Forward

Since 1 January 1999 the European Central Bank (ECB) has conducted the single monetary policy for the euro area. The Treaty on European Union assigns the Eurosystem the primary objective of maintaining price stability, reflecting a broad consensus in society that maintaining stable prices is the best contribution that monetary policy can make to economic growth, job creation and social cohesion.

In October 1998 the Governing Council adopted its monetary policy strategy and presented it to the public, well in advance of the launch of the single currency. The strategy has been successful in providing a robust framework for decision-making and a basis for accountability vis-?-vis the public. This was essential for establishing the credibility of the ECB and confidence in the euro from the outset.

In its early years, the single monetary policy faced a number of significant challenges. The ECB was confronted with a quadrupling of oil prices as well as pronounced movements in the foreign exchange and stock markets. It also had to deal with the period of uncertainty cast over the world economy in 2001 by the terrorist attacks of September 11 and the subsequent geopolitical tensions. Despite this demanding context, the ECB has managed to gain and maintain the trust of the public and of the markets. Inflation has been kept at low levels despite substantial adverse shocks, while indicators of long-term inflation expectations have remained in line with the ECB?s definition of price stability.

At the same time, the Eurosystem has also performed to the highest technical standards. Its operational framework for the single monetary policy has been functioning very smoothly since the launch of the euro in 1999 and, as a result, there has been little volatility in short-term interest rates.

In order to explain important aspects of the single monetary policy to a broader audience, this book provides a comprehensive overview of the ECB?s monetary policy and its economic and institutional background. The first edition, produced in 2001, was translated into most of the official Community languages together with Chinese, Japanese and Korean. Given the strong interest in this publication in Europe and beyond, and in the light of new developments over the past two years, the ECB has now decided to issue an updated version.

The structure of the second edition of this publication mirrors that of the first and provides an update on the economic and financial structure of the euro area. The book has been revised in line with the Governing Council?s confirmation and clarification of the ECB?s monetary policy strategy of May 2003. It also takes account of some changes to the Eurosystem?s operational framework for monetary policy and of our experience with actual policy-making since the publication of the first edition.

I am sure this new edition of ?The monetary policy of the ECB? will further contribute to the best possible understanding of the ECB?s monetary policy.

CONTENTS

FOREWORD

CHAPTER 1 The institutional framework of the single monetary policy

CHAPTER 2 The economic and financial structure of the euro area

2.1 Key characteristics of the real economy
2.2 Labour market
2.3 Government sector
2.4 External trade
2.5 Financial structure
2.6 Financial markets
2.7 Financial intermediaries

CHAPTER 3 The ECB?s monetary policy strategy

3.1 The role of monetary policy and the benefits of price stability
3.2 The transmission mechanism of monetary policy
3.3 The ECB?s monetary policy strategy: general principles
3.4 The ECB?s quantitative definition of price stability
3.5 The analysis of risks to price stability in the ECB?s monetary policy strategy
3.6 Accountability, transparency and communication

CHAPTER 4 Monetary policy implementation

4.1 General principles and objectives behind the design of the operational framework
4.2 Overview of the Eurosystem?s operational framework
4.3 Minimum reserves
4.4 Open market operations
4.5 Standing facilities
4.6 Central bank liquidity and the liquidity needs of the banking system
4.7 Experience from January 1999 to June 2003

CHAPTER 5 The conduct of monetary policy in the first years of the single monetary policy

5.1 Introduction
5.2 Main developments
5.3 An assessment of monetary policy during this period

ANNEX History ? The three stages of Economic and Monetary Union

GLOSSARY

BIBLIOGRAPHY

INDEX

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Source: European Central Bank