TH e Mon e Ta ry P olicy o f TH e ec b

2 01 1

THe M on e Ta ry Polic y o f TH e ec b
20 1 1

 European Central Bank, 2011 Address Kaiserstrasse 29 60311 Frankfurt am Main Germany Postal address Postfach 160319 60066 Frankfurt am Main Germany Telephone +49 69 13440 Internet http: !! !"ec#"europa"eu Fax +496913446000 Telex 411 144 ec# $ This publication was produced under the responsibility of the Executive Board of the ECB. All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is ac nowledged. The cut-off date for the statistics included in this issue was end-!anuary "#$$.

ISBN 978-92-8990777-4 (print) ISBN

978-92-899-0778-1 (online)

CONTENTS
FOREWORD INTRODUCTION CHAPTER 1 7 9

The instit ti!n"# $%"&e'!%( !$ the sin)#e &!net"%* +!#i,* CHAPTER The e,!n!&i, "n. $in"n,i"# st% ,t %e !$ the e %! "%e"Key characteristics of the rea) economy 2"1 2"2 3a#our market 2"3 Go'ernment sector 2"4 *1terna) tra$e 2", Financia) structure 2"6 Financia) markets 2"0 Financia) interme$iaries 2"4 *conomic $i'ersity
CHAPTER 3

13

-9 -9 -9 337 39 43 48 5-

The EC/0s &!net"%* +!#i,* st%"te)* 3"1 5he ro)e of monetary po)icy an$ the #enefits of price sta#i)ity 3"2 5he transmission mechanism of monetary po)icy 3"3 5he *.6+s monetary po)icy strate(y 7 (enera) princip)es an$ main e)ements 3"4 5he *.6+s /uantitati'e $efinition of price sta#i)ity 3", 5he ana)ysis of risks to price sta#i)ity in the *.6+s monetary po)icy strate(y 3"6 Monetary po)icy8 financia) sta#i)ity an$ asset prices 3"0 5ransparency an$ communication 3"4 5he *.6+s monetary po)icy strate(y 7 a (ui$epost in the financia) crisis
CHAPTER 4

55 55 58 664 69 83 86 90

1!net"%* +!#i,* i&+#e&ent"ti!n 4"1 %#&ecti'es an$ (enera) princip)es #ehin$ the $esi(n of the operationa) frame!ork 4"2 %'er'ie! of the *urosystem+s operationa) frame!ork 4"3 Minimum reser'es 4"4 %pen market operations 4", -tan$in( faci)ities 4"6 .entra) #ank )i/ui$ity an$ )i/ui$ity nee$s of the #ankin( system 4"0 *1perience since 2anuary 1999

93 93 96 10 10 4 10 8 11 11 5 3

CHAPTER 5

The ,!n. ,t !$ &!net"%* +!#i,* sin,e 1999 ,"1 9ntro$uction ,"2 Main $e'e)opments ,"3 :n assessment of monetary po)icy since the intro$uction of the euro in 1999
ANNE2

117 11 71 1 8 19

Hist!%* 3 The th%ee st")es !$ E,!n!&i, "n. 1!net"%* Uni!n 45OSSAR6

/I/5IO4RAPH6 INDE2 /O2ES 1"1 2"1 2"2 2"3 3"1 3"2 3"3 3"4 3", 3"6 3"0 3"4 4"1 4"2 4"3 ,"1 Key pro'isions from the 5reaties an$ the -tatute of the *-.6 *; institutiona) arran(ements for soun$ an$ sustaina#)e pu#)ic finances Financia) markets 7 key terms Monetary a((re(ates .onstruction an$ features of the <armonise$ 9n$e1 of .onsumer Prices 5he me$ium=term orientation of the *.6+s monetary po)icy :)ternati'e monetary po)icy strate(ies -tatistics re)atin( to $e'e)opments in the euro area *1tractin( information from financia) market prices Money an$ prices in the )on( run 5oo)s for monetary ana)ysis Key communication channe)s use$ #y the *.6 .ounterparties an$ co))atera) .han(es to the maturity of the main refinancin( operations an$ the reser'e maintenance perio$ as of March 2004 5ypes of open market transaction 5he *urosystem+s non=stan$ar$ measures since :u(ust 2000

13 1 13 5 15 1 15 7

-1 35 450 65 68 70 774 78 81 89 96 10 30 1 71 6

TA/5ES 2" 1 Key characteristics of the euro area rea) economy in 2009 2"2 3a#our force participation rates #y (en$er an$ a(e (roup in the euro area an$ the ;nite$ -tates in 2009 2"3 *1terna) tra$e in (oo$s of the euro area in 2009 2"4 5ra$e !ei(hts of the euro area+s 20 main tra$in( partners 30 337 38

2", 2"6 2"0 2"4

2"9 2"10 2"11 2"12 2"13 3"1 4"1 4"2 4"3 4"4

Main financia) assets an$ )ia#i)ities of non=financia) sectors in the euro area at the en$ of 2009 :mounts outstan$in( of euro=$enominate$ short=term $e#t securities issue$ #y euro area resi$ents :mounts outstan$in( of euro=$enominate$ )on(=term $e#t securities issue$ #y euro area resi$ents :mounts outstan$in( of $e#t securities $enominate$ in nationa) currency issue$ #y resi$ents in the euro area8 the ;nite$ -tates an$ 2apan at the en$ of 2009 -tock market capita)isation in the euro area8 the ;nite$ -tates an$ 2apan >um#er of $omestic an$ forei(n companies )iste$ on stock markets in the euro area8 the ;nite$ -tates an$ 2apan >um#er of euro area monetary financia) institutions ?efinitions of euro area monetary a((re(ates 6ank $eposits an$ )oans in the euro area8 the ;nite$ -tates an$ 2apan at the en$ of 2009 @ei(hts of the main euro area <9.P components app)ica#)e for 2010 *urosystem monetary po)icy operations .re$it institutions+ )ia#i)ities inc)u$e$ in the reser'e #ase .entra) #ank #a)ance sheet structure .ontri#utions to the #ankin( system+s )i/ui$ity

40 45 45

46 47 47 48 50 565 95 1011113

C H AR T S 1"1 1"2 2"1 2"2 2"3 2"4 2", 2"6 2"0 3"1 3"2 3"3 3"4 4"1 4"2 4"3 4"4 5he $ecision=makin( #o$ies of the *.6 5hree=(roup rotation system for the Go'ernin( .ounci) of the *.6 !ith 20 countries in the euro area ;nemp)oyment in the euro area8 the ;nite$ -tates an$ 2apan Genera) (o'ernment $eficit an$ $e#t in the *uro 12 Functions of financia) systems .omposition of the conso)i$ate$ #a)ance sheet of the euro area MF9s Ainc)u$in( the *urosystemB at the en$ of 2009 Percenta(e shares of components of M3 at the en$ of 2009 ?ispersion of annua) inf)ation across euro area countries an$ the ;nite$ -tates ?ispersion of rea) G?P (ro!th across euro area countries an$ the ;nite$ -tates : sty)ise$ i))ustration of the transmission mechanism from interest rates to prices Fre/uency $ecomposition of M3 an$ the <armonise$ 9n$e1 of .onsumer Prices 5he sta#i)ity=oriente$ monetary po)icy strate(y of the *.6 9nf)ation e1pectations in the euro area 6reak$o!n of assets su#mitte$ as co))atera) Key *.6 interest rates an$ the *%>9: since 1999 5he functionin( of the *urosystem+s reser'e re/uirement system Cecourse to stan$in( faci)ities 18 -0 31 37 39 49 51 53 54 59 79 83 91 98 10 00 1 40 1 9 5

4", 4"6 4"0 ,"1 ,"2 ,"3 ,"4 ,", ,"6 ,"0 ,"4 ,"9

Cecourse to stan$in( faci)ities !ithin a maintenance perio$ Do)ume of main an$ )on(er=term refinancin( operations Ce/uire$ reser'es an$ autonomous )i/ui$ity factors *.6 key interest rates in the si1 phases <9.P 9nf)ation >omina) effecti'e e1chan(e rate of the euro an$ oi) prices M1 an$ )oans to pri'ate sector M3 (ro!th Cea) G?P8 in$ustria) pro$uction an$ in$ustria) confi$ence for the euro area 9n$icators of )on(=term inf)ation e1pectations in the euro area -prea$ #et!een the three=month *;C96%C an$ the o'erni(ht in$e1e$ s!ap rate -prea$s of the ten=year (o'ernment #on$s of se)ecte$ euro area countries a(ainst the German 6un$

11 01 1 41 1 41 1 71 1 91 1 91 0 10 1116 18

FOREWORD
%n 1 2anuary 1999 a ne! currency 7 the euro 7 !as create$" 5o$ay the euro is the officia) currency of 10 *uropean countries !ith more than 330 mi))ion citiEens8 an$ an anchor of sta#i)ity for *urope" ()o#a) commo$ity price mo'ements8 !hich are not un$er the contro) of monetary po)icy" 9t has ha$ to $ea) !ith #outs of uncertainty in the !or)$ economy8 inc)u$in( the (eopo)itica) tensions that pre'ai)e$ in the aftermath of the terrorist attacks of 11 -eptem#er 5he 5reaty assi(ns the *urosystem the 2001 an$ the most serious financia) primary o#&ecti'e of maintainin( price crisis since the Great ?epression" sta#i)ity8 ref)ectin( a #roa$ consensus in society that maintainin( sta#)e prices 5he recent crisis has re'ea)e$ the nee$ is the #est contri#ution that monetary for a /uantum )eap for!ar$ to!ar$s po)icy can make to economic (ro!th8 reinforcin( the institutiona) frame!ork &o# creation an$ socia) cohesion" of *conomic an$ Monetary ;nion From the outset8 the Go'ernin( A*M;B" @hi)e the monetary aspects .ounci) of the *.6 has set itse)f a 'ery of *M; ha'e pro'en ro#ust8 some c)ear numerica) #enchmark8 a(ainst !eaknesses in its economic functions !hich our fe))o! citiEens can assess ha'e #ecome o#'ious" 5here is a nee$ the performance of their sin()e to reinforce economic (o'ernance in monetary po)icy" 5he Go'ernin( the euro area8 inc)u$in( the fisca) .ounci) aims to maintain inf)ation re(ime enshrine$ in the -ta#i)ity an$ #e)o!8 #ut c)ose to8 Gro!th Pact an$ the nationa) economic 2F o'er the me$ium term" po)icy frame!orks" @e a)so ha'e to #ui)$ an$ imp)ement a ri(orous an$ From the start8 the *urosystem has cre$i#)e sur'ei))ance frame!ork" succee$e$ in maintainin( price sta#i)ity in the euro area o'er the me$ium term" 5his #ook pro'i$es a comprehensi'e 9n the first 12 years of the euro8 the o'er'ie! of the *.6+s monetary a'era(e annua) inf)ation rate in the po)icy" 5he thir$ e$ition of the #ook euro area has #een #e)o!8 #ut c)ose to8 takes into account ne! $e'e)opments 2F an$ inf)ation e1pectations ha'e since the )ast e$ition !as pu#)ishe$ in remaine$ fu))y anchore$ in )ine !ith 2004" 5he imp)ications for the )e(a) price sta#i)ity" 5he cre$i#i)ity of the frame!ork of the entry into force of the euro8 as measure$ #y its a#i)ity to 3is#on 5reaty on 1 2anuary 2009 ha'e preser'e the purchasin( po!er of euro #een taken into account" 5he o'er'ie! area househo)$s8 has #een #etter than of the main economic an$ financia) that of its )e(acy currencies o'er the features of the euro area economy has pre'ious ,0 years" #een up$ate$ !ith si1 years of a$$itiona) $ata" 9n mi$=2000 the 5he con$itions for achie'in( price Go'ernin( .ounci) $eci$e$ to sta#i)ity ha'e not #een easy an$ the em#ark upon a research pro(ramme sin()e monetary po)icy has face$ a to enhance the *.6+s monetary num#er of si(nificant cha))en(es" ana)ysis8 the key resu)ts of !hich are -e'era) a$'erse shocks ha'e hit the presente$ to(ether !ith the *.6+s t!o= euro area economy" 5he *.6 has pi))ar monetary po)icy strate(y" 5he #een confronte$ !ith perio$s of stron( f)e1i#)e $esi(n 7

an$ the #roa$ ran(e of instruments an$ proce$ures !ithin the *urosystem+s operationa) frame!ork ha'e supporte$ the *.6+s #o)$ response to the financia) crisis8 inc)u$in( the intro$uction of a num#er of non= stan$ar$ monetary po)icy measures !hich are e1p)aine$ in this e$ition" Fina))y8 the #ook pro'i$es a #rief re'ie! of the con$uct of monetary po)icy $urin( near)y 12 years of *M;" 9 am sure this thir$ e$ition of G5he monetary po)icy of the *.6H !i)) further enhance un$erstan$in( of the *.6+s monetary po)icy" Frankfurt am Main8 May 2011

2ean=.)au$e 5richet Presi$ent of the *.6

%n 1 2anuary 1999 the *.6 assume$ responsi#i)ity for monetary po)icy in the euro area 7 the secon$ )ar(est economic area in the !or)$ after the ;nite$ -tates" 5his represente$ a mi)estone in a )on( an$ comp)e1 process of inte(ration amon( *uropean countries" 5!e)'e years on8 the *.6 en&oys a hi(h $e(ree of cre$i#i)ity !or)$!i$e for its soun$ monetary po)icy (eare$ to maintainin( price sta#i)ity in the euro area" 5he *.6+s ro#ust monetary po)icy frame!ork #ui)$s on )essons $ra!n from the historica) e1periences of many centra) #anks o'er se'era) $eca$es in the past8 ran(in( from fai)e$ attempts to fine=tune the economy an$ the resu)tin( sta(f)ation that pre'ai)e$ in many in$ustria)ise$ countries in the 1900s to the successfu) e1periences in #rin(in( inf)ation $o!n to )e'e)s consistent !ith price sta#i)ity in the 1940s" 5he institutiona) frame!ork of the sin()e monetary po)icy is #ase$ on t!o fun$amenta) princip)es that are in$ispensa#)e for soun$ monetary po)icy=makin(" First8 the centra) #ank+s man$ate sha)) focus c)ear)y an$ unam#i(uous)y on maintainin( price sta#i)ity" -econ$8 the centra) #ank sha)) #e in$epen$ent" @ith the ratification of the 3is#on 5reaty8 the assi(nment of a c)ear an$ unam#i(uous man$ate to the *.6 to maintain price sta#i)ity !as confirme$8 an$ e'en reinforce$8 #y the e)e'ation of the primary o#&ecti'e of the *.6 7 price sta#i)ity 7 to an o#&ecti'e of the *uropean ;nion as a !ho)e" 5he *.6 is (rante$ fu)) in$epen$ence from po)itica) inference in the fu)fi)ment of this man$ate8 inc)u$in( the prohi#ition of monetary financin( of pu#)ic authorities"

-ince its inception the *.6 has a$opte$ a c)ear monetary po)icy strate(y8 !hich has #een effecti'e #oth in tur#u)ent times an$ $urin( /uieter perio$s" -ince 1994 the *.6 has $efine$ price sta#i)ity as a year=on= year increase in the <armonise$ 9n$e1 of .onsumer Prices for the euro area of #e)o! 2F o'er the me$ium term" 5he $efinition makes it c)ear that inf)ation a#o'e 2F is not consistent !ith price sta#i)ity 7 the primary o#&ecti'e of the *.6" 9t a)so imp)ies that 'ery )o! inf)ation rates8 an$ especia))y $ef)ation8 are not consistent !ith price sta#i)ity either" 9n 20038 in the conte1t of the e'a)uation of the monetary po)icy strate(y8 the Go'ernin( .ounci) confirme$ the /uantitati'e $efinition of price sta#i)ity an$ c)arifie$ that8 in pursuin( price sta#i)ity8 it !i)) aim to keep the euro area inf)ation rate at #e)o!8 #ut c)ose to8 2F o'er the me$ium term" %ne of the key features of the *.6+s monetary po)icy strate(y is its t!o= pi))ar frame!ork for the ana)ysis of the risks to price sta#i)ity" 5he t!o pi))ars represent t!o comp)ementary perspecti'es on the $eterminants of price $e'e)opments" %ne perspecti'e8 referre$ to as the Geconomic ana)ysisH8 is aime$ at assessin( the short to me$ium=term $eterminants of price $e'e)opments8 !ith a focus on rea) acti'ity an$ the cost factors $ri'in( prices o'er those horiEons" 9t takes account of the fact that short to me$ium= term price $e'e)opments are inf)uence$ )ar(e)y #y the interp)ay of supp)y an$ $eman$ in the (oo$s8 ser'ices an$ factor markets" @hi)e many factors can inf)uence price $e'e)opments o'er shorter

horiEons8 it is an un$ispute$ fact that pro)on(e$ perio$s of hi(h inf)ation are associate$ !ith hi(h money (ro!th an$ that inf)ation is u)timate)y a monetary phenomenon" 5herefore8 the secon$ perspecti'e8 referre$ to as the Gmonetary ana)ysisH8 is foun$e$ on the re)ationship #et!een money (ro!th an$ inf)ation o'er the me$ium to )on(er= term horiEon an$ e1p)oits the fact that monetary tren$s )ea$ inf)ationary tren$s" 5he monetary ana)ysis ser'es8 in particu)ar8 as a means of cross= checkin(8 from a me$ium to )on(=term perspecti'e8 the short to me$ium=term in$ications for monetary po)icy $eri'e$ from the economic ana)ysis" 5!o important $e'e)opments that occurre$ after the secon$ e$ition of this #ook !as pu#)ishe$ $eser'e specia) mention" The enh"n,e&ent !$ the &!net"%* "n"#*sis *1perience has $emonstrate$ that communicatin( the monetary ana)ysis may at times #e cha))en(in(" 5his can #e attri#ute$ part)y to the fact that for a )on( time8 mainstream economics has ne()ecte$ the ana)ysis of monetary $ata an$ the $e'e)opments in theoretica) an$ empirica) research on interpretin( the interaction #et!een money $eman$ an$ money creation an$ its impact on the $etermination of prices" :s !ith a)) forms of ana)ysis8 to remain re)e'ant for po)icy=makin(8 the too)s emp)oye$ in the con$uct of the monetary ana)ysis nee$ to #e continuous)y refine$ an$ $e'e)ope$ as ne! $ata #ecome a'ai)a#)e an$ metho$s a$'ance" 9n sprin( 2000 the Go'ernin( .ounci) of the *.68 !hich !as confronte$ !ith e1cessi'e

money (ro!th an$ percei'e$ serious cha))en(es $o!n the roa$8 $eci$e$ to (i'e a$$itiona) impetus to this on(oin( process #y initiatin( a research pro(ramme to enhance the *.6+s monetary ana)ysis" >e! research 1 has $eepene$ the un$erstan$in( of the re)ationship #et!een )on(er=term tren$s in monetary (ro!th an$ inf)ation an$ has )e$ to a more refine$ 'ie! of ho! it can #e use$ to support monetary po)icy $ecisions" 5his has confirme$ the soun$ness of the t!o=pi))ar monetary po)icy strate(y since the intro$uction of the euro8 inc)u$in( the prominent ro)e (i'en to monetary ana)ysis as a usefu) (ui$e for monetary po)icy $ecisions" The EC/0s %es+!nse t! the $in"n,i"# ,%isis 5he secon$ cha))en(e face$ #y the *.6 since the pu#)ication of the secon$ e$ition of this #ook !as the ()o#a) financia) crisis that starte$ in 2000 an$ fu))y erupte$ in autumn 2004" Ce)yin( on a soun$ monetary po)icy strate(y in such uncertain times #ecomes a ma&or asset" 5he c)ear an$ unam#i(uous o#&ecti'e of maintainin( price sta#i)ity pro'i$e$ a stron( focus for a)) of the *.6+s $ecisions an$ create$ a foca) point for coor$inatin( pri'ate sector e1pectations" 5he *.6+s cre$i#i)ity ensure$ that price sta#i)ity cou)$ #e maintaine$" 9n this respect8 our monetary po)icy strate(y has pro'e$ its ro#ustness" 5hrou(hout the crisis8 monetary po)icy reacte$ to economic an$ financia) shocks !ith the appropriate me$ium= term orientation to ensure a so)i$ anchorin( of inf)ation e1pectations in )ine !ith the Go'ernin( .ounci)+s aim of keepin( inf)ation rates #e)o!8 #ut c)ose to8 2F o'er the me$ium

-ee Papa$emos8 3" an$ -tark8 2" Ae$s"B A2010B8 Enhancing monetary analysis8 *.6"

term" 5his me$ium=term orientation imp)ie$ that monetary po)icy ha$ to )ook #eyon$ short=term mo'ements in prices an$ reme$y $ysfunctiona)ities in the monetary transmission mechanism" 9t !as the monetary ana)ysis in particu)ar that ensure$ such a me$ium= term orientation in the con$uct of monetary po)icy" :t times of hei(htene$ stress an$ uncertainty8 the *.6 use$ its )i/ui$ity operations in a pra(matic manner" 9n a$$ition to re$ucin( con'entiona) interest rates to historica))y )o! )e'e)s8 the Go'ernin( .ounci) $eci$e$ to a$opt non=stan$ar$ measures 7 !hich #ecame kno!n as *nhance$ .re$it -upport 7 to restore the transmission mechanism of monetary po)icy" :)) non=stan$ar$ measures are of a temporary nature an$ are (enera))y $esi(ne$ to phase out automatica))y" 5hey are a)) aime$ at ensurin( continue$ maintenance of price sta#i)ity o'er the me$ium term"

$emo(raphic an$ key )a#our market features8 fisca) po)icy an$ patterns of tra$e #et!een the euro area an$ the rest of the !or)$" 5he key characteristics of the financia) structure are a)so $escri#e$ #y e1aminin( financia) markets an$ financia) institutions" .hapter 3 $escri#es the *.6+s monetary po)icy strate(y8 i"e" the *.6+s (enera) approach to achie'in( its primary o#&ecti'e of maintainin( price sta#i)ity" :fter e1p)ainin( the key features of the monetary po)icy transmission mechanism an$ their imp)ications for the con$uct of monetary po)icy8 the chapter focuses on the centra) e)ements of the *.6+s strate(y" 9t a)so )ooks at the ro)e of the *.6+s monetary po)icy strate(y in (ui$in( the po)icy response to the ()o#a) financia) crisis"

.hapter 4 e1p)ains ho! the *urosystem imp)ements monetary po)icy $ecisions usin( its monetary po)icy instruments" 9t starts !ith an o'er'ie! of the === o#&ecti'es an$ (enera) princip)es that (o'ern the functionin( of the 5he remain$er of the #ook is structure$ *urosystem+s operationa) frame!ork as fo))o!s" .hapter 1 $escri#es the an$ $escri#es the main monetary po)icy main institutiona) aspects that are instruments in (reater $etai) Aopen re)e'ant for un$erstan$in( the sin()e market operations8 the minimum monetary po)icy" Gettin( ac/uainte$ reser'e system an$ the stan$in( !ith the *.6+s monetary po)icy faci)itiesB" 9t conc)u$es !ith a #rief re/uires a soun$ kno!)e$(e of the assessment of the operationa) institutiona) frame!ork of *M;" 5his frame!ork+s performance in the first chapter co'ers fun$amenta) aspects8 12 years of the sin()e monetary po)icy" such as the primary o#&ecti'e of the *urosystem an$ centra) #ank .hapter , $escri#es ho! monetary in$epen$ence" po)icy has #een con$ucte$ in the euro area since 1999" 5he perio$ has .hapter 2 offers a #roa$ o'er'ie! of #een cha))en(in( for the euro area8 the main economic an$ financia) (i'en that it has #een confronte$ structures of the euro area economy" !ith a host of economic an$ financia) 5he key characteristics of the rea) shocks of 'aryin( nature8 siEe an$ economy are consi$ere$ first8 focusin( persistence" :(ainst this #ack$rop8 on the composition of output8 the

Go'ernin( .ounci) took its monetary po)icy $ecisions !ith a c)ear focus on the nee$ to maintain price sta#i)ity o'er the me$ium term" 9n the #i#)io(raphy you !i)) fin$ references for further rea$in( on topics that cou)$ not #e co'ere$ in fu)) in this pu#)ication" 5he no'e)ty an$ richness of the *.6+s monetary po)icy strate(y has often sparke$ intense $e#ate amon( #oth aca$emics an$ market practitioners" 5his #ook shou)$ #e seen as part of our constant effort to e1p)ain the *.6+s approach to monetary po)icy" Frankfurt am Main8 May 2011

2Ir(en -tark Mem#er of the *1ecuti'e 6oar$ of the *.6

1 THE INSTITUTIONA5 FRA1EWOR7 OF THE SIN45E 1ONETAR6 PO5IC6

On 1 January 1999 the European Central Ban (ECB) a!!u"e# re!pon!i$ility %or "onetary poli&y #e&i!ion-"a in' in the euro area ( the !e&on# lar'e!t e&ono"i& area in the )orl# a%ter the *nite# State!+ ,he tran!%er o% thi! re!pon!i$ility %ro" 11 national &entral $an ! (NCB!) ( )hi&h $e&a"e 17 )ith the parti&ipation o% E!tonia on 1 January 2011 ( to a ne) !upranational in!titution repre!ente# a "ile!tone in a lon' an# &o"ple- pro&e!! o% inte'ration a"on' European &ountrie!+ ,)el.e year! on/ the ECB en0oy! a hi'h #e'ree o% &re#i$ility )orl#)i#e %or it! !oun# "onetary poli&y o% en!urin' pri&e !ta$ility in the euro area+ ,hi! &hapter #e!&ri$e! the "ain in!titutional a!pe&t! that are rele.ant %or un#er!tan#in' the !in'le "onetary poli&y+

5e)"# 8"sis $!% the sin)#e &!net"%* +!#i,*

The EC/9 the E %!s*ste& "n. the ESC/ 5he )e(a) #asis for the sin()e monetary po)icy is )ai$ $o!n in the 5reaty on *uropean ;nion A5*;B8 the 5reaty on the Functionin( of the *uropean ;nion A5F*;B8 an$ the -tatute of the *uropean -ystem of .entra) 6anks an$ of the *uropean .entra) 6ank Athe -tatute of the *-.6B"1 *1cerpts from the most re)e'ant )e(a) pro'isions can #e foun$ in 6o1 1"1" 5he 5reaties an$ the -tatute of the *-.68 !hich is anne1e$ to the 5reaties as a protoco)8 esta#)ish the *.68 the *urosystem an$ the *uropean -ystem of .entra) 6anks A*-.6B" 5he *.6 is an institution of the *; A:rtic)e 13 of the 5*;B" 5he *urosystem is ma$e up of the *.6 an$ the >.6s of the *; Mem#er -tates !hose currency is the euro82 !hereas the *-.6 comprises the *.6 an$ the >.6s of a)) *; Mem#er -tates A:rtic)e 242A1B of the 5F*;B"3 :s )on( as there are *; Mem#er -tates !hose currency is not the euro8 it !i)) #e necessary to make a $istinction #et!een the G*urosystemH an$ the G*-.6H"

En#"%)e&ent !$ the e %! "%e" 5he term Geuro areaH refers to the area forme$ #y the *; Mem#er -tates !hose currency is the euro" 5his area current)y stretches from .yprus to 9re)an$ an$ from Portu(a) to Fin)an$" 5o $ate8 more than ha)f of the *; Mem#er -tates ha'e a$opte$ the euro as their officia) currency" -ince the intro$uction of the euro in 1999 in 11 *; Mem#er -tates8 the euro area has un$er(one fi'e roun$s of en)ar(ement that ha'e #rou(ht the num#er of euro area countries to 10 Ain 2011B" 5here are current)y 10 *; Mem#er -tates !hose currency is not the euro Ai"e 6u)(aria8 the .Eech Cepu#)ic8 ?enmark8 3at'ia8 3ithuania8 <un(ary8 Po)an$8 Comania8 -!e$en an$ the ;nite$ Kin($omB" ?enmark an$ the ;nite$ Kin($om ha'e a specia) status A#ase$ on an Gopt=out c)auseHBJ the other ei(ht countries are prospecti'e can$i$ates for a$option of the euro Ai"e" GMem#er -tates !ith a $ero(ationHB"

E %! "%e"

E %! "%e" en#"%)e& ent

The EC/9 the E %!s*ste & "n. the ESC/

1 2

5he 5reaty of 3is#on entere$ into force on 1 2anuary 2009 an$ has amen$e$ the 5reaty on *uropean ;nion" 5he (o'ernors of the >.6s of those *; Mem#er -tates !hose currency is not the euro $o not participate in monetary po)icy $ecision=makin( for the euro area an$ such >.6s $o not participate in the operationa) imp)ementation of these $ecisions" 9n contrast to the *-.6 as a !ho)e8 the *.6 has #een 'este$ !ith )e(a) persona)ity #y the 5reaties" *ach of the >.6s has )e(a) persona)ity8 as )ai$ $o!n #y the nationa) )a!s of the respecti'e country"

Nee. $!% s st"in" 8#e ,!n:e%) en,e

%nce a country has &oine$ the euro area8 it is no )on(er a#)e to use $omestic interest an$ e1chan(e rate po)icies as separate po)icy instruments" 9f con'er(ence is not sustaina#)e8 a country mi(ht run into competiti'eness pro#)ems8 !hich it can no )on(er a$$ress throu(h e1chan(e rate a$&ustments" 5herefore8 to #e a#)e to inte(rate smooth)y into the euro area8 *; Mem#er -tates must fu)fi) a num#er of )e(a) an$ economic precon$itions8 kno!n as con'er(ence criteria" 5he )e(a) con'er(ence criteria o#)i(e prospecti'e countries to #rin( their nationa) )a!s into )ine !ith the re)e'ant )e(is)ation app)yin( to the *urosystem Ae"(" centra) #ank in$epen$enceB" 5he economic con'er(ence criteria refer to the nee$ for a hi(h $e(ree of price sta#i)ity8 a soun$ fisca) position8 e1chan(e rate sta#i)ity an$ con'er(in( )on(=term interest rates"

fu)) emp)oyment an$ socia) pro(ress" Price sta#i)ity is therefore not on)y the primary o#&ecti'e of the *.6+s monetary po)icy8 #ut a)so an o#&ecti'e of the *; as a !ho)e" 5he 5reaties thus esta#)ish a c)ear hierarchy of o#&ecti'es for the *urosystem8 !hich c)arifies that price sta#i)ity is the most important contri#ution that monetary po)icy can make to achie'in( a fa'oura#)e economic en'ironment an$ a hi(h )e'e) of emp)oyment"
E;,h"n)e %"te %e)i&e s ++!%ts +%i,e st"8i#it*

O:e%%i. in) i&+!%t"n, e !$ +%i,e st"8i#it*

: f)e1i#)e e1chan(e rate re(ime has #een a$opte$ for the euro8 as is a)so the case for the ;- $o))ar" <ence8 the e1chan(e rate is not a separate po)icy instrument" @hen con$uctin( its monetary po)icy8 the *.6 takes the e1chan(e rate into account insofar as it affects the (enera) economic situation an$ out)ook for price sta#i)ity Asee .hapter 3B" @hi)e the 5reaties foresee that $ecisions on forei(n e1chan(e arran(ements are a share$ The E %!s*ste&0s &"n."te9 responsi#i)ity of the *.%F9> .ounci) in.e+en.en,e "n. %e+!%tin) A$e facto8 the *uro(roupB an$ the *.68 !8#i)"ti!ns their pro'isions ensure that forei(n :rtic)e 120A1B of the 5F*; 7 !hich e1chan(e po)icy is fu))y consistent !ith refers to the *-.6 rather than to the the primary o#&ecti'e of the sin()e *urosystem8 since it !as $ra!n up on monetary po)icy" :rtic)e 119 of the the premise that a)) *; Mem#er -tates 5F*; e1p)icit)y states that the primary !ou)$ e'entua))y a$opt the euro 7 o#&ecti'e of #oth the sin()e monetary states that the primary o#&ecti'e of the po)icy an$ e1chan(e rate po)icy is to *-.6 is to maintain price sta#i)ity an$ maintain price sta#i)ity" Furthermore8 that8 !ithout pre&u$ice to the o#&ecti'e as re(ar$s the o'era)) frame!ork of price sta#i)ity8 the *-.6 !i)) support !ithin !hich e1chan(e rate po)icy is to the (enera) economic po)icies in the #e con$ucte$8 the 5reaties re/uire that *; !ith a 'ie! to contri#utin( to the $ecisions in this area #e !ithout achie'ement of the o#&ecti'es of the pre&u$ice to the primary o#&ecti'e" *; as )ai$ $o!n in :rtic)e 3 of Fina))y8 the so)e competence for the 5*;" $eci$in( on an$ carryin( out operations in the forei(n e1chan(e :rtic)e 3 of the 5*; sets out the market )ies !ith the *urosystem" o#&ecti'es of the *;8 !hich inc)u$e8 amon( other thin(s8 the sustaina#)e 5he euro area is characterise$ #y a $e'e)opment of *urope #ase$ on uni/ue com#ination of centra)ise$ #a)ance$ economic (ro!th an$ price monetary po)icy=makin( an$ )ar(e)y sta#i)ity8 an$ a hi(h)y competiti'e socia) market economy8 aimin( at

1!net"%* +!#i,* "n. $is,"# +!#i,ies

$ecentra)ise$8 a)#eit c)ose)y coor$inate$8 fiscal po)icy=makin(" 5his feature of Gone monetary po)icy an$ many fisca) po)iciesH is at the heart of the institutiona) set=up !hich (o'erns the interactions #et!een monetary an$ fisca) po)icies in the euro area an$ aims to ensure the smooth functionin( of *conomic an$ Monetary ;nion A*M;B" :t the same time8 *; Mem#er -tates ha'e to treat their economic po)icies as a matter of common concern an$ coor$inate them !ithin the *; .ounci) A:rtic)e 121A1B of the 5F*;B" 5he frame!ork is #ase$ on c)ear)y specifie$ o#&ecti'es an$ a c)ear a))ocation of responsi#i)ities #et!een po)icy areas" .oncernin( the interactions #et!een monetary po)icy an$ fisca) po)icies8 the frame!ork is con$uci'e to !e))=a)i(ne$ po)icy outcomes8 pro'i$e$ that a)) po)icy= makers )i'e up to their responsi#i)ities"
A%%"n)e& ents $!% s! n. $is,"# +!#i,ies

Fisca) po)icies ha'e a si(nificant impact on economic (ro!th8 macroeconomic sta#i)ity an$ inf)ation" : num#er of institutiona) arran(ements for soun$ fisca) po)icies ha'e #een a(ree$ at the *; )e'e)8 a)so !ith a 'ie! to )imitin( risks to price sta#i)ity Asee 6o1 2"1B" 5hese inc)u$e: K the prohi#ition of monetary financin( A:rtic)e 123 of the 5F*;BJ K the prohi#ition of pri'i)e(e$ access to financia) institutions A:rtic)e 124 of the 5F*;BJ K the no=#ai)=out c)ause A:rtic)e 12, of the 5F*;BJ K the fisca) pro'isions for a'oi$in( e1cessi'e (o'ernment $eficits A:rtic)e 126 of the 5F*;8 !hich a)so sets out the e1cessi'e $eficit proce$ureBJ K the -ta#i)ity an$ Gro!th Pact Asecon$ary )e(is)ation #ase$ on :rtic)es 121 an$ 126 of the 5F*;B"

5he institutiona) frame!ork for the sin()e monetary po)icy has esta#)ishe$ a centra) #ank that is in$epen$ent from po)itica) inf)uence" : )ar(e #o$y of theoretica) ana)ysis8 supporte$ #y su#stantia) empirica) e'i$ence8 in$icates that centra) #ank in$epen$ence is con$uci'e to maintainin( price sta#i)ity" :rtic)e 130 of the 5F*; )ays $o!n this important princip)e"@hen e1ercisin( the po!ers an$ carryin( out the tasks an$ $uties conferre$ upon them8 neither the *.6 nor the >.6s8 nor any mem#er of their $ecision=makin( #o$ies8 are a))o!e$ to seek or take instructions from *; institutions or #o$ies8 from any (o'ernment of a Mem#er -tate or from any other #o$y" Furthermore8 un$er this artic)e8 the *; institutions an$ #o$ies an$ the (o'ernments of the *; Mem#er -tates must a)so respect the princip)e of in$epen$ence an$ not seek to inf)uence the mem#ers of the $ecision= makin( #o$ies of the *.6 or the >.6s in the performance of their tasks" 5here are a)so other pro'isions that safe(uar$ the in$epen$ence of the *urosystem an$ the $ecision=makin( #o$ies of the *.6" For e1amp)e8 the *.6+s financia) arran(ements are kept separate from the financia) interests of the *;: the *.6 has its o!n #u$(et8 an$ its capita) is su#scri#e$ an$ pai$ up #y the euro area >.6s" 3on( terms of office for the mem#ers of the *.6+s Go'ernin( .ounci) an$ a ru)e stipu)atin( that mem#ers of the *.6+s *1ecuti'e 6oar$ cannot #e re=appointe$ a)so he)p to protect in$i'i$ua) mem#ers of the *.6+s $ecision=makin( #o$ies from potentia) po)itica) inf)uence" Moreo'er8 the *urosystem+s in$epen$ence is preser'e$ further #y the fact that the 5reaties prohi#it any pro'ision of centra) #ank cre$it to the pu#)ic sector Asee 6o1 2"1B"

