When established, the pre-euro Bundesbank and the European Central Bank were assigned a single primary statutory objective of ‘safeguarding the currency’ and ‘price stability’, respectively. Both central banks interpreted their primary objective in very similar terms, which are now outlined. A detailed presentation of the quantitative definition of price stability by these two institutions is presented in Chapter 3. The evolution of the statutory objectives of the Federal Reserve System is also presented here. The standard macroeconomic benefits of maintaining ‘price stability’ are explained in Box 2.1.
The pre-euro Bundesbank was assigned a statutory primary objective of ‘safeguarding the currency’ (Bundesbank Act of 1957, Article 3 1), which the Bundesbank interpreted as maintaining a ‘low inflation’ regime. The pre-euro Bundesbank often referred in a vague sense to the goals of ‘monetary stability’ and ‘price stability’: ‘Monetary stability can in general be equated with stability of the price level, from which a constant purchasing power of money follows’ (Deutsche Bundesbank 1995:24). Although there is a difference between an objective of ‘low inflation’ and of ‘price stability’ (see Kenny and McGettigan 1997; Issing et al. 2001:71-75), 2 the Bundesbank preferred to refer to its mandate as ‘price stability’, with ‘normative price increases’ to account for the statistical upward bias in the measurement of the general price index. The medium-term maximum inflation of 2 per cent per annum that the Bundesbank incorporated as of 1985 in its basic formula for the derivation of the monetary target was to be interpreted as that ‘normative price increase’ or
the maximum inflation rate to be tolerated in the medium term … in light of the possibility of statistical recording errors and of a slight