Key Issues for Monetary Policy: An ECB View; the ECB Must Provide a Foundation of Stability That Withstands the Forces of Structural Change

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The European single currency, the euro, has become a visible and successful token of Europeans' drive towards unification. It was born in an era in which high-speed structural change tests the validity of economic models and defies searches for standard policy recipes. Like all central banks, the European Central Bank (ECB) must deal with uncertainty that derives not only from the timely identification of important disturbances but also imperfect knowledge of how such disturbances affect the economy. These problems are compounded by the likelihood that important and poorly understood structural changes accompany cyclical forces. Unification of Europe has brought about significant structural change, which has been amplified by the recent enlargement of the European Union. Under these conditions, independence of the ECB, a mandate of price stability, and clear rules of fiscal governance have been essential for the credibility of the euro. Thus, the ECB has quantified its target of price stability in a medium-term framework. Like the US Federal Reserve, the ECB's policy framework is comprehensive, and its decisions are transparent. Unlike the Fed, however, the ECB has an explicit, quantitative definition of price stability and performs a detailed and explicit crosscheck between its economic analysis and detailed monetary analysis. These differences notwithstanding, the similarities between the ECB and the Fed are more important.


Mr. President, Ladies and Gentlemen, it is a great pleasure to share some thoughts on monetary policy issues with members of the National Association for Business Economics gathered here in Philadelphia for their 46th Annual Meeting.

Only six years ago, Europe engaged in a grand enterprise of institutional design that irreversibly tied together the monetary desiny of eleven, then twelve, nations. The European single currency, the euro, has in the meantime become a visible token of Europeans' drive towards unification. Historically, currencies have been rightly regarded as one of the fundamental components of sovereignty. The euro is a very powerful symbol of European identity. I guess the rest of the world sees the euro not only as Europe's single currency, but also as a symbol of Europeans' strong determination to plan their future and to realise their dreams.

As I discuss this historical transition to the European single currency, I intend to focus my remarks on the challenges presented by the creation of the euro and the execution of monetary policy in a rapidly changing world: a world in which high--speed structural change--whether spurred by spontaneous economic forces or institutional evolution--may put tested economic models at risk and defy policy-makers' searches for well-trusted policy recipes.

Although in my remarks I will take a European perspective, at the end of my considerations I will attempt to draw a comparison between the monetary policy concept adopted by the European Central Bank (the ECB) and the one adopted by the US Federal Reserve System.

Central Banks and Uncertainty

The ECB, like all central banks, is faced with several dimensions of uncertainty. The economy is often hit by disturbances that are difficult to identify in real time. Even when policy-makers are able to correctly assess the source and the nature of a disturbance affecting the economy, tracking its propagation profile and working out its final impact on the key variables of interest is a highly demanding task.

Econometric theory has spent decades devising sophisticated tools to isolate different types of shocks hitting the economy. But inference is often non-robust across various alternative identification schemes. As a consequence, central bankers are given little guidance by theory in their daily endeavour to filter out noisy data.

The task of policy-makers is further complicated if they suspect that cyclical movements are compounded by an ongoing change in the deep structure of the economy. …