Abstract
Once the political decision to go ahead with EMU was unequivocally taken with the signing of the Treaty of Maastricht in December 1991, attention started to focus on what the union’s monetary policy would look like. After all, in terms of the targets and traditions governing monetary policy, the potential participants constituted a motley bunch. The need to reach consensus on the strategy for the single monetary policy was thus initially considered a major hurdle in the preparations for EMU. In part, this was because two seemingly irreconcilable views dominated the spectrum of opinions.
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Notes
See European Monetary Institute (1997). This publication was based on the report by the Monetary Policy Sub-Committee that was endorsed by the Council of the European Monetary Institute in late 1996.
Berk, Houben and Kakes (2000).
Overviews of the numerous empirical studies on EU-wide money demand are provided in Browne, Fagan and Henry (1997) and Van Riet (1993). The methodological intricacies of aggregation are addressed by Monticelli and Strauss-Kahn (1992) and by Winder (1997).
Arnold (1994) forcefully made this point by arguing that money demand instability is primarily caused by factors relating to the financial system and to monetary policy, and that these shocks average out in constructed aggregates. Later, Arnold (1997) reiterated his case by presenting evidence that the correlation of regional money aggregates in the United States is significantly higher than that of national money aggregates in Europe; this suggests that the greater money demand stability estimated for EMU may only be a diversification effect that disappears once EMU is actually established.
See Vlaar and Schuberth (1998) and Cabrero et al. (1998). These studies had a direct influence on the policy discussion within the Eurosystem, as they involved authors from the Dutch, Austrian and Spanish central bank respectively.
European Central Bank (1999a).
For an elaborate discussion of the role of money in the Eurosystem’s monetary policy strategy, see European Central Bank (1999b).
An overview of the role of short-term indicators in the analysis of future inflation in the euro area is provided in European Central Bank (1999c).
European Monetary Institute (1997).
On a detailed note, the HICP inflation measure selected in the price stability definition is transparently and independently calculated outside the Eurosystem by EUROSTAT.
In its list of key elements for the monetary policy strategy in Stage Three, the European Monetary Institute highlighted that the Eurosystem “should publicly set targets against which its performance can be assessed and explain its policy actions to the public with reference to its targets” (see European Monetary Institute, 1997, p. 12; italics in original text).
For instance, the Treaty (Article 113) only necessitates an annual testimony by the President of the European Central Bank to the European Parliament (on the basis of the Annual Report); the Protocol on the European System of Central Banks (Article 15) requires the publication of at least quarterly reports on the system’s activities.
The Monthly Bulletin is produced each month, except in those months that a Quarterly Report is published (implying eight issues a year).
Specifically, Article 10.4 of the Protocol on the European System of Central Banks determines the default setting that “The proceedings of the meetings shall be confidential. The Governing Council may decide to make the outcome of its deliberations public.” In the event, the Governing Council has prescribed a 30-year publication lag.
Buiter (1999) further claims that the formal confidentiality of the meetings and votes is likely to be breached through extensive leaks “within five minutes of a vote being taken”. This betrays little trust in the integrity of the (continental) European central banking community.
For a staunch defence of the Eurosystem’s line on transparency, see Issing (1999a, 1999b).
Specifically, Article 105 spells out that “The primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2”. This latter Article includes as objectives “to promote throughout the Community a harmonious and balanced development of economic activities, sustainable and non-inflationary growth … a high level of employment…”
See Hoogduin and Sleijpen (1999) who argue that the reference value will imply an anti-cyclical monetary policy as long as money velocity moves a-or anti-cyclically, and even if it moves pro-cyclically as long as the elasticity of velocity with respect to nominal income is less than one (although stabilisation would only be partial in this latter case). They advocate a modest stabilisation approach, whereby ambitions are set realistically and, especially in the uncertain initial years of EMU, monetary policy concentrates on maintaining price stability.
De Haan (1997) and Bini Smaghi (1998).
The Treaty on European Union spells out monetary policy independence in Article 108, financial independence in Articles 28 and 33 of the Protocol on the European System of Central Banks, and personnel independence in Articles 11 and 14 of same Protocol. The Treaty restricts government deficits in Article 104 (as elaborated in the EC Council Regulation 1477/97 on the Excessive Deficit Procedure) and prohibits privileged public sector access to financial institutions in Article 102 and public sector bail-outs in Article 103. As subsequently agreed at the Amsterdam Summit of 1997, the Stability and Growth Pact also includes a commitment to maintain budgets that are balanced or in surplus over the medium term and specifies an early warning procedure for fiscal digressions that put the Treaty limits at risk (stipulated in EC Council Regulation 1466/97). The Treaty establishes that general orientations for exchange rate policy shall be without prejudice to the price stability goal in Article 111.2. Although this Article 111.1 grants the political authorities somewhat greater latitude in decisions on the participation of the euro in formal exchange rate arrangements (including, for instance, Bretton Woods-type arrangements), such a step requires unanimous support within the European Council and may only be taken on a recommendation from the ECB or from the European Commission, after consulting with the ECB in an endeavour to reach a consensus consistent with its price stability goal.
To be precise, the Federal Reserve Act of 1977 requires the US monetary authorities “to maintain long-run monetary and credit aggregates commensurate with the economy’s long-run potential to increase production so as to promote effectively goals of maximum employment, stable prices, and moderate long-term interest rates.” More succinctly, this is commonly termed the Federal Reserve’s ‘twin objective’, the former of which is readily emphasised by the US Congress.
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Houben, A.C.F.J. (2000). The Monetary Policy Strategy of the Eurosystem. In: The Evolution of Monetary Policy Strategies in Europe. Financial and Monetary Policy Studies, vol 34. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-4471-5_8
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