In.e+en. en,e $%!& +!#iti,"# in$# en,e

F %the% +%!:isi !ns th"t he#+ t! s"$e) "%. in.e+en. en,e

Re+!%tin) !8#i)"ti!ns 5o ensure )e(itimacy8 an in$epen$ent centra) #ank must #e accounta#)e to $emocratic institutions an$ the (enera) pu#)ic for its actions in the pursuit of its man$ate" 9n fu)) respect of the *urosystem+s in$epen$ence8 :rtic)e 1, of the -tatute of the *-.6 imposes precise reportin( o#)i(ations on the *.6" For e1amp)e8 the *.6 is re/uire$ to pu#)ish /uarter)y reports on the acti'ities of the *urosystem8 as !e)) as a !eek)y conso)i$ate$ financia) statement" 9n a$$ition8 it must pro'i$e an annua) report on its acti'ities an$ on the monetary po)icy of #oth the pre'ious an$ the current year8 !hich is a$$resse$ to the *uropean Par)iament8 the *; .ounci)8 the *uropean .ommission an$ the *uropean .ounci)" Moreo'er8 in keepin( !ith :rtic)e 244 of the 5F*;8 the *.6+s Presi$ent an$ other *1ecuti'e 6oar$ mem#ers appear fre/uent)y at hearin(s or(anise$ #y the *uropean Par)iament+s .ommittee on *conomic an$ Monetary :ffairs" 9n practice8 the *.6 has (one #eyon$ these statutory reportin( re/uirements Asee .hapter 3B" T"s(s ,"%%ie. ! t th%! )h the E %!s*ste& ;n$er :rtic)e 120A2B of the 5F*;8 the #asic tasks carrie$ out throu(h the *urosystem are: K the $efinition an$ imp)ementation of the monetary po)icy of the euro areaJ K the con$uct of forei(n e1chan(e operationsJ K the ho)$in( an$ mana(ement of the officia) forei(n reser'es of the *; Mem#er -tatesJ K the promotion of the smooth operation of payment systems" Further tasks concern the fo))o!in( areas: Ban notes% the *.6 has

the e1c)usi'e ri(ht to authorise the issuance of #anknotes !ithin the euro area" &tatistics% in cooperation !ith the >.6s8 the *.6 co))ects the statistica) information necessary for the *urosystem to perform its tasks8 either from nationa) authorities or $irect)y from economic a(ents" 'inancial stability and supervision% the *urosystem contri#utes to the smooth con$uct of po)icies pursue$ #y the authorities in char(e of the pru$entia) super'ision of cre$it institutions an$ the sta#i)ity of the financia) system" (nternational and European cooperation% the *.6 maintains !orkin( re)ations !ith re)e'ant institutions8 #o$ies an$ fora8 #oth !ithin the *; an$ internationa))y8 in respect of tasks entruste$ to the *urosystem" 9n an en'ironment of financia) sta#i)ity8 price sta#i)ity is the #est contri#ution monetary po)icy can make to achie'in( other o#&ecti'es Asee a)so .hapter 3B" :t the same time8 financia) insta#i)ity can un$ermine the centra) #ank+s a#i)ity to maintain price sta#i)ity o'er the me$ium term" 9n a free market economy8 achie'in( an$ maintainin( financia) sta#i)ity is first an$ foremost the responsi#i)ity of market participants8 !ho are e1pecte$ to assess an$ mana(e their risks effecti'e)y an$ to #ear the financia) conse/uences of their transactions" 5he fact that financia) sta#i)ity is $eeme$ to #e a Gpu#)ic (oo$H re/uires8 nonethe)ess8 that an institutiona) frame!ork to safe(uar$ financia) sta#i)ity an$ miti(ate the effects of insta#i)ity is in p)ace" 9n or$er to promote financia) sta#i)ity8 the 5reaties pro'i$e for specific cooperation mechanisms" First8 un$er :rtic)e 120A,B of the 5F*;8 the *urosystem has to contri#ute to the smooth con$uct of po)icies pursue$ #y
1!net"%* +!#i,* "n. $in"n,i"# st"8i#it*

E;istin) &e,h"ni s&s $!% ,%!ss< 8!%.e% ,!!+e%"ti!n

,e $!% +% .enti"# s +e%:isi!n

the competent authorities re)atin( to the pru$entia) super'ision of cre$it institutions an$ the sta#i)ity of the financia) system" -econ$8 accor$in( to :rtic)e 2,"1 of the -tatute of the *-.68 the *.6 must #e consu)te$ on any propose$ *; act or any $raft )e(is)ati'e pro'ision of the nationa) authorities that re)ates to its fie)$s of competence" -imi)ar)y8 the *.6 may offer a$'ice to8 an$ #e consu)te$ #y8 the *; .ounci)8 the *uropean .ommission an$ the competent nationa) authorities on the scope an$ imp)ementation of *; )e(is)ation re)atin( to the pru$entia) super'ision of cre$it institutions an$ the sta#i)ity of the financia) system" Fina))y8 :rtic)e 120A6B of the 5F*; foresees the possi#i)ity of transferrin( specific super'isory tasks to the *.6 fo))o!in( a simp)ifie$ proce$ure !ithout the nee$ to amen$ the )e(is)ation" 9n or$er to a$$ress se'ere tensions in financia) markets the fo))o!in( ne! pro(rammes !ere create$ in 2010: the *uropean Financia) -ta#i)isation Mechanism A*F-MB an$ the *uropean Financia) -ta#i)ity Faci)ity A*F-FB" 5he *F-M has #een operationa) since 10 May 20108 an$ the *F-F #ecame fu))y operationa) on 4 :u(ust 2010" 5he *F-F has #een authorise$ to issue #on$s in the market8 !hich !i)) #e (uarantee$ #y the euro area countries" 3oans to a country in $ifficu)ty un$er the *F-M an$ *F-F must #e accompanie$ #y a $etai)e$ an$ $eman$in( set of po)icy con$itions" 9n March 2011 the *; .ounci) $eci$e$ to esta#)ish a permanent crisis mana(ement frame!ork8 the *uropean -ta#i)ity Mechanism A*-MB" 5he *-M !i)) comp)ement the ne! frame!ork of reinforce$ (o'ernance from 2une 2013" 5he institutiona) frame!ork $oes not (i'e the *urosystem $irect super'isory competencies" 9n se'era) euro area

Ne' &e,h"nis& s $!% ,%!ss< 8!%.e% ,!!+e%"ti!n

N! e %! "%e"< 'i.e ,!&+eten

countries8 #ut not a))8 centra) #anks are responsi#)e for8 or at )east c)ose)y in'o)'e$ in8 pru$entia) super'ision an$ super'isor y functions" 5he $ecentra)i se$ a))ocation of responsi#i)i ties has create$ a nee$ for c)ose cooperatio n AiB !ithin the *urosyste m8 #et!een the *.6 an$ the >.6s8 in or$er to monitor potentia) euro area= !i$e risks to financia) sta#i)ity8 an$ AiiB #et!een the *urosystem an$ nationa) super'isors to ensure the c)ose

coor$ination of centra) #ankin( an$ super'isory functions in contri#utin( to safe(uar$ financia) sta#i)ity" 5he *urosystem carries out t!o main functions in these areas" First8 it monitors an$ assesses the main risks to euro area financia) system sta#i)ity an$ a)so con$ucts market operations that aim to a$$ress (enera) financia) shocks an$ re)ie'e tensions in the euro area money market" Moreo'er8 the *urosystem contri#utes to the $efinition of the financia) sta#i)ity po)icies of the competent nationa) an$ *; authorities pertainin( to financia) sta#i)ity monitorin( an$ assessment8 financia) re(u)ation an$ super'ision8 an$ crisis mana(ement" -econ$8 the *urosystem o'ersees market infrastructures

as part of its #asic task of promotin( the smooth operation of payment systems" :s the financia) crisis has sho!n yet a(ain8 ()o#a) financia) markets an$ interconnecte$ financia) institutions are su#&ect to systemic risks" 9n or$er to miti(ate the e1posure of the system to the risk of fai)ure of systemic components an$ to enhance the o'era)) *; financia) system+s resi)ience to shocks8 important institutiona) chan(es !ere intro$uce$" %n 1 2anuary 2011 the *;+s ne! financia) super'isory architecture #ecame operationa)" 9t inc)u$es three ne! *uropean

A ne' EU $in"n,i"# s +e%:is!%* "%,hite,t %e

-uper'isory :uthorities A*-:sB for #ankin(8 insurance an$ securities markets to enhance micro=pru$entia) super'ision an$ the *uropean -ystemic Cisk 6oar$ A*-C6B8 an in$epen$ent *; #o$y8 responsi#)e for the macro= pru$entia) o'ersi(ht of the financia) system !ithin the *;" 5he *.6 ensures the -ecretariat function for the *-C68 an$ is a)so in char(e of pro'i$in( ana)ytica)8 statistica)8 a$ministrati'e an$ )o(istica) support to the ne! *; #o$y"
The t"s(s !$ the ESR/

time)ine for the re)e'ant po)icy response" 5he *.6+s support of the *-C6 is !ithout pre&u$ice to the princip)e of centra) #ank in$epen$ence" :)) mem#ers of the *.6+s Genera) .ounci) are 'otin( mem#ers of the Genera) 6oar$ of the *-C6" 5he Presi$ent of the *.6 is the first .hair of the *-C6 for a term of fi'e years" 5he first Dice=.hair is a mem#er of the Genera) .ounci) of the *.6 an$ is a)so appointe$ for a term of fi'e years" 5he -teerin( .ommittee of the *-C6 inc)u$es the Presi$ent of 5he *-C6 contri#utes to the the *.68 the Dice=Presi$ent of pre'ention or miti(ation of systemic the *.6 an$ four other mem#ers of the risks to financia) sta#i)ity in the Genera) .ounci)" *; that arise from $e'e)opments !ithin the financia) system" For this The .e,isi!n<&"(in) 8!.ies !$ purpose8 an$ particu)ar)y !ith a 'ie! the EC/ 5he monetary po)icy of to a'oi$in( !i$esprea$ financia) the *.6 is #ase$ on a co))ecti'e $istress8 the *-C6 takes into account $ecision=makin( system A:rtic)es 129 macroeconomic $e'e)opments" 5he an$ 132 of the 5F*;B" 5here are t!o *-C6 thus contri#utes to the smooth $ecision=makin( #o$ies of the *.6 functionin( of the interna) market an$ A:rtic)e 129A1B of the 5F*;B !hich there#y ensures a sustaina#)e are responsi#)e for the preparation8 contri#ution of the financia) sector to con$uct an$ imp)ementation of the economic (ro!th" 9ts main tasks are to sin()e monetary po)icy: the monitor an$ assess systemic risk an$ Go'ernin( .ounci) an$ the to issue !arnin(s an$8 !here *1ecuti'e 6oar$ Asee .hart 1"1B" : necessary8 recommen$ations to the thir$ $ecision=makin( #o$y of the *.6 is the Genera) .ounci)" re)e'ant po)icy=makers !ith a Ch"%t 1=1 The .e,isi!n<&"(in) 8!.ies !$ the EC/

Governors of the euro area CBs

Governors of the CBs of all E! "e#$er %tates

4!:e%n in) C! n,i # !$ the EC/

5he Go'ernin( .ounci) of the *.6 consists of the si1 mem#ers of the *1ecuti'e 6oar$ an$ the (o'ernors of the euro area >.6s A10 (o'ernors in 2011B" 6oth the Go'ernin( .ounci) an$ the *1ecuti'e 6oar$ are chaire$ #y the Presi$ent of the *.6 or8 in his a#sence8 #y the Dice=Presi$ent" 5he responsi#i)ities of the Go'ernin( .ounci) are: K to a$opt the (ui$e)ines an$ take the $ecisions necessary to ensure the performance of the tasks entruste$ to the *urosystemJ K to formu)ate the monetary po)icy of the euro area"

is responsi#)e for the current #usiness of the *.6J K assumes certain po!ers $e)e(ate$ to it #y the Go'ernin( .ounci)8 !hich may inc)u$e po!ers of a re(u)atory nature"
4ene%"# C! n,i# !$ the EC/

E;e, ti:e /!"%. !$ the EC/

5he Genera) .ounci) of the *.6 is compose$ of the Presi$ent an$ Dice=Presi$ent of the *.6 an$ the (o'ernors of the >.6s of a)) *; Mem#er -tates A20 in 2011B" 9t !i)) remain in e1istence for as )on( as there are *; Mem#er -tates !hose currency is not the euro" 5he Genera) .ounci) has no responsi#i)ity for monetary po)icy $ecisions in the euro area" 9n accor$ance !ith :rtic)e 12"1 of the 9t carries out those tasks inherite$ -tatute of the *-.68 the formu)ation from the *uropean Monetary 9nstitute of monetary po)icy for the euro A*M9B that sti)) ha'e to #e performe$ area inc)u$es takin( $ecisions on precise)y #ecause the euro is not the Ginterme$iate monetary o#&ecti'es8 currency of a)) *; Mem#er -tates"4 key interest rates an$ the supp)y of 9n accor$ance !ith :rtic)es 438 44 reser'esH in the *urosystem" Moreo'er8 an$ 46 of the -tatute of the *-.6 an$ the Go'ernin( .ounci) esta#)ishes :rtic)e 141A2B of the 5F*;8 the the necessary (ui$e)ines for the Genera) .ounci) contri#utes to: imp)ementation of those $ecisions" K stren(thenin( the coor$ination of the monetary po)icies of the *; Mem#er -tates !hose currency is not the 5he *1ecuti'e 6oar$ of the *.6 euro8 !ith the aim of ensurin( price consists of the Presi$ent8 the Dice= sta#i)ityJ Presi$ent an$ four other mem#ers8 a)) of !hom 7 since the entry into force K the co))ection of statistica) informationJ of the 5reaty of 3is#on 7 are appointe$ K the reportin( acti'ities of the *.6J #y the *uropean .ounci)8 actin( K the necessary preparations for #y a /ua)ifie$ ma&ority8 on a irre'oca#)y fi1in( the e1chan(e recommen$ation from the .ounci) of rates of *; Mem#er -tates !hose the *uropean ;nion" 9n accor$ance !ith currency is not the euro" :rtic)es 12"1 an$ 12"2 of the -tatute of the *-.68 the *1ecuti'e 6oar$: >!tin) K prepares the meetin(s of the &!."#ities in the 4!:e%nin) Go'ernin( .ounci)J K imp)ements monetary po)icy in C! n,i# accor$ance !ith the (ui$e)ines an$ ?ecisions on monetary po)icy an$ on $ecisions )ai$ $o!n #y the the other tasks of the *urosystem in the Go'ernin( .ounci) an$8 in so $oin(8 euro area must #e #ase$ on a euro area (i'es the necessary instructions to perspecti'e" @hen takin( $ecisions8 the mem#ers of the Go'ernin( .ounci) the euro area >.6sJ $o not act as nationa) representati'es #ut in a fu))y in$epen$ent8 persona)

For further $etai)s on the history of *M;8 see a)so the anne1"

capacity" *ach mem#er has one 'ote" 9n the e'ent of a tie8 the Presi$ent of the *.6 has a castin( 'ote" :rtic)e 10"2 of the -tatute of the *-.6 states that the Go'ernin( .ounci) must act #y a simp)e ma&ority" 9n practice8 monetary po)icy $ecisions ha'e (enera))y #een supporte$ #y a GconsensusH amon( mem#ers of the Go'ernin( .ounci)"
A.? st& ent !$ :!tin) &!."#ities in the 4!:e%nin) C! n,i#

@ith further en)ar(ements of the euro area8 the Go'ernin( .ounci) sti)) nee$s to take $ecisions in a time)y an$ efficient mannerJ so a ne! 'otin( system !as re/uire$" %n 21 March 2003 the *uropean .ounci) appro'e$ an amen$ment to :rtic)e 10"2 of the -tatute of the *-.6 !hich pro'i$es for an a$&ustment of the 'otin( mo$a)ities in the Go'ernin( .ounci)" 5he imp)ementation of a ne! rotation system aims to respect the princip)es of Gone mem#er8 one 'oteH8 a$ personam

participation8 Grepresentati'enessH8 ro#ustness an$ automaticity8 e/ua) treatment8 transparency an$ simp)icity" %n 19 March 2009 the Go'ernin( .ounci) $eci$e$ to imp)ement a rotation system for 'otin( ri(hts in the Go'ernin( .ounci)8 as )ai$ $o!n in a ne! :rtic)e 3a of the *.6+s Cu)es of Proce$ure" ;n$er this ne! system8 a)) si1 mem#ers of the *1ecuti'e 6oar$ !i)) maintain a permanent 'otin( ri(ht8 #ut the 'otin( ri(hts of >.6 (o'ernors !i)) #e su#&ect to a rotation system once the num#er of euro area countries e1cee$s 14", Go'ernors !i)) #e a))ocate$ to (roups accor$in( to a key set out in :rtic)e 10"2 of the -tatute of the *-.6" Go'ernors !i)) rotate in an$ out of 'otin( ri(hts after one month" For the first (roup8 the num#er of 'otin( ri(hts that rotate in each one=month perio$ !i)) #e oneJ for the secon$ an$ thir$ (roups8 the num#er of 'otin( ri(hts

Ch"%t 1=- Th%ee<)%! + %!t"ti!n s*ste& $!% the 4!:e%nin) C! n,i# !$ the EC/ 'ith -7 ,! nt%ies in the e %! "%e"

"E"BE&% 'F T(E E)EC!TI*E B'A&+

Six permanent votes

T(I&+ G&'!P Eight governors

rotating votes

votes ,n total rotating

21

FI&%T G&'!P votes Five governors

%EC' + G&'!P Fourteen governors

%n 14 ?ecem#er 2004 the Go'ernin( .ounci) $eci$e$ to continue its current 'otin( re(ime an$ to intro$uce the rotation system on)y !hen the num#er of (o'ernors an$ presi$ents of the euro area >.6s e1cee$s 148 an$ not 1,

as initia))y foreseen"

that rotate in each one=month perio$ !i)) #e e/ua) to the $ifference #et!een the num#er of (o'ernors a))ocate$ to the (roup an$ the num#er of 'otin( ri(hts assi(ne$ to it8 minus t!o" .hart 1"2 i))ustrates the three=(roup rotation system for a euro area comprisin( 20 countries" 5he rotation system ensures hi(h participation of mem#ers com#ine$ !ith re)ati'e sta#i)ity of the composition of the 'otin( co))e(e" First8 a)) (o'ernors atten$ a)) meetin(s of the Go'ernin( .ounci)8 irrespecti'e of !hether they ho)$ a 'otin( ri(ht at the time" -econ$8 the rotation fre/uency !i)) #e such that perio$s !ithout a 'ote for in$i'i$ua) (o'ernors !i)) #e short"

*.6 an$ co'er most functiona) areas of the *urosystem *-.6 !ork" 5hese e1perts pro'i$e 'a)ua#)e input8 in terms of e1pertise an$ technica) a$'ice8 to the $e)i#erations of the *.6+s $ecision= makin( #o$ies" Moreo'er8 these committees may operate a 'ariety of !orkin( (roups or task forces" @ork at 'arious )e'e)s contri#utes to shapin( 'ie!s an$ #ui)$in( consensus !ithin the *urosystem *-.6"

E %!s*ste&@ ESC/ ,!&&itt ees

5he current *urosystem *-.6 committees are: the Monetary Po)icy .ommittee AMP.B8 the 9nternationa) Ce)ations .ommittee A9C.B8 the Market %perations .ommittee AM%.B8 the -tatistics .ommittee A-5.B8 the Payment an$ -ett)ement The E %!s*ste&@ESC/ -ystems .ommittee AP--.B8 the ,!&&ittee st% ,t %e Financia) -ta#i)ity .ommittee AF-.B8 Monetary po)icy $ecisions #y the the 6anknote .ommittee A6:>.%B8 Go'ernin( .ounci) #enefit from the the .ommittee on .ost Metho$o)o(y carefu) preparations an$ ana)yses of A.%M.%B8 the 9nformation 5echno)o(y *urosystem *-.6 staff" @ith the .ommittee A95.B8 the 9nterna) :u$itors )aunch of the euro8 the e1istin( .ommittee A9:.B8 the *urosystem *-.6 $ecentra)ise$ architecture !as app)ie$ .ommunications .ommittee A*..%B8 an$ refine$" *urosystem *-.6 the 3e(a) .ommittee A3*G.%B8 the committees are responsi#)e for :ccountin( an$ Monetary 9ncome coor$inatin( those *urosystem *-.6 .ommittee A:M9.%B8 the 6u$(et tasks that in'o)'e #oth the *.6 an$ the .ommittee A6;.%MB8 <uman >.6s" Cesources .onference A<C.B8 the *urosystem 95 -teerin( .ommittee *urosystem *-.6 committees A*9-.B an$ the Cisk Mana(ement comprise e1perts from >.6s an$ the .ommittee ACM.B"

/!; 1=1 7e* +%!:isi!ns $%!& the T%e"ties "n. the St"t te !$ the ESC/
5his #o1 inc)u$es se)ecte$ key monetary po)icy pro'isions taken from the 5reaty on *uropean ;nion8 the 5reaty on the Functionin( of the *uropean ;nion an$ the -tatute of the *-.6" 5he fu)) )e(a) te1ts are a'ai)a#)e from: !!!"europa"eu an$ !!!"ec#"europa"eu" 1= E2CERPTS FRO1 THE TREAT6 ON EUROPEAN UNION A%ti,#e 3 3" 5he ;nion sha)) esta#)ish an interna) market" 9t sha)) !ork for the sustaina#)e $e'e)opment of *urope #ase$ on #a)ance$ economic (ro!th an$ price sta#i)ity8 a hi(h)y

competiti'e socia) market economy8 aimin( at fu)) emp)oyment an$ socia) pro(ress8 an$ a hi(h )e'e) of protection an$ impro'ement of the /ua)ity of the en'ironment" 9t sha)) promote scientific an$ techno)o(ica) a$'ance" LMN 4" 5he ;nion sha)) esta#)ish an economic an$ monetary union !hose currency is the euro" A%ti,#e 13 1" 5he ;nion sha)) ha'e an institutiona) frame!ork !hich sha)) aim to promote its 'a)ues8 a$'ance its o#&ecti'es8 ser'e its interests8 those of its citiEens an$ those of the Mem#er -tates8 an$ ensure the consistency8 effecti'eness an$ continuity of its po)icies an$ actions" 5he ;nion+s institutions sha)) #e: 7 the *uropean Par)iament8 7 the *uropean .ounci)8 7 the .ounci)8 7 the *uropean .ommission Ahereinafter referre$ to as Othe .ommission+B8 7 the .ourt of 2ustice of the *uropean ;nion8 7 the *uropean .entra) 6ank8 7 the .ourt of :u$itors" 2" *ach institution sha)) act !ithin the )imits of the po!ers conferre$ on it in the 5reaties8 an$ in conformity !ith the proce$ures8 con$itions an$ o#&ecti'es set out in them" 5he institutions sha)) practice mutua) sincere cooperation" 3" 5he pro'isions re)atin( to the *uropean .entra) 6ank an$ the .ourt of :u$itors an$ $etai)e$ pro'isions on the other institutions are set out in the 5reaty on the Functionin( of the *uropean ;nion" -= E2CERPTS FRO1 THE TREAT6 ON THE FUNCTIONIN4 OF THE EUROPEAN UNION A%ti,#e 119 1" For the purposes set out in :rtic)e 3 of the 5reaty on *uropean ;nion8 the acti'ities of the Mem#er -tates an$ the ;nion sha)) inc)u$e8 as pro'i$e$ in the 5reaties8 the a$option of an economic po)icy !hich is #ase$ on the c)ose coor$ination of Mem#er -tates+ economic po)icies8 on the interna) market an$ on the $efinition of common o#&ecti'es8 an$ con$ucte$ in accor$ance !ith the princip)e of an open market economy !ith free competition" 2" .oncurrent)y !ith the fore(oin(8 an$ as pro'i$e$ in the 5reaties an$ in accor$ance !ith the proce$ures set out therein8 these acti'ities sha)) inc)u$e a sin()e currency8 the euro8 an$ the $efinition an$ con$uct of a sin()e monetary po)icy an$ e1chan(e=rate po)icy the primary o#&ecti'e of #oth of !hich sha)) #e to maintain price sta#i)ity an$8 !ithout pre&u$ice to this o#&ecti'e8 to support the (enera) economic po)icies in the ;nion8 in accor$ance !ith the princip)e of an open market economy !ith free competition" 3" 5hese acti'ities of the Mem#er -tates an$ the ;nion sha)) entai) comp)iance !ith the fo))o!in( (ui$in( princip)es: sta#)e prices8 soun$ pu#)ic finances an$ monetary con$itions an$ a sustaina#)e #a)ance of payments"

A%ti,#e 1-1 1" Mem#er -tates sha)) re(ar$ their economic po)icies as a matter of common concern an$ sha)) coor$inate them !ithin the .ounci)8 in accor$ance !ith the pro'isions of :rtic)e 120" A%ti,#e 1-7 1" 5he primary o#&ecti'e of the *-.6 sha)) #e to maintain price sta#i)ity" @ithout pre&u$ice to the o#&ecti'e of price sta#i)ity8 the *-.6 sha)) support the (enera) economic po)icies in the ;nion !ith a 'ie! to contri#utin( to the achie'ement of the o#&ecti'es of the ;nion as )ai$ $o!n in :rtic)e 3 of the 5reaty on *uropean ;nion" 5he *-.6 sha)) act in accor$ance !ith the princip)e of an open market economy !ith free competition8 fa'ourin( an efficient a))ocation of resources8 an$ in comp)iance !ith the princip)es set out in :rtic)e 119" 2" 5he #asic tasks to #e carrie$ out throu(h the *-.6 sha)) #e: 7 to $efine an$ imp)ement the monetary po)icy of the ;nion8 7 to con$uct forei(n=e1chan(e operations consistent !ith the pro'isions of :rtic)e 2198 7 to ho)$ an$ mana(e the officia) forei(n reser'es of the Mem#er -tates8 7 to promote the smooth operation of payment systems" 3" 5he thir$ in$ent of para(raph 2 sha)) #e !ithout pre&u$ice to the ho)$in( an$ mana(ement #y the (o'ernments of Mem#er -tates of forei(n=e1chan(e !orkin( #a)ances" 4" 5he *uropean .entra) 6ank sha)) #e consu)te$: 7 on any propose$ ;nion act in its fie)$s of competence8 7 #y nationa) authorities re(ar$in( any $raft )e(is)ati'e pro'ision in its fie)$s of competence8 #ut !ithin the )imits an$ un$er the con$itions set out #y the .ounci) in accor$ance !ith the proce$ure )ai$ $o!n in :rtic)e 129A4B" 5he *uropean .entra) 6ank may su#mit opinions to the appropriate ;nion institutions8 #o$ies8 offices or a(encies or to nationa) authorities on matters in its fie)$s of competence" ," 5he *-.6 sha)) contri#ute to the smooth con$uct of po)icies pursue$ #y the competent authorities re)atin( to the pru$entia) super'ision of cre$it institutions an$ the sta#i)ity of the financia) system" 6" 5he .ounci)8 actin( #y means of re(u)ations in accor$ance !ith a specia) )e(is)ati'e proce$ure8 may unanimous)y8 an$ after consu)tin( the *uropean Par)iament an$ the *uropean .entra) 6ank8 confer specific tasks upon the *uropean .entra) 6ank concernin( po)icies re)atin( to the pru$entia) super'ision of cre$it institutions an$ other financia) institutions !ith the e1ception of insurance un$ertakin(s" A%ti,#e 1-9 1" 5he *-.6 sha)) #e (o'erne$ #y the $ecision=makin( #o$ies of the *uropean .entra) 6ank !hich sha)) #e the Go'ernin( .ounci) an$ the *1ecuti'e 6oar$" A%ti,#e 130 @hen e1ercisin( the po!ers an$ carryin( out the tasks an$ $uties conferre$ upon them

#y the 5reaties an$ the -tatute of the *-.6 an$ of the *.68 neither the *uropean .entra) 6ank8 nor a nationa) centra) #ank8 nor any mem#er of their $ecision=makin( #o$ies sha)) seek or take instructions from ;nion institutions8 #o$ies8 offices or a(encies8 from any

(o'ernment of a Mem#er -tate or from any other #o$y" 5he ;nion institutions8 #o$ies8 offices or a(encies an$ the (o'ernments of the Mem#er -tates un$ertake to respect this princip)e an$ not to seek to inf)uence the mem#ers of the $ecision=makin( #o$ies of the *uropean .entra) 6ank or of the nationa) centra) #anks in the performance of their tasks" A%ti,#e -19 1" 6y !ay of $ero(ation from :rtic)e 2148 the .ounci)8 either on a recommen$ation from the *uropean .entra) 6ank or on a recommen$ation from the .ommission an$ after consu)tin( the *uropean .entra) 6ank8 in an en$ea'our to reach a consensus consistent !ith the o#&ecti'e of price sta#i)ity8 may conc)u$e forma) a(reements on an e1chan(e= rate system for the euro in re)ation to the currencies of thir$ -tates" 5he .ounci) sha)) act unanimous)y after consu)tin( the *uropean Par)iament an$ in accor$ance !ith the proce$ure pro'i$e$ for in para(raph 3" 5he .ounci) may8 either on a recommen$ation from the *uropean .entra) 6ank or on a recommen$ation from the .ommission8 an$ after consu)tin( the *uropean .entra) 6ank8 in an en$ea'our to reach a consensus consistent !ith the o#&ecti'e of price sta#i)ity8 a$opt8 a$&ust or a#an$on the centra) rates of the euro !ithin the e1chan(e=rate system" 5he Presi$ent of the .ounci) sha)) inform the *uropean Par)iament of the a$option8 a$&ustment or a#an$onment of the euro centra) rates" 2" 9n the a#sence of an e1chan(e=rate system in re)ation to one or more currencies of thir$ -tates as referre$ to in para(raph 18 the .ounci)8 either on a recommen$ation from the .ommission an$ after consu)tin( the *uropean .entra) 6ank or on a recommen$ation from the *uropean .entra) 6ank8 may formu)ate (enera) orientations for e1chan(e= rate po)icy in re)ation to these currencies" 5hese (enera) orientations sha)) #e !ithout pre&u$ice to the primary o#&ecti'e of the *-.6 to maintain price sta#i)ity" A%ti,#e -81" 5he *uropean .entra) 6ank8 to(ether !ith the nationa) centra) #anks8 sha)) constitute the *uropean -ystem of .entra) 6anks A*-.6B" 5he *uropean .entra) 6ank8 to(ether !ith the nationa) centra) #anks of the Mem#er -tates !hose currency is the euro8 !hich constitute the *urosystem8 sha)) con$uct the monetary po)icy of the ;nion" 2" 5he *-.6 sha)) #e (o'erne$ #y the $ecision=makin( #o$ies of the *uropean .entra) 6ank" 5he primary o#&ecti'e of the *-.6 sha)) #e to maintain price sta#i)ity" @ithout pre&u$ice to that o#&ecti'e8 it sha)) support the (enera) economic po)icies in the ;nion in or$er to contri#ute to the achie'ement of the )atter+s o#&ecti'es" 3" 5he *uropean .entra) 6ank sha)) ha'e )e(a) persona)ity" 9t a)one may authorise the issue of the euro" 9t sha)) #e in$epen$ent in the e1ercise of its po!ers an$ in the mana(ement of its finances" ;nion institutions8 #o$ies8 offices an$ a(encies an$ the (o'ernments of the Mem#er -tates sha)) respect that in$epen$ence" 3= E2CERPTS FRO1 PROTOCO5 ANO 4B ON THE STATUTE OF THE EUROPEAN S6STE1 OF CENTRA5 /AN7S AND OF THE EUROPEAN CENTRA5 /AN7 A%ti,#e 10 AThe 4!:e%nin) C! n,i#B 10"2" *ach mem#er of the Go'ernin( .ounci) sha)) ha'e one 'ote" :s from the $ate on

!hich the num#er of mem#ers of the Go'ernin( .ounci) e1cee$s 218 each mem#er of

the *1ecuti'e 6oar$ sha)) ha'e one 'ote an$ the num#er of (o'ernors !ith a 'otin( ri(ht sha)) #e 1," 5he )atter 'otin( ri(hts sha)) #e assi(ne$ an$ sha)) rotate as fo))o!s: 7 as from the $ate on !hich the num#er of (o'ernors e1cee$s 1,8 unti) it reaches 228 the (o'ernors sha)) #e a))ocate$ to t!o (roups8 accor$in( to a rankin( of the siEe of the share of their nationa) centra) #ank+s Mem#er -tate in the a((re(ate (ross $omestic pro$uct at market prices an$ in the tota) a((re(ate$ #a)ance sheet of the monetary financia) institutions of the Mem#er -tates !hose currency is the euro" 5he shares in the a((re(ate (ross $omestic pro$uct at market prices an$ in the tota) a((re(ate$ #a)ance sheet of the monetary financia) institutions sha)) #e assi(ne$ !ei(hts of , 6 an$ 1 68 respecti'e)y" 5he first (roup sha)) #e compose$ of fi'e (o'ernors an$ the secon$ (roup of the remainin( (o'ernors" 5he fre/uency of 'otin( ri(hts of the (o'ernors a))ocate$ to the first (roup sha)) not #e )o!er than the fre/uency of 'otin( ri(hts of those of the secon$ (roup" -u#&ect to the pre'ious sentence8 the first (roup sha)) #e assi(ne$ four 'otin( ri(hts an$ the secon$ (roup e)e'en 'otin( ri(hts8 7 as from the $ate on !hich the num#er of (o'ernors reaches 228 the (o'ernors sha)) #e a))ocate$ to three (roups accor$in( to a rankin( #ase$ on the a#o'e criteria" 5he first (roup sha)) #e compose$ of fi'e (o'ernors an$ sha)) #e assi(ne$ four 'otin( ri(hts" 5he secon$ (roup sha)) #e compose$ of ha)f of the tota) num#er of (o'ernors8 !ith any fraction roun$e$ up to the nearest inte(er8 an$ sha)) #e assi(ne$ ei(ht 'otin( ri(hts" 5he thir$ (roup sha)) #e compose$ of the remainin( (o'ernors an$ sha)) #e assi(ne$ three 'otin( ri(hts8 7 !ithin each (roup8 the (o'ernors sha)) ha'e their 'otin( ri(hts for e/ua) amounts of time8 7 for the ca)cu)ation of the shares in the a((re(ate (ross $omestic pro$uct at market prices :rtic)e 29"2 sha)) app)y" 5he tota) a((re(ate$ #a)ance sheet of the monetary financia) institutions sha)) #e ca)cu)ate$ in accor$ance !ith the statistica) frame!ork app)yin( in the ;nion at the time of the ca)cu)ation8 7 !hene'er the a((re(ate (ross $omestic pro$uct at market prices is a$&uste$ in accor$ance !ith :rtic)e 29"38 or !hene'er the num#er of (o'ernors increases8 the siEe an$ or composition of the (roups sha)) #e a$&uste$ in accor$ance !ith the a#o'e princip)es8 7 the Go'ernin( .ounci)8 actin( #y a t!o=thir$s ma&ority of a)) its mem#ers8 !ith an$ !ithout a 'otin( ri(ht8 sha)) take a)) measures necessary for the imp)ementation of the a#o'e princip)es an$ may $eci$e to postpone the start of the rotation system unti) the $ate on !hich the num#er of (o'ernors e1cee$s 14" 5he ri(ht to 'ote sha)) #e e1ercise$ in person" 6y !ay of $ero(ation from this ru)e8 the Cu)es of Proce$ure referre$ to in :rtic)e 12"3 may )ay $o!n that mem#ers of the Go'ernin( .ounci) may cast their 'ote #y means of te)econferencin(" 5hese ru)es sha)) a)so pro'i$e that a mem#er of the Go'ernin( .ounci) !ho is pre'ente$ from atten$in( meetin(s of the Go'ernin( .ounci) for a pro)on(e$ perio$ may appoint an a)ternate as a mem#er of the Go'ernin( .ounci)" 5he pro'isions of the pre'ious para(raphs are !ithout pre&u$ice to the 'otin( ri(hts of a)) mem#ers of the Go'ernin( .ounci)8 !ith an$ !ithout a 'otin( ri(ht8 un$er :rtic)es 10"38 40"2 an$ 40"3" -a'e as other!ise pro'i$e$ for in this -tatute8 the Go'ernin( .ounci) sha)) act #y a simp)e ma&ority of the mem#ers ha'in( a 'otin( ri(ht" 9n the e'ent of a tie8 the Presi$ent sha)) ha'e the castin( 'ote" 9n or$er for the Go'ernin( .ounci) to 'ote8 there sha)) #e a /uorum of t!o=thir$s of the

mem#ers ha'in( a 'otin( ri(ht" 9f the /uorum is not met8 the Presi$ent may con'ene an e1traor$inary meetin( at !hich $ecisions may #e taken !ithout re(ar$ to the /uorum"

10"4" 5he procee$in(s of the meetin(s sha)) #e confi$entia)" 5he Go'ernin( .ounci) may $eci$e to make the outcome of its $e)i#erations pu#)ic" A%ti,#e 1- ARes+!nsi8i#ities !$ the .e,isi!n< &"(in) 8!.iesB 12"1" 5he Go'ernin( .ounci) sha)) a$opt the (ui$e)ines an$ take the $ecisions necessary to ensure the performance of the tasks entruste$ to the *-.6 un$er these 5reaties an$ this -tatute" 5he Go'ernin( .ounci) sha)) formu)ate the monetary po)icy of the ;nion inc)u$in(8 as appropriate8 $ecisions re)atin( to interme$iate monetary o#&ecti'es8 key interest rates an$ the supp)y of reser'es in the *-.68 an$ sha)) esta#)ish the necessary (ui$e)ines for their imp)ementation" 5he *1ecuti'e 6oar$ sha)) imp)ement monetary po)icy in accor$ance !ith the (ui$e)ines an$ $ecisions )ai$ $o!n #y the Go'ernin( .ounci)" 9n $oin( so the *1ecuti'e 6oar$ sha)) (i'e the necessary instructions to nationa) centra) #anks" 9n a$$ition the *1ecuti'e 6oar$ may ha'e certain po!ers $e)e(ate$ to it !here the Go'ernin( .ounci) so $eci$es" 5o the e1tent $eeme$ possi#)e an$ appropriate an$ !ithout pre&u$ice to the pro'isions of this :rtic)e8 the *.6 sha)) ha'e recourse to the nationa) centra) #anks to carry out operations !hich form part of the tasks of the *-.6" 12"2" 5he *1ecuti'e 6oar$ sha)) ha'e responsi#i)ity for the preparation of meetin(s of the Go'ernin( .ounci)" A%ti,#e 15 ARe+!%tin) ,!&&it&entsB 1,"1" 5he *.6 sha)) $ra! up an$ pu#)ish reports on the acti'ities of the *-.6 at )east /uarter)y" 1,"2" : conso)i$ate$ financia) statement of the *-.6 sha)) #e pu#)ishe$ each !eek" 1,"3" 9n accor$ance !ith :rtic)e 244A3B of the 5reaty on the Functionin( of the *uropean ;nion8 the *.6 sha)) a$$ress an annua) report on the acti'ities of the *-.6 an$ on the monetary po)icy of #oth the pre'ious an$ the current year to the *uropean Par)iament8 the .ounci) an$ the .ommission8 an$ a)so to the *uropean .ounci)" 1,"4" 5he reports an$ statements referre$ to in this :rtic)e sha)) #e ma$e a'ai)a#)e to intereste$ parties free of char(e" A%ti,#e 17 AA,,! nts 'ith the EC/ "n. the n"ti!n"# ,ent%"# 8"n(sB 9n or$er to con$uct their operations8 the *.6 an$ the nationa) centra) #anks may open accounts for cre$it institutions8 pu#)ic entities an$ other market participants an$ accept assets8 inc)u$in( #ook entry securities8 as co))atera)" A%ti,#e 18 AO+en &"%(et "n. ,%e.it !+e%"ti!nsB 14"1" 9n or$er to achie'e the o#&ecti'es of the *-.6 an$ to carry out its tasks8 the *.6 an$ the nationa) centra) #anks may: K operate in the financia) markets #y #uyin( an$ se))in( outri(ht Aspot an$ for!ar$B or un$er repurchase a(reement an$ #y )en$in( or #orro!in( c)aims an$ marketa#)e instruments8 !hether in euro or other currencies8 as !e)) as precious meta)sJ K con$uct cre$it operations !ith cre$it institutions an$ other market participants8

!ith )en$in( #ein( #ase$ on a$e/uate co))atera)"

A%ti,#e 19 A1ini& & %ese%:esB 19"1" -u#&ect to :rtic)e 28 the *.6 may re/uire cre$it institutions esta#)ishe$ in Mem#er -tates to ho)$ minimum reser'e on accounts !ith the *.6 an$ nationa) centra) #anks in pursuance of monetary po)icy o#&ecti'es" Ce(u)ations concernin( the ca)cu)ation an$ $etermination of the re/uire$ minimum reser'es may #e esta#)ishe$ #y the Go'ernin( .ounci)" 9n cases of non=comp)iance the *.6 sha)) #e entit)e$ to )e'y pena)ty interest an$ to impose other sanctions !ith compara#)e effect" 19"2" For the app)ication of this :rtic)e8 the .ounci) sha))8 in accor$ance !ith the proce$ure )ai$ $o!n in :rtic)e 418 $efine the #asis for minimum reser'es an$ the ma1imum permissi#)e ratios #et!een those reser'es an$ their #asis8 as !e)) as the appropriate sanctions in cases of non=comp)iance"

- THE ECONO1IC AND FINANCIA5 STRUCTURE OF THE EURO AREA

,he pur!uit o% the o$0e&ti.e o% pri&e !ta$ility re1uire! an un#er!tan#in' o% the %a&tor! that !hape the pri&e %or"ation pro&e!!/ in&lu#in' the tran!"i!!ion o% "onetary poli&y+ ,hi! &hapter pro.i#e! an o.er.ie) o% the "ain e&ono"i& an# %inan&ial !tru&ture! o% the euro area e&ono"y+ ,he ey &hara&teri!ti&! o% the real e&ono"y are &on!i#ere# %ir!t/ %o&u!in' on the &o"po!ition o% output/ #e"o'raphi& an# ey la$our "ar et %eature!/ %i!&al poli&y/ a! )ell a! pattern! o% tra#e $et)een the euro area an# the re!t o% the )orl#+ 2ollo)in' on %ro" thi!/ the ey &hara&teri!ti&! o% the %inan&ial !tru&ture are #e!&ri$e# $y e-a"inin' the "oney an# &apital "ar et! an# the "ain %inan&ial in!titution! in.ol.e#/ #i!tin'ui!hin' "onetary %inan&ial in!titution! (32I!) %ro" other %inan&ial inter"e#iarie! (O2I!)+
-=1 7E6 CHARACTERISTICS OF THE REA5 ECONO16
The e %! "%e" e,!n!&* is the se,!n. #"%)est in the '!%#.

