European monetary policy: the ongoing debate on conceptual issues

SINCE January 1999, European monetary policy has been centralised in the form of the European System of Central Banks (ESCB) with the European Central Bank (ECB) at its core. This new monetary authority is quite unique in many aspects: It is supranational and has the sole responsibility for monetary policy in the entire euro area, which now includes twelve member countries of the European Union. It has a clear mandate by the Treaty on European Union to ensure price stability in the whole currency zone; other objectives, in particular those more related to output and employment in the euro economy, should only be addressed if price stability is maintained. The EU Treaty also guarantees the ECB's operational independence as well as its independence from political interference. The presidents of the national central banks of the Eurosystem as members of the ECB Governing Council (together with the six members of the Executive Board) are supposed to pursue the goals of the monetary union as a whole; they should not act as delegates of their country of origin and should not base their decisions on national considerations. The paper is structured as follows: In Section 2, we discuss the decisions the ECB made concerning its strategy. The role of money and its leading indicator properties are then analysed in Section 3, followed in Section 4 by a short description of the ECB's interest rate policy, the development of monetary aggregates and inflation in the euro area. Section 5 deals with the issue of transparency and credibility. In Section 6 the paper briefly discusses issues related to the macroeconomic adjustment process within the euro area, before closing with some final remarks. As it is, in our view, too early to establish a thorough track-record of the ECB's actual interest rate policy, we will rather focus throughout the article on the conceptual issues concerning the monetary policy strategy.