The essence of monetary policy, it seems, used to be much more straightforward. During the Bretton Woods era of pegged exchange rates, as well as under the previous Gold Standard, monetary policy had a clearcut, predetermined nominal anchor. The main challenge for monetary policy-makers lay in using available margins for domestic purposes, while at the same time ensuring that the prime objectives of exchange rate stability and gold convertibility would not be unduly strained. Given restrictions on capital mobility and other sources of financial markets segmentation, these margins, although diminishing, were significant. This all changed when the system of pegged exchange rates collapsed. By lifting the external constraint that had previously dominated domestic policy choices, the definite end of the Bretton Woods regime in March 1973 ushered in a new era. National authorities were faced with the quintessential question of what compass to choose for their monetary policy-making and how to maximise the stabilising effects of this choice, including through interaction with the public. The choice was particularly pertinent in Europe, where different and varying monetary strategies have attempted to do justice to the interwoven nature of the economies and the common goal of more effective regional integration, on the one hand, and to the diverse views on the functioning of the economy and policy objectives, on the other.
KeywordsMonetary Policy Central Bank Euro Area Central Bank Independence Nominal Anchor
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- 1.Using a case study method for six major industrial countries, Bernanke and Mishkin (1992) find the outcomes of monetary policy to be independent of the choice of instruments and operating procedures. Similarly, in a specific survey of central bank adjustments following the adoption of inflation targets, Almeida and Goodhart (1998) do not establish a significant shift in operational behaviour. More broadly, in a review of monetary policy in 21 OECD countries, Swank and Van Velden (1997) find no clear relationship between a central bank’s monetary strategy, on the one hand, and its instruments and operating procedures, on the other. Nonetheless, there may be a link to the monetary strategy choice, for instance in the case of exchange rate targeting countries that adapt their instruments to those in the anchor country — as occurred in several European countries in the 1980s and 1990s-in order to be able to signal and to adjust the policy stance in unison. Similarly, money targeting may be supported by reserve requirements that are not remunerated at market rates; however, such reserve requirements are not a prerequisite for this strategy.Google Scholar