Long-term economic growth will be built on structural reform, not monetary policy, says Ardo Hansson
At the autumn school of the Institute of Government and Politics of the University of Tartu, held on Saturday in Kääriku, the Governor of Eesti Pank Ardo Hansson commented on monetary policy, saying that it cannot affect economic growth over the long term, as the only way to ensure growth is through structural reform.
Economists mainly generally find that the volume of money does not affect economic growth over the long term, though it does affect prices. “Price stability is good for households, for whom it is important that money keep its purchasing power, and it is also important for businesses, who need a stable operating environment to make their plans”, said Mr Hansson. The goal of the central banks of the euro area is to maintain price stability, keeping inflation at below but close to two per cent over the medium term.
“The independence of the central bank is important for keeping inflation under control, because historical experience has shown that if governments are given control of the money presses, high inflation often results”, he explained.
Mr Hansson noted that fiscal and monetary policy can smooth the effects of the economic cycle by encouraging or cooling growth in the economy. “Even though central banks have an increased role in economic policy, it is important to understand that monetary policy cannot be a substitute for structural reform and cannot remove the need to improve confidence in the state finances”, he said. “Investment in human capital and fixed assets have a longer-term effect and are more important for economic development. Reforms, however, can improve competitiveness and develop the investment climate”.