Европейская денежная система
to this issue, that combining linked exchange rates, the free circulation
of capital and monetary autonomy is not, to be quite blunt, sustainable. It
is precisely this which is the raison d'кtre of the ECB as the single
monetary authority in an economic area which has irrevocably fixed exchange
rates (a single currency) and freely circulating capital (a single market).
To conclude this section, let me stress that it is essential for the
ECB to make it absolutely clear that its main objective is stability. If,
as some would suggest (for instance in the Modigliani manifesto), the ECB
were to directly target employment, this would adversely affect the
credibility of its monetary policy and thus have an impact not only on
inflation but also, paradoxically, on employment. The direct targeting of
employment objectives by a central bank is counterproductive.
The ECB's monetary policy strategy
A strategy is a combination of criteria and procedures which allow
decisions to be taken in order to achieve a monetary policy objective. This
decision-making process can be based on inflation forecasts which depend on
the behaviour of a relevant monetary variable or, more simply, on the
"pegging" of exchange rates to a stable currency. This last strategy is
ideal for more open economies, encompassed by a specific monetary zone,
such as, for instance, the Netherlands and Germany. However, this would not
be suitable for a much larger but relatively closed economic space such as
the euro area.
I believe that it is a mistake to try to exaggerate the polarity of
the inflation strategy and the monetary strategy. These are quite clearly
separate strategies but they are not in any way opposed, incompatible or
irreconcilable. Certainly, some aspects of each of these strategies should
be combined, resulting in another, completely separate and valid strategy.
This is what the ECB has done and it now needs to give the end product a
name which does not merely describe the desired objective ("the stability-
orientated monetary policy strategy").
There are two components to the ECB's monetary policy strategy. The
first, more practical and visible component consists in a quantitative
reference to the growth of the money supply as defined by the broad M3
aggregate. Taking into account the quantitative definition of stability,
economic growth and realistic hypotheses on money circulation rates, this
monetary reference has initially been set at 4 1/2%.
The second component of the ECB's monetary strategy, a more general
and enveloping one, is the estimation of inflation forecasts and risks for
price stability in view of changes in a group of significant variables, all
of which are related to the euro area as a whole. Some examples of these
significant variables are credit, long-term interest rates, prices of raw
materials, import prices, wages and public spending deficits.
Inflation is a monetary phenomenon. When the rate at which the money
supply grows is greater than the nominal potential rate of growth of an
economy, in the medium term this will generate inflation. In other words,
the medium-term inflation rate is indicative of excessive monetary
expansion in relation to economic growth. Growth in the money supply
therefore provides the best early warning of inflation and monetary control
is the best monetary policy strategy. The virtues of the first component of
the ECB monetary strategy are, when all is said and done, well known. If it
worked, this alone would be sufficient.
In practice, however, things are never so simple. Inflation
forecasting and control cannot rely solely on a monetary aggregate because
of doubts as to whether or not this monetary aggregate can be controlled
and is stable and meaningful. If a narrow definition of money, such as M1,
is adopted, controllability can be achieved in that, through the monetary
policy instrument, it is possible to have a greater impact on its
evolution, but this is offset by the loss of stability and significance. If
it is decided to opt for a broad monetary aggregate, such as M3 or M4, the
money demand function becomes more stable and clearly more significant, in
that a greater correlation can be achieved between exchange rates,
providing a better explanation of changes in nominal costs and inflation,
in return for some loss of control. Despite this, doubts persist. In
practice, these will, of course, increase when national currencies are
replaced with the euro; then the need for the second part of the monetary
policy strategy will become obvious.
The ESCB monetary policy tool
The wide range of instruments available to the ESCB for the
implementation of the euro area monetary policy has been established with
reference to two fundamental criteria: efficiency and neutrality. These
instruments can be separated into three categories, related to open market
operations, standing facilities and minimum reserves.
The ESCB's instruments and procedures do not differ significantly
from those traditionally used by the Banco de Espaсa and with which you are
all familiar. This means that I only need to highlight a few differences.
