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What they fail to account for is the fact that in a currency union, "full employment" means "zone-wide full employment," not "local full employment."

If you stop creating demand as soon as a single jurisdiction has reached full employment, you basically ensure that there will be a persistent general glut when measured zone-wide. It is as silly as assuming that the British government should curtail spending when there are no unemployed left in London, instead of continuing until there are no unemployed left in any major city.

They are the central bank of a currency union, but they act like they're the central bank of Germany. Well, there is no such thing as a free lunch: If Germany wants to reduce exchange rate volatility, it will have to accept higher inflation volatility (and higher baseline inflation). Because you have to have a buffer variable, and there is no reason Germany's trading partners should accept "other people's unemployment rate" as the buffer variable for Germany.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:53:59 AM EST
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