Chapter 4: Monetary Policy in the Euro Area: Lessons from Five Years of the ECB and then Implications for Turkey
4. Monetary policy in the euro area: lessons from ﬁve years of the ECB and its the implications for Turkey Fabio Canova and Carlo Favero* 4.1 INTRODUCTION The end of 1998 witnessed an experiment of historical importance in monetary policy, an experiment which was challenging, exciting and, at the same time, risky. Launching the European Central Bank (ECB) and establishing it as a credible and respected institution capable of managing the transition from a number of central banks to a European one and of communicating and interacting with the central banks of other major developed countries, introducing a new currency and setting solid foundations for maintaining its international value and harmonizing banking regulations and supervisory activities constituted a complex and ambitious agenda whose implementation required eﬀective measures and ingenious action that had to be dealt with eﬀectively and with ingenuity. The costs of disrupting the monetary and credit markets of such a large group of countries were rightly considered to be huge. Many, both in ﬁnancial markets and overseas, doubted that accomplishing such a formidable feat was possible. Those who were more optimistic worried about the possibility of successfully achieving the goals within a reasonable time frame. The diﬃculties encountered in the 1980s and 1990s in managing and maintaining a system of ﬁxed exchange rates, the heterogeneities of member’s economies and of policymakers’ preferences and the historical diﬀerences in laws and regulations were clear stumbling blocks in the minds of academics and market observers, and all...
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