The Challenge of the Early Years
Edited by Marco Buti and André Sapir
Chapter 2: Monetary Policy in the Early Years of EMU
* 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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