P!+ #"t i!n "n. sh"%e in '!%#. 4DP

si(nificant)y sma))er8 !ith the )ar(est economy !ithin the euro area accountin( for 4"0F of !or)$ G?P @hi)e the in$i'i$ua) economies that in 2009" no! comprise the euro area may #e consi$ere$ re)ati'e)y sma)) an$ open 5he structure of pro$uction in the euro economies8 the euro area as a !ho)e area c)ose)y resem#)es that in the forms a )ar(e8 much more c)ose$ ;nite$ -tates an$ 2apan" 9n a)) three economy" 5herefore8 the structura) economies8 the ser'ices sector accounts features of the euro area are #etter for the )ar(est share of tota) output" compare$ !ith those of the 5here is8 ho!e'er8 an important ;nite$ -tates or 2apan than !ith those $ifference in the shares of the pu#)ic of in$i'i$ua) euro area countries" an$ pri'ate sectors in the o'era)) : num#er of key macroeconomic ser'ices sector in the ;nite$ -tates characteristics of the euro area are compare$ !ith the euro area" presente$ in 5a#)e 2"1"6 -pecifica))y8 the pu#)ic ser'ices sector in the ;nite$ -tates is re)ati'e)y sma))8 Measure$ in terms of popu)ation8 !hi)e it accounts for a much )ar(er the euro area is the )ar(est $e'e)ope$ share of the euro area economy" 9n a)) economy in the !or)$" 9n 2009 it ha$ a three economies8 the in$ustria) sector tota) popu)ation of 330", mi))ion8 accounts for the secon$ )ar(est share of some!hat )ar(er than that of the tota) output" Gi'en the hi(h)y ;nite$ -tates an$ more than t!ice as $e'e)ope$ nature of these economies8 )ar(e as the popu)ation of 2apan" the share of a(ricu)ture8 fishin( an$ 5he euro area ha$ a 1,"1F share of forestry is re)ati'e)y sma))" !or)$ G?P in 2009 Ae1presse$ in terms of purchasin( po!er parityB8 compare$ -=5A/OUR !ith 20"4F for the ;nite$ -tates an$ 1AR7ET 6"0F for 2apan" 5he shares of the in$i'i$ua) euro area countries !ere -ince 1999 more than 13 mi))ion &o#s ha'e #een create$ in the euro area8 !hereas in the ten years prior to -9

Se%:i,es se,t!% h"s #"%)est sh"%e !$ e %! "%e" 4DP

St% ,t %"# ne&+#!* &ent in the e %! "%e"

-e'era) ta#)es an$ charts in this section are re(u)ar)y up$ate$ on the *.6+s !e#site"

30

T "8 #e -=1 7e* ,h"%",te%isti,s !$ the e %! "%e" %e"# e,!n!&* in -009

!n,t Euro area !n,ted %tates -apan

Popu)ation 1B G?P Ashare of !or)$ G?PB 2B G?P per capita 2B Da)ue a$$e$ #y economic acti'ity :(ricu)ture8 fishin(8 forestry 9n$ustry Ainc)u$in( constructionB -er'ices Ainc)u$in( non=market ser'icesB ;nemp)oyment rate Ashare of the )a#our forceB 3a#our force participation rate 3B *mp)oyment rate 4B Genera) (o'ernment -urp)us A+B or $eficit A=B Gross $e#t ,B Ce'enue of which% $irect ta1es of which% in$irect ta1es of which% socia) contri#utions *1pen$iture 6B of which% fina) consumption of which% socia) payments *1terna) 0B *1ports of (oo$s *1ports of (oo$s an$ ser'ices 9mports of (oo$s 9mports of (oo$s an$ ser'ices *1ports Ashare of !or)$ e1ports8 inc)u$in( intra=euro area tra$eB *1ports Ashare of !or)$ e1ports8 e1c)u$in( intra=euro area tra$eB .urrent account #a)ance

mi))ions 330", F 1,"1 P thousan$s 20"1 F of G?P F of G?P F of G?P F F F F of G?P F of G?P F of G?P F of G?P F of G?P F of G?P F of G?P F of G?P F of G?P F of G?P F of G?P F of G?P F of G?P F F F of G?P 1"6 24"1 04"3 10"0QQ 01", 64"0 =6"3 09"2 44"6 11"4 13"1 1,"0 ,0"4 22"2 24"3 14"4 19"0 14"0 14"9 29"1 16"9 =0"6

300", 20"4 36"9 1"1Q 21"0Q 00"9Q 9"6QQ 04"6 60"6 =11"3 64"6 26"6 9"0 0"3 6"9 30"9 10"1 1, 0"6 11"1 11"2 13"4 4"6 10 =2"0

120"0 6"0 2,"4 1"6Q 20"3Q 01"1Q ,"1QQ 04"0 00"0 =4"0 140"4 31"6 0"4 4"2 11"0 40"4 20"1 2,"0 10"4 13"3 9"9 12"9 4"0 ,", 2"4

-ources: *urostat8 9MF8 *uropean .ommission8 %*.?8 5homson Ceuters8 *.68 nationa) $ata an$ *.6 ca)cu)ations" >otes: 1B ?ata for the euro area8 ;nite$ -tates an$ 2apan refer to the annua) a'era(e" 2B ?ata for the ;nite$ -tates an$ 2apan con'erte$ into euro at %*.? purchasin( po!er parities APPPsB" 3B Catio of the )a#our force to the !orkin( a(e popu)ation Aa(e$ 1, to 64B" ;- $ata refer to the proportion of the ci'i)ian non=institutiona) popu)ation Aa(e$ 16 to 64B either at !ork or acti'e)y seekin( !ork" :nnua) a'era(e" 4B Catio of persons emp)oye$ to the !orkin( a(e popu)ation Aa(e$ 1, to 64B" ;- $ata refer to the proportion of the ci'i)ian non=institutiona) popu)ation Aa(e$ 16 to 64B at !ork" :nnua) a'era(e" ,B ?ata fo))o! Maastricht $e#t concepts an$ $efinitions" Genera) (o'ernment $e#t consists of $eposits8 securities other than shares an$ )oans outstan$in( at nomina) 'a)ue an$ conso)i$ate$ !ithin the (enera) (o'ernment sector" Rear=en$" 6B *uropean $efinition a)so app)ies to $ata for the ;nite$ -tates an$ 2apan" 0B *uro area $ata are #ase$ on e1tra=euro area transactions" Q2004 fi(ures" QQ2010 fi(ures"

monetary union 0 mi))ion &o#s !ere create$" 5he unemp)oyment rate 7 the num#er of unemp)oye$ persons as a share of the )a#our force 7 $isp)aye$ cyc)ica) f)uctuations throu(hout the )ast $eca$e" 9n the 1940s an$ 1990s the unemp)oyment rate in the euro area reache$ 'ery hi(h )e'e)s as a resu)t of #oth ma&or shocks an$ structura) ri(i$ities Asee .hart 2"1B" 9n 2010 the a'era(e unemp)oyment rate !as 10"0F8 correspon$in( to aroun$ 1,"4 mi))ion unemp)oye$ persons in the euro area as a !ho)e" 5he fi(ures in 2010 !ere simi)ar for #oth the euro area an$ ;- economies" 6y contrast8 since 1940 the euro area unemp)oyment rate has #een8 on a'era(e8 marke$)y hi(her than that of the ;nite$ -tates" 5his (ap ref)ects structura) $ifferences #et!een the )a#our markets in the ;nite$ -tates an$ those in the euro area8 !hich ha'e )e$ to a hi(her )e'e) of structura) unemp)oyment in the euro area" Ceforms affectin( institutiona) features of )a#our markets !ere imp)emente$ in

euro area countries $urin( the 1990s8 #ut to $ifferin( $e(rees" 9n some cases8 these reforms si(nificant)y re$uce$ the )e'e) of unemp)oyment" >e'erthe)ess8 structura) ri(i$ities remain an$ these e1p)ain the sti)) hi(h )e'e)s of unemp)oyment in the euro area" 6esi$es a re)ati'e)y hi(h unemp)oyment rate8 remarka#)y the euro area has a re)ati'e)y )o! )a#our force participation rate Asee 5a#)e 2"2B" @hi)e the (ap #et!een the euro area an$ the ;)a#our force participation rate has narro!e$ consi$era#)y o'er time8 in 2009 the o'era)) rate in the euro area A01",FB !as sti)) )o!er than in the ;nite$ -tates A04"6FB" 9n terms of (en$er8 the 2009 fi(ures sho! that the (ap !as aroun$ 4 percenta(e points in the case of fema)e participation8 aroun$ t!ice the siEe of that for ma)es" 5he )o!er o'era)) )a#our force participation rate in the euro area re)ati'e to the ;nite$ -tates main)y ref)ects $ifferences in the youn(est an$ o)$est a(e (roups" 9n (enera)8 *uropeans
Re#"ti:e#* #!' #"8! % $!%,e +"%ti,i+"ti!n in the e %! "%e"

Ch"%t -=1 Une&+#!*&ent in the e %! "%e"9 the Unite. St"tes "n. C"+"n
Aas a percenta(e of the )a#our forceJ annua) $ataB euro area ;nite$ -tates 2apan 12 10 4 6 4 2 0 1900 12 10 4 6 4 2

1903

1906

1909

1942

194,

1944

1991

1994

1990

2000

2003

2006

2009

-ource: *uropean .ommission"

T"8#e -=- 5"8! % $!%,e +"%ti,i+"ti!n %"tes 8* )en.e% "n. ")e )%! + in the e %! "%e" "n. the Unite. St"tes in -009
Aas a percenta(e of the !orkin( a(e popu)ationB

Euro area "ales Fe#ales Total "ales

!n,ted %tates Fe#ales Total

:)) a(e (roups 1,=24 1B 2,=34 3,=44 4,=,4 ,,=,9 60=64

04", 46"9 91"2 94"0 91"0 04"4 34"2

64"6 40"4 04"4 09"6 0,"1 ,,", 22"4

01", 43"9 4,"1 40"2 43"3 64"4 30"1

40"4 ,4", 90"3 91"0 40"4 04"0 60"9

69"0 ,,"2 0,"0 0,"9 06"0 64", 49"9

04"6 ,6"9 42"0 43"0 41"6 03"1 ,,"1

-ources: *urostat an$ 6ureau of 3a#our -tatistics" 1B ;- $ata refer to the 16 to 24 a(e (roup"

in the youn(est a(e (roup participate si(nificant)y )ess in the )a#our force than their :merican counterparts" 5his cou)$ #e )inke$ to $ifferences in the tra$itions an$ structures of the e$ucation an$ socia) systems" Peop)e in the euro area a)so ten$ to )ea'e the )a#our force at a youn(er a(e than peop)e in the ;nite$ -tates" 6y contrast8 the $ifference #et!een the participation rates for those a(e$ 2, to 64 years is some!hat sma))er"
E %! "%e" e&+#!*&ent %"te is %e#"ti:e#* #!'

5he )o!er )a#our force participation rate in the euro area resu)ts in a )o!er emp)oyment rate Ameasure$ as the num#er of emp)oye$ persons as a share of the popu)ation a(e$ #et!een 1, an$ 64B than in either the ;nite$ -tates or 2apan" 9n 2apan+s case this is a)so on account of a )o!er unemp)oyment rate than in the euro area" 5he emp)oyment rate in the euro area in 2009 !as aroun$ 6,F8 )o!er than in the ;nite$ -tates an$ 2apan Asee 5a#)e 2"1B" 5he re)ati'e)y )o! emp)oyment rate in the euro area8 to(ether !ith a sma))er num#er of hours !orke$ per emp)oye$ person8 is one of the main reasons !hy G?P per capita is )o!er than in the ;nite$ -tates"

5he institutiona) aspects of )a#our markets8 such as &o# protection )e(is)ation8 unemp)oyment #enefit systems8 the !a(e formation process an$ the ta1ation of )a#our8 p)ay a si(nificant ro)e in $eterminin( economic $e'e)opments" For instance8 structura) ri(i$ities in )a#our markets re$uce the spee$ at !hich an economy a$&usts to a$'erse economic shocks" -tructura) ri(i$ities are therefore typica))y associate$ !ith re)ati'e)y hi(h an$ persistent unemp)oyment rates" Moreo'er8 ri(i$ities in the )a#our market ten$ to )imit the pace at !hich an economy can (ro! !ithout fue))in( inf)ationary pressures" -=3 4O>ERN1ENT SECTOR Fisca) po)icies ha'e a si(nificant impact on economic (ro!th an$ inf)ation throu(h a num#er of channe)s" %f particu)ar re)e'ance are the )e'e) an$ composition of (o'ernment e1pen$iture an$ re'enue8 as !e)) as #u$(et $eficits an$ (o'ernment $e#t" ;n#a)ance$ pu#)ic finances may resu)t in $eman$ an$ inf)ationary pressures8 forcin( the monetary authority to keep short=term interest rates at a hi(her )e'e) than !ou)$

St% ,t %"# %i)i.itie s ,"n h"&+e% the e$$i,ient $ n,ti!nin ) !$ the #"8! % &"%(et

Fis,"# +!#i,ies "$$e,t the e,!n!&*

other!ise #e necessary" For instance8 an e1cessi'e increase in (o'ernment spen$in( that stimu)ates a((re(ate $eman$ cou)$ create inf)ationary pressure if it occurs !hen the economy is a)rea$y operatin( at c)ose to fu)) capacity" Fisca) im#a)ances may a)so un$ermine confi$ence in a sta#i)ity= oriente$ monetary po)icy if there are e1pectations that e1cessi'e (o'ernment #orro!in( !i)) in the en$ #e accommo$ate$ #y the centra) #ank" Moreo'er8 hi(h )e'e)s of (o'ernment $e#t may en$an(er financia) sta#i)ity #y forcin( the centra) #ank to inter'ene in or$er to ensure the proper functionin( of markets an$ the monetary transmission mechanism" -uch )e'e)s of (o'ernment $e#t may a)so ha'e a$'erse effects on the rea) economic en'ironment" For instance8 e1cessi'e recourse to capita) markets #y (o'ernments ten$s to raise the cost of capita) an$ possi#)y re$uce pri'ate in'estment Aresu)tin( in !hat is kno!n as Gcro!$in( outHB" 5he 5reaty on the Functionin( of the *uropean ;nion contains se'era) pro'isions to a'oi$ such risks8 #ut it remains important for the *.6 to fo))o! fisca) po)icy $e'e)opments in the euro area countries c)ose)y"
S! n. $is,"# +!#i,ies nee.e. $!% &",%!e,!n !&i, "n. $in"n,i"# st"8i#it*

the *uropean ;nion aims to )imit the risks to price sta#i)ity that mi(ht other!ise arise from unsoun$ nationa) fisca) po)icies" 5hose proce$ures !ere further $e'e)ope$ an$ c)arifie$ in the -ta#i)ity an$ Gro!th Pact a$opte$ in 1990" 9t !as si(nificant)y !eakene$ #y the reform in 200, that intro$uce$ more f)e1i#i)ity an$ increase$ po)itica) $iscretion" 5he re'ise$ -ta#i)ity an$ Gro!th Pact a))o!s a Mem#er -tate to present its o!n country=specific me$ium=term o#&ecti'e8 !hich is then assesse$ #y the *; .ounci)" 9t a)so $efines an annua) structura) #u$(etary a$&ustment effort of 0",F of G?P to #e pursue$ #y a country as a #enchmark8 !hi)e takin( into account possi#)e #u$(etary costs as a resu)t of imp)ementin( structura) reforms" Gi'en the potentia) pro#)ems associate$ !ith fisca) im#a)ances8 the o#)i(ation to a'oi$ e1cessi'e $eficits an$ maintain a soun$ me$ium=term #u$(etary position is 'ita) to ensurin( that nationa) fisca) po)icies are con$uci'e to o'era)) macroeconomic an$ financia) sta#i)ity" 9n the $eca$es prece$in( *M;8 fisca) po)icies in many *uropean countries !ere characterise$ #y unsustaina#)e rates of (ro!th in spen$in(8 risin( ta1 #ur$ens an$ the stea$y #ui)$=up of (o'ernment $e#t" -ince then8 the interest rate on outstan$in( $e#t has fa))en consi$era#)y8 particu)ar)y in the countries that #enefite$ the most from the e)imination of e1chan(e rate risk an$ the transition to more sta#i)ity= oriente$ po)icies in *M;" 9n the first years of *M;8 the -ta#i)ity an$ Gro!th Pact !as #roa$)y successfu) in ensurin( the correction of e1cessi'e $eficits once they occurre$8 a)#eit !ith un$ue $e)ays an$ on the #ack of fa'oura#)e economic con$itions" <o!e'er8 the comp)iance #y Mem#er -tates !ith soun$

Fisca) $iscip)ine is a #asic component of a smooth functionin( monetary union" 9n an inte(rate$ sin()e currency area !ith inte(rate$ financia) markets8 fisca) $e'e)opments !i)) a)so ha'e an impact on other mem#er countries" :)thou(h in -ta(e 5hree of *M; #u$(etary po)icies remain the e1c)usi'e competence of Mem#er -tates8 a num#er of institutiona) arran(ements at the *; )e'e) ensure soun$ an$ sustaina#)e pu#)ic finances in a)) countries an$ therefore the euro area as a !ho)e Asee 6o1 2"1B" 9n particu)ar8 the e1cessi'e $eficit proce$ure pro'i$e$ for in the 5reaty on the Functionin( of

me$ium=term #u$(etary o#&ecti'es !as (enera))y $isappointin(" 9n the !ake of the financia) crisis8 *uropean institutions ha'e therefore un$ertaken preparatory !ork to reinforce the -GP an$ esta#)ish a frame!ork for the sur'ei))ance of macroeconomic im#a)ances"
The %e#"ti:e#* #"%)e sh"%e !$ )!:e%n&ent e;+en.it %e in e %! "%e" 4DP===

assumin( no chan(e in po)icy" 5he pro&ections a)so su((est that the rise in pu#)ic pension e1pen$iture in the euro area is )ike)y to acce)erate after 20208 #efore s)o!in( $o!n some!hat after 20,0" @ith re(ar$ to the structure of (o'ernment re'enue8 the euro area re)ies more hea'i)y on socia) contri#utions than either the ;nite$ -tates or 2apan" Moreo'er8 (reater use is ma$e of in$irect ta1ation as a source of re'enue in the euro area8 !hi)e the ;nite$ -tates re)ies more hea'i)y than the euro area on $irect ta1ation as a share of tota) ta1 re'enue"
4!:e%n& ent %e:en e

5he (enera) (o'ernment sector Ai"e" centra)8 state an$ )oca) (o'ernment8 as !e)) as the socia) security sectorB makes up a )ar(er share of the euro area economy than it $oes in the ;nite$ -tates or 2apan" Go'ernment e1pen$iture in the euro area accounte$ for ,0"4F of G?P in 2009" 9n the ;nite$ -tates8 (enera) (o'ernment e1pen$iture !as )o!er at aroun$ 30"9F of G?P" 2apan8 mean!hi)e8 recor$e$ a ratio of (o'ernment e1pen$iture to G?P of aroun$ 40"4F"

===%e$#e,ts the hi)h #e:e#s !$ $in"# )!:e%n&ent ,!ns &+ti! n "n. s!,i"# t%"ns$e%s t! h! seh!#. s

Go'ernment e1pen$iture e1cee$e$ (o'ernment re'enue in the euro area as a !ho)e throu(hout the perio$ 1900=2009" :ccor$in()y8 the (enera) (o'ernment #u$(et #a)ance recor$e$ a $eficit in each year" 5he a((re(ate 5he re)ati'e)y )ar(e share of $eficit for the euro area !i$ene$ to (o'ernment e1pen$iture in G?P in the c)ose to 6F of G?P in 19938 #ut then euro area ref)ects8 in particu)ar8 hi(h $iminishe$ (ra$ua))y to 1F of G?P )e'e)s of #oth fina) (o'ernment in 2000 Asee .hart 2"2B" 5hereafter8 consumption an$ socia) transfers to part)y as a resu)t of e1pen$iture househo)$s" 5he cross=economy s)ippa(es8 the (o'ernment $eficit 'ariation is part)y cause$ #y increase$ a(ain" 9n 2003 it accounte$ $ifferences in the $istri#ution of for 3F of G?P8 #ut #y the en$ of 2000 functions #et!een the pri'ate an$ it ha$ fa))en a(ain to #e)o! 1F pu#)ic sectors" Gi'en the o!in( main)y to fa'oura#)e economic characteristics of socia) security con$itions" For its part8 (enera) systems in *urope8 the a(e structure of (o'ernment (ross $e#t for the euro the euro area popu)ation a)so area as a !ho)e reache$ a peak of 04F contri#utes to the hi(h )e'e) of of G?P in 1996=908 ha'in( risen (o'ernment e1pen$iture" ;n)ess stea$i)y o'er the pre'ious t!o $eca$es" po)icy reforms are un$ertaken in the Fo))o!in( a #roa$ sta#i)isation for Mem#er -tates affecte$8 the situation some years8 the $e#t ratio $ec)ine$ !i)) #e e1acer#ate$ in the future #y the mo$erate)y to attain 66F of G?P #y e1pecte$ a(ein( of the popu)ation" the en$ of 2000" :t the same time8 :ccor$in( to the #ase)ine scenario of at the nationa) )e'e)8 (o'ernment the *uropean .ommission an$ the $eficit an$ $e#t ratios in many cases *conomic Po)icy .ommittee A2009B8 remaine$ too hi(h8 consi$erin( the the ratio of a(e=re)ate$ pu#)ic cha))en(es arisin( from a(ein( e1pen$iture to G?P in the euro area is popu)ations" pro&ecte$ to rise #y ,"2 percenta(e points $urin( the perio$ 2000=608

4ene%"# )!:e%n&en t 8 .)et 8"#"n,e "n. )%!ss .e8t

9n the !ake of the unprece$ente$ financia) an$ economic crisis of 2004=098 the euro area $eficit ratio !orsene$ $ramatica))y8 reachin( 6"3F of G?P in 2009" 5he euro area a)so e1perience$ a rapi$ an$ sharp increase in the (enera) (o'ernment (ross $e#t ratio 7 aroun$ 13 percenta(e points o'er t!o years 7 to stan$ at 09"1F in 2009" Fourteen of the euro area countries recor$e$ $eficits at or a#o'e the 3F of G?P reference 'a)ue in

2009 an$ ten countries ha$ a $e#t ratio a#o'e the 60F of G?P thresho)$ Asee 6o1 2"1B" 9n the ;nite$ -tates8 the $eficit ratio increase$ si(nificant)y to 11"3F of G?P in 20098 !hi)e the $eficit ratio in 2apan !as 4"0F in 2009" 5he (enera) (o'ernment (ross $e#t=to= G?P ratio in the ;nite$ -tates !as sti)) some!hat )o!er than in the euro area an$ stoo$ at 64"6F in 20098 !hereas the ratio in 2apan8 at 140"4F in 20098 !as much hi(her"

/!; -=1 EU instit ti!n"# "%%"n)e&ents $!% s! n. "n. s st"in"8#e + 8#i, $in"n,es
@hi)e the 5reaty on the Functionin( of the *uropean ;nion A5F*;B institutes a sin()e monetary po)icy8 it maintains nationa) responsi#i)ities for other economic Ae"(" fisca) an$ structura)B po)icies" <o!e'er8 :rtic)e 121 of the 5F*; stipu)ates that Mem#er -tates sha)) re(ar$ their economic po)icies as a matter of common concern" 5he 6roa$ *conomic Po)icy Gui$e)ines A6*PGsB are the cornerstone of this set=up" Fisca) $iscip)ine is a key pi))ar for the smooth functionin( of *conomic an$ Monetary ;nion A*M;B" 5herefore8 the 5reaty on the Functionin( of the *uropean ;nion contains a num#er of pro'isions that aim to ensure pru$ent fisca) po)icies an$ soun$8 sustaina#)e pu#)ic finances" First of a))8 the 5reaty on the Functionin( of the *uropean ;nion e1p)icit)y prohi#its the financin( of (o'ernment $eficits throu(h centra) #anks an$ the offerin( of any form of preferentia) con$itions to the pu#)ic sector #y financia) institutions" 9n a$$ition to increasin( the incenti'es to maintain fisca) $iscip)ine8 these pro'isions contri#ute to the cre$i#i)ity of the sin()e monetary po)icy in the pursuit of price sta#i)ity" More specifica))y8 :rtic)e 123 of the 5F*; for#i$s the *.6 an$ the >.6s to pro'i$e monetary financin( for pu#)ic $eficits usin( Go'er$raft faci)ities or any other type of cre$it faci)ity !ith the *.6 or !ith the centra) #anks of the Mem#er -tates AMBH" :rtic)e 124 of the 5F*; prohi#its any measure that may esta#)ish pri'i)e(e$ access to financia) institutions for (o'ernments an$ *; institutions or #o$ies" :n essentia) comp)ement to these !ays of promotin( sta#i)ity=oriente$ fisca) po)icies is the Gno #ai)=outH c)ause in the 5reaty on the Functionin( of the *uropean ;nion8 !hich makes c)ear that neither the *; nor any Mem#er -tate is a))o!e$ to take o'er the commitments of another Mem#er -tate" 5his c)ause ensures that the responsi#i)ity for repayin( (o'ernment $e#t remains nationa)" 9t thus encoura(es pru$ent fisca) po)icies at the nationa) )e'e)" More specifica))y8 :rtic)e 12,A1B of the 5F*; states that the *; an$ each Mem#er -tate Gsha)) not #e )ia#)e for or assume the commitments of centra) (o'ernments8 re(iona)8 )oca) or other pu#)ic authorities8 other #o$ies (o'erne$ #y pu#)ic )a!8 or pu#)ic un$ertakin(s of any other Mem#er -tate AMBH"

9n a$$ition8 the 5reaty on the Functionin( of the *uropean ;nion specifies an e1cessi'e $eficit proce$ure8 as $efine$ in :rtic)e 126 an$ a protoco) anne1e$ thereto" 5his proce$ure )ays $o!n the con$itions that must pre'ai) for a #u$(etary position to #e &u$(e$ soun$" :rtic)e 126A1B of the 5F*; $ecrees that GMem#er -tates sha)) a'oi$ e1cessi'e (o'ernment $eficits"H .omp)iance !ith this re/uirement is assesse$ on the #asis of a reference 'a)ue for the (o'ernment $eficit=to=G?P ratio of 3F an$ a reference 'a)ue for the (o'ernment $e#t=to=G?P ratio of 60F" ;n$er con$itions $efine$ in the 5reaty on the Functionin( of the *uropean ;nion an$ further specifie$ in the -ta#i)ity an$ Gro!th Pact8 $eficit or $e#t ratios a#o'e the reference 'a)ues may #e consi$ere$ not to imp)y the e1istence of an e1cessi'e $eficit" -hou)$ the *; .ounci) $eci$e that an e1cessi'e $eficit e1ists in a certain country8 the e1cessi'e $eficit proce$ure pro'i$es for further steps to #e taken8 u)timate)y inc)u$in( sanctions for persistent non=comp)iance" 5he fisca) frame!ork !as si(nificant)y enhance$ in 1990 !ith the a$option of the -ta#i)ity an$ Gro!th Pact8 !hich came into effect from the start of -ta(e 5hree of *M;" 9t consists of the Ceso)ution of the *uropean .ounci) on the -ta#i)ity an$ Gro!th Pact8 the .ounci) Ce(u)ation on the stren(thenin( of the sur'ei))ance of #u$(etary positions an$ the sur'ei))ance an$ coor$ination of economic po)icies an$ the .ounci) Ce(u)ation on spee$in( up an$ c)arifyin( the imp)ementation of the e1cessi'e $eficit proce$ure" 6y a(reein( to the -ta#i)ity an$ Gro!th Pact8 Mem#er -tates ha'e committe$ themse)'es to pursuin( the me$ium=term o#&ecti'e of #u$(etary positions that are Gc)ose to #a)ance or in surp)usH" 5he i$ea is that ha'in( such positions !ou)$ a))o! them to $ea) !ith the #u$(etary impact of norma) cyc)ica) f)uctuations !ithout #reachin( the 3F of G?P reference 'a)ue an$ ensure a rapi$ con'er(ence of $e#t ratios to pru$ent )e'e)s" 5he Gpre'enti'e armH of the -ta#i)ity an$ Gro!th Pact intro$uces a more concrete proce$ure of mu)ti)atera) sur'ei))ance8 !here#y euro area *; Mem#er -tates su#mit a sta#i)ity pro(ramme an$ non=euro area *; Mem#er -tates su#mit a con'er(ence pro(ramme" 5hese annua) pro(rammes present an o'er'ie! of the economic an$ fisca) $e'e)opments in each country8 a me$ium=term o#&ecti'e for fisca) po)icy an$ an a$&ustment path to!ar$s the me$ium=term o#&ecti'e" 9n a$$ition8 the -ta#i)ity an$ Gro!th Pact c)arifies an$ stream)ines the $ifferent steps an$ timeta#)e of the e1cessi'e $eficit proce$ure throu(h its Gcorrecti'e armH" 5he reform of the -ta#i)ity an$ Gro!th Pact in 200, intro$uce$ (reater f)e1i#i)ity into the proce$ures re)ate$ to the pre'enti'e an$ the correcti'e arms" @ith re(ar$ to the pre'enti'e arm8 the re'ise$ -ta#i)ity an$ Gro!th Pact intro$uce$ increase$ $iscretion concernin( the settin( of an$ pro(ress to!ar$s the me$ium=term o#&ecti'e" :s for the correcti'e arm8 the use of $iscretion in $eterminin( an e1cessi'e $eficit !as !i$ene$ an$ proce$ura) $ea$)ines !ere e1ten$e$" Many o#ser'ers8 inc)u$in( the *.68 e1presse$ concern at the time that these chan(es !ou)$ un$ermine the effecti'eness of the *; fisca) frame!ork an$ cou)$ en$an(er the sustaina#i)ity of the pu#)ic finances of euro area countries" Fo))o!in( the stron( $eterioration of #u$(etary positions in the perio$ to 20098 a further re'ie! of the -ta#i)ity an$ Gro!th Pact in the conte1t of a more (enera) stren(thenin( of economic (o'ernance in the *; an$ the euro area is un$er!ay"

Ch"%t -=- 4ene%"# )!:e%n&ent .e$i,it "n. .e8t in the E %! 1Aas a percenta(e of G?PB $e#t Ari(ht=han$ sca)eB $eficit A)eft=han$ sca)eB 0 6 , 4 3 2 1 0 1940 1942 1944 1946 1944 1990 1992 1994 1996 1994 2000 2002 2004 2006 2004 -ources: *uropean .ommission8 *.6 an$ *.6 ca)cu)ations" >ote: ?eficit $ata e1c)u$e the procee$s from sa)es of uni'ersa) mo#i)e te)ecommunications system A;M5-B )icences8 !hich !ere particu)ar)y si(nificant in 2000 Aaroun$ 1F of G?PB" 90 40 00 60 ,0 40 30 20 10 0

-=4 E2TERNA5 TRADE

E %! "%e" e,!n!&* %e#"ti:e#* !+en ,!&+"%e. 'ith the Unite. St"tes "n. C"+"n

-ince the euro area is a re)ati'e)y open economy8 particu)ar)y !hen compare$ !ith other ma&or a$'ance$ economies8 it can #e si(nificant)y affecte$ #y $e'e)opments in the ()o#a) economy" 9n 2009 the com#ine$ 'a)ue of e1ports an$ imports of (oo$s an$ ser'ices !as e/ui'a)ent to aroun$ 34F

of G?P8 in contrast to aroun$ 26F an$ 2,F for 2apan an$ the ;nite$ -tates respecti'e)y Asee 5a#)e 2"1B" :t the same time8 it is far )ess open than the economies of its constituent mem#er countries" 5his ten$s to )imit the impact of e1terna) economic $e'e)opments an$8 in particu)ar8 mo'ements in e1terna) prices on $omestic euro area prices"

T"8#e -=3 E;te%n"# t%".e in )!!.s !$ the e %! "%e" in -009

Ashare of tota) as a percenta(eB

Exports

I#ports

Total trade of which% Machinery an$ transport e/uipment .hemica)s Ca! materia)s *ner(y Foo$8 $rink an$ to#acco %ther manufacture$ artic)es %ther
-ources: *urostat an$ *.6 ca)cu)ations"

