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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.
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Chapter 3: The ECB’s Monetary Policy Strategy: Responding to the Challenges of the Early Years of EMU

Vítor Gaspar, Klaus Masuch and Huw Pill


3. The ECB’S monetary policy strategy: responding to the challenges of the early years of EMU Vítor Gaspar, Klaus Masuch and Huw Pill 1. INTRODUCTION* On 1 January 1999, responsibility for monetary policy in eleven of the Member States of the European Union (EU) passed from their respective national central banks (NCBs) to a new supranational institution, the European Central Bank (ECB). This unprecedented transfer of monetary sovereignty marked a watershed in both the process of European integration and in the history of monetary policy, as responsibility for an important instrument of economic policy passed from national control to a new, independent European institution. Given the unique character of this event, it is unsurprising that many serious challenges emerged in the transition process. With the benefit of hindsight, one can conclude that the initial challenges have been successfully overcome. Although many commentators doubted the viability of the single currency project from both macroeconomic and operational perspectives (Obstfeld, 1998; Feldstein, 1997a; inter alia), the euro was introduced successfully at the beginning of January 1999 and the single monetary policy has been implemented effectively ever since. One important aspect of this success has been the high degree of credibility achieved by the ECB’s monetary policy strategy and the ECB’s conduct of monetary policy. Inflation expectations have remained consistent with the primary objective of the ECB, despite the significant economic shocks – such as the increase in oil prices and the weakening of the euro exchange rate between early...

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