Monetary Policy in America v. Europe: Whatever Happened to Expenditure-Switching?

Sebastian Mallaby writes about how the U.S. Federal Reserve is pursuing easy monetary policy to stimulate our aggregate demand while the European Central Bank is pursuing a tighter monetary policy on the concern that Europe might slip into an inflationary spiral from excessive aggregate demand:

The divergence in approaches on either side of the Atlantic is likely to stoke tensions. Americans resent Europeans for not sharing the burden of stimulating the world economy, forcing them into unilateral action. Europeans resent Americans for blundering foolishly ahead, exacerbating inflation. For years there has been an unhealthy imbalance in the world economy, with the United States contributing disproportionately to the growth in demand and doing too little in the way of saving. The response to the current economic mess increases that lopsidedness. Americans are spending heavily to head off the risk of recession while Europeans close their wallets.

One would think that we were still under the Bretton Woods regime of fixed exchange rates. OK, we might have a Bretton Woods II regime with certain Asian Central Banks avoiding the appreciation of their currencies with respect to the dollar. But as our graph shows – the value of the Euro has been rising with respect to the dollar, which tends to push U.S. net export demand as it tends to push down European net export demand.