On the other hand, using fiscal policy to manage demand can be dangerous because it is less flexible than monetary policy.
But the dilemma is how to make fiscal policy more flexible, in order to take pressure off monetary policy, while still maintaining long-term discipline.
To regain control over its monetary policy, China needs a more flexible exchange rate.
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Current conventional wisdom argues that monetary policy is more useful and more flexible for short-term macroeconomic management.
German interest rates really need to be lower, but since this is not possible under Europe's single monetary policy, common sense would argue that Germany should allow fiscal policy to be more flexible.
Moreover, successful monetary union may sometimes require governments that have lost their monetary and exchange-rate flexibility to resort to a more flexible fiscal policy.
Countries in the euro area will have to undertake more reforms, such as making their labour markets more flexible, if they are to make the best of life with a single monetary policy.
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Devising a one-size-fits-all monetary policy for such a diverse area might prove hideously difficult, and European economies are not flexible enough to cope with the potential problems.
There are limits to monetary policy: the Fed does not have the knowledge to bring about full employment, which requires flexible relative prices for all factors of production.
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Precisely what "flexible inflation targeting" can and should mean is, of course, the great subject of the moment among UK monetary policy nerds (and plenty of economic journalists) as we eagerly await the arrival of the new UK bank governor.
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