The Challenge of the Early Years
Edited by Marco Buti and André Sapir
Chapter 3: The ECB’s Monetary Policy Strategy: Responding to the Challenges of the Early Years of EMU
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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