100 41"0 10", 2"3 4"2 0"2 24"4 3"1

100 31"4 10"4 4"0 20"1 6"0 24", 2"6

4!!.s ",,! nt $!% the #"%)est sh"%e !$ e;t%"< e %! "%e" t%".e

@ith re(ar$ to the composition of tra$e8 (oo$s account for aroun$ three=/uarters of #oth euro area imports an$ euro area e1ports" @ithin the (oo$s cate(ory8 machinery an$ transport e/uipment ma$e up more than 40F of e1ports in 2009" 5hey a)so constitute$ the )ar(est share of euro area (oo$s imports Asee 5a#)e 2"3B" 5he secon$ )ar(est component !as that of other manufacture$ artic)es8 !hich ha$ #roa$)y the same share in #oth imports an$ e1ports" 9n 2009 chemica)s accounte$ for 10",F of (oo$s e1ports #ut on)y 10"4F of imports8 !hereas the shares of ra! materia)s an$ ener(y !ere consi$era#)y )ar(er for imports than for e1ports" 5hese fi(ures sho! that8 in net terms8 the euro area ten$s to import ra!

materia)s an$ interme$iate (oo$s8 an$ to e1port processe$ (oo$s" 5his in turn ref)ects the internationa) $i'ision of )a#our an$ the a'ai)a#i)ity of ra! materia)s in the euro area" 5urnin( to the (eo(raphica) $istri#ution of euro area tra$e8 the ;nite$ Kin($om an$ the ;nite$ -tates are the t!o )ar(est tra$in( partners of the euro area" 6ase$ on a'era(e tra$in( f)o!s o'er the perio$ 1999=20098 the t!o countries to(ether accounte$ for a)most 24F of tota) euro area imports an$ e1ports Asee 5a#)e 2"4B" %'er the same perio$8 the euro area has a)so #een tra$in( increasin()y !ith other non=euro area *; Mem#er -tates8 representin( 11"1F of tota) euro area
4e!)%"+h i,"# .ist%i8 ti !n !$ e %! "%e" t%".e

T"8#e -=4 T%".e 'ei)hts 1B !$ the e %! "%e"0s -0 &"in t%".in) +"%tne%s

Apercenta(e pointsB

1 2 3 4 , 6 0 4 9 10 11 12 13 14 1, 16 10 14 19 20

;nite$ Kin($om ;nite$ -tates %ther *; Mem#er -tates 2B .hina -!itEer)an$ Cussia 2apan -!e$en 5urkey ?enmark >or!ay Korea 6raEi) 9n$ia 5ai!an .ana$a -au$i :ra#ia :)(eria -in(apore -outh :frica

14"96 12"41 11"11 6"2, ,"42 4",4 3"0, 3",4 2"2, 2"24 2"10 1"61 1"46 1"14 1"14 1"14 1"11 1"11 1"03 0"96

-ource: *.6 ca)cu)ations #ase$ on *urostat tra$e $ata" 1B 5ra$e !ei(hts are the sum of e1ports an$ imports e1presse$ as tota) of euro area e1ports an$ imports an$ are a'era(e fi(ures for the perio$ 1999=2009" 2B 5he other main tra$in( partners that are a)so *; Mem#er -tates are the .Eech Cepu#)ic8 .yprus8 *stonia8 3at'ia8 3ithuania8 <un(ary8 Ma)ta8 Po)an$8 -)o'enia an$ -)o'akia unti) 2006" 9n 2000 6u)(aria an$ Comania !ere a$$e$8 !hi)e -)o'enia !as remo'e$" 9n 2004 .yprus an$ Ma)ta !ere remo'e$"

tra$e8 fo))o!e$ #y .hina8 -!itEer)an$ an$ Cussia8 !ith tra$e !ei(hts of 6"3F8 ,"4F an$ 4"6F respecti'e)y"

Di%e,t "n. in.i%e ,t $in"n,i n)

or Gmarket=#ase$H financin( Athe route sho!n at the top of .hart 2"3B8 $e#tors #orro! fun$s $irect)y from )en$ers in financia) markets #y se))in( them financia) instruments8 a)so ca))e$ -=5 FINANCIA5 STRUCTURE securities Asuch as $e#t securities an$ sharesB8 !hich are c)aims on the 5he financia) system performs the #orro!er+s future income or assets" essentia) economic function of 9f financia) interme$iaries p)ay an channe))in( fun$s from those !ho are a$$itiona) ro)e in the channe))in( net sa'ers Ai"e" !ho spen$ )ess than of fun$s8 one refers to in$irect or their incomeB to those !ho are net G#ank=#ase$H financin( Asee the route spen$ers Ai"e" !ho spen$ more than at the #ottom of .hart 2"3B" Financia) their incomeB" 5he functions of interme$iaries can #e c)assifie$ into financia) systems are sho!n cre$it institutions8 other monetary schematica))y in .hart 2"3" 5he most financia) institutions AMF9sB an$ other important )en$ers are norma))y financia) interme$iaries" househo)$s8 #ut firms8 the (o'ernment an$ non=resi$ents a)so sometimes fin$ 9n the functionin( of the financia) themse)'es !ith e1cess fun$s an$ so system8 financia) markets an$ financia) )en$ them out" .on'erse)y8 the interme$iaries are not separate principa) #orro!ers are typica))y firms entities #ut are stron()y inter)inke$" an$ the (o'ernment8 #ut househo)$s For e1amp)e8 fun$s can f)o! in an$ non=resi$ents a)so sometimes #oth $irections #et!een $irect an$ #orro! to finance their purchases" in$irect financin( Asee the mi$$)e of .hart 2"3B" Fun$s f)o! from markets Fun$s f)o! from )en$ers to #orro!ers to #anks !hen financia) interme$iaries 'ia t!o routes" 9n the case of $irect

Ch"%t -=3 F n,ti!ns !$ $in"n,i"# s*ste&s

+I&ECT FI A CE

Funds

Funds

Funds

I +I&ECT FI A CE

T"8#e -=5 1"in $in"n,i"# "ssets "n. #i"8i#ities !$ n!n< $in"n,i"# se,t!%s in the e %! "%e" "t the en. !$ -009 1B
Aoutstan$in( amountsB

%ele.ted f,nan.,al assets

E!& $,ll,ons

Total Currency and deposits .urrency ?eposits !ith *uro area MF9s >on=MF9s &ecurities other than shares -hort=term 3on(=term &hares 2B Suote$ shares Mutua) fun$ shares o ! money market fun$ shares units (nsurance technical reserves >et e/uity of househo)$s in )ife insurance an$ pension fun$s reser'es Prepayments of insurance premiums an$ reser'es for outstan$in( c)aims

"#)**+., *)*-*.# 6,6"0 48202"0 08691"1 ,10"4 ")$/+.# 141"2 18944"1 .)",/.# 28329"1 18906"6 403"4 -)/"0.# ,8130"1 449"4

$##.# .".. 3"1 39"3 36"4 2"4 $#.. 0"9 9", "#., 11"1 9"1 2"3 "/.+ 24"6 2"3

-ources: *.6 an$ *urostat" 1B >on=financia) sectors comprise (enera) (o'ernment8 non=financia) corporations an$ househo)$s8 inc)u$in( non=profit institutions ser'in( househo)$s" 2B *1c)u$in( un/uote$ shares"

issue $e#t an$ e/uity securities to raise fun$s in or$er to finance their acti'ities" .on'erse)y8 fun$s f)o! from #anks to markets !hen8 for instance8 financia) interme$iaries purchase securities issue$ #y (o'ernments an$ firms either as o!n in'estments or as part of a money market fun$" :nother e1amp)e of the interre)ationship #et!een financia) markets an$ financia) interme$iaries )ies in the fact that non= financia) corporations that issue securities often $epen$ on #ri$(e financin( 7 temporary )oans to #ri$(e the perio$ #efore the fun$s o#taine$ throu(h securities issuance #ecome a'ai)a#)e 7 an$ take a$'ice from financia) interme$iaries" More recent)y8 inno'ations in cre$it markets8 such as securitisation an$ cre$it $eri'ati'es8 ha'e ha$ a si(nificant impact" 9n fact8 #y shiftin( the risk

of corporate an$

househo)$ )oans off their #a)ance sheets8 #anks ha'e pro(ressi'e)y assume$ a ne! ro)e8 mo'in( from their more tra$itiona) asset transformatio n ro)e to!ar$s one in !hich they increasin()y mana(e an$ tra$e cre$it risk 'ia the financia)

markets" 5he other main structura) $e'e)opment affectin( corporate finance in recent years has #een the (ro!th of institutiona) in'estors such as pension fun$s8 insurance companies8 pri'ate e/uity an$ he$(e fun$s" 5hese in'estors ha'e a)tere$ the channe)s of fun$s a'ai)a#)e to corporations an$ ha'e chan(e$ the set of incenti'es face$ #y corporations" 6efore $escri#in( in more $etai) the financia) markets !here $irect financin( takes p)ace an$ the financia) interme$iaries that are in'o)'e$ in in$irect financin(8 5a#)e 2", pro'i$es
1"in $in"n,i"# "ssets "n. #i"8i#ities !$ the n!n<$in"n,i"# se,t!%s

T"8#e -=5 A,!nt0.B

Aoutstan$in( amountsB

%ele.ted f,nan.,al l,a$,l,t,es

E!& $,ll,ons

Total 1oans aB 5aken from *uro area MF9s o ! short=term o ! )on(=term %ther financia) interme$iaries #B Grante$ to Genera) (o'ernment -hort=term 3on(=term >on=financia) corporations -hort=term 3on(=term <ouseho)$s 3B -hort=term 3on(=term &ecurities other than shares Genera) (o'ernment -hort=term 3on(=term >on=financia) corporations -hort=term 3on(=term 2uoted shares issue$ #y non=financia) corporations 3eposits )ia#i)ities of centra) (o'ernment 4ension fund reserves of non=financia) corporations
3B 9nc)u$in( non=profit institutions ser'in( househo)$s"

"/).,0 $-)./0 108664 18,00 98094 48099 183,0 14, 1816, 48313 2834, ,8924 ,840, 3,4 ,8440 /)++/ 6810, 18004 ,8160 421 304 ,10 38430 212 332

$##.# -*.40"4 ,"9 34"4 14"2 ,"1 0"0 4"4 31"4 9"0 22"4 22"0 1"4 20"6 "/.23"4 3"4 19", 3"1 1"2 2"0 13"0 0"4 1"3

ets

an o'er'ie! of the main financia) assets an$ )ia#i)ities of the non=financia) sectors in the euro area in terms of percenta(es of tota) amounts outstan$in( at the en$ of 2009" 5he outstan$in( financia) assets an$ )ia#i)ities constitute the GstocksH in the /uarter)y frame!ork of financia) accounts" 5he tota) financia) assets sho!n in 5a#)e 2", amounte$ to P 208490 #i))ion

T!t"#

$in" n,i" # "ss

Aaroun$ 233F of annua) G?P in the euro areaB at the en$ of 2009" .urrency an$ $eposits accounte $ for aroun$ 42F of tota) assets at the en$ of 20098 !hi)e securitie s an$ shares accounte $ to(ether for aroun$ 31F" 9nsuranc e technica) reser'es8 i"e" the pro'isio ns of pension fun$s8 insuranc e an$ non= financia) corporati ons to co'er the c)aims of po)icy ho)$ers8 accounte $ for the remainin

( 20F"

/!; -=- Fin"n,i"# &"%(ets 3 (e* te%&s

Financia) markets can #e c)assifie$ accor$in( to se'era) criteria8 i))ustratin( $ifferent essentia) features of these markets" %ne possi#)e c)assification is !hether the financia) transaction re)ates to the first purchase of a securities issue AGprimaryH marketB or is a tra$e #et!een ho)$ers of securities AGsecon$aryH marketB" 9n turn8 the secon$ary market can #e or(anise$ in t!o !ays" %ne is to or(anise e1chan(es8 !here #uyers an$ se))ers of securities meet in one centra) )ocation to con$uct tra$es AGe1chan(e=tra$e$H marketsB" 5he other is to ha'e an Go'er=the=counterH A%5.B market8 in !hich $ea)ers transact securities !ith counterparties on a #i)atera) #asis" Markets can a)so #e c)assifie$ accor$in( to the ori(ina) maturity of the financia) contract tra$e$ on them" Genera))y a $istinction is ma$e #et!een ori(ina) maturities of )ess than one year an$ those of one year or more AGmoneyH or Gcapita)H marketsB" 5he money market $iffers some!hat from other financia) markets in that it is typica))y a !ho)esa)e inter#ank market !here transaction siEes are )ar(e" Moreo'er8 the *urosystem8 throu(h its monetary po)icy operations8 can $irect)y inf)uence con$itions in the money market Asee .hapter 4B" :s the *.6 is the monopo)y supp)ier of centra) #ank money8 it can set the refinancin( con$itions for cre$it institutions in the euro area" 5his8 in turn8 inf)uences the con$itions at !hich cre$it institutions an$ other money market participants transact in the euro area money market" Furthermore8 for money an$ capita) market instruments8 a $istinction is ma$e #et!een Gco))atera)ise$H an$ Gunco))atera)ise$G instruments" For e1amp)e8 in the money market8 the euro inter#ank offere$ rate A*;C96%CB refers to unco))atera)ise$ )en$in(8 !hereas co))atera)ise$ )en$in( often takes the form of Grepurchase a(reementsH8 in !hich the #orro!er p)e$(es co))atera)" 9f the co))atera) 'a)ue is re/uire$ to e1cee$ the amount of fun$s #orro!e$8 it is referre$ to as a GhaircutH" 9n the capita) markets8 co))atera)ise$ securities e1ist8 for e1amp)e8 in the form of Gco'ere$ #on$sH8 !here the promise of the issuer to re$eem the #on$ at maturity is #acke$ #y specific co))atera)" 5he Gco'er poo)H8 !hich typica))y inc)u$es mort(a(es8 offers a$$itiona) protection a(ainst $efau)t" : fina)8 common)y use$ c)assification refers to the form of the financia) instrument tra$e$ in a market" %ne important $istinction is #et!een Ge/uityH an$ G$e#tH markets" 5he main $ifference #et!een e/uity an$ $e#t is that e/uity $oes not ha'e to #e repai$ #y the issuer8 !hereas $e#t is a financia) c)aim !hich has to #e repai$ Ain specifie$ amounts8 at a specifie$ interest rate an$ on a specifie$ $ateB" G?eri'ati'esH constitute another important cate(ory of financia) instruments" 5hese are financia) contracts the 'a)ue of !hich $eri'es from un$er)yin( securities prices8 interest rates8 forei(n e1chan(e rates8 market in$ices or commo$ity prices" 5he #asic c)asses of $eri'ati'es are futures8 options8 s!aps an$ for!ar$ rate a(reements" For e1amp)e8 the ho)$er of a ca)) AputB option has the ri(ht8 #ut not the o#)i(ation8 to #uy Ase))B a financia) instrument Ae"(" a #on$ or shareB at a (i'en price at a specifie$ time in the future" Many other $eri'ati'es contracts ha'e #een $e'e)ope$ #y com#inin( the #asic cate(ories" ?eri'ati'es can assist the functionin( of the financia) markets #ecause they can #e use$ to impro'e the pricin( an$ a))ocation of financia) risks" <o!e'er8 mis'a)uation an$ su#se/uent chan(es in the price of financia) $eri'ati'es can in$uce $isrupti'e mo'ements in other asset prices"

T!t"# $in"n,i "# #i"8i#iti es

5he main )ia#i)ities sho!n in 5a#)e 2", amounte$ to P268440 #i))ion A29,F of G?PB at the en$ of 2009" 3oans accounte$ for ,9F of tota) )ia#i)ities8 !hereas securities8 inc)u$in( /uote$ shares8 comprise$ aroun$ 40F of the financin( sources of the non=financia) sectors" Most of the fun$in( Aa)most 41F of the )ia#i)itiesB !as at maturities e1cee$in( one year" -=6 FINANCIA5 1AR7ETS 5his section intro$uces the main features of the money8 $e#t an$ e/uity markets in the euro area" 6o1 2"2 pro'i$es an o'er'ie! of some key terms re)atin( to financia) markets" The &!ne* &"%(et 5he money market p)ays a crucia) part in the transmission of monetary po)icy $ecisions8 since chan(es in monetary po)icy instruments affect the money market first Asee .hapter 4B" : $eep an$ inte(rate$ money market is a precon$ition for an efficient monetary po)icy8 since it ensures an e'en $istri#ution of centra) #ank )i/ui$ity an$ a homo(eneous )e'e) of short=term interest rates across the sin()e currency area" 9n the euro area8 this precon$ition !as met ri(ht from the start of -ta(e 5hree of *M;8 !hen the nationa) money markets !ere successfu))y inte(rate$ into an efficient euro area money market" 5he financia) market turmoi) in :u(ust 2004 an$ the su#se/uent crisis se'ere)y cha))en(e$ the functionin( of the money market8 as they affecte$ inter#ank re)ationships $irect)y throu(h an increase in )i/ui$ity risk an$ counterparty cre$it risk" 5he *.6 a$opte$ non=stan$ar$ measures in or$er to he)p #anks e1ten$ cre$it to the rea) economy8 there#y promotin( an efficient monetary po)icy transmission mechanism Asee 6o1 ,"1B"

5he rapi$ creation of the euro area money market !as a)so supporte$ #y $e'e)opments in the payment systems infrastructure8 a#o'e a)) the esta#)ishment of the 5:CG*5 A5rans= *uropean :utomate$ Cea)=time Gross sett)ement *1press 5ransferB system8 !hich a))o!s the smooth functionin( of the sett)ement of cross=#or$er payments" 5he 5:CG*5 system interconnects the euro rea)=time (ross sett)ement systems operate$ #y the >.6s in the *; an$ the *.6+s payment mechanism" 5he Go'ernin( .ounci) of the *.6 isresponsi#)e forthe mana(ement an$ contro) of 5:CG*5" 5here are 'arious GcashH se(ments in the euro area money market" %ne important se(ment is the unsecure$ market" 5he unsecure$ market is main)y $e'ote$ to the mana(ement of the )i/ui$ity nee$s of #anks an$8 hence8 the unsecure$ transactions are stron()y concentrate$ on short maturities" 5here are t!o important reference rates for the unsecure$ money market8 the *%>9: Aeuro o'erni(ht in$e1 a'era(eB an$ the *;C96%C Aeuro inter#ank offere$ rateB8 !hich to(ether pro'i$e uniform price references for maturities from o'erni(ht to one year" 5he other main cash se(ments of the money market are the GrepoH market an$ the market for s!aps a(ainst forei(n currencies" 5hese markets are kno!n as secure$ markets8 since )en$in( is $one a(ainst assets actin( as co))atera)" %'er recent years8 the repo market has $e'e)ope$ to #ecome the most important se(ment of the euro area money market" Cepo transactions an$ s!aps a(ainst forei(n currencies are main)y concentrate$ on maturities of up to one month" 9n a$$ition to the cash se(ments mentione$ a#o'e8 the euro area money

R!#e !$ the +"*&ent s*ste&s

Unse, %e. +"%ts !$ the &!ne* &"%(et

Inte)%"ti !n !$ the &!ne* &"%(et

Se, %e. +"%ts !$ the &!ne* &"%(et

De%i:"ti

:es &"%( ets

market a)so inc)u$es $eri'ati'es se(ments" 9nterest rate s!aps an$ for!ar$ rate a(reements8 as !e)) as futures an$ options8 are the most important $eri'ati'es" 5he most acti'e instruments in these market se(ments are the *%>9: s!aps an$ *;C96%C futures"
1"? !% .e:e#!+&e nts in the e %! &!ne* &"%(et nti# &i.< -010

From its inception unti) 20008 the euro money market $isp)aye$ su#stantia) Aa'era(eB annua) (ro!th rates" <o!e'er8 this chan(e$ some!hat !ith the start of the financia) turmoi) in 2000" :ccor$in( to $ata from the *.6+s *uro Money Market -ur'ey8 a((re(ate turno'er in the euro money market $ecrease$ for a thir$ consecuti'e year in the secon$ /uarter of 2010" 5his continue$ $ec)ine can #e e1p)aine$ main)y #y the on(oin( a$'erse impact of the financia) crisis on inter#ank acti'ities an$ #y the surp)us )i/ui$ity en'ironment that pre'ai)e$ in the euro inter#ank market as a resu)t of the hi(h a))otment 'o)umes at the *.6 refinancin( operations !ith fu)) a))otment" 5he most nota#)e $ecreases in acti'ity took p)ace in the *%>9: s!aps an$ the unsecure$ market se(ments" 5he contraction in unsecure$ turno'er cou)$ part)y #e e1p)aine$ #y the continue$ shift to secure$ fun$in( resu)tin( from the on(oin( tren$ to!ar$s a'oi$in( counterparty cre$it risk an$ #y the $ec)ine in $eman$ for )i/ui$ity resu)tin( from the surp)us )i/ui$ity en'ironment that pre'ai)e$ in the secon$ /uarter of 2010" 5here are a)so in$ications that an increasin( share of #anks+ term fun$in( took p)ace throu(h the issuance of short=term securities rather than throu(h the co))ection of inter#ank $eposits" 5he secure$ market remaine$ the )ar(est se(ment of the euro money market an$ continue$ to (ro! in the secon$ /uarter of 2010" 5he increase in turno'er !as $ri'en #y maturities

of up to one month8 !hich continue$ to account for the )ar(est part of the secure$ market" 5he increase is )ar(e)y e1p)aine$ #y the continue$ tren$ for a re$uction of counterparty cre$it risk" 9n the $eri'ati'es market se(ments8 o'er the past four years there has #een a nota#)e $ec)ine in the *%>9: s!aps se(ment8 !hich use$ to #e the most )i/ui$ $eri'ati'es se(ment" 5his has main)y #een $ri'en #y the nee$ of #anks to shorten their #a)ance sheets in the )i(ht of the financia) turmoi) an$ #y the re)ati'e sta#i)ity of short=term interest rate e1pectations" %n the other han$8 there has #een an increase in the importance of the for!ar$ rate a(reements an$ forei(n e1chan(e s!aps se(ments" :)thou(h the financia) turmoi) has #een a cha))en(e for market inte(ration8 *.6 $ata sho! that the euro money market se(ments (enera))y remain hi(h)y inte(rate$" De8t se, %ities &"%(ets 5he money market a)so inc)u$es the market for short=term securities Ae"(" commercia) paper8 certificates of $eposit8 etcB" 5he tota) amount outstan$in( of short=term $e#t securities issue$ #y euro area resi$ents increase$ stea$i)y throu(hout the past $eca$e8 peakin( in the sprin( of 2009" ?isrupte$ #y the recent financia) turmoi)8 the short=term $e#t securities market has contracte$ some!hat since then8 amountin( to P1862, #i))ion at the en$ of 20098 i"e" 14"1F of euro area G?P Asee 5a#)e 2"6B" 5his is sti)) t!ice as much as at the #e(innin( of the $eca$e an$ i))ustrates the su#stantia) $e'e)opment of this market se(ment8 !hich8 $espite some impro'ement8 remains one of the most fra(mente$ amon( euro area financia) markets" ?urin( the past $eca$e8 monetary financia) institutions ten$e$ to #e8 #y far8 the most important issuer8 representin( more than ha)f of tota)

5!'e% %e#"ti:e i&+!%t"n, e !$ sh!%t< te%& .e8t se, %itiesD

T"8#e -=6 A&! nts ! tst"n.in) !$ e %!<.en!&in"te. sh!%t<te%& .e8t se, %ities iss e. 8* e %! "%e" %esi.ents
Aen$ of yearJ *;C #i))ionsJ Apercenta(e of G?PBB

1001

2000

2001

2002

2003

2000

Monetary financia) institutions >on=monetary financia) institutions >on=financia) corporations Pu#)ic sector 5ota)
-ource: *.6"

111 A2"0B 4 A0"1B 4, A0"4B 322 A,"4B 442 A4"0B

31, A4"0B 6 A0"1B 90 A1"3B 2,4 A3"4B 66, A9"4B

442 A,"9B 19 A0"2B 09 A1"0B 360 A4",B 940 A11"6B

044 A4"0B 30 A0"4B 100 A1"1B 363 4"0 18240 14"3

422 A4"9B 66 A0"0B 116 A1"2B ,91 A6"4B 18,9, A10"2B

033 A4"2B 0, A0"4B 01 A0"4B 046 A4"3B 1862, A14"1B

issuance" 9n the aftermath of the financia) crisis8 an$ as short=term pu#)ic financin( nee$s #ecame more acute8 the (o'ernment sector+s share of issuance rose a(ain8 reachin( near)y ha)f of the tota) issuance #y the en$ of 2009"
D 'hen ,!&+"%e. 'ith #!n)< te%& .e8t se, %ities

*uro=$enominate$ )on(=term $e#t securities represente$ a#out 90F of o'era)) $e#t securities issue$ #y euro area resi$ents $urin( the past $eca$e" ;n)ike for short=term maturities8 the amount outstan$in( of these $e#t instruments continue$ to increase throu(hout the recent financia) turmoi)8

amountin( to P138600 #i))ion at the en$ of 20098 i"e" 1,2",F of G?P 7 compare$ !ith 90"6F ten years ear)ier Asee 5a#)e 2"0B" 5he pu#)ic sector Ai"e" centra) (o'ernment an$ other (enera) (o'ernmentB is the most important )on(=term $e#t issuer in terms of 'o)ume8 a)thou(h the share of the MF9 sector increase$ rapi$)y $urin( the secon$ ha)f of the pre'ious $eca$e" More recent)y8 a(ainst the #ack(roun$ of the financia) turmoi)8 the re)ati'e importance of )on(=term $e#t securities issue$ #y MF9s $ecrease$ some!hat" 6y contrast8 that of non=monetary financia) institutions (re! noticea#)y8

T"8#e -=7 A&! nts ! tst"n.in) !$ e %!<.en!&in"te. #!n)<te%& .e8t se, %ities iss e. 8* e %! "%e" %esi.ents
Aen$ of yearJ *;C #i))ionsJ Apercenta(e of G?PBB

1001

2000

2001

2002

2003

2000

Monetary financia) institutions >on=monetary financia) institutions >on=financia) corporations Pu#)ic sector 5ota)

18012 A14"2B 06 A1"4B 103 A3"1B 18162 A20"9B 28424 A43"6B

28462 38629 48261 484,0 48646 A36"3B A44"6B A40"3B A44"1B A,1"4B 300 934 18460 28104 381,1 A,",B A11",B A16"3B A22"0B A3,"1B 341 ,04 ,,6 ,93 043 A,"0B A6"2B A6"2B A6"4B A4"3B 38402 48266 48490 48640 ,8130 A,0"2B A,2"4B A49"9B A,0"6B A,0"3B 68,0, 98330 108042 118434 138600 A90"0B A114"6B A119"0B A120"4B A1,2",B

-ource: *.6"

ref)ectin( the use of securitisation #y #ank=sponsore$ specia)=purpose 'ehic)es" .omparati'e)y8 the issuance of $e#t securities #y non=financia) corporations in the euro area $i$ not increase much $urin( most of the past $eca$e8 risin( from 6"2F of G?P #efore the financia) turmoi) to 4"3F #y the en$ of 2009" @hi)e this cou)$ #e main)y e1p)aine$ #y su#stantia) impro'ements in firms+ fun$in( con$itions in the capita) market8 it cou)$ a)so part)y ref)ect the $eterioration of the a'ai)a#i)ity of #ank financin( throu(h a ti(htenin( of terms an$ con$itions on #ank )oans $urin( the financia) turmoi)"
De8t se, %ities0 $in"n,in) in the e %! "%e" is #!' ,!&+"%e. 'ith the Unite. St"tes

compare$ !ith 19",F an$ 1,"3F of G?P in the ;nite$ -tates an$ 2apan respecti'e)y" ?espite the si(nificant on(oin( (ro!th of the euro area $e#t securities market8 some market se(ments8 such as those for $e#t !ith a )o! cre$it ratin( or unrate$ $e#t8 remain re)ati'e)y un$er$e'e)ope$" .ompare$ !ith the ;nite$ -tates8 fe!er euro area non=financia) corporations ha'e cre$it ratin(s8 !hich restricts their access to the corporate #on$ market" EE it* &"%(et 5urnin( to the e/uity market8 a common)y use$ in$icator of its importance is the market capita)isation of stocks tra$e$ in terms of G?P" *uro area stock market capita)isation increase$ from 21F of G?P at the en$ of 1990 to ,6F of G?P at the en$ of 20098 peakin( t!ice at aroun$ 4,F in the )ast t!o $eca$es Aat the en$ of 2000 an$ 2000B8 #ut $roppin( sharp)y to a historica) )o! of 34F at the en$ of 2004 Asee 5a#)e 2"9B" <i(h 'o)ati)ity an$ sharp $ec)ines in stock prices aroun$ the !or)$8 in the !ake of a num#er of e'ents that ha'e reshape$ the entire financia) )an$scape an$ $eterioratin( ()o#a) macroeconomic con$itions8 ha'e stron()y $epresse$ e/uity prices an$ )e$ to the fa)) in stock market capita)isation" 6y contrast8 2009 !as characterise$ #y an impressi'e re#oun$ in e/uity prices ()o#a))y" 5his !as spurre$ #y returnin(
S!&e se)&ents in e %! "%e" .e8t se, %ities &"%(et #itt#e .e:e#!+e.

5he issuance of $e#t securities remains )o!er in the euro area than in the ;nite$ -tates an$ 2apan" 5he amounts outstan$in( at the en$ of 2009 !ere 1,,F of G?P in the euro area8 compare$ !ith 106F an$ 22,F of G?P in the ;nite$ -tates an$ 2apan respecti'e)y Asee 5a#)e 2"4B" 5he hi(h fi(ure in 2apan can #e e1p)aine$ #y the siEe of the (o'ernment #on$ market8 !hich is more than t!ice that of the ;nite$ -tates or the euro area" 5he use of $e#t financin( in the form of securities issuance #y euro area non=financia) corporations represents a si(nificant)y sma))er percenta(e of G?P than in #oth the ;nite$ -tates an$ 2apan" :t the en$ of 20098 the amount outstan$in( of $e#t securities issue$ #y the non=financia) corporate sector in the euro area !as aroun$ 4F of G?P8

E %! "%e" st!,( &"%(et ,"+it"#is" ti!n )%!'in)D

T"8#e -=8 A&! nts ! tst"n.in) $!% .e8t se, %ities .en!&in"te. in n"ti!n"# , %%en,* iss e. 8* %esi.ents in the e %! "%e"9 the Unite. St"tes "n. C"+"n "t the en. !$ -009
Aas a percenta(e of G?PB

Total

Issued $4 f,nan.,al .orporat,ons

Issued $4 non5f,nan.,al .orporat,ons

Issued $4 6eneral 6overn#ent

*uro area ;nite$ -tates

1,4"6 10,"4

41"4 49"4

0"4 19",

64"9 66",

2apan
-ources: *.6 an$ 69-"

224"4

21"1

1,"3

144"2

T"8#e -=9 St!,( &"%(et ,"+it"#is"ti!n in the e %! "%e"9 the Unite. St"tes "n. C"+"n
Aen$ of yearJ as a percenta(e of G?PB

1000

1001

1003

2000

2002

2007

2002

2003

2000

*uro area ;nite$ -tates 2apan

21 ,4 90

20 93 60

63 144 63

46 1,3 64

,0 104 ,3

40 146 106

44 142 99

34 41 64

,, 106 6,

-ource: @or)$ Fe$eration of *1chan(es"

confi$ence an$ $ecreasin( risk a'ersion amon( in'estors8 for !hich the )ar(e= sca)e support measures of (o'ernments an$ centra) #anks !ere an important $ri'in( force" .ompare$ !ith )e'e)s at the en$ of 20048 ma&or stock market in$ices in the euro area8 the ;nite$ -tates an$ 2apan increase$ #y aroun$ 108 24 an$ 1 percenta(e pointAsB8 amountin( to ,,F8 106F an$ 6,F of G?P respecti'e)y"
D8 t #!'e% th"n in the Unite. St"tes

)iste$ companies" 9n the euro area8 this num#er (re! from 48206 at the en$ of 1990 to 6844, #y the en$ of 2009 Asee 5a#)e 2"10B" 6y means of comparison8 the num#er of )iste$ companies in the ;nite$ -tates an$ 2apan at the en$ of 2009 !as ,8109 an$ 2833, respecti'e)y" -ince the intro$uction of the euro8 there ha'e #een many initiati'es to form a))iances or mer(e the acti'ities of stock e1chan(es of in$i'i$ua) euro area countries" -tock market participants a)so increasin()y seem to #e takin( into account the economic factors common to the euro area as a !ho)e" 5he 'ery )ar(e osci))ations in e/uity prices in recent times $o not seem to ha'e ha$ an apprecia#)e impact on the $e(ree of cross=#or$er inte(ration of *uropean e/uity markets" 6et!een 2001 an$ 20008 euro area in'estors increase$ their ho)$in(s of e/uity issue$ in other euro area countries from 22F to 33F of their tota) portfo)io of euro area e/uity assets" Moreo'er8 in 2004 this share further increase$ 'ery su#stantia))y
In,%e"sin) inte)%"ti!n !$ e %! "%e" st!,( &"%(ets

5ota) stock market capita)isation in the euro area remaine$ si(nificant)y )o!er than in the ;nite$ -tates8 an$ the (ap #et!een stock market capita)isation in terms of G?P in the ;nite$ -tates an$ that in the euro area e'en !i$ene$8 from aroun$ 30 percenta(e points in 1990 to aroun$ ,0 percenta(e points in 2009" 6y contrast8 in 2apan stock market capita)isation $ec)ine$ from 90F of G?P in 1990 to 6,F of G?P in 20098 peakin( at 106F of G?P in 2006" :nother in$ication of the (ro!in( importance of the e/uity market is pro'i$e$ #y statistics on the num#er of

4%!'in) n &8e% !$ ,!&+"nies #iste. !n e %! "%e" st!,( &"%(ets

T"8#e -=10 N &8e% !$ .!&esti, "n. $!%ei)n ,!&+"nies #iste. !n st!,( &"%(ets in the e %! "%e"9 the Unite. St"tes "n. C"+"n
Aen$ of yearB

1000

1001

1003

2000

2002

2007

2002

2003

2000

*uro area 48206 ,8106 48,46 ,8,16 686,1 68392 68601 68646 6844, ;nite$ -tates 6806, 48160 48461 084,1 68,46 6800, ,896, ,8402 ,8109 2apan 180,2 18091 18490 28096 281,3 28416 28414 28390 2833,
-ource: @or)$ Fe$eration of *1chan(es"

to 34F" >ot!ithstan$in(8 since 20018 the share of euro area e/uity assets he)$ outsi$e the euro area has remaine$ at a much )o!er )e'e) an$ increase$ on)y mar(ina))y" 5he rea))ocation out of $omestic e/uity an$ into e/uity issue$ e)se!here in the euro area !as a)so $ue to the contri#ution of institutiona) in'estors" 5he percenta(e of in'estment fun$s+ tota) ho)$in(s of a)) shares an$ other e/uity Ae1c)u$in( in'estment fun$ shares unitsB issue$ #y resi$ents of the euro area outsi$e the Mem#er -tate in !hich the in'estment fun$ is )ocate$ actua))y increase$ from 10F in 1994 to aroun$ 2,F #y the en$ of 2009" 5he recent financia) turmoi) has on)y s)i(ht)y affecte$ the a))ocation of euro area in'estment" -=7 Fin"n,i"# inte%&e.i"%ies ,%e.it instit ti!ns "n. !the% &!net"%* $in"n,i"# instit ti!ns 5here are t!o #roa$ cate(ories of financia) interme$iaries: monetary financia) institutions AMF9sB an$ other financia) interme$iaries A%F9sB" MF9s comprise the *urosystem Athe *.6 an$ the >.6s of those countries that ha'e a$opte$ the euroB8 cre$it institutions an$ non=cre$it institutions Amain)y money market fun$sB !hose #usiness is to recei'e $eposits from entities other than MF9s an$ to (rant cre$it an$ or in'est

in securities" 5he 'ast ma&ority of euro area MF9s are cre$it institutions Ai"e" commercia) #anks8 sa'in(s #anks8 cooperati'e #anks8 post #anks8 specia)ise$ cre$it institutions8 etcB" 5hey are c)ear)y $efine$ in t!o #ankin( coor$ination $irecti'es 0 an$ are su#&ect to common *;=!i$e super'isory stan$ar$s" .re$it institutions are the counterparties for centra) #ank monetary po)icy operations Asee .hapter 4B" -ince they (rant cre$it to househo)$s an$ firms8 nota#)y on the #asis of cre$it recei'e$ from the centra) #ank8 they are crucia) to the transmission of monetary po)icy $ecisions to the economy Asee .hapter 3B" :t the en$ of 20108 there !ere 68334 cre$it institutions resi$ent in the euro area8 representin( 40F of a)) euro area MF9s Asee 5a#)e 2"11B" @ith 18404 institutions8 money market fun$s accounte$ for most of the remainin( 20F" ?espite the en)ar(ement of the euro area !ith the accession of Greece A2001B8 -)o'enia A2000B8 .yprus an$ Ma)ta A2004B8 -)o'akia A2009B an$ *stonia A2011B8 the num#er of MF9s in the euro area has $ecrease$ #y near)y 20F since the intro$uction of the euro" 5his ref)ects an on(oin( conso)i$ation process in the *uropean #ankin( in$ustry" 5he tren$ to!ar$s conso)i$ation in the cre$it institution sector is a response to chan(in( market con$itions

n &8e% !$ &Fis .e,#ine. !'in) t! $in"n,i"# ,!ns!#i."ti !n

.e$initi!n !$ ,%e.it instit ti !ns "n. &Fis

5he term Gcre$it institutionH is use$ to refer to any institution fa))in( un$er the $efinition containe$ in 6ankin( .oor$ination ?irecti'es 00 040 **. of 12 ?ecem#er 1900 an$ 49 646 **. of 30 ?ecem#er 19498 i"e" Gan un$ertakin( !hose #usiness is to recei'e $eposits or other repaya#)e fun$s from the pu#)ic an$ to (rant cre$it for its o!n accountH"

t"8#e -=11 n &8e% !$ e %! "%e" &!net"%* $in"n,i"# instit ti!ns

Aen$ of yearB

2000

2008

2003

2010

.re$it institutions Money market fun$s

08,21 186,1

68406 18600

68,00 18021

68334 18404

.entra) #anks an$ other institutions :)) MF9s

-ource: *.6"