In addition, I should add that over recent weeks the Banco de Espaсa has
introduced changes aimed at facilitating a smooth transition.
With regard to open market operations, the frequency and maturity of
the main re-financing operation has become that of a weekly auction of
loans with a maturity of two weeks, and an interest rate which is either
announced in advance (fixed rate auction) or announced later as the result
of offers received (variable rate auction). There will also be monthly
auctions for three-month loans which will always be of the variable rate
type in order to avoid sending signals to the market. Fine-tuning will be
carried out in exceptional circumstances between two regular auctions and,
finally, the structural liquidity demand can be influenced by means of open
market transactions which consist in the direct purchase and sale of
securities or the issuance of debt certificates.
Standing credit and deposit facilities will supply or absorb
overnight liquidity, without the imposition of any other restrictions on
their use by institutions other than the provision of guarantees or
collateral. Both types of interest on standing facilities constitute a
strip or corridor which will contain short-term market interest rate swings
and provide a structure for monetary policy trends. This means that they
will play an important role in terms of providing signals, a role also
fulfilled by the Banco de Espaсa but in a less predetermined and formalised
As far as guarantees for all these transactions are concerned, it
should be stated that acceptable collateral may take the form of either a
public instrument or a private instrument, provided that these are of a
suitable nature, according to the neutrality principle applied to the
public sector and to the private sector.
The minimum reserves will be equal to 2% of book liabilities
calculated on the basis of a monthly average, will be subject to a minimum
exempt level of EUR 100,000 and - this being the most important point
underlining the main difference compared with the current position in Spain
- will be remunerated in line with market rates. The averaging provision
will allow us to absorb liquidity shocks without recourse to standing
facilities. Such a minimum reserves will constitute a useful tool for
restricting the volatile nature of monetary market interests rates, for
reducing the need for fine-tuning and for tightening up the system's
liquidity, thereby enhancing the effectiveness of the monetary policy. Its
remuneration in line with the market will not only reduce money demand
elasticity with regard to interest rates but also offer neutrality to euro
area banks as compared with those in other countries which do not use such
Although inevitably in a simplified form, I hope that this statement
on the aims, strategy and instruments of the euro area monetary policy has
provided some basic information on the central core of the ECB's operations
and that it can be used as a starting-point for our discussions.
Thank you for listening; during the discussion period, I shall be
pleased to elaborate on the issues raised or examine any others which you
think may be of interest.
The monetary policy of the Eurosystem
Main remarks of the speech delivered by Eugenio Domingo Solans
Member of the Governing Council and the Executive Board of the
European Central Bank
at the SOCIETAT CATALANA D'ECONOMIA
(Institut d'Estudis Catalans)
Barcelona, 2 July 1999
The text will be available in Catalan at a later stage.
* The primary objective of the Eurosystem and, therefore, the touchstone to
measure its success is the achievement of price stability. In the medium
term the best contribution that the Eurosystem can make in favour of
sustained growth is, precisely, to create an environment of stability.
There is clearly no greater fertiliser for economic growth than price
stability, and nothing is more refractory to economic growth than
inflation. Provided that stability is achieved and that there is no risk
for stability in the future, the Eurosystem has to create the best monetary
conditions for exploiting the considerable growth potential of the euro
area. This should be done in a passive way, without any activism: like the
air we breathe, not like the air from an oxygen tank.
* The 5.2% increase in the three-month moving average of the 12-month
growth rates of M3 covering the period from March PROGRAM
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аto May 1999 is in line with the 4 Ѕ reference value for money growth,
which is the basis of the first pillar of the ECB's monetary policy.
Neither the slight increase in the moving average compared to its value
last month (5.1%) nor the non-substantial and almost constant difference
from the reference value signal a risk for price stability.
* The results of the broadly based assessment of the outlook for price
developments, which constitutes the second pillar of the ECB's strategy,
confirm that there is no risk to price stability in the euro area.
* The second pillar of the ECB's monetary policy strategy includes, among
other indicators, the exchange rate developments of the euro. The ECB's
assessment on the evolution of the exchange rate of the euro should,
therefore, be linked to the risk for price stability of a depreciation of
the euro. Taking into account that the euro area economy is a rather closed
one, no significant inflationary impact should be expected from the recent
exchange rate developments of the euro.
