stability

P R I C E S TA B I L I T Y:
W H Y I S I T I M P O R TA N T
F O R YO U ?

CONTENTS
1

2

Foreword

3

4

5

5

Price stability: why is it important for you?

6

Summary

6

2

Chapter 2
Money – a short history

2.1 Functions of money

2.2 Forms of money

1

15

16

18

Chapter 1

Introduction

11

3

B OX E S
3.1 Measuring inflation
– a simple example

Chapter 3
The importance of price stability 23

3.2 The relationship between expected inflation and interest rates
– the so-called “Fisher effect”

26

3.1 What is price stability?

24

28

3.3 The benefits of price stability

29

3.4 Demand for cash

32

3.3 Hyperinflation

2

31

3.2 Measuring inflation

25

4

Chapter 4
Factors determining price developments

35

4.1 What monetary policy can and cannot do – an overview 36

4.2 Money and interest rates – how can monetary policy influence interest rates?

38

4.3 How do changes in interest rates affect the expenditure decisions taken by consumers and firms?
38
4.4 Factors driving price developments over shorter-term horizons

44

4.5 Factors driving price developments over longer-term horizons

B OX E S
4.1 Why can central banks influence
(ex ante) real interest rates?
The role of “sticky” prices

39

4.3 The quantity theory of money

47

4.2 How do changes in aggregate demand affect economic activity and price developments? 40

46

B OX E S
5.1 The road to the single currency, the euro

51

5.3 Construction and features of the HICP

60

5.2 Convergence criteria

5.4 A safety margin against deflation

5

5.5 The medium-term orientation of the ECB’s monetary policy

Chapter 5
The ECB’s monetary policy

5.1 A short historical overview

5.2 The institutional framework

5.3 The ECB’s monetary policy strategy
5.4 Overview of the Eurosystem’s operational framework

49

50

53

57

5.6 Real economic and