If I understand the news coming out of Europe correctly, the new head of the European Central Bank is offering a simple deal: If fiscal policy becomes hawkish, monetary policy will be dovish. In other words, as government spending is cut to put European governments on a sounder financial footing, monetary policy will do its best to ensure that any adverse impact on aggregate demand is kept to a minimum.
That seems a sensible compromise, given all the competing risks. Indeed a similar deal might well make sense for the United States.
My more liberal friends argue, based on Keynesian principles, that we need dovish fiscal policy as well. They often argue for short-run fiscal expansion coupled with long-run fiscal contraction. The problem is that fiscal policymakers cannot bind their future selves. It is hard to make commitments to future fiscal contraction credible, especially as short-run actions expand the budget deficit.
My more conservative friends argue, based on monetarist principles, that a dovish monetary policy risks future inflation. In my view, however, there are bigger risks than inflation just now. They include prolonged high unemployment and meager growth.
So I see Draghi as a fiscal hawk and monetary dove (at least under present circumstances). I wonder, which U.S. central bankers are in the same camp?