First draft: October 1998
This version: February 1999
Conference version
Carnegie-Rochester Conferences Series on Public Policy 51-1 (1999) 79-136
Abstract
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.