* One main feature of the instruments and procedures of the Eurosystem's
monetary policy is their high level of flexibility, in the sense that
without discretionary changes the instruments can accommodate a wide range
of different market situations. On the other hand, there is flexibility in
the sense that the Eurosystem has at its disposal a wide set of monetary
policy instruments and has, therefore, the possibility to move from one to
the other if and when it is deemed appropriate, taking into account their
advantages and disadvantages. In the first stage of the ECB's monetary
policy, the fixed rate tender with a discretionary allotment is the best
choice for the main refinancing operation owing to its advantages in terms
of signalling effects and controlling both the liquidity allotted and the
volatility of overnight rates. On the contrary, in the case of longer-term
refinancing operations, the Eurosystem as a rule does not intend to send
signals to the market and the effects on the liquidity and on the overnight
rates are weaker. Therefore, for longer-term refinancing operations, the
market-oriented variable rate tender has a clear advantage.
* The activities and the monetary policy decisions of the ECB should be
interpreted from a euro area perspective as a whole. To interpret them from
a national standpoint would be a mistake.
THE ROLE OF THE CENTRAL BANK IN THE UNITED EUROPE
Speech by Dr. Willem F. Duisenberg,
President of the European Central Bank,
National Bank of Poland,
Warsaw, Poland on 4 May 1999
First and foremost, I should like to congratulate the National Bank
of Poland (the NBP) on its 75th anniversary. The age of the NBP already
suggests that as the President of the European Central Bank (ECB), an
institution that is even less than one year old and has only been
conducting monetary policy since January this year, I should be modest. I
am aware that the role of the NBP has not been constant over these 75 years
and that in the past decade, in particular, the NBP has gone through a
remarkable restructuring process. My previous central bank, de
Nederlandsche Bank, has, together with the International Monetary Fund and
many national central banks, been involved in assisting the NBP in its
efforts to adapt to the role of a central bank in a market economy. Of
course, the real work had to be done by you yourselves and I believe you
can be proud of what has been achieved over the past decade.
Today in my speech I should like to focus on the role of the ECB, as
a truly European institution. First of all, I shall explain the background
against which the introduction of the euro and the establishment of the ECB
should be considered. Thereafter, I shall discuss the main features of the
institutional structure that determines monetary policy-making. I shall
then turn to our monetary policy strategy and the role of accountability
and transparency in this strategy. I shall conclude by briefly addressing
the issue of EU enlargement.
2. The process of European integration
On 1 January of this year the euro was introduced in 11 countries
with a combined population of almost 300 million. The ECB started to
conduct a single monetary policy for the so-called euro area. Former
national currencies, such as the French franc and the German Mark are no
longer autonomous currencies, but subdivisions of the euro. Euro banknotes
and coins will only be introduced in 2002.
The voluntary transfer of monetary sovereignty from the national to
the European level is unique in history. However, it should not be seen as
a single, isolated event. The introduction of the euro is part of the
process of European integration. This process started shortly after the
second World War and has now been under way for more than half a century.
The aims of European integration are not only, or even primarily, economic.
Indeed, this process has been driven and continues to be driven by the
political conviction that an integrated Europe will be safer, more stable
and more prosperous than a fragmented Europe. It is true that economic
integration has been the main engine of this process and that, although it
has had its ups and downs, integration has delivered important economic
benefits. On balance it has been successful.
The introduction of the euro and the establishment of the ECB are
important new steps in this process of European integration. They are not
the completion of this process, for at least two reasons. First, the launch
of the euro can be compared to the launch of a rocket. A good launch is
crucial, but only the beginning of the mission. The euro has been launched
successfully. The challenge now is to make it a success. This will not
happen automatically, but will require effort on the part of many
authorities, institutions and people. Second, four EU Member States have
not (yet) introduced the euro. I hope that this will happen in the future.