21 98193

19 4809,

19 48310

20 08424

$ri'en #y a num#er of factors8 such as techno)o(ica) $e'e)opments8 $ere(u)ation8 )i#era)isation an$ ()o#a)isation" 5he intro$uction of the euro has pro#a#)y #een fue))in( these $e'e)opments #y creatin( more transparency across nationa) #or$ers" Germany an$ France accounte$ for 41"1F of a)) euro area MF9s8 a share #roa$)y unchan(e$ from that recor$e$ !hen the euro !as intro$uce$"

inte(ration of financia) systems an$ the importance of the inter#ank market" 5he conso)i$ate$ #a)ance sheet of the MF9 sector is o#taine$ #y nettin( positions #et!een MF9s in the euro area on the a((re(ate$ #a)ance sheet" 5he conso)i$ate$ #a)ance sheet pro'i$es the #asis for the re(u)ar ana)ysis of monetary an$ cre$it $e'e)opments in the euro area8 inc)u$in( monetary a((re(ates Asee 6o1 2"3B" .hart 2"4 sho!s the composition of the conso)i$ate$ #a)ance sheet of euro area MF9s inc)u$in( the *urosystem at the en$ of 2010" ?eposits accounte$ for 42F of tota) )ia#i)ities8 !hi)e other important )ia#i)ity items !ere e1terna) )ia#i)ities an$ $e#t securities8 !hich accounte$ for 10F an$ 11F respecti'e)y of tota) MF9 )ia#i)ities" 3oans represente$ the )ar(est share of tota) assets A44F at the en$ of 2010B" *1terna) assets ma$e up 19F of tota) MF9 assets8 !hereas )en$in( in the form of $e#t securities8 shares an$ other e/uity accounte$ for 14F"
De+!sits "n. #!"ns "%e the &!st i&+!%t"nt 1FI 8"#"n,e sheet ite&s

A))%e)"te. "n. ,!ns!#i."te . 8"#"n,e sheet !$ 1FIs

5he *.6 an$ the >.6s co))ect month)y an$ /uarter)y statistics from the MF9s in the euro area an$ compute #oth an a((re(ate$ an$ a conso)i$ate$ MF9 #a)ance sheet at the euro area )e'e)" 5he a((re(ate$ #a)ance sheet of the MF9 sector is the sum of the harmonise$ #a)ance sheets of a)) the MF9s resi$ent in the euro area" 5he a((re(ate$ #a)ance sheet presents information on inter=MF9 positions on a (ross #asis" 9t inc)u$es cross= #or$er inter=MF9 acti'ities #oth !ithin the euro area an$ 'is=T='is the rest of the !or)$" 5his information is usefu) for assessin( the

Ch"%t -=4 C!&+!siti!n !$ the ,!ns!#i."te. 8"#"n,e sheet !$ e %! "%e" 1FIs Ain,# .in) the E %!s*ste&B "t the en. !$ -010
Apercenta(e of the #a)ance sheet tota)B

Total assets
Cemainin( assets 1,F Fi1e$ assets 1F *1terna) assets 19F 3oans 44F

Total l,a$,l,t,es
Cemainin( )ia#i)ities 10F ?eposits 42F

*1terna) )ia#i)ities 10F

-hares an$ other e/uity 3F ?e#t securities 14F

11F .apita) an$ reser'es 4F

?e#t securities

.urrency -ource: *.6"

3 F

M o

n e

y market fun$ shares units 2F

/!; -=3 "))%e)"tes

1!net"%*

5he startin( point for the $efinition of euro area monetary a((re(ates is the conso)i$ate$ #a)ance sheet of the MF9 sector" 9n (enera)8 the appropriate $efinition of a monetary a((re(ate )ar(e)y $epen$s on the purpose for !hich the a((re(ate is inten$e$" Gi'en that many $ifferent financia) assets are su#stituta#)e an$ that the nature an$ characteristics of financia) assets8 transactions an$ means of payment chan(e o'er time8 it is not a)!ays c)ear ho! money shou)$ #e $efine$ an$ !hich financia) assets #e)on( to !hich $efinition of money" For these reasons8 centra) #anks usua))y $efine an$ monitor se'era) monetary a((re(ates" 5he *.6+s $efinitions of euro area monetary a((re(ates are #ase$ on a harmonise$ $efinition of the money=issuin( sector an$ the money=ho)$in( sector8 as !e)) as of harmonise$ cate(ories of MF9 )ia#i)ities" 5he money=issuin( sector comprises MF9s resi$ent in the euro area" 5he money=ho)$in( sector inc)u$es a)) non=MF9s resi$ent in the euro area e1c)u$in( the centra) (o'ernment sector"1 6ase$ on conceptua) consi$erations an$ empirica) stu$ies8 an$ in )ine !ith internationa) practice8 the *urosystem has $efine$ a narro! AM1B8 an Ginterme$iateH AM2B an$ a #roa$ monetary a((re(ate AM3B" 5hese a((re(ates $iffer !ith re(ar$ to the $e(ree of )i/ui$ity Aas assesse$ on the #asis of the criteria of transfera#i)ity8 con'erti#i)ity8 price certainty an$ marketa#i)ityB of the assets they inc)u$e" 5a#)e 2"12 sets out the $efinitions of euro area monetary a((re(ates" M1 comprises currency in circu)ation an$ o'erni(ht $eposits8 !hich can #e imme$iate)y con'erte$ into currency or use$ for cash)ess payments" M2 inc)u$es8 in a$$ition8 $eposits that can #e con'erte$ into components of narro! money8 a)thou(h some restrictions may app)y8 such as the nee$ for a$'ance notification8 pena)ties an$ fees" Fina))y8 M3 comprises M2 an$ certain marketa#)e instruments issue$ #y the resi$ent MF9 sector" : hi(h $e(ree of )i/ui$ity an$ price certainty make these instruments c)ose su#stitutes for $eposits" :s a resu)t of their inc)usion8 #roa$ money is )ess affecte$ #y su#stitution #et!een 'arious )i/ui$ asset cate(ories than narro!er $efinitions of money an$ is more sta#)e Asee a)so .hapter 3B"
1

*'en thou(h the centra) (o'ernment sector is not consi$ere$ to #e part of the money=issuin( sector8 centra) (o'ernment )ia#i)ities of a monetary nature Ae"(" $eposits he)$ #y househo)$s !ith the post officeB are inc)u$e$ as a specia) item in the $efinition of monetary a((re(ates #ecause they are hi(h)y )i/ui$"

T"8#e -=1- De$initi!ns !$ e %! "%e" &!net"%* "))%e)"tes

9,a$,l,t,es 1: "1 "2 ";

.urrency in circu)ation %'erni(ht $eposits ?eposits !ith an a(ree$ maturity of up to 2 years ?eposits re$eema#)e at notice of up to 3 months Cepurchase a(reements Money market fun$ shares units ?e#t securities issue$ !ith a maturity of up to 2 years

1 1

1 1 1 1

1 1 1 1 1 1 1

-ource: *.6" 1B Monetary )ia#i)ities of MF9s an$ centra) (o'ernment Apost office8 treasuryB 'is=T='is non=MF9 euro area resi$ents e1c)u$in( centra) (o'ernment"

50

Ch"%t -=5 Pe%,ent") e sh"%es !$ ,!&+!nent s !$ 13 "t the en. !$ -010

Money market fun$ shares units 6F Cepurchase a(reements ,F ?eposits re$eema#)e at a perio$ of notice of up to three months 20F ?e#t securities !ith a maturity of up to t!o years 1F .urrency in circu)ation 4F

%'erni(ht $eposits 41F

?eposits !ith an a(ree$ maturity of up to t!o years 19F -ource: *.6"

<o)$in(s #y euro area resi$ents of )i/ui$ assets $enominate$ in forei(n currencies can #e c)ose su#stitutes for euro=$enominate$ assets" 5herefore8 the monetary a((re(ates inc)u$e such assets if they are he)$ !ith MF9s )ocate$ in the euro area" :s the $efinition of monetary a((re(ates a$opte$ #y the *.6 on)y inc)u$es )ia#i)ities of MF9s )ocate$ in the euro area 'is=T='is euro area resi$ents8 ho)$in(s #y forei(n resi$ents of: iB short=term $eposits !ith euro area MF9sJ iiB shares units issue$ #y money market fun$s )ocate$ in the euro areaJ an$ iiiB $e#t securities issue$ !ith a maturity of up to t!o years #y MF9s )ocate$ in the euro area are e1c)u$e$" .urrency in circu)ation is inc)u$e$ in its entirety in the monetary a((re(ates8 irrespecti'e of !hether it is he)$ #y euro area resi$ents or non=resi$ents8 (i'en the $ifficu)ty of $eri'in( accurate an$ time)y measures of the amounts of #anknotes an$ coins he)$ #y non=resi$ents" .hart 2", i))ustrates the re)ati'e shares of the components of M3 in ?ecem#er 2010" %'erni(ht $eposits accounte$ for the )ar(est share8 name)y 41F of M3" 5he share in M3 of $eposits !ith an a(ree$ maturity of up to t!o years !as 19F8 !hi)e that of $eposits re$eema#)e at a perio$ of notice of up to three months !as 20F" .urrency in circu)ation amounte$ to 4F of M3 an$ money market fun$ shares units accounte$ for 6F" Fina))y8 repurchase a(reements an$ $e#t securities issue$ !ith an initia) maturity of up to t!o years accounte$ for ,F an$ 1F of M3 respecti'e)y"
/"n( .e+!sits "n. #!"ns in the e %! "%e"9 the Unite. St"tes "n. C"+"n

6ank $eposits in the euro area amounte$ to 132F of G?P at the en$ of 2009 Asee 5a#)e 2"13B" 5his !as more than in the ;nite$ -tates A64F of G?PB an$ )ess than in 2apan A21,F of G?PB" :t the same time8 #ank )oans in the euro area tota))e$ 142F of G?P8 !hi)e

for the ;nite$ -tates an$ 2apan this ratio !as ,6F an$ 14,F respecti'e)y" 5hese fi(ures are an in$ication of the importance of financia) interme$iation throu(h #anks in the euro area8 particu)ar)y !hen compare$ !ith the ;nite$ -tates" 9n #oth the euro area an$ 51

T"8#e -=13 /"n( .e+!sits "n. #!"ns in the e %! "%e"9 the Unite. St"tes "n. C"+"n "t the en. !$ -009
Aas a percenta(e of G?PB

Bank depos,t l,a$,l,t,es 1:

Bank loans

Bank loans to non5f,nan.,al .orporat,ons

*uro area ;nite$ -tates 2B 2apan

131"9 63"0 21,"2

141", ,,"6 14,"3

,2"4 22"0 40"4

-ources: *uro area accounts A*.6BJ F)o! of Fun$s A;- Fe$era) Ceser'e -ystemBJ Financia) :ccounts A6ank of 2apanB" 1B .onso)i$ate$ Ai"e" e1c)u$in( estimate$ intra #ank $epositsB" 2B ;- #anks comprise commercia) #anks8 sa'in(s institutions an$ cre$it unions"

2apan8 #ank )oans to non=financia) corporations !ere aroun$ ,0F of G?P at the en$ of 2009" 6y contrast8 in the ;nite$ -tates they amounte$ to 22F of G?P" 5his ref)ects the si(nificance of capita) markets in corporate finance $ecisions in the euro area an$ 2apan8 !hereas ;- non=financia) #usinesses (enera))y re)y to a much )ar(er e1tent on non=#ank sources of financin(" Othe% $in"n,i"# inte%&e.i"%ies 5hose financia) interme$iaries that fa)) into the cate(ory of %F9s a)so pro'i$e financia) ser'ices to househo)$s an$ non=financia) corporations an$ or tra$e in financia) markets on their o!n #eha)f" %ther financia) interme$iaries inc)u$e insurance corporations8 pension fun$s8 financia) au1i)iaries8 mutua) fun$s8 securities an$ $eri'ati'es $ea)ers8 an$ financia) corporations en(a(e$ in )en$in(" 5he %F9 sector a)so inc)u$es institutions create$ #y MF9s to faci)itate the securitisation of )oans that !ou)$ other!ise #e he)$ on the MF9 #a)ance sheet" 5he key $ifference #et!een %F9s an$ MF9s is that the )atter can take $eposits from the pu#)ic8 !hi)e %F9s are finance$ #y other means8 e"(" #y issuin( securities" %F9s are su#&ect to )ess strin(ent re(u)atory re/uirements an$ may therefore a$opt financia)

Othe% $in"n,i"# inte%&e.i"%i es h":e )"ine. ,!nsi.e%"8# e i&+!%t"n,e !:e% the #"st $e' *e"%s

inno'ations faster than MF9s" 3ike MF9s8 %F9s are part of the money= ho)$in( sector an$ any e1pansion in their #a)ance sheet )ea$s automatica))y to e1pansion in the MF9s+ #a)ance sheets" 9n )ine !ith financia) )i#era)isation an$ inno'ation8 the tota) amount of assets he)$ #y in'estment fun$s increase$ su#stantia))y #et!een 2003 an$ 20008 (ro!in( from aroun$ ,0F of G?P in 2003 to 60F at the #e(innin( of 2000" :s a resu)t of the financia) crisis8 ho!e'er8 this amount ha$ shrunk #ack to a )e'e) e/ui'a)ent to ,1F of euro area G?P #y the en$ of 2009" 5his remains comparati'e)y much )ess than the re)ati'e importance of assets of MF9s8 !hich accounte$ for 269F of euro area G?P at the en$ of 2009" -=8 ECONO1IC DI>ERSIT6 9nf)ation an$ output (ro!th $ifferentia)s #et!een the countries of the euro area are mo$erate an$ #roa$)y in )ine !ith other )ar(e currency areas such as the ;nite$ -tates" -uch $ifferentia)s may resu)t from $ifferences in $emo(raphic tren$s8 )on(=term catchin(=up processes8 or on(oin( a$&ustments )ea$in( to a more efficient a))ocation of resources" <o!e'er8 the persistence of inf)ation an$ (ro!th $ifferentia)s of in$i'i$ua)

1!.e%"te in$#"ti!n "n. ! t+ t )%!'th .i$$e%enti"# s in the e %! "%e"

Ch"%t -=6 Dis+e%si!n !$ "nn "# in$#"ti!n ",%!ss e %! "%e" ,! nt%ies "n. the Unite. St"tes
Aun!ei(hte$ stan$ar$ $e'iation in percenta(e pointsB euro area A16 countriesB euro area A12 countriesB ;nite$ -tates A14 Metropo)itan -tatistica) :reasB ;nite$ -tates A4 census re(ionsB 4 0 6 , 4 3 2 1 0 1990 1992 1994 1996 1994 2000 2002 2004 2006 2004 2010 4 0 6 , 4 3 2 1 0

-ources: *urostat an$ ;- 6ureau of 3a#or -tatistics"

euro area countries o'er )on(er perio$s of time8 if in$uce$ #y structura) inefficiencies or misa)i(ne$ nationa) po)icies8 may #e !orrisome an$ !ou)$ nee$ to #e a$$resse$ #y nationa) po)icy a$&ustments" 9n or$er to #etter (au(e the impact of euro area en)ar(ement on a'ai)a#)e in$icators for $ispersion8 in the fo))o!in( hetero(eneity is i))ustrate$ for the 12 countries that intro$uce$ euro #anknotes an$ coins in 2002 an$ for the 16 countries that ma$e up the euro area in 2010"
Dis+e%si! n !$ "nn "# in$#"ti!n

.hart 2"6 presents the $ispersion of inf)ation across the euro area an$ the ;nite$ -tates8 #ase$ on the un!ei(hte$ stan$ar$ $e'iation" 5he cur'e for the 12 euro area countries sho!s a #roa$)y sta#)e $ispersion of <9.P inf)ation since the )ate 1990s8 at a )e'e) simi)ar to that of the 14 ;- Metropo)itan -tatistica) :reas8 #ut hi(her than that of the four ;- census re(ions" 9n 2009

an$ the first months of 20108 $ispersion of inf)ation in the euro area increase$ some!hat8 ref)ectin( $ifferences across countries in the e1tent an$ timin( of the impact of the economic recession an$ reco'ery8 as !e)) as the fisca) po)icy response Ainc)u$in( in$irect ta1 increasesB" 5he rise hi(h)i(hts the nee$ for $omestic economic po)icy a$&ustments to tack)e pre'ious)y accumu)ate$ im#a)ances at a nationa) )e'e)8 !hich ha'e starte$ to #e imp)emente$" 9n the secon$ ha)f of 2010 inf)ation $ispersion in the euro area $ec)ine$ an$ Aat the #e(innin( of 2011B stoo$ c)ose to its a'era(e o'er the past $eca$e" @hen it inc)u$es -)o'enia Aa mem#er of the euro area since 2000B8 .yprus an$ Ma)ta Amem#ers since 2004B an$ -)o'akia Aa mem#er since 2009B8 the $ispersion )e'e) of the 16 euro area countries (ra$ua))y con'er(es to!ar$s that of the 12 euro area countries" 5he ca'eats for

Ch"%t -=7 Dis+e%si!n !$ %e"# 4DP )%!'th ",%!ss e %! "%e" ,! nt%ies "n. the Unite. St"tes 1B
Aun!ei(hte$ stan$ar$ $e'iationJ percenta(e pointsB euro area A16 countriesB euro area A12 countriesB ;nite$ -tates A,0 states an$ ?istrict of .o)um#iaB ;nite$ -tates A4 re(ionsB 4"0 3", 3"0 2", 2"0 1", 1"0 0", 0"0 1990 1992 1994 1996 1994 2000 2002 2004 2006 2004 4"0 3", 3"0 2", 2"0 1", 1"0 0", 0"0

-ources: *uropean .ommission+s autumn 2010 forecast an$ ;- 6ureau of *conomic :na)ysis A6*:B" 1B 5here is a statistica) #reak in the ;- re(iona) $ata in 1994" For the ;- states an$ re(ions8 the $ata refer to G?P #y state" 5he ei(ht re(ions are $efine$ #y the 6*: an$ co'er the !ho)e country" ?ata for -)o'akia start in 1992"

makin( such comparisons re)ate to the compara#i)ity of the Aunharmonise$B $ata an$ (eo(raphica) entities"
Dis+e%si! n !$ %e"# 4DP )%!'th

@ith re(ar$ to rea) G?P (ro!th8 .hart 2"0 sho!s the $ispersion of output (ro!th across the euro area an$ the ;nite$ -tates8 #ase$ on the un!ei(hte$ stan$ar$ $e'iation" 5he )ine for the 12 euro area countries sho!s a #roa$)y sta#)e $ispersion of output (ro!th for the 1990s8 !hich $ec)ine$ some!hat thereafter" More recent)y8 (ro!th $ispersion increase$ mo$erate)y8 returnin( to )e'e)s seen in the ear)y 2000s" @hen it inc)u$es -)o'enia8 .yprus8 Ma)ta an$ -)o'akia8 the $ispersion for the 16 euro area countries has #een 'ery simi)ar to the $ispersion for the 12 euro area countries since 19948 a)thou(h in recent years the $ispersion across the 16 euro area countries has e1cee$e$ that for the 12 euro area countries" :s can #e seen8

euro area (ro!th $ispersion has #een #roa$)y simi)ar to that of the ;- states" :(ain8 the ca'eats for makin( such comparisons re)ate to the compara#i)ity of the Aunharmonise$B $ata an$ (eo(raphica) entities"

3 THE EC/0S 1ONETAR6 PO5IC6 STRATE46

,hi! &hapter #e!&ri$e! the "onetary poli&y !trate'y o% the European Central Ban (ECB)/ i+e+ the ECB4! 'eneral approa&h to a&hie.in' it! pri"ary o$0e&ti.e o% "aintainin' pri&e !ta$ility+ ,he %ir!t !e&tion %o&u!e! on the rea!on! un#erlyin' the a!!i'n"ent o% thi! o$0e&ti.e to "onetary poli&y+ ,he !e&on# !e&tion !u""ari!e! the ey %eature! o% the "onetary poli&y tran!"i!!ion "e&hani!" (i+e+ the )ay in )hi&h "onetary poli&y in%luen&e! pri&e #e.elop"ent!) an# #i!&u!!e! their i"pli&ation! %or the &on#u&t o% "onetary poli&y+ ,he !e&tion! that %ollo) e-plain the &entral ele"ent! o% the ECB4! !trate'y in 'reater #etail+ ,he %inal !e&tion #e!&ri$e! ho) the ECB4! "onetary poli&y !trate'y 'ui#e# poli&y &hoi&e! #urin' the 'lo$al %inan&ial &ri!i!+
% n9 ,h"n)es in the &!ne* s ++#* 'i## "$$e,t the )ene%"# +%i,e #e:e#D

3=1 THE RO5E OF 1ONETAR6 PO5IC6 AND THE /ENEFITS OF PRICE STA/I5IT6 Wh"t &!net"%* +!#i,* ,"n "n. 'h"t it ,"nn!t .! 5he !ay in !hich monetary po)icy e1erts its inf)uence on the economy can #e e1p)aine$ as fo))o!s" 5he centra) #ank is the so)e issuer of #anknotes an$ #ank reser'es8 i"e" it is the monopo)y supp)ier of the monetary #ase" 6y 'irtue of this monopo)y8 the centra) #ank is a#)e to inf)uence money market con$itions an$ steer short=term interest rates" 9n the short run8 a chan(e in money market interest rates in$uce$ #y the centra) #ank sets in motion a num#er of mechanisms an$ actions #y economic a(ents8 u)timate)y inf)uencin( $e'e)opments in economic 'aria#)es such as output or prices" 5his process 7 a)so kno!n as the monetary po)icy transmission mechanism 7 is comp)e1 an$8 !hi)e its #roa$ features are un$erstoo$8 there is no uni/ue an$ un$ispute$ 'ie! of a)) the aspects in'o)'e$" 5he neutra)ity of money is a !i$e)y accepte$ an$ empirica))y 'a)i$ate$

/* ,!nt%!##in ) the s ++#* !$ the &!net"%* 8"seD

proposition in the economic profession" 9n the )on( run8 i"e" after a)) a$&ustments in the economy ha'e !orke$ throu(h8

Dthe ,ent%"# 8"n( ,"n in$# en,e e,!n!&i, .e:e#!+& ents

In the #!n)

a chan(e in the /uantity of money in the economy Aa)) other thin(s #ein( e/ua)B !i)) #e ref)ecte$ in a chan(e in the (enera) )e'e) of prices an$ !i)) not in$uce permanent chan(es in rea) 'aria#)es such as rea) output or emp)oyment" : chan(e in the /uantity of money in circu)ation u)timate)y represents a chan(e in the unit of account Aan$ there#y the (enera) price )e'e)B !hich )ea'es a)) other 'aria#)es unchan(e$" 5his (enera) princip)e8 referre$ to as Gthe )on(=run neutra)ityH of money8 un$er)ies a)) stan$ar$ macroeconomi c thinkin( an$ theoretica) frame!orks" Cea) income or the )e'e) of emp)oyment in the

economy are8 in the )on( run8 essentia))y $etermine$ #y rea) Asupp)y= si$eB factors" 5hese are techno)o(y8 popu)ation (ro!th8 the preferences of economic a(ents an$ a)) aspects of the institutiona) frame!ork of the economy Anota#)y property ri(hts8 ta1 po)icy8 !e)fare po)icies an$ other re(u)ations $eterminin( the f)e1i#i)ity of markets an$ incenti'es to supp)y )a#our an$ capita) an$ to in'est in human capita)B" 9n the )on( run8 the centra) #ank cannot inf)uence economic (ro!th #y chan(in( the money supp)y" Ce)ate$ to this is the
D8 t n!t the #e:e# !$ %e"# in,!&e !% e&+#!*&ent

In$#"ti!n is #ti&"te#* " &!net"%* +hen!&en!n

assertion that inf)ation is u)timate)y a price )e'e)" 9n such an en'ironment8 monetary phenomenon" 9n$ee$8 peop)e kno! that mo'ements in prices pro)on(e$ perio$s of hi(h inf)ation are typica))y mirror typica))y associate$ !ith hi(h monetary (ro!th" @hi)e other factors Asuch as 'ariations in a((re(ate $eman$8 techno)o(ica) chan(es or commo$ity price shocksB can inf)uence price $e'e)opments o'er shorter horiEons8 o'er time their effects can #e offset #y some $e(ree of a$&ustment of the money stock" 9n this sense8 the )on(er= term tren$s of prices or inf)ation can #e contro))e$ #y the centra) #ank"
P%i,e st"8i#it* enh"n,es the +!tenti"# $!% e,!n!&i, )%!'th

5he c)ose association #et!een the (ro!th of money an$ inf)ation in the economy an$ the )on(=run neutra)ity of monetary po)icy ha'e #een confirme$ #y a 'ery )ar(e num#er of economic stu$ies8 co'erin( 'arious perio$s an$ countries" 6oth empirica) an$ theoretica) research has confirme$ that the costs of inf)ation an$ $ef)ation are su#stantia)" 9n a re(ime of price sta#i)ity8 ho!e'er8 these costs are sma)) an$ more $ifficu)t to $iscern empirica))y" .onse/uent)y8 it is !i$e)y ackno!)e$(e$ to$ay that price sta#i)ity contri#utes to increasin( economic !e)fare an$ the (ro!th potentia) of an economy" The 8ene$its !$ +%i,e st"8i#it* 5he o#&ecti'e of price sta#i)ity refers to the (enera) )e'e) of prices in the economy an$ imp)ies a'oi$in( #oth pro)on(e$ inf)ation an$ $ef)ation" 5here are se'era) !ays in !hich price sta#i)ity contri#utes to achie'in( hi(h )e'e)s of economic acti'ity an$ emp)oyment" First8 price sta#i)ity makes it easier for peop)e to $isentan()e chan(es in re)ati'e prices Ai"e" mo'ements in prices of any in$i'i$ua) (oo$ or ser'iceB from chan(es in the (enera)

chan(es in the Gre)ati'e scarcityH of the in$i'i$ua) (oo$s an$ ser'ices !hich resu)t from chan(es in the supp)y of8 an$ $eman$ for8 these (oo$s an$ ser'ices" 5his a))o!s the market to a))ocate resources more efficient)y" 6y he)pin( the market to (ui$e resources to !here they can #e use$ most pro$ucti'e)y8 price sta#i)ity increases the !e)fare of househo)$s an$ thus the pro$ucti'e potentia) of the economy" -econ$8 if cre$itors can #e sure that prices !i)) remain sta#)e in the future8 they !i)) not $eman$ an Ginf)ation risk premiumH to compensate them for the risks associate$ !ith ho)$in( nomina) assets

P%i,e st"8i#it* s ++!%ts hi)he% #i:in) st"n."%.s 8*D

Di&+%!:in) the t%"ns+"%en, * !$ %e#"ti:e +%i,es9D

o'er the )on(er term" 6y re$ucin( such risk premia in the rea) interest rate8 monetary po)icy cre$i#i)ity contri#utes to the efficiency !ith !hich the capita) markets a))ocate resources an$ thus increases the incenti'es to in'est" 5his in turn fosters economic !e)fare" 5hir$8 the cre$i#)e maintenance of price sta#i)ity a)so makes it )ess )ike)y that in$i'i$ua)s an$ firms !i)) $i'ert resources from pro$ucti'e uses in or$er to he$(e a(ainst inf)ation" For e1amp)e8 in a hi(h=inf)ation en'ironment there is an incenti'e to stockpi)e rea) (oo$s since they retain their 'a)ue #etter in such circumstances than money or certain financia) assets"

<o!e'er8 stockpi)in( (oo$s is not an efficient in'estment $ecision8 an$ therefore hin$ers economic (ro!th" Fourth8 ta1 an$ !e)fare systems can create per'erse incenti'es !hich $istort economic #eha'iour" 9n most cases8 these $istortions are e1acer#ate$ #y inf)ation or $ef)ation8 as fisca) systems $o not norma))y a))o! for the in$e1ation of ta1 rates an$ socia)

D%e. ,in) in$#"ti!n %is( +%e&i" in inte%est %"tes9D

D":!i.in) nne,ess"%* he.)in) ",ti:ities9D

D%e. ,in) .ist!%ti!ns !$ t"; s*ste&s "n. s!,i"# se, %it* s*ste&s9D

security contri#utions to the inf)ation rate" Price sta#i)ity e)iminates the rea) costs entai)e$ !hen inf)ation e1acer#ates the $istortionary impact of ta1 an$ socia) security systems"
D in,%e"sin) the 8ene$its !$ h!#.in) ,"sh9D

Fifth8 inf)ation acts as a ta1 on ho)$in(s of cash" 9n an inf)ationary en'ironment8 househo)$s ha'e an incenti'e not to use cash as often in or$er to re$uce transaction costs" 5hese so=ca))e$ Gshoe=)eatherH costs arise #ecause in$i'i$ua)s ha'e to 'isit the #ank Aor cash machineB more fre/uent)y to !ith$ra! #anknotes" -i1th8 maintainin( price sta#i)ity pre'ents the consi$era#)e an$ ar#itrary re$istri#ution of !ea)th an$ income that arises in inf)ationary as !e)) as $ef)ationary en'ironments8 !here price tren$s chan(e in unpre$icta#)e !ays Ae"(" re$istri#ution effects from cre$itors to $e#torsB" 5ypica))y8 the !eakest (roups of society often suffer the most from inf)ation8 as they ha'e on)y )imite$ possi#i)ities for he$(in( a(ainst it" :n en'ironment of sta#)e prices thus he)ps to maintain socia) cohesion an$ sta#i)ity" :s se'era) e1amp)es in the t!entieth century ha'e $emonstrate$8 hi(h rates of inf)ation or $ef)ation often create socia) an$ po)itica) insta#i)ity" -e'enth8 su$$en re'a)uations of financia) assets may un$ermine the soun$ness of the #ankin( sector+s #a)ance sheets an$ $ecrease househo)$s+ an$ firms+ !ea)th" 6y contrast8 if monetary po)icy succee$s in maintainin( price sta#i)ity in a cre$i#)e manner8 inf)ationary as !e)) as $ef)ationary shocks to the rea) 'a)ue of nomina) assets can #e a'oi$e$" 9n this !ay8 monetary po)icy aime$ at price sta#i)ity pro'i$es an important contri#ution to financia) sta#i)ity"

:)) these ar(uments su((est that a )on(=term centra) #ank that maintains price sta#i)ity makes a su#stantia) contri#ution to the achie'ement of #roa$er economic (oa)s8 such as hi(her stan$ar$s of )i'in(8 hi(h )e'e)s of economic acti'ity an$ #etter emp)oyment prospects" 5his is in )ine !ith a host of empirica) stu$ies for a !i$e ran(e of countries !hich point to the e1istence of a ne(ati'e re)ationship #et!een inf)ation an$ (ro!th" : permanent rise in inf)ation out!ei(hs any short=term (ain in nomina) income8 an$ e'entua))y causes rea) income to $ec)ine permanent)y" Assi)n&ents !$ the T%e"ties 5he #asic an$ !i$e)y share$ princip)es out)ine$ a#o'e are ref)ecte$ in the soun$ a))ocation of o#&ecti'es an$ responsi#i)ities to the $ifferent po)icy= makin( authorities in *uropean Monetary ;nion A*M;B Asee .hapter 1B" 5he primary o#&ecti'e of the *urosystem8 an$ of the sin()e monetary po)icy for !hich it is responsi#)e8 is specifie$ #y the 5reaty on the Functionin( of the *uropean ;nion as the maintenance of price sta#i)ity" Moreo'er8 an$ G!ithout pre&u$ice to the o#&ecti'e of price sta#i)ityH8 the *urosystem sha)) a)so Gsupport the (enera) economic po)icies in the ;nion !ith a 'ie! to contri#utin( to the achie'ement of the o#&ecti'es of the ;nionH !hich inc)u$e8 inter a)ia8 Gfu)) emp)oymentH an$ G#a)ance$ economic (ro!thH" 5he institutiona) frame!ork is foun$e$ on the princip)e that the *urosystem+s o#&ecti'e of maintainin( price sta#i)ity is of o'erri$in( importance" -ince monetary po)icy can u)timate)y on)y inf)uence the price )e'e) in the economy8 price sta#i)ity is the #est contri#ution that a centra) #ank can make to economic !e)fare an$ to the

D +%e:entin) the "%8it%"%* %e.ist%i8 ti!n !$ 'e"#th "n. in,!&e===

D "n. ,!nt%i8 tin) t! $in"n,i"# st"8i#it*

/* &"int"inin) +%i,e st"8i#it* the ,ent%"# 8"n( ,!nt%i8 tes t! 8%!".e% e,!n!&i, )!"#s

The +%!:isi!ns !$ the T%e"ties %e$#e,t these )ene%"# +%in,i+#esD

D8* settin) +%i,e st"8i#it* "s the +%i&"%* !8?e,ti:e !$ &!net"%* +!#i,*

(ro!th prospects of the economy" 6y ensurin( )astin( con$itions of price sta#i)ity8 the centra) #ank promotes a stea$y course of economic $e'e)opment o'er )on(er horiEons8 encoura(es capita) formation8 an$ hence contri#utes in$irect)y to income (ro!th" :ssi(nin( monetary po)icy an o#&ecti'e for rea) income or emp)oyment !ou)$ ha'e #een su#= optima)8 since monetary po)icy has no scope for e1ertin( any )astin( inf)uence on rea) 'aria#)es in the short to me$ium term" 5his can #e e1p)aine$ on the #asis of t!o consi$erations" First8 a centra) #ank has on)y one instrument at its $isposa) in the pursuit of its man$ate" -econ$8 it is the task of other economic po)icy=makers8 nota#)y those responsi#)e for fisca) an$ structura) po)icies8 to smooth rea) economic acti'ity in the short term an$ to $irect)y enhance the (ro!th potentia) of the economy" 5he c)ear hierarchy of o#&ecti'es on !hich the *urosystem is foun$e$ ref)ects $eca$es of practica) e1perience an$ numerous economic stu$ies !hich su((est that monetary po)icy !i)) contri#ute most to impro'in( economic prospects an$ raisin( the )i'in( stan$ar$s of citiEens #y maintainin( price sta#i)ity in a )astin( !ay" 3=- THE TRANS1ISSION 1ECHANIS1 OF 1ONETAR6 PO5IC6
The t%"ns&issi! n is ,h"%",te%ise . 8* #!n)9 :"%i"8#e "n. n,e%t"in ti&e #")sD

The t%"ns&issi!n &e,h"nis& "n. its ,h"nne#s 5he process throu(h !hich monetary po)icy $ecisions affect the economy in (enera)8 an$ the price )e'e) in particu)ar8 is kno!n as the transmission mechanism of monetary po)icy" 5he transmission of monetary impu)ses to the rea) sector in'o)'es a num#er of $ifferent mechanisms an$ actions #y economic a(ents at 'arious

sta(es of the process" :s a resu)t8 po)icy monetary action usua))y takes a consi$era#) e time to affect price $e'e)opmen ts" Furthermore 8 the siEe an$ stren(th of the $ifferent effects can 'ary accor$in( to the state of the economy8 !hich makes the precise impact $ifficu)t to estimate" 5aken to(ether8 centra) #anks typica))y see themse)'es confronte$ !ith )on(8 'aria#)e an$ uncertain )a(s in the con$uct of monetary po)icy" 9$entifyin( the transmissio n mechanism of monetary po)icy is comp)icate$ #y the fact

that8 in practice8 economic $e'e)opments are continuous)y inf)uence$ #y shocks from a !i$e 'ariety of sources" For instance8 chan(es in oi) or other commo$ity prices or in a$ministere$ prices can ha'e a short=term8 $irect impact on inf)ation" -imi)ar)y8 $e'e)opments in the !or)$ economy or in fisca) po)icies may inf)uence a((re(ate $eman$ an$ there#y price $e'e)opments" Furthermore8 financia) asset prices an$ e1chan(e rates $epen$ on many other factors in a$$ition to monetary po)icy" Monetary po)icy must therefore monitor the transmission chain to a'oi$ that e1o(enous shocks to the financia) structure interfere !ith

the transmission of monetary impu)ses" 9t shou)$ a)so take into account a)) other $e'e)opments re)e'ant for future inf)ation in or$er to pre'ent these ha'in( an impact on )on(er=term inf)ation tren$s an$ e1pectations in a !ay that is inconsistent !ith price sta#i)ity" 5he re/uire$ path of monetary po)icy is therefore a)!ays $epen$ent on the nature8 siEe an$ $uration of the shocks hittin( the economy" 9t is an on(oin( cha))en(e for the centra) #ank to i$entify the factors $ri'in( price tren$s in or$er to app)y the appropriate monetary po)icy reaction"

