Rogoff's Central Banker Cum Stability and Growth Pact : Mutually Reinforcing Institutions or a Cursed Overdose?

Two different institutions, meant to provide each other's support, underpin economic policymaking in Euroland. First, a shared central bank whose objectives and operational procedures imply inflation stabilization weighting more heavily (relative to employment stabilization) than that the social loss functions of selected individual countries would yield. Rogoff's icon, for all practical purposes, would be in monetary control for the whole area. Second, the Stability and Growth Pact, aimed at ensuring national budgetary policies supporting such inflation stabilization-oriented monetary policies. This objective calls for national fiscal deficits being kept below 3 percent of the GDP reference value. This narrow margin may not permit to offset the most damaging effects that would inflict a Rogoff's like central banker to the most vulnerable countries. While this paper is not particularly aimed at reviewing the various opinions and objections that either institutional pillar have raised, it focuses on the slippery recession path that the combination of the two institutional arrangements may entail with resulting political and social turbulences. The underlying question is whether less dogmatic, time-consistent coordination between monetary and fiscal policymaking, between Frankfurt and Brussels, is the iniquity that conventional economic analysis purports to be