Moreover, as you are aware, the EU itself is likely to increase its
membership over time, also to include Poland. Ultimately, this is bound to
extend the euro area. This process, too, is already requiring and will
continue to require great efforts: no pain, no gain, as is often the case.
3. The institutional framework of the single monetary policy
Let me now turn to the institutional framework for the conduct of the
single monetary policy. This was laid down in the Treaty establishing the
European Community, the so-called Maastricht Treaty, and the Statute of the
ESCB, which is an integral part of this Treaty. According to the Treaty the
ECB has the primary objective of maintaining price stability. Without
prejudice to this objective, it is to support the general economic policies
in the Community, with objectives such as economic growth and high
Decisions on monetary policy are made by the Governing Council of the
ECB. This body comprises the six executive directors of the ECB and the 11
governors of the national central banks (NCBs) of the Member States which
have introduced the euro. These 17 people meet every fortnight at the ECB,
in Frankfurt am Main. Decision-making on monetary policy is fully
centralised. All members of the Governing Council have one vote, whether
they come from Germany or Luxembourg. This is because of an important
principle. They are not representing their country, but are obliged to take
decisions on the basis of euro area-wide considerations. Regional or
national monetary policy does not and cannot exist in the euro area. There
is only one, single monetary policy for the euro area as a whole.
Therefore, the ECB should develop into a truly European institution. This
is a process that will inevitably take some time, but my feeling is that we
are already making good progress.
The execution of monetary policy is to a great extent decentralised.
It is in large part carried out by the NCBs. The ECB and the 11 NCBs
together are referred to as the Eurosystem. If we refer to the ECB and the
15 NCBs of all EU Member States, we speak of the European System of Central
Banks (ESCB). The General Council of the ECB meets quarterly and comprises
the President and Vice-President of the ECB and the 15 governors of the
NCBs of all the EU Member States. This body does not make decisions on
monetary policy, but discusses issues concerning the relationship between
the "ins" and the countries I prefer to call "pre-ins", such as exchange
rate issues. The third decision-making body of the ECB is the Executive
Board of the ECB, comprising the six executive directors of the ECB. The
Executive Board is responsible for current business and the implementation
of monetary policy as decided by the Governing Council. The staff of the
ECB will, in the course of this year, reach a level of between 750 and 800
and is likely to grow further in the years ahead.
The ECB is one of the most, if not the most, independent central bank
in the world. Its independence and that of the participating national
central banks are firmly enshrined in the Maastricht Treaty. Members of the
Governing Council are not allowed to take or seek instructions from
anybody, politicians included. Politicians are not allowed to give such
instructions. Members of the Governing Council have a term of office of at
least five years. The ECB is financially independent.
The independent status of the ECB fits into the recent world-wide
trend of granting independence to central banks. This tendency is evidenced
by both practical experience and academic research. By shielding monetary
policy decisions from political interference, price stability can be
maintained without having to give up economic growth. Indeed, in that sense
having an independent central bank is a good thing for all concerned. The
reason for central bank independence is that monetary policy-making under
the influence of politicians tends to focus too much on short-term
considerations. This can easily lead to temporary, non-sustainable
increases in growth, but inevitably results in lasting increases in
inflation with no lasting gains in growth and employment at all.
Politicians all over the world have come to realise this and have decided
to remove the temptation to pursue short-term gains and to make their
central bank independent. It should be underlined that granting this
independence is, as it should be, a political decision. An independent
central bank needs a clear legal mandate.
4. The monetary policy strategy
The ECB has, as I mentioned earlier, such a mandate. However, the
Treaty does not specify how the ECB should pursue its primary objective of
maintaining price stability; in other words: it is silent on what is called
the monetary policy strategy. The ECB therefore formulated its strategy in
the second half of last year. That was no easy task. The introduction of
the euro constitutes a structural break, which may change the behaviour of
firms and individuals and make it less predictable. To a certain extent it
is comparable to what Poland experienced when it embarked on its reform
process. The rules of the game change and this makes policy-making more
complicated. Our monetary policy strategy has taken these specific
circumstances into account. It is tailored to this unique period of the
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