meaningful. in particular, my hope is that work in this area can help policymaking escape the obsession of “ competitiveness ” which, when narrowly defined, focuses on export market shares, real exchange rates and unit labour costs ( cœure, 2014 ). such an approach indeed risks perpetuating the fallacy of composition where all economies aim to export low demand. a positive - sum solution to global growth requires a global productivity shock, and in that regard we need better evidence on two things. first, on what types of policies will spur domestic total factor productivity growth through innovation, technology adoption and reallocation, and how to optimally sequence those policies to yield the largest short - term gains. second, we need better evidence on the broader design of the global economy which will encourage productivity spill - overs and the reallocation of capital and labour between economies, restarting what researchers at the oecd have termed the stalled “ diffusion machine ”. 13 similar reflections are needed for the euro area, where most countries have now restored an external balance after a painful but necessary period of internal devaluation, and where corporate investment is inhibited by expectations of depressed long - term output growth. it is high time that the growth narrative is shifted from a narrow view of “ competitiveness ” towards a broader understanding of “ productivity ”, both within countries and across countries, including through a stronger single market. countries should no longer wait for each other to generate sustainable growth. exchange rates : the role of openness my second point is related to the importance of flexible exchange rate for the international macroeconomic adjustment. the case for flexible exchange rates as macroeconomic shock absorbers was made as early as 1953 by milton friedman. evidence for developing countries in the post - bretton woods era seemed to confirm that view, at least for emerging market economies. 14 the world ’ s major central banks have been operating on the basis of the mundell - fleming assumption that their ability to conduct independent monetary policy see eggertsson, g. a., ferrero, a., and a. raffo ( 2013 ). “ can structural reforms help europe? ”, international finance discussion papers 1092, board of governors of the federal reserve system. a one - off price adjustment has distributional effects ex post, but it does not affect the perception of real rates going forward – insofar as it boosts future income, it may indeed raise inflation expectations and lower real rates. by contrast, if

economy created and maintained by the staff of the federal reserve board ( mishkin, 2007b ), illustrate this point. to keep the simulations as simple as possible, i have assumed that the economy begins at full employment with both headline and core inflation at desired levels. the economy is then assumed to experience a shock that raises the world price of oil about $ 30 per barrel over two years ; the shock is assumed to slowly dissipate thereafter. in each of two scenarios, a taylor rule is assumed to govern the response of the federal funds rate ; the only difference between the two scenarios is that in one, the federal funds rate responds to core personal consumption expenditures ( pce ) inflation, whereas in the other, it responds to headline pce inflation. 6 figure 1 illustrates the results of those two scenarios. the taylor rule is written as follows : equilibrium real short - term rate ;, where r is the nominal policy rate ; r * is the is the four - quarter inflation rate, either core or headline ; is the inflation the federal funds rate jumps higher and faster when the central bank responds to headline inflation rather than to core inflation, as would be expected ( top - left panel ). likewise, responding to headline inflation pushes the unemployment rate markedly higher than otherwise in the early going ( top - right panel ), and produces an inflation rate that is slightly lower than otherwise, whether measured by core or headline indexes ( bottom panels ). more important, even for a shock as persistent as this one, the policy response under headline inflation has to be unwound in the sense that the federal funds rate must drop substantially below baseline once the first - round effects of the shock drop out of the inflation data. 7 the basic point from these simulations is that monetary policy that responds to headline inflation rather than to core inflation in response to an oil price shock pushes unemployment markedly higher than monetary policy that responds to core inflation. in addition, because this policy has larger swings in the federal funds rate that must be reversed, it leads to more pronounced swings in unemployment. on the other hand, monetary policy that responds to core inflation does not lead to appreciably worse performance on stabilizing inflation than does monetary policy that responds to headline inflation. stabilizing core inflation, therefore, leads to better economic outcomes than stabilizing headline inflation. although the simplest sticky - price models imply that stabilizing sticky - price inflation and economic activity are two sides of the same coin, the presence of