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EMU and Economic Policy in Europe

EMU and Economic Policy in Europe

The Challenge of the Early Years

Edited by Marco Buti and André Sapir

EMU is a completely new policy regime which has significant economic implications and which, it is hoped, will ultimately enhance the role of Europe on the world stage. EMU and Economic Policy in Europe takes stock of the initial experiences of EMU and assesses the challenges which will have to be addressed in the early years of its existence to ensure its long-term objectives are successfully achieved.

Chapter 2: Monetary Policy in the Early Years of EMU

Jordi Galí

Subjects: economics and finance, financial economics and regulation


* Jordi Galí 1. INTRODUCTION The goal of the present chapter is to provide an overview of the monetary policy framework of EMU and its operation during its first years of existence. Its overall assessment of the ECB’s track record during this period is quite positive, in spite of the persistent overshooting of the inflation target range since mid-2000, and the large depreciation of the euro since its birth. That good record notwithstanding, the chapter points out several aspects of the ECB strategy and the way it is communicated to the public that could be improved significantly and at little cost. The existing flaws in the strategy and its communication have not caused major damage so far, but there is no guarantee that such a lucky state of affairs may prevail in the future. Two issues pertaining to the nature of the chapter are worth mentioning at the outset. The first has to do with its overlap with some of the existing literature on the ECB. Over the past two years, several papers and reports with an aim similar to this one have been published and widely debated.1 As a result some of the points made in the present chapter may be found in the existing literature. Though the existence of some overlap on the issues discussed and, quite often, on the viewpoint and diagnoses might be unavoidable, I have tried to provide whenever possible some complementary perspective or some additional evidence. Second, the chapter is far from...

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