Monetary Policy Issues for the Eurosystem


Lars E.O Svensson
Princeton University,

First draft: October 1998
This version: February 1999
Conference version

Conferences Series on Public Policy 51-1 (1999) 79-136


The paper discusses the choice between inflation targeting and monetary targeting as a strategy for the Eurosystem, the actual strategy that the Eurosystem has recently announced, the framework for policy decisions appropriate for achieving the Eurosystem’s goals, the role of exchange rate management in the EMU, and the Eurosystem’s accountability and transparency. The choice between inflation targeting and monetary targeting is in effect a choice between high and low transparency. Inflation targeting and monetary targeting, in practice, imply similar policy decisions, but monetary targeting implies that policy decisions are explained in terms of money-growth developments that are not essential for policy. The Eurosystem has specified an operational inflation target, although in a somewhat ambigious way. More importantly, its announced monetary strategy is deficient, since it proposes to give a prominent role to an essentially irrelevant money-growth indicator in analysis and communication, but will keep secret the inflation forecast that will, in practice, be the decisive input in policy decisions. Exchange rate policy is controlled by the Council of finance ministers in the EMU; this is a major flaw in the Maastricht Treaty and a threat to the independence of the Eurosystem. The European Parliament may have a crucial role in ensuring the accountability of the Eurosystem; the minimum transparency needed for effective outside monitoring and evaluation of the Eurosystem’s policy decisions require published inflation forecasts and most likely published minutes and voting records of the Governing Council.

JEL Classification: E42, E52, E58

Keywords: inflation targeting, monetary targeting, ECB, transparency.