Monetary Policy in the Euro Area: Strategy and Decision-Making at the European Central Bank

211 Pages·2001·0.84 MB·English

by  Otmar Issing

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Monetary Policy in the Euro Area
How the European Central Bank (ECB) works, and how well it per-
forms,isoneofthemostimportantissuesfacingEurope,andhasbeen
thesubjectofvastmediaandacademicinterest.AlmostdailytheECB
isatopicofdiscussioninthepressandamong‘EuroWatchers’.Much
of this discussion has been of a confused and political nature and has
servedtoblurratherthaninform.
Thisbook,writtenbyateamattheECBincludingOtmarIssing,the
ECB’sChiefEconomist,providesthefirstcomprehensive,insider,non-
technicalanalysisofthemonetarypolicystrategy,institutionalfeatures
andoperationalproceduresoftheEurosystem.
The goals and the transmission mechanism of monetary policy are
explored,asarethetheoreticalandempiricalresultsunderpinningthe
‘stability-orientedmonetarypolicystrategy’adoptedbytheECB.The
characteristics of this strategy are also discussed in comparison with
suggestedalternatives.
OTMAR ISSING is a Member of the Executive Board of the European
CentralBank.
VÍTOR GASPAR is Director General, DG Research at the European
CentralBank.
IGNAZIO ANGELONI isDeputyDirectorGeneral,DGResearchatthe
EuropeanCentralBank.
ORESTE TRISTANI is a senior economist in DG Research at the
EuropeanCentralBank.

Monetary Policy in the
Euro Area
Strategy and Decision Making at the
European Central Bank
Otmar Issing
V´ıtor Gaspar
Ignazio Angeloni
Oreste Tristani
AllattheEuropeanCentralBank
         
The Pitt Building, Trumpington Street, Cambridge, United Kingdom
  
The Edinburgh Building, Cambridge CB2 2RU, UK
40 West 20th Street, New York, NY 10011-4211, USA
477 Williamstown Road, Port Melbourne, VIC 3207, Australia
Ruiz de Alarcón 13, 28014 Madrid, Spain
Dock House, The Waterfront, Cape Town 8001, South Africa
http://www.cambridge.org
©Otmar Issing, Vítor Gaspar, Ignazio Angeloni, Oreste Tristani 2004
First published in printed format 2001
ISBN 0-511-03116-5 eBook (Adobe Reader)
ISBN 0-521-78324-0 hardback
ISBN 0-521-78888-9 paperback
Contents
Listoffigures pagevii
Listoftables ix
Acknowledgements x
Introduction 1
1 Money,outputandprices:thescopeofmonetarypolicy 7
1.1 Thelongrun 8
1.2 Theshortrun 18
2 Monetarypolicymaking:strategiesandrules 32
2.1 Rulesvs.discretion:theimportanceofcredibility 33
2.2 Optimalpolicy 39
2.3 Simplerulesaspolicybenchmarks 41
2.4 Monetarypolicystrategies 45
3 Theeuroarea:anoverview 47
3.1 Salientfeaturesoftheeuroareaeconomy 47
3.2 Euroareadata 51
3.3 Sometentativeevidenceonthemonetarytransmission
mechanismintheeuroarea 58
4 TheECBstrategy:definingpricestability 65
4.1 ThemandateoftheTreaty 65
4.2 TheECB’sdefinitionofpricestability 68
4.3 Otheraspectsofthedefinitionofpricestability 71
5 Theroleofmoney 76
5.1 Whatdotheliteratureandpolicyexperiencestellus? 76
5.2 TwoimplicationsfortheECBstrategy 79
5.3 Fromprinciplestopractice:moneyintheECBstrategy 82
5.4 Moneydemandmodelsfortheeuroarea 86
6 Abroadlybasedassessment 90
6.1 Leadingindicators 91
6.2 Expectationsandforecasts 94
v
vi Contents
7 TheECBstrategy:anoverallview 98
7.1 Theroleofuncertaintyinthestrategy:generalaspects 99
7.2 Euroarea-specificaspects 101
7.3 Anewstrategy 103
7.4 Twopillars,asingleframework 106
7.5 Recentcriticismsandsomeanswers 108
8 Theoperationalframework 112
8.1 OutlineoftheEurosystem’soperationalframework 114
8.2 Howdoestheframeworkfulfilitsmaingoals? 119
8.3 Counterpartiesandeligiblecollateral 120
8.4 Theperformanceoftheoperationalframeworkin1999 121
9 Accountabilityandtransparency 128
9.1 Accountabilityandindependence 129
9.2 Transparency 134
9.3 AccountabilityandtransparencyoftheECB 138
10 Thesinglemonetarypolicyin1999 144
10.1 Theannouncementofthestrategy 145
10.2 Thefirstmonetarypolicyactions:3December1998and
22December1998 148
10.3 Secondpolicymove:8April1999 150
10.4 Thefirstpolicytightening:4November1999 159
Appendix:ExcerptsfromECBexternalcommunications
tothepress 165
References 179
Index 195
Figures
1.1 Cross-countryinflationratesandmoneysupply
growthinselectedcountries page 11
1.2 Cross-countryshortterminterestandinflationrates
in‘lowinflation’countries 13
1.3 Cross-countryoutputandmoneysupplygrowthin
IMFmembercountries 14
1.4 Correlationbetweenpricesandoutputoverthe
businesscycle 24
1.5 CorrelationbetweenmoneyM1andoutputoverthe
businesscycle 25
1.6 CorrelationbetweenmoneyM3andoutputoverthe
businesscycle 27
1.7 CorrelationbetweenmoneyM3andpricesoverthe
businesscycle 27
3.1 PercentageshareofthecomponentsofM3 57
8.1 Normaltimeframefortheoperationalstepsfor
standardtenders 118
8.2 Normaltimeframefortheoperationalstepsfor
quicktenders 118
8.3 ECBinterestratesandmoneymarketrates 122
8.4 Recoursetothemarginallendinganddepositfacility 124
8.5 Biddinginthemainrefinancingoperationsduring1999 125
8.6 SpreadEONIA–reporate 125
8.7 Volumeofmainandlongtermrefinancingoperations 126
8.8 Requiredreservesandautonomousfactors 126
10.1 Inflationratesintheninetiesineuroareacountries 147
10.2 Officialinterestratesinselectedeuroareacountries 149
10.3 RateofgrowthofM3,July1998toNovember1999 151
10.4 Confidenceindicatorsfortheeuroarea,January1998
toJanuary2000 154
10.5 Shortandlongterminterestratesandyieldspread,
January1997toJanuary2000 156
vii
viii Listoffigures
10.6 Evolutionofinflationforecastsfortheeuroarea,
1998–2000 157
10.7 EvolutionofrealGDPgrowthforecastsforthe
euroarea,1998–2000 158
10.8 GrowthdifferentialbetweentheUSAandtheeuroarea
andthedollar–euroexchangerate 161
10.9 Realshorttermandlongterminterestrates,1990–2000 162