, and would be less effective as a stabiliser. in that case moving to a fixed exchange rate would be less costly. mundell ( 1961 ). some, including bean ( 1992 ), have expressed scepticism that factors of production could in fact move over a shorter timescale than that over which prices and wages adjust. this is consistent with evidence that labour moves less in europe in response to regional shocks than is the case in the us – see blanchard and katz ( 1992 ) for the us, and decressin and fatas ( 1995 ) who apply the same methodology to europe. the latter find that participation reacts by more to a labour demand shock, and migration by less in europe than the us. office for national statistics, 2011 census. frankel and rose ( 1998 ) found that countries with closer trade links tend to have more tightly correlated business cycles. since joining a currency area promotes trade integration, it also is also likely to help align international business cycles. that means one of the key optimum currency area criteria is endogenous to the decision to join. rose ’ s ( 2009 ) more recent meta - analysis also finds a significant effect of trade on the synchronisation of business cycles. de grauwe ( 2000 ) provides a discussion of how closer integration may affect the likelihood that countries experience asymmetric shocks. on the one hand closer trade links could result in greater specialisation, leaving currency union members more prone to asymmetric shocks. on the other, it could result in more intra - industry trade, increasing the likelihood that countries will experience similar shocks, and thereby helping to align business cycles. a high degree of openness also means that the adjustment required to boost net exports is somewhat lower. a much weaker adjustment in prices and wages is necessary to raise net exports by a given share of gdp if both exports and imports are a large share of gdp than if they are a small share