- The problem and an overview: "Europäische Geldpolitik"
textbook aims to give a detailed, systematic explanation of new developments
in European monetary policy as it has been conducted since the beginning
of 1999 and to combine them with traditional insights. For example,
the transition to Stage Three of EMU has gone hand in hand with a change
in the method of quoting exchange rates, namely from direct quotation
to indirect quotation; therefore the latter will be used throughout
this book. On the other hand, the issue of what monetary policy strategy
is adequate and the monetary transmission process will be discussed
here, bearing in mind the existence of known alternatives yet also taking
into account changes in the underlying framework. The fact that this
monetary policy regime is new, however, will mean that some of this
book's statements will tend to be speculative, which is unusual for
I explains why monetary union started with 11 countries. In this connection,
the conditions for entry, also known as the convergence criteria, are
explained in further detail, since they will be applied-in a modified
fashion-to further candidates for accession and also, in part, to the
present members in the coming years.
II begins by covering the institutional framework in which the single
monetary policy has been active since 1999. The centrepiece is formed
by the structure and tasks of the Eurosystem and an analysis of the
aspect of independence. The generation and use of profits in the Eurosystem
is also discussed.
second section of Chapter II discusses various monetary policy strategies
and their adequacy to the Eurosystem. A monetary policy strategy is
defined as the basic thrust of monetary policy in order to achieve the
desired goals. Besides strategies focusing on interim targets (e.g.
interest-rate targeting or monetary targeting), the relatively new strategy
of direct inflation targeting, as well as a multi-indicator strategy
modelled upon that of the Federal Reserve System, are the subject of
analysis. Finally, the strategy embarked upon by the Eurosystem is discussed,
including arguments for or against the various choices.
third section deals with the Eurosystem's set of monetary policy instruments.
Together with the Eurosystem's banknote-issuing monopoly, the new minimum
reserve system forms the basis for the banking system's dependence on
the central bank for funds and stabilises the overnight money market
through its operational design. Within the framework of credit institutions'
refinancing with the Eurosystem, open-market transactions, especially
the weekly main refinancing operations, play a crucial role. They are
accompanied by the standing facilities, i.e. the marginal lending facility
and the deposit facility. The individual instruments are described,
and their effects characterised, using the consolidated balance sheet,
the "financial statement", of the Eurosystem.
decisive field of monetary policy operations is the money market. The
interest rate on main refinancing operations is the key interest rate
for overnight money lent among banks (overnight money). The Eurosystem,
as the sole supplier of central bank money, can manage either the price
(the interest rate) or the quantity; the Eurosystem uses the price approach
(i.e., the overnight interest rate). Section four shows how this is
implemented technically. The overnight money rate, which functions as
an operative target in the Eurosystem's concept, is then where the monetary
transmission process begins.
general transmission process deals with how monetary policy stimuli
are transmitted from a change in central bank interest rates to the
final macroeconomic objectives. It is covered in the fifth section.
In particular, one must address the question as to which-in some cases,
heterogeneous-national effects can be unleashed by a single monetary
policy and which transmission channels will have a stronger or weaker
impact in future. It will thus become readily apparent to the reader
that exchange rate changes, owing to the relative lack of openness of
the euro area, will in future play only a subordinate role. However,
there are some reasons to believe that an expectation-induced transmission
process is becoming increasingly relevant and that the credit channel
may need to be reassessed.
Chapter Three is devoted to factors which could potentially disrupt
the single monetary policy of the Eurosystem. The first section addresses
interrelationships between monetary policy and fiscal policy. The theoretical
relationships are discussed against the backdrop of the provisions of
the EC Treaty and the Stability and Growth Pact. The latter sections
seek to defuse the traditional potential for conflict. All the same,
there do remain problems involving a lack of co-ordination between monetary
and fiscal policy, which, in the final analysis, consist in temptations
to shake off the burden of real government debt by means of inflation
spending. This section is discussed the most extensively because of
the debate over the past few years and the position of prominence occupied
by budgetary policy in the Maastricht Treaty.
wage policy, which continues to be each member nation's individual responsibility,
must take heed of the sea changes ushered in by monetary union (section
two). Otherwise, wage policy, too, could cause problems for the single
monetary policy. This uniformity will cause national rate of inflation
to differ only imperceptibly in the long run, and it will no longer
be possible to create a national competitive advantage within the euro
area by means of devaluing one's currency. Accordingly, the taking into
consideration of productivity developments in wage negotiations will
become an increasingly relevant element of labour market developments,
particularly the further development of unemployment. If unemployment
cannot be brought under control within the foreseeable future, the project
of monetary union could encounter increasing pressure from that side,
and demands for national and/or supranational (i.e. from the EU) transfer
payments could grow louder and louder.
last issue to be discussed will be the interplay between monetary policy
and exchange rate policy (section three). Responsibility for the latter
is held by the ECOFIN Council, whose guidelines must be followed by
the Eurosystem. If the ECOFIN council takes a formal decision on an
exchange-rate system or introduces exchange-rate target zones, this
could cause difficulties for a stability-oriented monetary policy via
the foreign-exchange-market interventions which would be triggered off
by such a decision. This problem was defused right from the outset when
the exchange-rate relationships were devised between the euro area countries
and the EU countries not participating in monetary union, the ERM II
contents we have selected, in our opinion, cover the core concepts of
European monetary policy. A textbook that covers a project which is
still in the beginning stages and is marked by dynamic growth is automatically
in danger of being "overtaken by events" as it were. Therefore, in some
places the book needs to rely on plausible assumptions. On the other
hand, we have tried to give the reader the opportunity to find more
up-to-date information on monetary union and the euro by including a
list of websites.
section of this book ends with a quiz on the contents of that section,
the answers to which are found at the end of the book, as well as considerable
bibliographical references. To make it easier for the interested reader
to find literature, we refer-wherever possible-to Internet addresses
where the sources we have provided can be called up. For didactic reasons,
too, we have attempted not to overload the text, so as to make our train
of thought easy to follow. Thus, every chapter has several boxes where
a term is explained in greater detail or a line of thinking is elaborated
upon. In addition, it is our goal to combine theory with current trends
and data. This is reflected in the inclusion a large number of charts
and tables based on empirical data.