Edited by Patrick Artus, André Cartapanis and Florence Legros
Chapter 14: Are there Benefits to a Monetary Policy Rule in the EMU?
14. Are there beneﬁts to a monetary policy rule in the EMU? Jean-Jacques Durand, Nathalie Payelle and Virginie Traclet INTRODUCTION Recent years have been characterized by a ﬂourishing literature on the ‘rules versus discretion’ debate in monetary policy. In this context, the European Central Bank (ECB) had to adopt a clear position on this subject. The ECB has logically rejected discretionary stimulating monetary surprises, since it is widely recognized that they create an inﬂationary bias in economy (Kydland and Prescott, 1977; Barro and Gordon, 1983). Furthermore the ECB has clearly announced a strategy consistent with the Maastricht Treaty which states that ‘the primary objective of the European System of Central Banks (ESCB) shall be to maintain price stability’. The ECB has therefore adopted a price stability goal for the long run1 like the main central banks around the world. However, while choosing a ‘two-pillar’ strategy to satisfy its price stability goal, the ECB has adopted a strategy which can be viewed as less transparent than a rule. Eﬀectively these two pillars include a wide variety of indicators which are used by monetary authorities to evaluate the risks to price stability. These indicators include monetary growth (M3) as the ﬁrst pillar, and several monetary, ﬁnancial and real indicators as the second pillar. It is worth underlining here that these various variables can give contradictory information about future price developments (what may not be the case with a precise rule). This two-pillar strategy, considered representative of central bank’s pragmatism,...
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