How Should the Eurosystem Reform Its Monetary Strategy ? ∗

The Eurosystem should modify its definition of price stability to a symmetric and unam-biguous inflation target, at the level of 1.5 or 2% per year. It should abandon its two-pillar strategy and adopt the superior international-best-practice strategy of flexible inflation targeting. The big question is whether the Eurosystem will be able to abandon its stubborn defense of an inferior monetary-policy strategy and seek a genuine improvement of its strategy. received a question on whether the Governing Council saw any reasons for changing anything in the future in its two-pillar monetary-policy strategy. The much noted, and quite surprising, answer was: " We are aware of the comments made here and there and now and then about our two-pillar strategy. We have decided, in the course of next year, to come up with a serious evaluation, not necessarily a change, because we are still happy with our strategy. But we will make a serious assessment and evaluation of the monetary strategy in the course of, I think, the first half of next year. " (ECB [4]). This answer was a welcome alternative to the Eurosystem's usual stubborn official defense of its strategy. It was also a welcome indication of a possible reconsideration and change in the Eurosystem's strategy. As every observer knows, the Eurosystem's monetary-policy strategy has serious flaws. These flaws have been extensively discussed, for instance, in many reports by the several Eurosystem watcher groups. I have discussed these flaws in several academic articles, for instance, Svensson [13], and in previous briefing papers to the European Parliament's Committee on Economic and Monetary Affairs, for instance, Svensson [14]-[17] and [19]-[21]. Duisenberg's answer again raises * Briefing paper for the Committee on Economic and Monetary Affairs (ECON) of the European Parliament for the quarterly dialogue with the President of the European Central Bank. I thank Kathleen DeGennaro for editorial and secretarial assistance. Expressed views and any errors are solely my own responsibility.