The Monetary Policy Strategy of the Eurosystem

  • Aerdt C. F. J. Houben
Part of the Financial and Monetary Policy Studies book series (FMPS, volume 34)


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.


Monetary Policy Central Bank Euro Area Monetary Union Money Demand 
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  1. 1.
    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.Google Scholar
  2. 2.
    Berk, Houben and Kakes (2000).Google Scholar
  3. 3.
    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).Google Scholar
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    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.Google Scholar
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    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.Google Scholar
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    European Central Bank (1999a).Google Scholar
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    For an elaborate discussion of the role of money in the Eurosystem’s monetary policy strategy, see European Central Bank (1999b).Google Scholar
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    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.Google Scholar
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    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.Google Scholar
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    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.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2000

Authors and Affiliations

  • Aerdt C. F. J. Houben
    • 1
  1. 1.De Nederlandsche BankAmsterdamThe Netherlands

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