Abstract
With the Treaty of Maastricht the European governments whose countries are members of the European Monetary System marked out their route to European Economic and Monetary Union. According to the provisions on monetary policy laid down in the treaty, the establishment of a European System of Central Banks and the “irrevocable fixing of exchange rates leading to the introduction of a single currency” are provided for in the final stage of this union. When this third stage is introduced, it will be the task of the ESCB to lay down and implement the monetary policy of the member states. The primary objective of the European Central Bank will be to ensure price stability. The ESCB has to support the general economic policies in the Community only as long as it is possible to do so without prejudice to this objective. In order to ensure that this mandate is observed the ESCB has a free hand in its monetary policy actions. The decision-making bodies of the European Central Bank and of the national central banks participating in the system are independent of all instructions.
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The author wishes to thank Heinz Herrmann for his active assistance in the preparation of this paper.
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Notes
Jack Guttentag wrote in an article in 1966: The main weakness of the (money market) strategy is its incompleteness, i.e. the fact that the Federal Open Market Committee (FOMC) does not set specific quantitative target values for which it would hold itself accountable for the money supply, long-term interest rates, or any other strategic “variable” that could serve as a connecting link between open market operations and system objectives. J. Guttentag (1966), “The strategy of open market operations”, Quarterly Journal of Economics, pp. 1–30.
See B. Friedman (1973), “Targets, instruments, and indicators of monetary policy”, Journal of Monetary Economics, pp. 443–473.
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Interest rate targets are fraught with well-known problems, namely that they encourage a procyclical impact of monetary policy, that they can lead to cumulative inflationary and deflationary processes, that the trend in market conditions cannot be clearly interpreted and that the relevant long-term interest rates, at least, are controlled by the central bank only to a very limited extent. Yet in American literature the idea of applying interest rates as an intermediate monetary target has recently regained an element of popularity. See R. Barro (1989), “Interest rate targeting”, Journal of Monetary Economics, pp. 3–30
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See also V. Reinhardt (1991), “Conducting monetary policy without a nominal anchor”, Journal of Macroeconomics, pp. 575–596.
For a technical description of such a view see R. Flood and P. Isard (1989), “Monetary policy strategies”, IMF staff papers, pp. 612–632.
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For an approach to the determining of an optimal time horizon for monetary targeting which takes such arguments into account see M. Garfinkel and S. Oh (1993), “Strategic discipline in monetary policy with private information: Optimal targeting horizons”, American Economic Review, pp. 99–117.
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See, for example, I. Angeloni, C. Cottarelli and A. Levy (1991), Cross-border deposits and monetary aggregates in the transition to EMU, IMF Working Paper No. 114.
See C. Monticelli (1993), All the money in Europe, mimeographed, Basle.
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See B. Chadha, P. Masson and G. Meredith (1992), “Models of inflation and the costs of disinflation”, IMF staff papers, pp. 395–431.
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See L. Hoogduin and G. Korteweg (1993), “Monetary policy on the road to EMU”, in S. Eijffinger and J. Gerards (eds): European monetary integration and the financial sector, pp. 61–83.
See also P. Kenen (1992), “The European Central Bank and monetary policy in stage three of EMU”, International Affairs, pp. 457–474.
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Issing, O. (1994). Monetary Policy Strategy in the EMU. In: De Beaufort Wijnholds, J.O., Eijffinger, S.C.W., Hoogduin, L.H. (eds) A Framework for Monetary Stability. Financial and Monetary Policy Studies, vol 27. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-0850-8_12
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