Essay about The Monetary of European Central Bank

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A Literature Review of European Central Bank’s Monetary Policy



The European Central Bank (ECB) was established in June 1998, as the core of European System of Central Banks (ESCB), ECB formally centralized the European monetary policies since January 1999. This new monetary authority is quite different from any traditional sovereign central banks, for its operational independence and its independence from political interference are guaranteed by the European Union Treaty. Besides, the supranational organizational attribution make it has the only responsibility for monetary policy in the whole euro zone, which now consist of eighteen member states of the European Union. During
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As Grauwe and Paul De (2002) indicated, it has resulted in the formulation of a reference value for the growth rate of money (M3) of 4.5 per cent that should not be exceeded. However, it is hard to base the strategy on monetary aggregates if these special effects occur over longer periods. If so, this pillar seems ineffective, as it has been the case for several economies in the past, which led them to formulate direct inflation- targeting strategies (Fendel and Frenkel, 2006).

The second pillar is economic analysis, which consists of an analysis of a wide range of other economic and financial variables that usually affect price changes (Fendel and Frenkel, 2006). Model-based forecasts and a variety of other indicators are included in this broad-based analysis of the prospective for inflation. The basket of indicators contains bond prices, the exchange rate, oil prices, the yield curve, unit labor costs, and the degree of capacity utilization in the economy. The ECB emphasized that the second pillar is not simply equal to an inflation forecast. In December 2000, after having been exposed to quite pressure, it published the first internal forecast of HICP growth and real GDP growth for a two-year horizon. These forecasts constitute conditional forecasts as they are conducted on the assumption of unchanged short term