Monetary Policy Issues for the Eurosystem

The paper discusses the choice between in‡ation targeting and monetary targeting as a strategy for the Eurosystem, the actual strategy that the Eurosystem has recently announced, the framework for policy decisions appropriate for achieving the Eurosystem’s goals, the role of exchange rate management in the EMU, and the Eurosystem’s accountability and transparency. The choice between in‡ation targeting and monetary targeting is in e¤ect a choice between high and low transparency. In‡ation targeting and monetary targeting, in practice, imply similar policy decisions, but monetary targeting implies that policy decisions are explained in terms of money-growth developments that are not essential for policy. The Eurosystem has speci…ed an operational in‡ation target, although in a somewhat ambigious way. More importantly, its announced monetary strategy is de…cient, since it proposes to give a prominent role to an essentially irrelevant money-growth indicator in analysis and communication, but will keep secret the in‡ation forecast that will, in practice, be the decisive input in policy decisions. Exchange rate policy is controlled by the Council of …nance ministers in the EMU; this is a major ‡aw in the Maastricht Treaty and a threat to the independence of the Eurosystem. The European Parliament may have a crucial role in ensuring the accountability of the Eurosystem; the minimum transparency needed for e¤ective outside monitoring and evaluation of the Eurosystem’s policy decisions require published in‡ation forecasts and most likely published minutes and voting records of the Governing Council. JEL Classi…cation: E42, E52, E58 Keywords: in‡ation targeting, monetary targeting, ECB, transparency. ¤This paper was presented at the Carnegie-Rochester Conference on Issues Regarding European Monetary Integration, held in Pittsburg, November 20–21, 1998. I thank the discussant Dale Henderson and Claes Berg, Stefan Gerlach, Otmar Issing, Henrik Jensen, Bennett McCallum, Allan Meltzer, Francisco Nadal de Simone, Dag…nn Rime, Scott Roger, participants in the Conference and participants in seminars at IIES and IMF for comments, Thomas Eisensee and Marcus Salomonsson for research assistance, and Christina Lönnblad for editorial and secretarial assistance. The views expressed and any errors are my own responsibility. Email: [email protected]. Homepage: http:// www.iies.su.se/leosven/.