D"n. is in$# en,e. 8* e;!)en! s sh!,(s

Se:e%"# ,h"nne#s !$ t%"ns&issi !n

-e'era) transmission channe)s 7 the in$i'i$ua) )inks throu(h !hich monetary po)icy impu)ses are Atypica))yB transferre$ to the rea) economy 7 may #e in'o)'e$ at the same time8 an$ ha'e separate inf)uences on price $e'e)opments" .entra) #anks are face$ !ith a comp)e1 !e# of economic interactions" 5he main channe)s of monetary po)icy transmission can #e presente$ in a schematic form Asee the )eft=han$ si$e of .hart 3"1B" 5he A)on(B chain of cause an$ effect )inkin( monetary po)icy $ecisions !ith the price )e'e) starts !ith a chan(e in the officia) interest rates set #y the centra) #ank on its o!n operations" 9n these operations8 the centra) #ank typica))y pro'i$es fun$s to #anks Asee .hapter 4 for a $etai)e$ $escription of the *urosystem+s monetary po)icy instrumentsB" 5he #ankin( system $eman$s money issue$ #y the centra)

#ank Akno!n as G#ase moneyHB to meet the pu#)ic $eman$ for currency8 to c)ear inter#ank #a)ances an$ to meet the re/uirements for minimum reser'es that must #e $eposite$ !ith the centra) #ank" Gi'en its monopo)y o'er the creation of #ase money8 the centra) #ank can contro) the interest rates on its operations" -ince the centra) #ank there#y affects the fun$in( cost of )i/ui$ity for #anks8 #anks nee$ to pass on these costs !hen )en$in( to their customers AGinterest rate channe)HB" 5hrou(h this process8 the centra) #ank can e1ert a $ominant inf)uence on money market con$itions an$ there#y steer money market interest rates" .han(es in money market rates in turn affect other interest rates8 a)#eit to 'aryin( $e(rees" For e1amp)e8 chan(es in money market rates ha'e an impact on the interest rates set #y #anks on short=term )oans an$ $eposits"
D.i%e,t#* "$$e,ts &"%(et inte%est %"tes9D

A ,h"n)e in !$$i,i"# inte%est %"tesD

Ch"%t 3=1 A st*#ise. i## st%"ti!n !$ the t%"ns&issi!n &e,h"nis& $%!& inte%est %"tes t! +%i,es

.red,t

rate

<a6e and pr,.e 5 sett,n6

D "$$e,ts e;+e,t"ti!n s9D

9n a$$ition8 e1pectations of future officia) interest rate chan(es affect )on(er=term market interest rates8 since these ref)ect e1pectations of the future e'o)ution of short=term interest rates" <o!e'er8 the impact of money market rate chan(es on interest rates at 'ery )on( maturities Ae"(" ten=year (o'ernment #on$ yie)$s8 )on(=term #ank )en$in( ratesB is )ess $irect" 5hose rates $epen$ to a )ar(e e1tent on market e1pectations for )on(=term (ro!th an$ inf)ation tren$s in the economy" 9n other !or$s8 chan(es in the centra) #ank+s officia) rates $o not norma))y affect these )on(er=term rates un)ess they !ere to )ea$ to a chan(e in market e1pectations concernin( )on(= term economic tren$s" Monetary po)icy can a)so (ui$e economic a(ents+ e1pectations of future inf)ation an$ thus inf)uence price $e'e)opments Asee .hart 3"1B" .han(es in interest rates affect the sa'in(8 spen$in( an$ in'estment $ecisions of househo)$s an$ firms" For e1amp)e8 a)) other thin(s #ein( e/ua)8 hi(her interest rates ten$ to make it )ess attracti'e for househo)$s or companies to take out )oans in or$er to finance their consumption or in'estment" <i(her interest rates a)so make it more attracti'e for househo)$s to sa'e their current income rather than spen$ it8 since the return on their sa'in(s is increase$" :s a conse/uence of chan(es in consumption an$ in'estment8 the )e'e) of $omestic $eman$ for (oo$s an$ ser'ices re)ati'e to $omestic supp)y !i)) chan(e" @hen $eman$ e1cee$s supp)y8 a)) other thin(s #ein( e/ua)8 up!ar$ pressure on prices is )ike)y to resu)t" Moreo'er8 chan(es in a((re(ate $eman$ may trans)ate into ti(hter or )ooser con$itions in )a#our an$ interme$iate pro$uct markets8 an$ these

in turn can affect price an$ !a(e= settin( in the respecti'e market" 6ecause of their impact on financin( con$itions in the economy an$ on e1pectations8 monetary po)icy $ecisions can affect other financia) 'aria#)es such as asset prices Ae"(" stock market pricesB an$ e1chan(e rates" .han(es in the e1chan(e rate can affect inf)ation $irect)y8 insofar as importe$ (oo$s are part of the consumption #asket8 #ut they may a)so !ork throu(h other channe)s Asee .hart 3"1B" .han(es in other asset prices typica))y affect inf)ation in$irect)y8 to the e1tent that !ea)th effects impact on the pri'ate sector+s consumption $ecisions" 5hey may a)so ha'e imp)ications for financia) sta#i)ity !hen protracte$ asset price #u##)es su$$en)y #urst" 6oom=#ust cyc)es in asset prices are often associate$ !ith perio$s of pro)on(e$ )oose monetary po)icy" Furthermore8 chan(es in officia) interest rates may a)so affect the supp)y of cre$it AGcre$it channe)HB" Fo))o!in( an increase in interest rates8 the risk that some #orro!ers cannot safe)y pay #ack their )oans may increase to a )e'e) such that the #ank !i)) not (rant a )oan to these #orro!ers Athe G#ank )en$in( channe)H of the cre$it channe)B" :s a conse/uence8 such #orro!ers8 househo)$s or firms are force$ to postpone their consumption or in'estment p)ans" 9nterest rate chan(es a)so affect firms+ #a)ance sheets" :n increase in interest rates )ea$s to a )o!er net !orth of firms !hich means a )o!er co))atera) 'a)ue an$ thus a re$uce$ a#i)ity to #orro! Athe G#a)ance sheet channe)H of the cre$it channe)B" 9n a$$ition to the tra$itiona) #ank )en$in( channe)8 !hich focuses on the /uantity of )oans supp)ie$8 a Grisk= takin( channe)H may e1ist !hen #anks+
D"$$e,ts "sset +%i,es9D

D"$$e,ts s":in) "n. in:est&ent .e,isi!ns9D

D"$$e,ts the s ++#* !$ ,%e.it9 D

D#e".s t! " ,h"n)e in "))%e)"t e .e&"n. "n. +%i,es9D

D"n. &"* "$$e,t the !:e%"## %is(< t"(in)

8eh":i ! % !$ the e,!n!&*

incenti'e to #ear risk re)ate$ to the pro'ision of )oans is affecte$" 5he risk= takin( channe) is thou(ht to operate main)y 'ia t!o mechanisms" First8 )o! interest rates #oost asset an$ co))atera) 'a)ues" 5his8 in con&unction !ith the #e)ief that the increase in asset 'a)ues is sustaina#)e8 )ea$s #oth #orro!ers an$ #anks to accept hi(her risks" -econ$8 )o! interest rates make riskier assets more attracti'e8 as a(ents search for hi(her yie)$s" 9n the case of #anks8 these t!o effects usua))y trans)ate into a softenin( of cre$it stan$ar$s8 !hich can )ea$ to an e1cessi'e increase in )oan supp)y"
The e;,h"n) e %"te ,h"nne#

effects are in (enera) )ess important for )ar(e economies than for sma)) open economies" Furthermore8 financia) asset prices )ike the e1chan(e rate $epen$ on many other factors in a$$ition to monetary po)icy"
The e;+e,t"ti!n s ,h"nne#

5he e1pectations channe) main)y !orks #y inf)uencin( the pri'ate sector+s )on(er=term e1pectations" 9t has (aine$ particu)ar re)e'ance for the con$uct of monetary po)icy o'er past $eca$es" 9ts effecti'eness crucia))y $epen$s on the cre$i#i)ity of centra) #ank communication !hich primari)y rests on a soun$ monetary po)icy frame!ork" For instance8 if a centra) .han(es in the e1chan(e rate !i)) #ank en&oys a hi(h $e(ree of norma))y affect inf)ation in three !ays" cre$i#i)ity in pursuin( its o#&ecti'e8 First8 e1chan(e rate mo'ements may monetary po)icy can e1ert a po!erfu) $irect)y affect the $omestic price of $irect inf)uence on price $e'e)opments importe$ (oo$s" 9f the e1chan(e rate #y (ui$in( economic a(ents+ appreciates8 the price of importe$ e1pectations of future inf)ation an$ (oo$s ten$s to fa))8 thus he)pin( to there#y inf)uencin( their !a(e an$ re$uce inf)ation $irect)y8 insofar as price=settin( #eha'iour" 5he cre$i#i)ity these pro$ucts are $irect)y use$ in of a centra) #ank to maintain price consumption" -econ$8 if these imports sta#i)ity in a )astin( manner is crucia) are use$ as inputs into the pro$uction in this respect" 9f economic a(ents process8 )o!er prices for inputs mi(ht8 #e)ie'e in the centra) #ank+s a#i)ity an$ o'er time8 fee$ throu(h into )o!er commitment to maintain price sta#i)ity8 prices for fina) (oo$s" 5hir$8 e1chan(e inf)ation e1pectations !i)) remain rate $e'e)opments may a)so ha'e an firm)y anchore$ to price sta#i)ity" 5his8 effect 'ia their impact on the in turn8 !i)) inf)uence !a(e an$ price= competiti'eness of $omestica))y settin( in the economy (i'en that8 in an pro$uce$ (oo$s on internationa) en'ironment of price sta#i)ity8 !a(e markets" 9f an appreciation in the an$ price=setters !i)) not ha'e to a$&ust e1chan(e rate makes $omestica))y their prices up!ar$s for fear of hi(her pro$uce$ (oo$s )ess competiti'e in inf)ation in the future" 9n this respect8 terms of their price on !or)$ markets8 cre$i#i)ity faci)itates the task of this ten$s to constrain e1terna) $eman$ monetary po)icy" an$ thus re$uce o'era)) $eman$ pressure in the economy" :)) other E&+i%i,"# thin(s #ein( e/ua)8 an appreciation of (n!'#e.)e the e1chan(e rate !ou)$ thus ten$ to !$ the t%"ns&issi!n +%!,ess re$uce inf)ationary pressures" 5he ;n$erstan$in( the transmission stren(th of e1chan(e rate effects mechanism is crucia) for monetary $epen$s on ho! open the economy is po)icy" 9t is8 therefore8 not surprisin( to internationa) tra$e" *1chan(e rate that numerous researchers ha'e trie$ to ana)yse the comp)e1 interactions un$er)yin( it" %'er time8 more

Rese"%, h ,!nt%i8 tes t! " 8ette% n.e%st"n .in) !$ the t%"ns&issi !n &e,h"nis

&

information an$ research resu)ts ha'e #ecome a'ai)a#)e an$ there is no! a #etter un$erstan$in( of monetary transmission in the euro area" %ne of the main fin$in(s of the Monetary 5ransmission >et!ork is that monetary po)icy affects the economy main)y throu(h the interest rate channe)" :)thou(h the use of empirica) metho$s for the /uantification of the transmission mechanism an$ its channe)s has pro'e$ to #e of (reat he)p in recent $eca$es8 the resu)ts ha'e she$ on)y partia) )i(ht on the comp)e1 process in'o)'e$" 5he )earnin( process is therefore sti)) un$er!ay an$ the *.6 !i)) continue to monitor possi#)e #eha'ioura) an$ structura) chan(es"
Un,e%t"i nt* "8! t the t%"ns&is si!n +%!,ess

more s)u((ish)y to the ti(htenin( of monetary po)icy than output" Moreo'er8 recent research has re'ea)e$ that the monetary transmission mechanism an$8 in particu)ar8 the response of output an$ inf)ation to interest rate shocks ha'e not si(nificant)y chan(e$ since the intro$uction of the sin()e currency" 5hir$8 #eyon$ these a((re(ate effects8 interest rate chan(es a)so affect economic acti'ity 'ia their impact on firms+ cash f)o!s an$ the supp)y of #ank )oans8 hence confirmin( the re)e'ance of the cre$it channe) of monetary po)icy" 3=3 THE EC/0S 1ONETAR6 PO5IC6 STRATE46F 4ENERA5 PRINCIP5ES AND 1AIN E5E1ENTS

#eha'iour of #anks an$ on their !i))in(ness to entertain smooth

@hen the *.6 took responsi#i)ity for an entire)y ne! currency area8 it !as face$ !ith an e1traor$inary )e'e) of uncertainty 7 unkno!n to most other centra) #anks 7 re(ar$in( the transmission process an$ the un$er)yin( $ata" 9n a$$ition8 institutiona) an$ #eha'ioura) chan(es fo))o!in( the intro$uction of the sin()e currency at the #e(innin( of 1999 may ha'e a)tere$ the re)ationships #et!een $ifferent economic 'aria#)es"

C!n:enti !n"# %es+!nse t! inte%est %"te ,h"n)es

5akin( into account the kno!)e$(e a#out the transmission process8 the Go'ernin( .ounci) of the *.6 aims to inf)uence con$itions in the money market" 5he )e'e) of short=term interest rates can #e set so as to ensure that price sta#i)ity is maintaine$ o'er the me$ium term" 9n so $oin(8 the centra) #ank is continuous)y confronte$ !ith a @ith the #enefit of hin$si(ht8 a num#er hi(h )e'e) of uncertainty re(ar$in( of !i$e)y accepte$ an$ !e))= #oth the nature of the economic shocks esta#)ishe$ facts #ase$ on e1perience hittin( the economy an$ the e1istence in other economies ha'e #een an$ stren(th of the re)ationships that confirme$ to #e 'a)i$ a)so for the euro )ink macroeconomic 'aria#)es" :(ainst area" First8 )on( an$ uncertain )a(s this #ack(roun$8 it is possi#)e to e1ist in the transmission of monetary i$entify some key characteristics of a impu)ses to the $omestic price )e'e)" successfu) monetary po)icy" -econ$8 in norma) times8 monetary po)icy !orks main)y throu(h the First8 the functionin( of the money interest rate channe): a ti(htenin( of market p)ays a 'ita) ro)e in the monetary po)icy )ea$s to a transitory operation of the interest rate channe)" $ecrease in output8 !hich is estimate$ 9ts proper functionin( is centra) to the to reach its ma1imum #et!een one an$ transmission of the *.6+s po)icy rates" t!o years after the interest rate 5he smooth transmission of the monetary increase" Prices ten$ to $ec)ine more Go'ernin( .ounci)+s po)icy intentions to money market (ra$ua))y8 an$ respon$ rates $epen$s critica))y on the

The t"s( !$ &!net"%* +!#i,*

1!net"%* +!#i,* & st +%ese%:e the $ n,ti!ni n) !$ the t%"ns&is si!n &e,h"ni s&

e1chan(es of )i/ui$ity in the inter#ank intro$uction market" ?ysfunctiona) money markets can !eaken the capacity of monetary po)icy to inf)uence the out)ook for price sta#i)ity throu(h interest rate a$&ustments a)one" Cecent e'ents ha'e $emonstrate$ that the or$er)y transmission of monetary po)icy can #e hampere$ !hen massi'e financia) tur#u)ences occur" 9n or$er to keep the transmission mechanism fu))y operationa) an$ to ensure the maintenance of price sta#i)ity o'er the me$ium term8 a centra) #ank may nee$ to intro$uce non=stan$ar$ po)icy measures8 i"e" )i/ui$ity inter'entions aime$ at faci)itatin( the transmission of the interest rate po)icy an$ enhancin( the f)o!s of cre$it to the #roa$ economy"
1!net"%* +!#i,* & st 8e $!%'"%.< #!!(in) "n. +%e< e&+ti:e9 D

of unnecessary 'o)ati)ity into the rea) economy" Fourth8 as stresse$ in -ection 3"28 monetary po)icy !i)) #e consi$era#)y more effecti'e if it firm)y anchors inf)ation e1pectations" 9n this respect8 the centra) #ank shou)$ specify its (oa)8 e)a#orate an$ keep to a consistent an$ systematic metho$ for con$uctin( monetary po)icy8 an$ communicate c)ear)y an$ open)y" 5hese are key e)ements for ac/uirin( a hi(h )e'e) of cre$i#i)ity8 a necessary precon$ition for inf)uencin( the e1pectations of economic actors" @e))= anchore$ inf)ation e1pectations act as automatic sta#i)isers in

-econ$8 o!in( to the )a(s an$ stochastic uncertainty in the transmission process8 chan(es in monetary po)icy to$ay !i)) on)y affect the price )e'e) after a num#er of /uarters or years" 5his means that centra) #anks nee$ to ascertain !hat po)icy stance is nee$e$ to$ay in or$er to maintain price sta#i)ity in the future8 after the transmission )a(s un!in$" 9n this sense8 monetary po)icy must #e for!ar$=)ookin( an$ pre= empti'e" 5hir$8 as the transmission )a(s make it impossi#)e in the short run for monetary po)icy to offset unanticipate$ shocks to the price )e'e) Afor e1amp)e8 those cause$ #y chan(es in internationa) commo$ity pricesB8 some short=term 'o)ati)ity in inf)ation rates is una'oi$a#)e" 9n a$$ition8 o!in( to the comp)e1ity of the transmission process8 there is a)!ays a )ar(e e)ement of uncertainty surroun$in( the effects of monetary po)icy" For these reasons8 monetary po)icy shou)$ ha'e a me$ium=term orientation to a'oi$ e1cessi'e acti'ism an$ the

D$!, sin) !n the &e.i & te%&9D

con$itions of hei(htene$ macroeconom ic uncertainty an$ amp)ify the potency of monetary po)icy in those con$itions in !hich the transmission mechanism is pertur#e$" Fina))y8 &ust )ike any other centra) #ank8 the *.6 faces consi$era#)e uncertainty a#out the re)ia#i)ity of economic in$icators8 the structure of the euro area economy an$ the monetary po)icy transmission mechanism8 amon( other thin(s" : successfu) monetary po)icy therefore has to #e #roa$)y #ase$8 takin( into account a)) re)e'ant information in or$er to un$erstan$ the factors $ri'in( economic $e'e)opments8 an$ cannot re)y on a sin()e mo$e) of the

economy" 5he *.6 has a$opte$ an$ announce$ a monetary po)icy strate(y to ensure a consistent an$ systematic approach to monetary po)icy $ecisions" 5his monetary po)icy strate(y em#o$ies the a#o'e=mentione$ (enera) princip)es in or$er to meet the cha))en(es facin( the centra) #ank" 9t aims to pro'i$e a comprehensi'e frame!ork !ithin !hich $ecisions on the appropriate )e'e) of short=term interest rates can #e taken an$ e1p)aine$ to the pu#)ic"

D$i%&#* "n,h!%in) in$#"ti!n e;+e,t"ti!ns9D

D"n. 8e 8%!".#* 8"se.

A ,!&+%ehensi:e $%"&e'!%( $!% &!net"%* +!#i,* .e,isi!ns

The &"in e#e&ents !$ the EC/0s &!net"%* +!#i,* st%"te)*

"n,h!%s in$#"ti!n e;+e,t"ti!ns "n. enh"n,es the t%"ns+"%en,* !$ the EC/0s &!net"%* +!#i,*

5he *.6+s monetary po)icy strate(y comprises t!o main e)ements" 5he first e)ement of the strate(y is a /uantitati'e $efinition of price sta#i)ity" 5he secon$ e)ement is a t!o=pi))ar approach to the ana)ysis of the risks to price sta#i)ity" 5his )atter e)ement pro'i$es a frame!ork !hich ensures that the Go'ernin( .ounci) assesses a)) the re)e'ant information an$ ana)yses necessary to take monetary po)icy $ecisions in a for!ar$=)ookin( an$ pre= empti'e manner" 9n this respect8 the *.6+s strate(y a)so pro'i$es a frame!ork for e1p)ainin( monetary po)icy $ecisions to the pu#)ic in a c)ear an$ transparent manner" 5he fo))o!in( sections of this chapter $escri#e these e)ements in $etai)" 3=4 THE EC/0S GUANTITATI>E DEFINITION OF PRICE STA/I5IT6

The EC/ h"s .e$ine. +%i,e st"8i#it* in E "ntit"ti :e te%&s

5he 5reaty on the Functionin( of the *uropean ;nion c)ear)y esta#)ishes the maintenance of price sta#i)ity as the primary o#&ecti'e of the *urosystem" 9n or$er to specify this o#&ecti'e more precise)y8 the Go'ernin( .ounci) of the *.6 announce$ the fo))o!in( /uantitati'e $efinition in 1994: GPrice sta#i)ity sha)) #e $efine$ as a year=on=year increase in the <armonise$ 9n$e1 of .onsumer Prices A<9.PB for the euro area of #e)o! 2F" Price sta#i)ity is to #e maintaine$ o'er the me$ium termH" Fo))o!in( a thorou(h e'a)uation of its monetary po)icy strate(y in 20038 the Go'ernin( .ounci) further c)arifie$ that8 !ithin the $efinition8 it aims to maintain inf)ation rates G#e)o!8 #ut c)ose to8 2F o'er the me$ium termH" 5he Go'ernin( .ounci) $eci$e$ to pu#)ic)y announce a /uantitati'e $efinition of price sta#i)ity for a num#er of reasons" First8 #y c)arifyin( ho! the

The .e$initi!n 8!th

Go'ernin( .ounci) interprets the *.6+s primary o#&ecti'e8 the $efinition he)ps to make the monetary po)icy frame!ork easier to un$erstan$ an$ makes monetary po)icy more transparent" -econ$8 the $efinition of price sta#i)ity pro'i$es a c)ear an$ measura#)e yar$stick a(ainst !hich the pu#)ic can ho)$ the *.6 accounta#)e" ?e'iations of price $e'e)opmen ts from the $efinition of price sta#i)ity can #e i$entifie$8 an$ the *.6 !ou)$ then #e re/uire$ to pro'i$e an e1p)anation for such

64

$e'iations an$ to communicate ho! it inten$s to re=esta#)ish price sta#i)ity !ithin a rea)istic perio$ of time" Fina))y8 the $efinition pro'i$es (ui$ance to the pu#)ic for formin( e1pectations of future price $e'e)opments" 5he *.6+s monetary po)icy has a euro area=!i$e focus" :ccor$in()y8 price sta#i)ity is assesse$ on the #asis of price $e'e)opments in the euro area 'ie!e$ as a !ho)e8 in$icatin( that $ecisions re(ar$in( the sin()e monetary po)icy aim at achie'in( price sta#i)ity for the a((re(ate economy" 5his focus on the euro area as a !ho)e is the natura) conse/uence of the fact that8 !ithin a monetary

union8 monetary po)icy can on)y steer the a'era(e money market interest rate )e'e) in the area8 i"e" it must use a too) that is uniform across the area" 5he $efinition a)so i$entifies a specific price in$e1 7 name)y the <9.P for the euro area 7 as that to #e use$ for the purposes of assessin( !hether price sta#i)ity has #een achie'e$" 5his in$e1 has #een harmonise$ across the 'arious countries of the euro area" 5he <9.P is the in$e1 that most c)ose)y appro1imates the chan(es o'er time in the price of a representati'e #asket of consumer e1pen$itures Asee 6o1 3"1B" Price

F!, s !n the e %! "%e" "s " 'h!#e

The HICP

65

sta#i)ity is measure$ in terms of hea$)ine inf)ation8 !hich correspon$s to the representati'e #asket" 5he use of a harmonise$ in$e1 for hea$)ine inf)ation makes transparent the *.6+s commitment to the fu)) an$ effecti'e protection a(ainst )osses in the purchasin( po!er of money" 5he so=ca))e$ GcoreH inf)ation in$ices can

pro'i$e supp)ementary information a#out the causes of un$er)yin( price $e'e)opments" 5hey e1c)u$e certain 'o)ati)e components from the #asket8 such as ener(y an$ unprocesse$ foo$" 5he *.6 monitors such in$icators8 #ut $oes not consi$er core inf)ation to #e an appropriate yar$stick for measurin( price sta#i)ity in the euro area"

/!; 3=1 C!nst% ,ti!n "n. $e"t %es !$ the H"%&!nise. In.e; !$ C!ns &e% P%i,es
5he Go'ernin( .ounci) of the *.6 has $efine$ price sta#i)ity in terms of the <armonise$ 9n$e1 of .onsumer Prices A<9.PB for the euro area" 5he conceptua) !ork re)ate$ to the compi)ation of this price in$e1 is carrie$ out #y the *uropean .ommission A*urostatB in c)ose )iaison !ith the nationa) statistica) institutes" :s a key user8 the *urosystem has #een c)ose)y in'o)'e$ in this !ork" 5he <9.P $ata re)ease$ #y *urostat are a'ai)a#)e from 2anuary 199, on!ar$s" *stimate$ #ack$ata8 !hich are not fu))y compara#)e !ith <9.P $ata from 199,8 are a'ai)a#)e for the o'era)) <9.P an$ its main components from 1990" 6ase$ on the consumer e1pen$iture !ei(hts app)ica#)e for 20108 (oo$s account for ,4"0F an$ ser'ices account for 42"0F of the <9.P Asee 5a#)e 3"1B" 5he main i$ea #ehin$ the #reak$o!n of o'era)) <9.P into in$i'i$ua) components is to i$entify the $ifferent economic factors that impact on consumer price $e'e)opments" For e1amp)e8 $e'e)opments in the ener(y price component are c)ose)y re)ate$ to oi) price mo'ements" Foo$ prices are $i'i$e$ into processe$ an$ unprocesse$ foo$s8 #ecause prices for the )atter are inf)uence$ #y factors such as !eather con$itions an$ seasona) patterns8 !hi)e such

T"8#e 3=1 Wei)hts !$ the &"in e %! "%e" HICP ,!&+!nents "++#i,"8#e $!% -010
'verall ,ndex Goo$s prices ;nprocesse$ foo$ Processe$ foo$ >on=ener(y in$ustria) (oo$s *ner(y -er'ices <ousin( ser'ices 5ransport .ommunication Cecreation an$ persona) ser'ices Misce))aneous
-ource: *urostat"

100=0 ,4"0 0"3 11"9 29"3 9"6 42"0 10"2 6"6 3"3 14"9 0"1

factors ha'e )ess of an impact on processe$ foo$ prices" -er'ices prices are su#=$i'i$e$ into fi'e components !hich8 on account of $ifferent market con$itions8 typica))y sho! $ifferences in their respecti'e $e'e)opments" 5he harmonisation measures intro$uce$ for the <9.P in the $ifferent countries are #ase$ on se'era) *; re(u)ations an$ (ui$e)ines a(ree$ !ith the Mem#er -tates" :mon( other thin(s8 they concern co'era(e of consumer spen$in(8 initia) stan$ar$s for /ua)ity a$&ustment proce$ures8 the treatment of ne! (oo$s an$ ser'ices8 an$ the re'ision of !ei(hts" G9nitia)H refers to the fact that some further harmonisation is en'isa(e$ in se'era) areas" Moreo'er8 a $etai)e$ an$ harmonise$ c)assification has #een a(ree$ for su#=in$ices8 a))o!in( a consistent comparison of price $e'e)opments in consumer e1pen$iture su#= (roups across countries" :s a resu)t of the harmonisation an$ statistica) impro'ements aime$ at enhancin( its accuracy8 re)ia#i)ity an$ time)iness8 the <9.P has #ecome a hi(h= /ua)ity8 internationa)= stan$ar$ price in$e1 an$ a #roa$)y compara#)e in$icator across countries" 9mpro'ements are sti)) on(oin( !ith re(ar$ to the stan$ar$s for /ua)ity a$&ustment an$ samp)in(8 as !e)) as the treatment of o!ner=occupiers+ housin( costs"
The .e$initi! n e;,# .e s .e$#"ti!n D

6y referrin( to Gan increase in the <9.P of #e)o! 2FH the $efinition makes c)ear that not on)y inf)ation a#o'e 2F #ut a)so $ef)ation8 i"e" a se)f= sustainin( fa)) in the #roa$ price in$e18 is inconsistent !ith price sta#i)ity" 9n the pursuit of price sta#i)ity8 the Go'ernin( .ounci)+s e1p)icit aim is to maintain the inf)ation rate at a )e'e) #e)o!8 #ut c)ose to8 2F" 9t there#y si(na)s its commitment to pro'i$e an a$e/uate mar(in to a'oi$ the risks of $ef)ation" @hi)e $ef)ation imp)ies simi)ar costs to the economy as inf)ation Asee -ection 3"1B8 a'oi$in( $ef)ation is important #ecause8 once it occurs8 it may #ecome entrenche$ in 'ie! of the )imitations encountere$ #y monetary po)icy !hen the nomina) interest rate fa))s to )e'e)s 'ery c)ose to Eero" 9n a $ef)ationary en'ironment8 if an$ !hen inf)ation e1pectations )ose their anchor an$ start pro&ectin( a se)f= sustainin( process of price )e'e) $ec)ines8 monetary po)icy may not #e a#)e to pro'i$e a sufficient $e(ree of support to the economy #y usin( its interest rate instrument" :ny attempt to #rin( the nomina) interest rate #e)o! Eero !ou)$ fai)8 as the pu#)ic !ou)$ prefer to ho)$ cash rather than

to )en$ or ho)$ $eposits at a ne(ati'e rate" :)thou(h 'arious stimu)atin( monetary po)icy actions are possi#)e e'en !hen nomina) interest rates are at Eero8 these a)ternati'e8 uncon'entiona) po)icies can #e 'ery cost)y" 9t is therefore more $ifficu)t for monetary po)icy to fi(ht $ef)ation than to fi(ht inf)ation" 6y settin( the upper #oun$ for inf)ation c)ear)y a#o'e Eero an$ aimin( at inf)ation #e)o!8 #ut c)ose to8 2F8 the *.6 a)so takes into account the possi#i)ity of <9.P inf)ation s)i(ht)y o'erstatin( true inf)ation as a resu)t of a sma)) #ut positi'e #ias in the measurement of price )e'e) chan(es usin( the <9.P" For 'arious reasons8 consumer price in$ices may #e su#&ect to measurement errors" -uch errors may arise if prices are not a$e/uate)y a$&uste$ for chan(es in the /ua)ity of the (oo$s components or if some re)e'ant transactions remain systematica))y out of the samp)e use$ to construct the in$e1" 9n the past8 a num#er of economic stu$ies ha'e i$entifie$ a sma)) #ut positi'e #ias in the measurement of nationa) consumer price in$ices8 su((estin(
Dt"(es int! ",,! nt " +!tenti"# &e"s %e &ent 8i"sD

that Aas a resu)t of /ua)ity impro'ements in (oo$s8 for e1amp)eB a measure$ inf)ation rate of Eero cou)$ in fact imp)y a s)i(ht $ec)ine in the actua) price )e'e)" @here the euro area is concerne$8 se'era) measures ha'e #een taken to ensure time)y up$ates of price statistics" 5akin( into account the continuous impro'ements #ein( ma$e to the <9.P+s properties #y *urostat Athe *uropean .ommission a(ency responsi#)e for this area of statistics at *; )e'e)B8 any #ias is )ike)y to #e sma))"
D"n. the i&+#i,"ti !ns !$ in$#"ti!n .i$$e%ent i"#s in the e %! "%e"

arise" For e1amp)e8 there may #e $ifferences in initia) income )e'e)s an$ an on(oin( process of catchin(= up in stan$ar$s of )i'in( !ithin a currency area"
Un":!i."8 #e in$#"ti!n .i$$e%enti"# s in the e %! "%e"

9nf)ation $ifferentia)s #et!een the euro area countries are mo$erate an$ #roa$)y in )ine !ith other )ar(e currency areas8 such as the ;nite$ -tates Asee -ection 2"4B" -uch $ifferentia)s may resu)t from $ifferences in $emo(raphic tren$s8 )on(=term catchin(=up processes8 or on(oin( a$&ustments )ea$in( to a more 5he settin( of a precise o#&ecti'e for efficient a))ocation of resources" 5o monetary po)icy in a monetary union some e1tent8 the persistence of a)so takes into account the e1istence of inf)ation $ifferentia)s of in$i'i$ua) inf)ation $ifferentia)s across re(ions in euro area countries may #e the resu)t the union !hich operate at $ifferent of structura) inefficiencies or sta(es of economic $e'e)opment" misa)i(ne$ nationa) po)icies" 5he fact that some economies in the Persistent a#o'e=a'era(e inf)ation rates euro area are in a structura) Gcatchin(= can )ea$ to a )oss of competiti'eness of upH process mi(ht mean that 7 for a the respecti'e countries" 9n a monetary possi#)y e1ten$e$ perio$ of time 7 union8 $omestic po)icies must a$$ress their inf)ation rates !i)) #e hi(her than such inf)ation $ifferentia)s" 5akin( the the a'era(e" 5he inf)ation rate in e1istence of una'oi$a#)e inf)ation countries at 'ery a$'ance$ sta(es of $ifferences into account8 it has #een $e'e)opment cou)$ 7 #y imp)ication 7 ar(ue$ that the *.6+s monetary po)icy #e force$ to structura))y operate at shou)$ aim to achie'e 7 o'er the e1cessi'e)y )o! or ne(ati'e inf)ation me$ium term 7 an inf)ation rate for the rates" 9n princip)e8 inf)ation area as a !ho)e that is hi(h enou(h to $ifferentia)s across re(ions are a pre'ent re(ions !ith structura))y )o!er norma) feature of any monetary union" inf)ation rates from ha'in( to meet the 5hey are an inte(ra) part of the costs of possi#)e $o!n!ar$ nomina) a$&ustment mechanism resu)tin( from ri(i$ities or enterin( perio$s of $i'er(ences in economic $e'e)opments protracte$ $ef)ation" :ccor$in( to a)) across the re(ions+ economies" a'ai)a#)e stu$ies8 a rate of inf)ation Monetary po)icy can on)y inf)uence the #e)o!8 #ut c)ose to8 2F for the euro price )e'e) of the euro area as a !ho)e area pro'i$es a sufficient mar(in a)so an$ cannot affect inf)ation $ifferentia)s in this respect" across re(ions or cities" 9nf)ation $ifferentia)s may #e $ue to transitory Fina))y8 a fun$amenta) aspect of the factors an$ may thus #e on)y *.6+s monetary po)icy is that it aims temporary" -uch $ifferentia)s are of to pursue price sta#i)ity Go'er the )itt)e economic concern" <o!e'er8 if me$ium termH" :s out)ine$ a#o'e8 rea) con'er(ence #et!een re(ions this ref)ects the consensus that in a currency union is incomp)ete8 monetary po)icy cannot8 an$ therefore structura) inf)ation $ifferentia)s across shou)$ not8 attempt to fine=tune the re(ions comprisin( the union may

The &e.i &< te%& !%ient"ti!n

$e'e)opments in prices or inf)ation o'er short horiEons of a fe! !eeks or months" .han(es in monetary po)icy on)y affect prices !ith a 'aria#)e time )a(8 an$ the ma(nitu$e of the e'entua) impact is uncertain an$ state $epen$ent Asee -ection 3"2B" 5his imp)ies that monetary po)icy cannot offset a)) unanticipate$ $istur#ances to the price

)e'e)" -ome short=term 'o)ati)ity in inf)ation is therefore ine'ita#)e" :s 6o1 3"2 e1p)ains8 the me$ium= term orientation a)so a))o!s monetary po)icy to make sure that in reactin( to shocks that ha'e an impact on inf)ation8 the centra) #ank $oes not #ecome an in$epen$ent source of unnecessary output f)uctuations"

/!; 3=- The &e.i &<te%& !%ient"ti!n !$ the EC/0s &!net"%* +!#i,*
:n economy is continuous)y su#&ect to )ar(e)y unforeseea#)e shocks that a)so affect price $e'e)opments" :t the same time8 monetary po)icy can on)y affect price $e'e)opments !ith si(nificant time )a(s8 !hich are 'aria#)e an$8 )ike most economic re)ationships8 hi(h)y uncertain" :(ainst this #ack(roun$8 it !ou)$ #e impossi#)e for any centra) #ank to keep inf)ation at a specific point tar(et at a)) times or to #rin( it #ack to a $esire$ )e'e) !ithin a 'ery short perio$ of time" .onse/uent)y8 monetary po)icy nee$s to act in a for!ar$=)ookin( manner an$ can on)y maintain price sta#i)ity o'er )on(er perio$s of time" 5his is the reasonin( that )ies at the core of the *.6+s me$ium=term orientation" 5he *.6 has not $efine$ the me$ium term !ith reference to a pre$etermine$ horiEon8 #ut $e)i#erate)y retains some f)e1i#i)ity !ith re(ar$ to the e1act time frame" -e'era) reasons un$erpin that choice" 9t is not a$'isa#)e to specify e1 ante a precise horiEon for the con$uct of monetary po)icy8 since the transmission mechanism spans a 'aria#)e8 uncertain perio$ of time" 9n a$$ition8 the *.6+s man$ate is formu)ate$ in terms of a price sta#i)ity o#&ecti'e rather than an inf)ation tar(et" 5his e)ement he)ps po)icy=makers to a'oi$ mechanistic reactions in response to shorter=term $e'e)opments aime$ at restorin( the inf)ation tar(et at a fi1e$ short=term po)icy horiEon" Furthermore8 the optima) monetary po)icy response to ensure price sta#i)ity a)!ays $epen$s on the specific nature an$ siEe of the shocks affectin( the economy" For a !i$e 'ariety of shocks Ae"(" $eman$ shocks that mo'e output an$ prices in the same $irectionB a prompt reaction #y monetary po)icy is often a$e/uate an$ !i)) not on)y preser'e price sta#i)ity #ut a)so he)p to sta#i)ise the economy" <o!e'er8 there are other types of economic shocks Ae"(" of a cost=push nature8 such as oi) price hikesB that mo'e output an$ prices in opposite $irections" For e1amp)e8 monetary po)icy has to accept the inf)ationary conse/uences cause$ #y the first=roun$ effects of oi) price shocks8 since )itt)e 7 if anythin( 7 can #e $one to counter them" :n e1cessi'e)y a((ressi'e po)icy response to restore price sta#i)ity in a 'ery short span of time !ou)$8 in these circumstances8 risk impartin( a si(nificant cost in terms of output an$ emp)oyment 'o)ati)ity !hich8 o'er a )on(er horiEon8 cou)$ a)so affect price $e'e)opments" 9n these cases8 it is !i$e)y reco(nise$ that a (ra$ua) response of monetary po)icy is appropriate #oth to a'oi$ unnecessari)y hi(h 'o)ati)ity in rea) acti'ity an$ to maintain price sta#i)ity o'er a )on(er horiEon" 5hus8 the me$ium=term orientation a)so (i'es the *.6 the f)e1i#i)ity re/uire$ to respon$ in an appropriate manner to the $ifferent economic shocks that mi(ht occur"

