The Monetary of European Central Bank

Topics: Monetary policy, Central bank, Inflation Pages: 8 (2085 words) Published: May 20, 2015


A Literature Review of European Central Bank’s Monetary Policy

FIN11128

Introduction

The European Central Bank (ECB) was established in June 1998, as the core of European System of Central Banks (ESCB), ECB formally centralized the European monetary policies since January 1999. This new monetary authority is quite different from any traditional sovereign central banks, for its operational independence and its independence from political interference are guaranteed by the European Union Treaty. Besides, the supranational organizational attribution make it has the only responsibility for monetary policy in the whole euro zone, which now consist of eighteen member states of the European Union. During the sixteen years since its establishment, ECB has confronted several economic fluctuations, especially the global financial crisis in 2008 and sovereign debt crisis since 2010. The ECB plays an important role in the conduct of its main strategies and tools of monetary policy to stabilise the euro currency in the crisis.

The strategies of ECB

The monetary policy strategy of ECB is price stability-oriented (Bordes, Christian and Clerc, 2007). The Maastricht Treaty defined that the ECB's ultimate objective is price stability. The ECB’s monetary policy strategies consist of three key components: a quantitative definition of price stability, a prominent role for money in the assessment of risks to price stability, and a broadly based assessment of the outlook for price developments (Gradinaru, Cristian, 2009).

1. Price Stability

Since the birth of euro in 1999, the ESCB has set up its primary task for maintaining price stability. According to the Maastricht Treaty, the primary objective of ECB is to keep price stability in the entire euro area. And other objectives to be pursued by the ECB, in particular those more involved in output and high employment in the euro economy, should only be addressed if price stability is maintained(Clausen and Donges,2001) (Aksoy, DeGrauwe and Dewachter, 2002).

Some researchers (Grauwe and Paul De, 2002) suggest that the Treaty uses the word ‘primary’ but not ‘sole’ objective should be note, as is sometimes erroneously concluded. So, according to the Treaty the ECB should also pursue other objectives like sustaining business cycle, provided this does not endanger price stability. But some other experts took a different view of point, Weber (2011) emphasized that monetary policy and its tools must remain focused on price stability and should not be overburdened with other objectives. Since adopting extra objectives as an additional, such as financial stability, independent monetary policy objective runs the risk of arousing unrealistic expectations about the effectiveness of monetary policy tools.

In addition, the definition of the primary objective was specified more precisely by the ECB (1998) to be ”a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%”, which is ‘to be maintained over the medium term’ (Clausen and Donges, 2001) (Aksoy, DeGrauwe and Dewachter, 2002) (Fendel and Frenkel, 2006). It is no deniable that the HICP has many advantages, not only because its availability, but also it is the only harmonized indices calculated for the whole euro zone. This guarantees the comparability of prices of the entire euro area. Also, the HICP are regarded as a credible price-level changes measurement and it is available on a monthly basis (Bordes, Christian and Clerc, 2007). Hence, Clausen and Donges (2001) believe that it is a precious contribution to employment creation and economic development in the whole euro zone which can be expected from monetary policy.

However, there are also some drawbacks of the HICP. As Bordes, Christian and Clerc (2007) stated, HICP can be refined through more frequent revisions of the weights used at national level....

Bibliography: Clausen J.R. , Donges J.B. (2001), European Monetary Policy:The Ongoing Debate on Conceptual Issues, World Economy, 2001, Vol.24(10), pp.1309-1326
Ejerskov S., Moss C
Feldstein, Martin (2012), The Failure of the Euro: The Little Currency That Couldn 't, Foreign Affairs, Jan/Feb 2012, Vol 91(1), pp.105-116.
Grauwe, Paul De (2002), Challenges for Monetary Policy in Euroland, JCMS: Journal of Common Market Studies, 2002, Vol.40 (4), pp.693-718
Hugo Dixon (2013), A Tool Kit for Future Euro Crises, The New York Times, September 23, 2013 Monday
Jaeger, A. (2002), The ECB’s money pillar: an assessment, IMF Working Paper No.WP/03/82.
Svensson, L.E.O. (2000), Open-Economy Inflation Targeting, Journal of International Economics, No. 50, pp. 155–83.
Weber, A. A.(2011), Challenges for monetary policy in the European monetary union, Federal Reserve Bank of St. Louis Review, July-August, 2011, Vol.93(4), pp.235(8)
Wyplosz, C
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