Monetary policy in stage three: a review of the framework proposed by the European Monetary Institute

Abstract

If the European Central Bank (ECB) adopts the proposals of the European Monetary Institute, the formulation of monetary policy for the euro area will be centralized but its implementation will be decentralized. The ECB will probably employ both inflation and monetary targets and use policy instruments resembling those of the Bundesbank. Short-term interest rates will be contained within a corridor bounded from above by the rate charged for overnight credit and bounded from below by the rate on overnight deposits. Market interest rates and bank liquidity will be governed mainly by periodic repurchase operations. But several matters remain unresolved. No decision has been made on the use of reserve requirements or the conduct of foreign-exchange intervention. More importantly, the extent of political influence on monetary policy remains in dispute, even though the Maastricht Treaty guarantees the independence of the ECB. © 1998 John Wiley & Sons, Ltd.