68

9n sum8 the focus of the *.6+s monetary po)icy in pursuin( its price sta#i)ity man$ate is on the me$ium term" 5he *.6+s $ecision not to (i'e the po)icy= re)e'ant horiEon a precise time $imension has #een an appropriate choice8 #oth in norma) an$ crisis times" 5he me$ium=term orientation imp)ies that the po)icy= re)e'ant horiEon8 $efine$ as the horiEon at !hich the *.6 pursues the sustaina#)e a)i(nment of consumer price inf)ation !ith its price sta#i)ity o#&ecti'e8 can #e of 'aria#)e )en(th o'er time8 takin( into account the fact that transmission )a(s are not on)y )on( #ut a)so 'aria#)e an$ uncertain" Furthermore8 the inf)ationary or $ef)ationary impact associate$ !ith the accumu)ation of financia) im#a)ances may (o #eyon$ the stan$ar$ horiEon of t!o to three years common)y use$ in inf)ation pro&ections" 5his un$er)ines the importance of the monetary ana)ysis Asee -ection 3",B !hich pro'i$es po)icy=makers !ith the necessary too)s to pursue a me$ium to )on(=term perspecti'e"

3=5 THE ANA56SIS OF RIS7S TO PRICE STA/I5IT6 IN THE EC/0S 1ONETAR6 PO5IC6 STRATE46
The t'!< +i##"% $%"&e' !%( is " t!!# $!% !%)"nisin ) in$!%&"ti! nD

o'er those horiEons" 9t takes account of the fact that short to me$ium=term price $e'e)opments o'er those horiEons are inf)uence$ )ar(e)y #y the interp)ay of supp)y an$ $eman$ in the (oo$s8 ser'ices an$ factor markets" : The t'! +i##"%s !$ the EC/0s secon$ perspecti'e8 referre$ to as the &!net"%* +!#i,* st%"te)* Gmonetary ana)ysisH8 focuses on a 9n or$er to #est ser'e its o#&ecti'e of me$ium to )on(er=term horiEon" maintainin( price sta#i)ity8 the 9t e1p)oits the )on(=run )ink #et!een Go'ernin( .ounci) re(u)ar)y assesses money an$ prices" 5he monetary the risks to price sta#i)ity" 9ts approach ana)ysis ser'es8 in particu)ar8 as a to or(anisin(8 e'a)uatin( an$ cross= means of cross=checkin(8 from a checkin( a)) information re)e'ant for me$ium to )on(=term perspecti'e8 the assessin( the risks to price sta#i)ity is short to me$ium=term in$ications for #ase$ on t!o ana)ytica) perspecti'es8 monetary po)icy $eri'e$ from the referre$ to as the Gt!o pi))arsH: the economic ana)ysis" economic ana)ysis an$ the monetary ana)ysis" 5hey form the #asis for the 5he t!o=pi))ar approach is $esi(ne$ to Go'ernin( .ounci)+s monetary po)icy ensure that no re)e'ant information is $ecisions" 5his approach !as )ost in the assessment of the risks to confirme$ an$ further c)arifie$ #y the price sta#i)ity an$ that appropriate Go'ernin( .ounci) in May 2003" attention is pai$ to $ifferent 5he comprehensi'e ana)ysis of the risks to price sta#i)ity is or(anise$ on the #asis of t!o comp)ementary perspecti'es on $eterminin( price $e'e)opments" %ne perspecti'e8 referre$ to as the Geconomic ana)ysisH8 is aime$ at assessin( the short to me$ium=term $eterminants of price $e'e)opments8 !ith a focus on rea) acti'ity an$ cost factors $ri'in( prices perspecti'es an$ the cross=checkin( of information in or$er to reach an o'era)) &u$(ement on the risks to price sta#i)ity" 9t represents8 an$ con'eys to the pu#)ic8 the notion of $i'ersifie$ ana)ysis an$ ensures ro#ust $ecision= makin( #ase$ on $ifferent ana)ytica) perspecti'es Asee 6o1 3"3 for a $iscussion of a)ternati'e strate(iesB"

Dt! ens %e th"t n! %e#e:"nt in$!%&"ti!n is #!st

D8"se. !n t'! "n"#*ti,"# +e%s+e,ti: esD

/!; 3=3 A#te%n"ti:e &!net"%* +!#i,* st%"te)ies

: num#er of other monetary po)icy strate(ies are8 or ha'e #een8 pursue$ #y other centra) #anks" -e'era) of these !ere consi$ere$ #y the *uropean Monetary 9nstitute an$ the *.6 #efore the $ecision !as taken to a$opt the sta#i)ity=oriente$ t!o=pi))ar strate(y" %ne such strate(y is #onetar4 tar6et,n6" 9n practice8 this means that a centra) #ank chan(es officia) interest rates in an attempt to either spee$ up or s)o! $o!n monetary (ro!th to a specific an$ pre=announce$ rate" 5his tar(et rate is $eri'e$ so as to #e compati#)e !ith price sta#i)ity" -uch a strate(y rests on t!o premises" First8 a sta#)e re)ationship #et!een money an$ the price )e'e) Ae"(" in the form of a money $eman$ e/uationB shou)$ e1ist o'er the me$ium term" 9f so8 a path consistent !ith price sta#i)ity can #e $eri'e$ for the money stock" -econ$8 the money stock shou)$ #e contro))a#)e #y monetary po)icy" 5aken to(ether8 these con$itions imp)y that the centra) #ank can use chan(es in officia) interest rates to keep the money stock on its prescri#e$ path an$ there#y 7 #ecause of the sta#i)ity of the money=price re)ationship 7 in$irect)y maintain price sta#i)ity" @hi)e centra) #ank e1periences !ith this approach inf)uence$ the $esi(n of the *.6+s strate(y8 the *.6 $eci$e$ not to a$opt monetary tar(etin(" 5his $ecision ackno!)e$(e$ the e1istence of information in macroeconomic 'aria#)es other than money that is important for monetary po)icy $ecisions aime$ at price sta#i)ity" Furthermore8 some uncertainties a#out the empirica) properties of money in the euro area !ere create$ #y the institutiona) an$ #eha'ioura) chan(es associate$ !ith the transition to monetary union8 an$ 7 more (enera))y 7 #y the possi#i)ity that specia) factors mi(ht temporari)y $istort monetary $e'e)opments" 9t is therefore not a$'isa#)e to re)y e1c)usi'e)y on monetary ana)ysis" :nother strate(y is d,re.t ,nflat,on tar6et,n6" Cather than usin( money to (ui$e monetary po)icy $ecisions8 this approach focuses on $e'e)opments in inf)ation itse)f re)ati'e to a pu#)ishe$ inf)ation tar(et" 9n practice8 $ifferent forms of inf)ation tar(etin( e1ist" 5hey a)) ha'e in common a pu#)ishe$ numerica) inf)ation tar(et an$ a pre$efine$ po)icy horiEon" .entra) #anks usin( this approach communicate monetary po)icy $ecisions in terms of a more or )ess mechanica) reaction to $e'iations in a forecast for a particu)ar measure of inf)ation from the inf)ation tar(et at a particu)ar horiEon" 5he centra) #ank+s forecast for inf)ation is therefore p)ace$ at the centre of po)icy ana)ysis an$ $iscussions8 #oth !ithin the centra) #ank an$ in its presentations to the pu#)ic" @hi)e there are many simi)arities #et!een the *.6+s strate(y an$ strate(ies of other centra) #anks8 the *.6 $eci$e$ not to pursue a $irect inf)ation tar(etin( strate(y in the sense $iscusse$ a#o'e for a num#er of reasons" First8 focusin( entire)y on a forecast inf)ation fi(ure $oes not pro'i$e a comprehensi'e an$ re)ia#)e frame!ork for i$entifyin( the nature of threats to price sta#i)ity" 5he appropriate monetary po)icy response (enera))y $epen$s on the sources of these risks to price sta#i)ity" :s a minimum8 it re/uires a $eeper ana)ysis of the un$er)yin( economic situation an$ #eha'iour than is capture$ in an inf)ation forecast a)one" -econ$8 'arious aspects of the te1t#ook inf)ation tar(etin( approach 7 such as the fi1e$ horiEon Ae"(" t!o yearsB of the forecast from !hich monetary po)icy $ecisions fee$ #ack 7 are some!hat ar#itrary an$ in many circumstances $o not appear to #e optima)" Factors that may affect inf)ation #eyon$ the chosen horiEon8 such as asset price im#a)ances8 may nee$ to #e taken into account in current monetary

po)icy $ecisions" 5his #ecame particu)ar)y o#'ious $urin( the recent financia) crisis8 an$ )e$ some inf)ation tar(etin( centra) #anks to a$opt a more f)e1i#)e stance concernin( the po)icy horiEon" 5hir$8 it is ne'erthe)ess $ifficu)t to inte(rate the information containe$ in monetary a((re(ates into inf)ation forecasts that are #ase$ on con'entiona) macroeconomic mo$e)s" Fina))y8 the *.6 takes the 'ie! that re)yin( on a sin()e forecast !ou)$ not #e appropriate8 (i'en the consi$era#)e uncertainty re)atin( to the structure of the euro area economy" 9t is consi$ere$ prefera#)e to a$opt a $i'ersifie$ approach to the ana)ysis of economic $ata #ase$ on a 'ariety of ana)ytica) metho$o)o(ies" : thir$ strate(y is ex.han6e rate tar6et,n6, !hich !as pursue$ #y se'era) *uropean countries prior to monetary union in the conte1t of the e1chan(e rate mechanism of the *uropean Monetary -ystem" For sma)) open economies !here the pro$uction an$ consumption of internationa))y tra$e$ (oo$s are a )ar(e part of the economy8 $e'e)opments in the e1chan(e rate can ha'e a si(nificant impact on the price )e'e) throu(h their effect on the price of imports" :n e1chan(e rate tar(etin( strate(y !as not consi$ere$ appropriate for the euro area8 as it is a )ar(e an$ re)ati'e)y c)ose$ economy !here the impact of e1chan(e rate $e'e)opments on the price )e'e) is more mo$est"

An"#*sis !$ sh!%t t! &e.i &< te%& %is(s t! +%i,e st"8i#it*D

E,!n!&i, "n"#*sis 5he economic ana)ysis focuses main)y on the assessment of current economic an$ financia) $e'e)opments an$ the imp)ie$ short to me$ium=term risks to price sta#i)ity" 5he economic an$ financia) 'aria#)es that are the su#&ect of this ana)ysis inc)u$e8 for e1amp)e: $e'e)opments in o'era)) outputJ a((re(ate $eman$ an$ its componentsJ fisca) po)icyJ capita) an$ )a#our market con$itionsJ a #roa$ ran(e of price an$ cost in$icatorsJ $e'e)opments in the e1chan(e rate8 the ()o#a) economy an$ the #a)ance of paymentsJ financia) markets an$ the #a)ance sheet positions of euro area sectors" :)) these factors are he)pfu) in assessin( the $ynamics of rea) acti'ity an$ the )ike)y $e'e)opment of prices from the perspecti'e of the interp)ay #et!een supp)y an$ $eman$ in the (oo$s8 ser'ices an$ factor markets at shorter horiEons" Moreo'er8 staff macroeconomic pro&ection e1ercises p)ay an important ro)e in the economic ana)ysis" 9n the economic ana)ysis8 $ue attention is pai$ to the nee$ to i$entify the nature of shocks hittin( the economy8 their effects

D ,!nt%i8 tes t! %e:e"#in) the n"t %e !$ sh!,(s

on cost an$ pricin( #eha'iour an$ the short to me$ium=term prospects for their propa(ation in the economy" 5o take appropriate $ecisions8 the Go'ernin( .ounci) nee$s to ha'e a comprehensi'e un$erstan$in( of the pre'ai)in( economic situation an$ must #e a!are of the specific nature an$ ma(nitu$e of any economic $istur#ances threatenin( price sta#i)ity" For e1amp)e8 the appropriate monetary po)icy response to the inf)ationary conse/uences of a temporary rise in the internationa) price of oi) mi(ht #e $ifferent from the appropriate response to hi(her consumer prices resu)tin( from !a(e increases not in )ine !ith pro$ucti'ity (ro!th" 5he former resu)ts in a transient an$ short=)i'e$ increase in inf)ation !hich /uick)y re'erses" 9f this shock $oes not )ea$ to hi(her inf)ation e1pectations8 it may pose )ess of a threat to price sta#i)ity o'er the me$ium term" 9n the case of e1cessi'e !a(e increases8 ho!e'er8 the $an(er e1ists that a se)f= sustainin( spira) of hi(her costs8 hi(her prices an$ hi(her !a(e $eman$s may #e create$" 5o a'oi$ such a spira)8 a $etermine$ monetary po)icy reaction to reaffirm the centra) #ank+s commitment to the maintenance of price sta#i)ity8

there#y he)pin( to sta#i)ise inf)ation e1pectations8 may #e the appropriate response"

An"#* sis !$ %e"# e,!n!&* in.i,"t!%s

:(ainst this #ack(roun$8 the *.6 re(u)ar)y re'ie!s $e'e)opments in o'era)) output8 $eman$ an$ )a#our market con$itions8 a #roa$ ran(e of price an$ cost in$icators8 an$ fisca) po)icy8 as !e)) as the #a)ance of payments for the

euro area" :mon( other thin(s8 these in$icators he)p to assess mo'ements in a((re(ate $eman$8 a((re(ate supp)y an$ the $e(ree of capacity uti)isation" 5he *.6 a)so carries out se'era) sur'eys that pro'i$e further input into the economic ana)ysis8 such as the -ur'ey of Professiona) Forecasters A-PFB" 6o1 3"4 pro'i$es information on the euro area in$icators that are ana)yse$ #y the *.6"

/!; 3=4 St"tisti,s %e#"tin) t! .e:e#!+&ents in the e %! "%e"

:s e1p)aine$ in -ection 3"28 the chain of causes an$ effects )inkin( monetary po)icy $ecisions !ith the price )e'e) is comp)e1 an$ in'o)'es time )a(s8 !hich may #e si(nificant" 5herefore8 po)icy=makers nee$ to monitor a !i$e ran(e of in$icators !hen assessin( the out)ook for price sta#i)ity" <i(h /ua)ity statistics are 'ita) to o#tain a re)ia#)e picture of the economy" Po)icy mistakes attri#uta#)e to incomp)ete or unre)ia#)e statistics can #e cost)y in terms of hi(her inf)ation an$ output 'o)ati)ity" .ommon metho$o)o(ica) stan$ar$s ha'e #een $efine$ for many areas of euro area statistics" 5he pro'ision of statistics for the euro area is #ein( continuous)y $e'e)ope$ an$ impro'e$" 5his #o1 (i'es a #rief o'er'ie! of the main #ui)$in( #)ocks of euro area statistics" A,,ess t! e %! "%e" st"tisti,s *.6 press re)eases an$ the G*uro area statisticsH section of the *.6+s Month)y 6u))etin Aor the -tatistics Pocket 6ookB are the main officia) sources" 5hey can #e $o!n)oa$e$ from the *.6+s !e#site or ac/uire$ in har$ copy free of char(e" More $etai)e$ statistica) information is a'ai)a#)e from the *.6+s -tatistica) ?ata @arehouse Ahttp: s$!"ec#" europa"euB in the G-tatisticsH section of the *.6+s !e#site" <ere8 users can e1tract $ata in 'arious formats an$ o#tain information on the respecti'e A)e(a)B $efinitions an$ concepts use$ for the 'arious statistics" 4ene%"# e,!n!&i, st"tisti,s ?ata on prices8 costs8 output8 $eman$ an$ the )a#our market are of crucia) importance for the *.6+s con$uct of monetary po)icy" 5he *.6 $efines price sta#i)ity8 its primary o#&ecti'e8 in terms of the <9.P for the euro area" Price an$ cost $e'e)opments may p)ay an important ro)e in si(na))in( future chan(es in consumer prices as chan(es in pro$uction costs fee$ throu(h to consumer prices" 3a#our costs8 !hich are an important e)ement of o'era)) pro$uction costs8 ha'e a si(nificant impact on price formation" 9n$icators of output an$ $eman$ Anationa) accounts8 short=term statistics on acti'ity in in$ustry an$ ser'ices8 or$ers8 an$ /ua)itati'e sur'ey $ataB an$ )a#our market $ata Aon emp)oyment8 unemp)oyment8 'acancies an$ )a#our market participationB pro'i$e information on the cyc)ica) position of the economy" 1!net"%* st"tisti,s "n. st"tisti,s %e#"tin) t! $in"n,i"# instit ti!ns "n. &"%(ets *ach month the *.6 compi)es an$ $isseminates a !i$e ran(e of monetary statistics an$

statistics re)atin( to financia) institutions an$ markets" Monetary a((re(ates an$ their counterparts are ca)cu)ate$ from the #a)ance sheet of the monetary financia) institution AMF9B

sector Asee -ection 2"0B" 5hese statistics a)so pro'i$e the #asis for ca)cu)atin( the minimum reser'es that MF9s must ho)$ !ith euro area nationa) centra) #anks A>.6sB Asee -ection 4"3B" Moreo'er8 the *.6 is in char(e of statistics for cre$it institutions an$ money market fun$s8 !hich are #oth part of the MF9 sector8 as !e)) as statistics for in'estment fun$s" 5he *.6 a)so compi)es harmonise$ statistics on the interest rates app)ie$ #y MF9s on )oans to an$ $eposits from euro area househo)$s an$ firms" 9t pro$uces $etai)e$ statistics on financia) markets Ae"(" the euro area yie)$ cur'e !hich is pu#)ishe$ e'ery $ayB" /"#"n,e !$ +"*&ents "n. !the% e;te%n"# st"tisti,s 6a)ance of payments $ata for the euro area inc)u$e the main transactions #et!een euro area resi$ents an$ resi$ents of countries outsi$e the euro area" :)on( !ith e1terna) tra$e statistics8 they pro'i$e important information on ho! $e'e)opments in e1ports an$ imports an$ the respecti'e price mo'ements may affect inf)ationary pressures 'ia their impact on $eman$ con$itions" 5he *.6 pu#)ishes effecti'e e1chan(e rates for the euro area an$ harmonise$ competiti'eness in$icators for euro area countries" 5hese in$ices contri#ute to the assessment of the potentia) impact on import prices of mo'ements in the e1chan(e rate an$ chan(es in commo$ity prices" 9n a$$ition8 the *.6 pu#)ishes other e1terna) statistics8 such as the /uarter)y an$ annua) statistics on the internationa) in'estment position of the euro area8 !hich pro'i$e an o'era)) picture of the euro area+s c)aims an$ )ia#i)ities 'is=T='is the rest of the !or)$" E %! "%e" ",,! nts *conomic an$ financia) accounts for the euro area present financia) transactions an$ #a)ance sheets for a)) economic sectors8 such as househo)$s an$ financia) an$ non=financia) corporations" 5hese statistics sho! the $ifferent sectors+ financia) in'estment an$ financin( acti'ities8 the $e'e)opment of !ea)th an$ $e#t8 an$ the financia) interre)ationships #et!een the sectors" 5hey fo))o! the inte(rate$ approach out)ine$ in the *uropean system of nationa) an$ re(iona) accounts A*-: 9,B" :mon( other app)ications8 the statistics are re/uire$ for an ana)ysis of the sources of portfo)io shifts in financia) #a)ance sheets an$ for cross=checkin( the consistency of the hi(h=fre/uency $ata pro'i$e$ #y monetary an$ financia) statistics" 4!:e%n&ent $in"n,e st"tisti,s 5he *.6 recei'es annua) $ata necessary to assess con'er(ence Ai"e" a Mem#er -tate+s rea$iness to a$opt the euroB an$ statistics re)atin( to the e1cessi'e $eficit proce$ure an$ the -ta#i)ity an$ Gro!th Pact" :nnua) (o'ernment finance $ata co'er re'enue an$ e1pen$iture8 (o'ernment $e#t an$ the re)ationship #et!een the (o'ernment $eficit an$ chan(es in (o'ernment $e#t" Suarter)y (o'ernment finance statistics Ainc)u$in( $ata on re'enue an$ e1pen$itureB form an important part of the inte(rate$ system of sectora) non= financia) an$ financia) accounts for the euro area" S %:e *s 6usiness an$ consumer ten$ency sur'eys pro'i$e )ea$in( an$ time)y information for /uantitati'e in$icators" -uch sur'eys are carrie$ out #y the *uropean .ommission8 commercia) $ata pro'i$ers an$ statistica) institutes" 9n a$$ition8 the *urosystem con$ucts its o!n sur'eys !hich faci)itate a time)y assessment of euro area financin( con$itions" : /uarter)y #ank )en$in( sur'ey pro'i$es information on supp)y an$ $eman$ con$itions in the euro area cre$it markets an$ on the )en$in( po)icies of euro area #anks" : #iannua) sur'ey on the access to finance of sma)) an$ me$ium=siEe$ enterprises he)ps to assess

enterprises+ financin( nee$s8 the structure of financin( an$ the a'ai)a#i)ity of finance" 5he -ur'ey of Professiona) Forecasters pro'i$es information on e1pectations re(ar$in( euro area inf)ation8 G?P (ro!th an$ unemp)oyment rates #y sector" : ne! sur'ey on euro area househo)$s+ finance an$ consumption !i)) enhance the un$erstan$in( of househo)$s+ economic $ecisions"

An"#* sis !$ $in"n,i"# &"%(et .e:e#!+& ents

?e'e)opments in financia) market in$icators an$ asset prices Asee 6o1 3",B are a)so c)ose)y monitore$ un$er the economic ana)ysis to the e1tent that mo'ements in asset prices affect price $e'e)opments 'ia income an$ !ea)th effects" For e1amp)e8 as e/uity prices

rise8 share=o!nin( househo)$s #ecome !ea)thier an$ may choose to increase their consumption" 5his !i)) a$$ to consumer $eman$ an$ may fue) $omestic inf)ationary pressures" .on'erse)y8 !hen e/uity prices fa))8 househo)$s may !e)) re$uce consumption"

/!; 3=5 E;t%",tin) in$!%&"ti!n $%!& $in"n,i"# &"%(et +%i,es

Financia) market prices incorporate in'estors+ e1pectations a#out future economic $e'e)opments" :s such8 they are a 'a)ua#)e source of information for monetary po)icy= makers" 9n particu)ar8 the term structures of nomina) an$ rea) #on$ yie)$s can #e use$ to (au(e pri'ate sector e1pectations of future interest rates an$ inf)ation" For!ar$ rates8 !hich represent the path of e1pecte$ future short=term interest rates an$ re)ate$ risk premia8 can #e $eri'e$ from the term structure of nomina) #on$ yie)$s" 5his path is c)ear)y important information for the centra) #ank8 as it in$icates !hen an$ to !hat e1tent market participants e1pect po)icy rates to chan(e" : &oint ana)ysis of nomina) an$ rea) #on$ yie)$s he)ps to (au(e pri'ate sector inf)ation e1pectations" 5he yie)$ on a con'entiona) nomina) #on$ ref)ects three components: the rea) interest rate8 in'estors+ inf)ation e1pectations8 an$ a risk premium8 !hich compensates in'estors for inf)ation uncertainty" 5he other re/uire$ in(re$ient for e1tractin( inf)ation e1pectations is the yie)$ on an inf)ation=)inke$ #on$" 9n the euro area8 there is a )ar(e market for these (o'ernment $e#t instruments !hose principa) an$ coupon payments are $etermine$ #y inf)ation $e'e)opments as measure$ #y the <9.P Ae1c)u$in( to#accoB" 9n this !ay8 #on$ ho)$ers are essentia))y shie)$e$ from inf)ation risk8 an$ the yie)$s on the #on$s can #e un$erstoo$ as measures of rea) interest rates" :ccor$in()y8 the $ifference #et!een a con'entiona) nomina) an$ an inf)ation=)inke$ #on$ yie)$ !ith the same resi$ua) maturity represents in'estors+ inf)ation e1pectations an$ re)ate$ inf)ation risk premia" 5his nomina) rea) yie)$ $ifference is kno!n as the #reak=e'en inf)ation rate A6*9CB" -ince 6*9Cs can #e compute$ for 'arious maturities8 they are usefu) for monitorin( inf)ation e1pectations an$ re)ate$ risk premia o'er a !i$e ran(e of horiEons" Moreo'er8 it is possi#)e to $eri'e for!ar$ 6*9C measures from this term structure" For e1amp)e8 the fi'e=year for!ar$ #reak=e'en inf)ation rate fi'e years ahea$ is a measure of the anchorin( of )on(er=term inf)ation e1pectations" :s 6*9Cs are #ase$ on $ai)y financia) market $ata8 they pro'i$e information at a hi(h fre/uency" <o!e'er8 some caution is !arrante$ in interpretin( the si(na)s from 6*9Cs" First8 the 6*9Cs ref)ect #oth GpureH inf)ation e1pectations an$ inf)ation risk premia" :)thou(h certain econometric approaches #ase$ on asset pricin( mo$e)s a$$ress this issue8 the resu)tin( $ecomposition into e1pectations an$ premia is su#&ect to consi$era#)e uncertainty" -econ$8 some a$$itiona) factors inf)uence the tra$in( an$ pricin( of nomina) an$ inf)ation=)inke$ #on$s8 such as8 for e1amp)e8 #on$ market )i/ui$ity con$itions or stron( f)i(ht=to=safety f)o!s in times of financia) stress8 !hich usua))y ha'e $ifferent impacts on nomina) an$ inf)ation=)inke$ #on$s" 5hese factors can apprecia#)y affect

measure$ 6*9Cs8 !ithout any un$er)yin( chan(es in inf)ation e1pectations an$ re)ate$ risk premia" -uch inf)uences8 #)urrin( the inf)ation=re)ate$ information in 6*9Cs8 !ere particu)ar)y noticea#)e $urin( 'arious phases of the financia) crisis that starte$ in 2000" For these reasons8 it is crucia) to cross=check information from 6*9Cs !ith si(na)s from other in$icators" 5hese may inc)u$e sur'ey measures of inf)ation e1pectations Aa)thou(h a'ai)a#)e at a )o!er fre/uencyB8 as !e)) as other financia) market instruments8 such as inf)ation s!ap rates" 9nf)ation s!aps are $eri'ati'e instruments un$er !hich the t!o contract parties a(ree to e1chan(e a fi1e$ payment !ith a payment that is )inke$ to actua) inf)ation $e'e)opments $urin( the contract perio$" ;sin( these instruments8 inf)ation e1pectations an$ re)ate$ risk premia can #e $eri'e$ in a simi)ar fashion as in the case of 6*9Cs" :t the same time8 the factors that $istort the information content of 6*9Cs are not e1pecte$ to affect inf)ation s!aps simu)taneous)y" 6esi$es the term structure of nomina) an$ rea) interest rates8 other asset prices contain re)e'ant information a#out pri'ate sector e1pectations" 5hese inc)u$e e1pectations of the )e'e) an$ 'aria#i)ity of future asset prices8 #ut a)so8 more in$irect)y8 e1pectations of future economic acti'ity" :ccor$in()y8 the too)kit of monetary po)icy ana)ysis a)so inc)u$es metho$s for e1tractin( market e1pectations from instruments such as e1chan(e rate futures or stock options"

Asset +%i,es ,!nt"in in$!%&"t i!n !n +%i:"te se,t!% e;+e,t"ti !ns

:sset prices an$ financia) yie)$s can a)so #e ana)yse$ to $eri'e information a#out the e1pectations of the financia) markets8 inc)u$in( e1pecte$ future price $e'e)opments" For e1amp)e8 !hen #uyin( an$ se))in( #on$s8 financia) market participants imp)icit)y re'ea) their e1pectations a#out future $e'e)opments in rea) interest rates an$ inf)ation" ;sin( a 'ariety of techni/ues8 the *.6 can ana)yse financia) prices to e1tract the markets+ imp)icit e1pectations a#out future $e'e)opments" :sset markets8 an$ thus a)so asset prices8 are #y their 'ery nature for!ar$= )ookin(" .han(es in asset prices therefore )ar(e)y ref)ect Gne!sH 7 information a#out $e'e)opments that the asset markets ha$ not #een e1pectin(" 9n this sense8 the monitorin( of asset prices mi(ht he)p to i$entify shocks that are current)y hittin( the economy8 inc)u$in( shocks to e1pectations a#out future economic $e'e)opments" 9n ana)ysin( financia) markets8 statistica) information on financia) asset prices from 'arious

sources is assesse$" %n top of this8 the *.6 co))ects certain statistica) information itse)f Asee 6o1 3"4B" ?e'e)opments in the e1chan(e rate are a)so c)ose)y assesse$ for their imp)ications for price sta#i)ity" :s a)rea$y $iscusse$ in -ection 3"28 e1chan(e rate mo'ements ha'e a $irect effect on price $e'e)opments throu(h their impact on import prices" .han(es in the e1chan(e rate may a)so a)ter the price=competiti'eness of $omestica))y pro$uce$ (oo$s on internationa) markets8 there#y inf)uencin( $eman$ con$itions an$ potentia))y the out)ook for prices" 9f such e1chan(e rate effects a)ter the e1pectations an$ #eha'iour of !a(e an$ price=setters8 the potentia) for secon$=roun$ effects stemmin( from the e1chan(e rate may e1ist" 5he *.6+s economic ana)ysis has #een enhance$ o'er time" 5his is )ar(e)y $ue to the pro(ress ma$e in the pro$uction of euro area rea) economy an$ financia) statistics an$ in the ana)ytica) processin(
An"#*sis !$ e;,h"n)e %"te .e:e#!+& ents

The e,!n!&i, "n"#*sis h"s 8een enh"n,e. !:e% ti&e

of such information" Furthermore8 a num#er of ana)ytica) an$ empirica) mo$e)s ha'e #een $e'e)ope$ to #etter assess an$ un$erstan$ past an$ on(oin( $e'e)opments8 to make more re)ia#)e short=term forecasts an$ to un$erpin the re(u)ar macroeconomic pro&ection e1ercises for the euro area economy" 6y monitorin( incomin( $ata an$ usin( a)) the a'ai)a#)e ana)ytica) too)s8 a comprehensi'e assessment of the economic situation an$ the out)ook for the euro area can #e con$ucte$ an$ up$ate$ continuous)y"
E %! "%e" &",%!e,!n !&i, +%!?e,ti!ns D

5he *.6 pu#)ishes macroeconomic pro&ections for the euro area four times a year in its Month)y 6u))etin" *urosystem staff pro&ections8 !hich are pro$uce$ &oint)y #y e1perts from #oth the *.6 an$ the euro area >.6s t!ice a year8 are pu#)ishe$ in the 2une an$ ?ecem#er issues" *.6 staff pro&ections are pu#)ishe$ in the March an$ -eptem#er issues" 5hese staff macroeconomic pro&ection e1ercises p)ay an important ro)e in the economic ana)ysis" 5hey he)p to structure an$ synthesise a )ar(e amount of economic $ata an$ ensure consistency across $ifferent sources of economic e'i$ence" 9n this respect8 they are a key e)ement in sharpenin( the assessment of economic prospects an$ the short to me$ium=term f)uctuations of inf)ation aroun$ its tren$" Pro&ections are referre$ to as such to un$er)ine that they are the resu)ts of a scenario #ase$ on a set of un$er)yin( technica) assumptions" 9nitia))y8 staff pro&ections !ere con$itione$ on a constant interest rate path" 9n fact8 it represents a scenario that is un)ike)y to materia)ise in practice8 since monetary po)icy !i)) a)!ays act to a$$ress any threats to price sta#i)ity" -ince 2une 2006 the un$er)yin(

assumption for short=term interest rates has #een #ase$ on market e1pectations" 5he chan(e !as of a pure)y technica) nature8 an$ !as moti'ate$ #y the potentia) for further impro'ements in the /ua)ity an$ interna) consistency of the pro&ections" Gi'en $e'iations #et!een the assume$ interest rate path an$ the actua) outcome8 it is c)ear that the pro&ection !i)) not8 in (enera)8 #e the #est pre$ictor of future outcomes8 in particu)ar at some!hat )on(er horiEons" 5herefore8 the macroeconomic pro&ections of inf)ation #y *urosystem *.6 staff shou)$ not8 un$er any circumstances8 #e seen as /uestionin( the commitment of the Go'ernin( .ounci) to maintainin( price sta#i)ity o'er the me$ium term" @a(e an$ price= setters Ai"e" the (o'ernment8 firms an$ househo)$sB shou)$ re)y on the *.6+s /uantitati'e $efinition of price sta#i)ity an$ especia))y the aim to keep inf)ation #e)o!8 #ut c)ose to8 2F as the #est pre$iction of me$ium an$ )on(=term price $e'e)opments" -taff macroeconomic pro&ections are pro$uce$ usin( a num#er of too)s an$ inputs" -e'era) $ifferent macroeconometric mo$e)s are a'ai)a#)e for the euro area as !e)) as for in$i'i$ua) mem#er countries" 9n a situation of mo$e) uncertainty8 it is prefera#)e to emp)oy a 'ariety of them8 em#o$yin( 'arious 'ie!s of economic structure an$ estimate$ usin( $ifferent metho$o)o(ies8 rather than re)y on a uni/ue an$ a))= encompassin( frame!ork" 5he pro&ections pro$uce$ #y these mo$e)s are a$&uste$ in the )i(ht of the technica) e1pertise of staff #oth at the *.6 an$ at the >.6s" 5hey are presente$ in the form of ran(es8 there#y ackno!)e$(in( the ine'ita#)e uncertainty surroun$in( macroeconomic pro&ections" Darious metho$s ha'e #een app)ie$ to compute
D&!.e#s "n. te,hni,"# e;+e%tise !$ st"$$D

D8"se. !n te,hni,"# "ss &+ti!n s9D

these ran(es" -ince ?ecem#er 2009 the !i$th of the ran(es has #een $eri'e$ from errors ma$e in past staff pro&ections8 !here )ar(e errors are i$entifie$ as out)iers an$ e1c)u$e$ from the samp)e"
D"%e se$ #9 "#th! )h +%!?e,ti! ns h":e s!&e #i&it"ti!ns D

e1ten$in( !e)) #eyon$ con'entiona) forecastin( horiEons" Fina))y8 !ith a 'ie! to the assumptions usua))y un$er)yin( the mo$e)s use$ for forecasts8 a centra) #ank is !e)) a$'ise$ to e'a)uate an$ compare the ro#ustness of the information stemmin( from 'arious sources" 5o fu))y assess the economic situation an$ the out)ook for price sta#i)ity8 the Go'ernin( .ounci) must recei'e input #ase$ on a 'ariety of techni/ues an$ po)icy simu)ations #ase$ on 'arious mo$e)s8 an$ must use its o!n &u$(ement8 particu)ar)y !ith re(ar$ to the )ike)ihoo$ that certain hypothetica) scenarios !i)) e'entua))y materia)ise" :n articu)ate$ an$ #roa$)y #ase$ ana)ysis of the economic forces at !ork in the economy must therefore a)!ays accompany the use of pro&ections" For a)) these reasons8 staff macroeconomic pro&ections p)ay an important #ut not a))=encompassin( ro)e in the *.6+s monetary po)icy strate(y" 5he Go'ernin( .ounci) e'a)uates them to(ether !ith many other pieces of information an$ forms of ana)ysis or(anise$ !ithin the t!o= pi))ar frame!ork" 5hese inc)u$e monetary ana)ysis an$ ana)yses of financia) prices8 in$i'i$ua) in$icators an$ the forecasts of other institutions" 5he Go'ernin( .ounci) neither assumes responsi#i)ity for the pro&ections nor $oes it use the staff pro&ections as its on)y too) for or(anisin( an$ communicatin( its assessment" 1!net"%* "n"#*sis 5he *.6+s monetary po)icy strate(y assi(ns a prominent ro)e to monetary ana)ysis" 5his ro)e ref)ects the ro#ust re)ationship #et!een monetary (ro!th an$ inf)ation o'er the me$ium to )on( run A6o1 3"6 summarises se'era) stu$ies
D'hi,h +!ints t! the nee. t! se :"%i! s s! %,es "n. te,hniE e s

