The Monetary Policy Strategy of the ECB

Abstract

Monetary policy is an ongoing process, whose implications can only be understood in conjunction with the broad economic context and with the goals that policy itself is trying to achieve. Just as chess moves acquire meaning in succession, as part of the player’s overall game plan, so sequences of policy actions are linked together with the underlying circumstances and goals by a rigorous, although flexible, logical thread. From Lucas’ early contributions we learned that specific monetary policy actions have different impacts on economic agents depending on the overall policy framework according to which they are conducted. It is the monetary policy strategy — in short, the framework that a central bank uses to translate relevant information into actions and to publicly explain such actions — that really matters when it comes to affecting market expectations and, indirectly, economic behaviour and outcomes.

The man of system… is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the elements of a great society with as much ease as the hand arranges different pieces upon a chessboard. He does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature may choose to impress upon it. (Smith, 1759)

* The opinions expressed are personal and do not necessarily reflect the views of the European Central Bank.