:)thou(h they p)ay a usefu) ro)e8 the staff macroeconomic pro&ections ha'e their )imitations" First8 the fina) pro&ection $epen$s to a consi$era#)e e1tent on the un$er)yin( conceptua) frame!ork an$ the techni/ues emp)oye$" :ny such frame!ork is #oun$ to #e a simp)ification of rea)ity an$ may on occasions ne()ect the key issues that are re)e'ant for monetary po)icy" -econ$8 economic pro&ections can on)y pro'i$e a summary $escription of the economy an$ thus $o not incorporate a)) re)e'ant information" 9n particu)ar8 important information8 such as that containe$ in monetary a((re(ates8 is not easi)y inte(rate$ into the frame!ork use$ to pro$uce the pro&ections8 or information may chan(e after the pro&ections are fina)ise$" 5hir$8 e1pert &u$(ement is ine'ita#)y incorporate$ into pro&ections8 an$ there can #e (oo$ reasons not to a(ree !ith particu)ar 'ie!s" Fourth8 pro&ections are a)!ays #ase$ on specific assumptions 7 such as those concernin( oi) prices or e1chan(e rates 7 !ith !hich it is possi#)e to $isa(ree or !hich can chan(e rapi$)y8 makin( the pro&ections out$ate$" : further consi$eration re)ates to the fact that the $e(ree to !hich forecasts pro'e re)ia#)e ten$s to fa)) si(nificant)y as the )en(th of the forecastin( horiEon increases" %n some occasions8 nota#)y in the face of uncertainty a#out the sustaina#i)ity of asset price mo'ements8 it may #e a$'isa#)e for a centra) #ank to set interest rates in response to such $e'e)opments that mi(ht other!ise impact on price sta#i)ity at horiEons

O:e%"##9 +%!?e,ti!ns +#"* "n i&+!%t"nt9 8 t n!t "##< en,!&+"ssi n) %!#e

1!ne* +%!:i.es " n!&in"# "n,h!%

on this issueB" 5his !i$e)y accepte$ re)ationship pro'i$es a firm an$ re)ia#)e nomina) anchor for the con$uct of monetary po)icy8 offerin( an insi(ht into tren$s in inf)ation persistin( #eyon$ the horiEons typica))y associate$ !ith con'entiona) inf)ation forecasts" :ssi(nin( a prominent ro)e to monetary ana)ysis in the *.6+s strate(y therefore a)so he)ps to un$erpin the me$ium=term orientation of the sin()e monetary po)icy" 9n this respect8 the monetary ana)ysis ensures a$herence to a fun$amenta) princip)e: in respon$in( to economic $e'e)opments8 a centra) #ank must ne'er

)ose si(ht of the nee$ to ensure that the rate of money (ro!th is consistent !ith price sta#i)ity o'er sufficient)y e1ten$e$ horiEons" 6y takin( po)icy $ecisions an$ e'a)uatin( their conse/uences not on)y on the #asis of the short=term in$ications stemmin( from the ana)ysis of economic an$ financia) con$itions #ut a)so on the #asis of money an$ )i/ui$ity consi$erations8 a centra) #ank can see throu(h the transient impact of the 'arious short=term shocks on the price )e'e) an$ not #e tempte$ to take an o'er)y acti'ist course in $eterminin( the monetary po)icy stance"

/!; 3=6 1!ne* "n. +%i,es in the #!n) % n

5he )on(=run )ink #et!een money (ro!th an$ inf)ation is one of the most ro#ust an$ en$urin( empirica) fin$in(s in the entire economic )iterature" 9mportant)y8 this re)ationship has #een foun$ to ho)$ across time8 countries an$ monetary po)icy re(imes8 su((estin( that it is Ghar$!ire$H into the structure of the economy" 5he e1istence of a ro#ust )on(=run re)ationship #et!een money (ro!th an$ inf)ation has #een $ocumente$ for the euro area in a num#er of stu$ies that use $ifferent empirica) techni/ues" For i))ustrati'e purposes8 it is con'enient to re)y on statistica) fi)terin( metho$s that $isentan()e f)uctuations in money an$ inf)ation accor$in( to their $ifferent $e(rees of persistence" 9n particu)ar8 this techni/ue $istin(uishes the more persistent8 tren$=)ike mo'ements in money Athe so=ca))e$ G)o!=fre/uency componentHB from mo'ements that e1hi#it shorter f)uctuations associate$ !ith the #usiness cyc)e an$ from mo'ements that ref)ect erratic an$ transitory $e'e)opments Athe Ghi(h fre/uency componentHB" 5he e'i$ence pro'i$e$ in .hart 3"2 confirms the )on(=run )ink #et!een money an$ prices in t!o respects: the )o!=fre/uency component of M3 (ro!th mo'es c)ose)y in )ine !ith the )o!=fre/uency component of inf)ation8 an$ $e'e)opments in tren$ money (ro!th ten$ to systematica))y )ea$ $e'e)opments in tren$ inf)ation" : ro#ust )on(=run )ink #et!een money (ro!th an$ inf)ation $oes not prec)u$e the e1istence of a c)ose re)ationship a)so at hi(her fre/uencies" 9n$ee$8 empirica) stu$ies ha'e sho!n that the persistence of mo'ements in money that are #est )inke$ to tren$ inf)ation 'aries $epen$in( on the nature of the shocks hittin( the economy" 9n (enera)8 ho!e'er8 short=run mo'ements in money ten$ to #e affecte$ #y temporary shifts in money $eman$ an$ chan(es in the financia) system that ha'e no #earin( on price $e'e)opments8 there#y o#scurin( the )ink #et!een money (ro!th an$ inf)ation in the short run" For this reason8 the assessment of the short to me$ium=term inf)ation $ynamics in the *.6+s monetary po)icy frame!ork re)ies main)y on the economic ana)ysis"

Ch"%t 3=- F%eE en,* .e,!&+!siti!n !$ 13 "n. HICP

Aannua) percenta(e chan(esJ $e'iations from meanB (,6h fre>uen.,es M3 <9.P 9 6 3 0 =3 =6 =9 1904 1942 1990 1994 2006 9 6 3 0 =3 =6 =9 1", 1"0 0", 0"0 =0", =1"0 =1", 1904 1942 1990 1994 2006 1", 1"0 0", 0"0 =0", =1"0 =1",

Bus,ness .4.le fre>uen.,es

9o? fre>uen.,es M3 <9.P

4", 3"0 1", 0"0 =1", =3"0 =4", 1904 1942 1990 1994 2006

4", 3"0 1", 0"0 =1", =3"0 =4",

4 4 0 =4 =4 1904

4 4 0 =4 =4

1942

1990

1994

2006

-ources: *.68 *.6 ca)cu)ations"

5he o#ser'ation that the )ink #et!een money (ro!th an$ inf)ation is most ro#ust in the )on( run8 i"e" in the tren$ mo'ements of the t!o 'aria#)es8 $oes not cha))en(e the po)icy re)e'ance of the re)ationship" 5ren$ mo'ements in inf)ation are centra) to monetary po)icy= makin(: they are intimate)y re)ate$ to )on(=term inf)ation e1pectations an$8 precise)y #ecause of their persistent8 tren$=)ike nature8 !i)) e1ert a )astin( inf)uence on inf)ation that must #e taken into account !hen formu)atin( monetary po)icy aime$ at maintainin( price sta#i)ity" 9n a$$ition8 it is important to appreciate that o#ser'e$ mo'ements in inf)ation at any point in time ref)ect mo'ements in the components of a)) fre/uencies8 inc)u$in( the tren$ component" 5he a$'ance information re(ar$in( mo'ements in tren$ inf)ation that is em#e$$e$ in monetary tren$s is therefore of particu)ar re)e'ance for monetary po)icy"

A +%",ti, "# "++%!" ,h t! i.enti$*in) &!net"%* t%en.s

5he me$ium to )on(=term perspecti'e on risks to price sta#i)ity pro'i$e$ #y the monetary ana)ysis imp)ies that the )ink #et!een short=term monetary $e'e)opments an$ monetary po)icy $ecisions can ne'er #e $irect" 5he

practica) cha))en(e is to i$entify the uno#ser'e$ un$er)yin( rate of monetary e1pansion8 i"e" the rate of money (ro!th that pro'i$es the re)e'ant si(na) for risks to price sta#i)ity in the me$ium to )on( term" 5he statistica)

fi)terin(

approach to the i$entification of monetary tren$s $iscusse$ in 6o1 3"6 is usefu) for i))ustratin( the )on(=run )ink #et!een money an$ prices8 #ut it is not a re)ia#)e practica) frame!ork for $eri'in( po)icy assessments in rea) time" 5he smoothin( imp)icit in any fi)terin( approach re/uires the use of #oth kno!n past an$ unkno!n future o#ser'ations of money in or$er to e1tract accurate)y the )o!=fre/uency component at the en$ of the samp)e" 5he *.6+s monetary ana)ysis therefore a$opts a more practica) approach to i$entifyin( the un$er)yin( rate of monetary e1pansion" 5his approach entai)s a comprehensi'e ana)ysis of the )i/ui$ity situation8 (oin( !e)) #eyon$ the hea$)ine M3 a((re(ate an$ e1ten$in( to a carefu) e1amination of the #a)ance sheet conte1t of M3 (ro!th Ai"e" the counterparts of M3 in the conso)i$ate$ #a)ance sheet of the MF9 sector8 in particu)ar )oans to the pri'ate sectorB8 as !e)) as the composition of M3 (ro!th Ai"e" the components an$ sectora) contri#utionsB" 5he approach $ra!s on a comp)ementary use of e1pert kno!)e$(e an$ more forma) an$ structure$ metho$s8 in'o)'in( a suite of mo$e)s an$ ana)ytica) too)s A6o1 3"0 pro'i$es an o'er'ie! of some of the too)s re(u)ar)y emp)oye$B" *1pert kno!)e$(e of the institutiona) features of the financia) an$ monetary sector he)ps to i$entify the component of o#ser'e$ monetary $e'e)opments that is attri#uta#)e to transitory factors8 such as8 for instance8 chan(es in the ta1 treatment of interest or capita) income8 or a$&ustments in the portfo)io a))ocation #eha'iour of the money=ho)$in( sectors" Monetary $e'e)opments $ri'en #y such Gspecia) factorsH are not informati'e a#out the out)ook for price sta#i)ity"

5his approach is a)so re)e'ant for the operationa) use of the *.6+s reference 'a)ue for the (ro!th of the #roa$ monetary a((re(ate M3" ?e'iations of actua) monetary $e'e)opments from this reference 'a)ue can ref)ect #oth transitory an$ more persistent factors" %n)y the )atter ten$ to ha'e a #earin( on the tren$ of price $e'e)opments" Monetary po)icy hence $oes not react mechanica))y to $e'iations of M3 (ro!th from the reference 'a)ue" -uch $e'iations8 ho!e'er8 tri((er increase$ efforts to i$entify an$ assess the nature an$ persistence of the forces responsi#)e" : much richer set of information than M3 a)one 7 inc)u$in( inter a)ia the components an$ counterparts of M3 in the #anks+ #a)ance sheet8 the #eha'iour of interest rate sprea$s an$ information from the *.6+s #ank )en$in( sur'ey 7 is use$ to support these efforts" 6ut the concept of the reference 'a)ue i))ustrates the *.6+s commitment to con$uctin( a thorou(h ana)ysis of monetary $e'e)opments an$ thus pro'i$es a (uarantee of this me$ium to )on(=term orientation" 5he ro#ust )on(=run )ink #et!een money (ro!th an$ price $e'e)opments ena#)es assessments to #e ma$e re(ar$in( the me$ium to )on(=term risks to price sta#i)ity !ithout ha'in( to take a specific 'ie! on the operation of the transmission mechanism" :t the same time8 the )a(s !ith !hich protracte$ $e'iations of monetary $ynamics from historica) norms )ea$ to risks to price sta#i)ity can #e )on( an$ 'aryin(" 5his un$er)ines the importance of un$erstan$in( the channe)s throu(h !hich monetary $ynamics u)timate)y ha'e a #earin( on price $e'e)opments" @hi)e tren$s in monetary $e'e)opments are the prime focus of monetary ana)ysis8 persistent $e'iations from those tren$s are

The EC/0s %e$e%en,e :"# e $!% &!net"%* )%!'th

1!net"%* "n"#*sis $!, ses !n the &e.i & t! #!n)< te%& %is(s t! +%i,e st"8i#it*D

of particu)ar interest insofar as they ha'e imp)ications for asset market $ynamics" Monetary im#a)ances in the form of e1cess money an$ cre$it creation may manifest themse)'es in hi(her asset prices #efore they can #ecome an acti'e factor in $eterminin( consumer price tren$s o'er the me$ium to )on( term Athis )ink is $iscusse$ in -ection 3"6B"
D "n. +%!:i.es :"# "8#e insi)hts !n the t%"ns&issi! n &e,h"nis&

con$ition of the #ankin( sector an$ therefore the a'ai)a#i)ity of fun$in( to the non=financia) sector" ;)timate)y8 these types of insi(ht are a)so particu)ar)y he)pfu) !hen formin( a 'ie! on the sustaina#i)ity of a (i'en asset price confi(uration an$ the o#ser'e$ tren$s in financia) markets" From this )atter perspecti'e8 incorporatin( a systematic ana)ysis of monetary im#a)ances into the po)icy process in the form of a strate(ic monetary pi))ar can offer a centra) #ank a too) !hich can #e use$ to assess !hether financia) market $e'e)opments are hea)thy an$ sustaina#)e8 or rather a source of potentia) threat for the sta#i)ity of prices an$ of the #roa$er economy o'er a )on(er horiEon" 9n the )atter case8 a monetary pi))ar can promote a sort of G)eanin( a(ainst the !in$H attitu$e 'is=T='is financia) im#a)ances !hich can pro'i$e a 'a)ua#)e pre=empti'e )ine of $efence a(ainst risks to price sta#i)ity that are )ike)y to materia)ise in the )on( term"

5he *.6+s monetary ana)ysis aims to i$entify the un$er)yin( rate of monetary e1pansion that is ro#ust)y )inke$ to inf)ation $ynamics o'er the me$ium to )on(er term" :t the same time8 the comprehensi'e ana)ysis of monetary an$ cre$it $e'e)opments can pro'i$e 'a)ua#)e insi(hts into the operation of the transmission mechanism" 9n this )atter respect8 monetary ana)ysis he)ps sharpen the ana)ysis of a$&ustments to househo)$s+8 firms+ an$ #ank portfo)ios in response to chan(es in the yie)$ confi(uration an$ in asset prices more #roa$)y" 9n a$$ition8 the $etai)e$ ana)ysis of #ank #a)ance sheets is critica) to the assessment of the

/!; 3=7 T!!#s $!% &!net"%* "n"#*sis

5he *.6+s monetary ana)ysis has #een si(nificant)y enhance$ o'er past years" 5hrou(h the $e'e)opment of ne! too)s8 the operationa)isation of the re)ationship #et!een monetary tren$s an$ un$er)yin( price )e'e) $ynamics has #ecome richer an$ #etter un$erpinne$ ana)ytica))y" :(ainst this #ack(roun$8 the #o1 $escri#es four cate(ories of ana)ytica) too)s that are re(u)ar)y an$ e1tensi'e)y use$ in the *.6+s monetary ana)ysis: money $eman$ mo$e)s8 structura) (enera) e/ui)i#rium mo$e)s !ith an acti'e ro)e for money an$ cre$it8 money=#ase$ inf)ation risk in$icators an$ f)o!=of=fun$s ana)ysis" Money $eman$ mo$e)s are use$ to e1tract po)icy=re)e'ant assessments from monetary $e'e)opments in t!o #roa$ !ays" First8 they are use$ to /uantify the contri#utions of the 'arious macroeconomic $eterminants to o#ser'e$ monetary (ro!th" -uch an ana)ysis ena#)es a $eeper un$erstan$in( of the causes of monetary (ro!th8 !hich is necessary to form a 'ie! on the un$er)yin( rate of monetary e1pansion" -econ$8 the mo$e)s are use$ to $e'e)op normati'e #enchmarks for the )e'e) of money or money (ro!th that is consistent !ith price sta#i)ity o'er the me$ium term" <o!e'er8 $e'iations of actua) money (ro!th from such #enchmarks shou)$ #e interprete$ !ith caution" -uch $e'iations may #e re'erse$ throu(h a protracte$ perio$ of

)o! money (ro!th8 rather than hi(her inf)ation8 )inke$8 for instance8 to a $e)e'era(in( of the money=ho)$in( sectors" -tructura) (enera) e/ui)i#rium mo$e)s incorporatin( an acti'e ro)e for money an$ cre$it offer a comp)ementary approach to money $eman$ mo$e))in(" 5hese mo$e)s offer scope to i$entify the factors $ri'in( money an$ cre$it $e'e)opments more precise)y" 5hey a)so pro'i$e an interna))y consistent #eha'ioura) 'ie! of ho! money (ro!th may #e )inke$ to price $e'e)opments8 for instance8 'ia e1pectationa) effects or asset price mo'ements" 5he process of formin( a 'ie! on the un$er)yin( monetary tren$s an$8 u)timate)y8 of $ra!in( imp)ications for risks to price sta#i)ity is first an$ foremost a &u$(ementa) e1ercise of synthesisin( across mo$e)s8 too)s8 $atasets an$ ana)yses" 5his e1ercise is8 ho!e'er8 comp)emente$ #y the compi)ation of money=#ase$ inf)ation risk in$icators" 5hese are empirica) too)s that e1p)oit the )ea$in( in$icator properties of smoothe$ measures of monetary (ro!th for a'era(e inf)ation o'er a me$ium=term horiEon an$ are therefore use$ to pro'i$e a summary measure of the risks to price sta#i)ity o'er this horiEon si(na))e$ #y the monetary $ata" F)o!=of=fun$s ana)ysis $ra!s on the consistent sectora) frame!ork of the inte(rate$ euro area accounts" 9t comp)ements an$ enriches the monetary ana)ysis #ase$ on MF9 #a)ance sheets in three main !ays" First8 it e1press)y consi$ers portfo)io in'estment an$ financin( $ecisions across a #roa$er set of financia) instruments an$ a !i$er spectrum of financia) interme$iation channe)s" -econ$8 it is use$ to pro$uce financia) pro&ections8 !hich are part of the re(u)ar macroeconomic pro&ection e1ercises8 to reconci)e financia) information !ith the #ase)ine imp)icit in rea)=sector pro&ections an$ as an input for scenario ana)ysis" 5hir$8 in con&unction !ith in$icators on rea) 'aria#)es an$ asset prices8 f)o!=of=fun$s ana)ysis pro'i$es a$$itiona) insi(hts into the !orkin( of the monetary transmission mechanism" 9n the presence of continuous financia) inno'ation an$ structura) chan(e8 the ana)ytica) too)s use$ in monetary ana)ysis must #e constant)y refine$8 e1ten$e$ an$ impro'e$ in or$er to $eri'e re)ia#)e an$ ro#ust po)icy assessments" 5he *.6+s monetary ana)ysis therefore maintains a $ynamic an$ constant)y e'o)'in( ana)ytica) too)set"

C%!ss< ,he,(i n) the t'! "n"#*s es===

#et!een the t!o C%!ss<,he,(in) in$!%&"ti!n $%!& the t'! +i##"%s Ce(ar$in( the Go'ernin( .ounci)+s $ecisions on the appropriate stance of monetary po)icy8 the t!o=pi))ar approach pro'i$es a cross=check of the in$ications that stem from the shorter= term economic ana)ysis !ith those from the )on(er term=oriente$ monetary ana)ysis" :s e1p)aine$ in more $etai) a#o'e8 this cross=check ensures that monetary po)icy $oes not o'er)ook important information re)e'ant for assessin( future price tren$s" :)) comp)ementarities

pi))ars are e1p)oite$ 8 as this is the #est !ay to ensure that a)) the re)e'ant informati on for assessin( price prospects is use$ in a consisten t an$ efficient manner8 faci)itatin ( #oth the $ecision= makin( process an$ its communi cation Asee .hart 3"3B" 5his approach re$uces the risk of po)icy error cause$ #y the o'er= re)iance on a sin()e in$icator8 forecast or mo$e)" 6y takin( a

$i'ersifie$ approach to the interpretation of economic con$itions8 the *.6+s strate(y aims at a$optin( a ro#ust monetary po)icy in an uncertain en'ironment"

Ch"%t 3=3 T h e s t " 8 i # i t *< ! % i e n t e . & ! n e t "% * + ! # i , * s t % " t e ) * ! $ t h e EC/

E.ono#,. anal4s,s .ross5.he.k,n6

"onetar4 anal4s,s

Full set of ,nfor#at,on

3=6 1ONETAR6 PO5IC69 FINANCIA5 STA/I5IT6 AND ASSET PRICES

Cent %"# 8"n(s0 %!#e in +%!&!tin) $in"n,i"# st"8i#it*

Fin"n,i"# st"8i#it* "n. +%i,e st"8i#it* -ome centra) #anks p)ay an important ro)e in promotin( financia) sta#i)ity" Price sta#i)ity is no! the primary o#&ecti'e of most centra) #anks in the !or)$8 !hereas responsi#i)ity for financia) sta#i)ity is8 in most instances8 )ess forma)ise$ or has #een assi(ne$ to the (o'ernment sector" 5hose centra) #anks !ith an e1p)icit man$ate for financia) sta#i)ity may nee$ to use their monetary po)icy instruments in or$er to achie'e this (oa) re(ar$)ess of potentia) tra$e=offs !ith their price sta#i)ity o#&ecti'e" Ce(ar$in( the *.6+s monetary po)icy8 the contri#ution to financia) sta#i)ity is su#or$inate$ to the o#&ecti'e of price sta#i)ity Asee .hapter 1B" 5his assi(nment ref)ects the 'ie! that the maintenance of price sta#i)ity is u)timate)y the #est contri#ution monetary po)icy can make in support of financia) sta#i)ity"

Price sta#i)ity is a precon$ition for financia) sta#i)ity" :t the same time8 #y ensurin( an or$er)y functionin( of the transmission mechanism of monetary po)icy8 financia) sta#i)ity he)ps a centra) #ank to foster price sta#i)ity" <ence8 from a )on(er=term perspecti'e8 financia) sta#i)ity an$ price sta#i)ity are mutua))y reinforcin( po)icy o#&ecti'es" :t shorter horiEons8 financia) sta#i)ity an$ price sta#i)ity may not a)!ays (o han$ in han$" *'en in an en'ironment of price sta#i)ity8 financia) im#a)ances may e'o)'e an$ pose a cha))en(e to the maintenance of price sta#i)ity" 9n the presence of asset price #u##)es8 centra) #anks must a$opt a )on(er time perspecti'e in their monetary po)icy response" : me$ium= term orientation he)ps po)icy=makers to capture the )on(er=)astin( nature of the shock an$ to formu)ate a monetary po)icy response !hich G)eans a(ainstH accumu)atin( asset price im#a)ances" 6y contrast8 a po)icy frame!ork !ith a pre=specifie$8 fi1e$=term po)icy horiEon cou)$ )ea$ po)icy=makers to a$opt a too

Fin"n,i"# st"8i#it* "n. +%i,e st"8i#it*

short=si(hte$ perspecti'e of the risks to price sta#i)ity8 an$ possi#)y to $esta#i)ise inf)ation e1pectations" Cent%"# 8"n(s0 %es+!nse t! "sset +%i,es :t times8 asset prices seem to rise #eyon$ )e'e)s that are consi$ere$ consistent !ith an appropriate 'a)uation of the un$er)yin( asset" -uch $e'e)opments may in$icate the e1istence of a G#u##)eH in the asset market8 i"e" a rapi$ an$ sustaine$ increase in prices that is #oun$ to re'ert 7 possi#)y in a $isrupti'e manner 7 at some time in the future" @hen asset price #u##)es emer(e8 the information content of asset prices #ecomes #)urre$" 9n norma) times8 asset prices are 'ery important information 'aria#)es" :sset prices are inherent)y for!ar$=)ookin( 'aria#)es8 in the sense that they are $etermine$ main)y #y market participants+ e1pectations of the future e'o)ution of their un$er)yin( pay=offs" 6ut8 !hen a #u##)e forms8 e1pectations of the pro$ucti'e potentia) of the un$er)yin( asset mi(ht come to ref)ect e1cessi'e)y optimistic #e)iefs" 5he formation of #u##)es can $istort the a))ocation of resources in the economy an$ harm macroeconomic sta#i)ity for a pro)on(e$ perio$ of time" Gi'en its imp)ications for macroeconomic sta#i)ity8 an asset price co))apse 7 !hen e1pectations of e1cessi'e returns are sharp)y correcte$ 7 can mark the #e(innin( of perio$s of economic contraction" @hene'er the #ui)$in(=up of a #u##)e is associate$ !ith e1cess cre$it an$ )i/ui$ity creation8 asset price crashes can #ecome the cause of $ef)ationary tren$s" Fo))o!in( the co))apse of an asset price #u##)e8 the economy may un$er(o an e1ten$e$ perio$ of a$&ustment !ith #e)o!=a'era(e (ro!th rates unti) it sta#i)ises"

Asset +%i,e 8 88#es D

:sset price #u##)es therefore pose an important cha))en(e for the monetary po)icy strate(y of a centra) #ank" 9n or$er to $etect a specu)ati'e #u##)e8 it is necessary to ha'e a (oo$ un$erstan$in( of !hat the GcorrectH 'a)uation of assets is )ike)y to #e" -uch #enchmark scenarios are norma))y su#&ect to consi$era#)e uncertainty" :(ainst this #ack(roun$8 it may #e $ifficu)t for po)icy=makers to i$entify asset price #u##)es in rea) time" 5his ho)$s especia))y true in the nascent sta(e of a #u##)e" :s a resu)t8 asset price #u##)es can often on)y #e i$entifie$ !ith some $e(ree of confi$ence e1 post" @hi)e the a#o'e $ifficu)ties in $etectin( #u##)es are certain)y serious8 economic history su((ests that concomitant an$ mutua))y reinforcin( si(ns of Ge1cessesH may soun$ an a)arm #e)) that an asset price #u##)e is formin(" For e1amp)e8 a((re(ate in$icators of monetary an$ financia) im#a)ances can pro'i$e e'i$ence that he)ps assess the sustaina#i)ity of an asset price #oom" :mon( these )atter in$icators8 intense empirica) research has i$entifie$ a num#er of monetary an$ financia) 'aria#)es that seem to ha'e a c)ear corre)ation !ith asset price inf)ation8 particu)ar)y $urin( asset price #u##)es that en$ in financia) $istress" %f these 'aria#)es8 the 'o)ume of a((re(ate cre$it $emonstrates a fair)y systematic )ea$in( re)ationship !ith episo$es of asset price tur#u)ence" 5he )iterature has $iscusse$ se'era) approaches #y !hich a centra) #ank cou)$ respon$ to asset price #u##)es" 5he most ra$ica) approach is to inc)u$e asset prices $irect)y in the price in$e1 $efinin( price sta#i)ity" 5ar(etin( asset prices in a simi)ar !ay to consumer prices 7 !hether #y inc)usion in a

D"n. "%e .i$$i, #t t! i.enti$* in %e"# ti&e

In.i,"t!%s !$ e&e%)in) $in"n,i"# i&8"#"n,es

D&"* th%e"ten the e,!n!&*D

1!net"%* +!#i,* %es+!nses t! "sset +%i,e 8 88#es

#roa$ene$ price in$e1 or other!ise 7 is8 ho!e'er8 not a reasona#)e approach" 9t !ou)$ most )ike)y )ea$ to a po)icy !here#y the #u##)e is pricke$ #y monetary po)icy8 !hich !ou)$ in&ect unnecessary insta#i)ity into the economy" : further option8 !hich !as supporte$ #y many centra) #ankers prior to the ()o#a) financia) crisis8 is to refrain from usin( monetary po)icy to a$$ress an asset price #u##)e #ut instea$ Gc)ean upH its effects after it has #urst"
HP%i,(i n)I 8 88#es ,"n 8e ,!st#*

horiEons stemmin( from asset price $e'e)opments into the o'era)) comprehensi'e assessment supportin( monetary po)icy $ecisions" 5hus8 the centra) #ank !ou)$ a$opt a some!hat ti(hter po)icy stance in the face of an inf)atin( asset market than it !ou)$ ha'e $one if confronte$ !ith a simi)ar macroeconomic out)ook un$er more norma) market con$itions" 9n this !ay a centra) #ank !ou)$8 at an ear)ier sta(e of market $ynamics8 err on the si$e of caution #y tryin( to a'oi$ fee$in( the #u##)e !ith an accommo$ati'e po)icy" :n important ar(ument in fa'our of the G)eanin( a(ainst the !in$H approach is its imp)icit symmetry" 9n contrast to the Gc)ean upH approach accor$in( to !hich monetary po)icy main)y acts in support of the economy !hen asset prices ha'e sharp)y $ec)ine$8 interest rates !ou)$ a)rea$y #e use$ in or$er to counter the #ui)$=up of an asset price #u##)e" Moreo'er8 an$ un)ike the Gasset price tar(etin(H approach8 the po)icy reaction !ou)$ not #e automatic #ut in'o)'e a $e(ree of &u$(ement concernin( the source of the #u##)e an$ the state of the economy !hen the #u##)e occurs" 9n this respect8 the *.6+s t!o=pi))ar monetary po)icy strate(y offers an appropriate frame!ork to re'ea) the con$itions an$ circumstances in !hich a sustaine$ tren$ $e'e)opment in asset prices can ha'e ne(ati'e imp)ications for macroeconomic sta#i)ity" @hi)e the *.6 $oes not tar(et asset prices8 it c)ose)y monitors phenomena 7 mountin( e1cesses in the creation of money an$ cre$it 7 !hich8 if $etecte$ in con&unction !ith sustaine$ market $ynamics8 can re'ea) the nature of the financia) facts an$ pro'i$e information on !hether these financia) facts shou)$ #e taken into account in tracin( out the po)icy course" Monetary ana)ysis he)ps
Dh"s ".:"nt" )es

5he option 7 Gprickin(H #u##)es #y means of monetary po)icy 7 is not 'ia#)e for a sta#i)ity=oriente$ monetary po)icy" -uch an approach !ou)$ re/uire a stron( ti(htenin( of the po)icy stance in or$er to counter specu)ation !hen a #u##)e is $etecte$" 9t !ou)$ a)so a$'erse)y affect (ro!th perspecti'es8 an$ may therefore pose serious risks for the entire economy" Moreo'er8 a #u##)e cou)$ initia))y pro'e resi)ient to a((ressi'e interest rate hikes8 thus increasin( the risk that monetary po)icy o'erreacts" -imi)ar)y8 e1perience (aine$ $urin( the financia) crisis has cha))en(e$ the con'entiona) !is$om accor$in( to !hich centra) #anks shou)$ )et asset price #u##)es #urst natura))y8 rather than actin( to contain them8 an$ then ease po)icy a((ressi'e)y to repair its a$'erse macroeconomic fa))out" 5his po)icy 7 if con$ucte$ systematica))y 7 can intro$uce a #ias in the stance of monetary po)icy !hich can increase the pro#a#i)ity of a #u##)e formin( in the first p)ace" :n approach !hich has (aine$ increasin( popu)arity o'er time is to G)ean a(ainst the !in$H of financia) market e1cesses" -uch an approach $oes not entai) tar(etin( any particu)ar asset price or in$e1" Cather8 it aims to incorporate an ana)ysis of risks to price sta#i)ity o'er me$ium to )on(=term

The EC/0s &!net"%* +!#i,* st%"te)* t"(es "sset +%i,e .e:e#!+&e nts int! ",,! nt

The H#e"n in) ")"in st the 'in.I "++%!",hD

to assess $e'e)opments in asset prices an$ the $e(ree to !hich they pose a risk to price sta#i)ity in a more $istant future" 5his is ho! e)ements of the G)eanin( a(ainst the !in$H approach ha'e #een incorporate$ in the *.6+s strate(y" Furthermore8 a re(u)ar cross= check of the outcome of the economic ana)ysis !ith that of the monetary ana)ysis )en(thens the horiEon o'er !hich the *.6 traces the )ike)y $e'e)opments in consumer prices" 5hanks to the me$ium to )on(=term perspecti'e pro'i$e$ #y the monetary pi))ar an$ the systematic monitorin( of monetary an$ cre$it $e'e)opments con$ucte$ !ithin the monetary ana)ysis8 the t!o=pi))ar strate(y $oes not o'er)ook the potentia) ro)e of such $e'e)opments as $ri'in( forces of consumer price inf)ation in the me$ium to )on( run" 3=7 TRANSPARENC 6 AND CO11UNICATI ON
In.e+en. en,e "n. t%"ns+"%en, *

:ccounta#i)ity is a fun$amenta) precon$ition for8 an$ a core e)ement of8 $emocratic )e(itimacy" : c)ear)y $efine$ man$ate

Cent%"# 8"n( in.e+en.en,e9 ",,! nt"8i#it* "n. t%"ns+"%en,* :s e1p)aine$ in .hapter 18 there are (oo$ reasons to entrust the task of maintainin( price sta#i)ity to an in$epen$ent centra) #ank8 !hich is not su#&ect to potentia) po)itica) pressure" :t the same time8 in $emocratic societies8 centra) #ank in$epen$ence nee$s to #e #a)ance$ !ith accounta#i)ity to the pu#)ic an$ its e)ecte$ representati'es" :ccounta#i)ity can #e un$erstoo$ as the )e(a) an$ po)itica) o#)i(ation of an in$epen$ent centra) #ank to proper)y e1p)ain an$ &ustify its $ecisions to the citiEens an$ their e)ecte$ representati'es8 there#y ho)$in( the centra) #ank responsi#)e for fu)fi))in( its o#&ecti'e"

is the #asis for the $emocratic )e(itimacy of $e)e(atin( monetary po)icy to an in$epen$ent centra) #ank8 an$ an o'erri$in( focus on the man$ate of price sta#i)ity ena#)es the pu#)ic to ho)$ an in$epen$ent centra) #ank more easi)y accounta#)e" 9n this sense8 accounta#i)it y imposes $iscip)ine on the centra) #ank to perform its tasks !ith hi(h )e'e)s of professiona)i sm" 5he appropriate channe)s for ensurin( the accounta#i)it y of a centra) #ank $epen$ on the institutiona) frame!ork an$ on the #ank+s man$ate" :s a #o$y esta#)ishe$

#y 'irtue of the 5reaties8 an$ actin( !ithin the )imits of the po!ers conferre$ upon it8 the *.6 has the statutory task of maintainin( price sta#i)ity an$ of performin( other centra) #ankin( functions for the euro area as a !ho)e" 5herefore8 the *.6 is accounta#)e first an$ foremost to *; citiEens8 an$ 7 more forma))y 7 to the *uropean Par)iament8 !hich is the on)y *uropean institution $irect)y e)ecte$ #y *; citiEens" 5he *.6+s re)ationship !ith the *uropean Par)iament fu))y respects centra) #ank in$epen$ence" 5he 5reaty on the Functionin( of the *uropean ;nion sets $o!n a num#er of reportin( re/uirements for the *.6 Ae"(" the

presentation of the :nnua) Ceport #y the Presi$ent to the *uropean Par)iament an$ the *; .ounci)B an$ pro'i$es that the Presi$ent Aan$ other *1ecuti'e 6oar$ mem#ers on an a$ hoc #asisB may appear #efore the *uropean Par)iament8 !ith a 'ie! to ensurin( accounta#i)ity Asee .hapter 1B" : concept c)ose)y re)ate$ to yet $istinct from accounta#i)ity is that of centra) #ank transparency" 5ransparency can #e $efine$ as an en'ironment in !hich the centra) #ank pro'i$es the (enera)

The EC/ is ",,! nt"8#e t! EU ,itiJens

The EC/0s %e#"ti!ns 'ith the E %!+e"n P"%#i"&ent

T%"ns+"%en,*

pu#)ic an$ the markets !ith a)) re)e'ant information on its strate(y8 assessments an$ po)icy $ecisions as !e)) as its proce$ures8 an$ $oes so in an open8 c)ear an$ time)y manner" 5o$ay8 most centra) #anks8 inc)u$in( the *.68 consi$er transparency to #e a crucia) component of their monetary po)icy frame!ork8 emphasisin( the importance of effecti'e communication an$ proper interaction !ith the pu#)ic" ;)timate)y8 a)) efforts to enhance transparency are aime$ at ensurin( that monetary po)icy is #etter un$erstoo$ #y the pu#)ic an$ therefore #ecomes more cre$i#)e an$ effecti'e"
Wh"t &"(es " ,ent%"# 8"n( t%"ns+"%e ntK

a#)e an$ !i))in( to achie'e its po)icy man$ate8 inf)ation e1pectations are !e)) anchore$" 9n this respect8 fre/uent communication a#out the centra) #ank+s assessment of the economic situation is particu)ar)y usefu)" Furthermore8 it is he)pfu) for centra) #anks to #e open an$ rea)istic a#out !hat monetary po)icy can $o an$8 e'en more important)y8 !hat it cannot $o Asee -ection 3"1B" -econ$8 a stron( commitment to transparency imposes se)f=$iscip)ine on po)icy=makers" 5his he)ps to ensure that their po)icy $ecisions an$ e1p)anations are consistent o'er time" Faci)itatin( pu#)ic scrutiny of monetary po)icy actions enhances the incenti'es for the $ecision= makin( #o$ies to fu)fi) their man$ates in an appropriate manner" 5hir$8 #y pu#)ic)y announcin( its monetary po)icy strate(y an$ communicatin( its re(u)ar assessment of economic $e'e)opments8 the centra) #ank pro'i$es (ui$ance to the markets so that e1pectations can #e forme$ more efficient)y an$ accurate)y" 5his he)ps the markets to un$erstan$ the systematic response pattern of monetary po)icy to economic $e'e)opments an$ shocks an$ thus to anticipate the #roa$ $irection of monetary po)icy o'er the me$ium term8 makin( po)icy mo'es more pre$icta#)e" -uch pre$icta#i)ity is important for the con$uct of monetary po)icy: !hi)e centra) #anks on)y $irect)y contro) 'ery short= term interest rates8 the e1pecte$ path of these rates o'er )on(er horiEons an$ the premia for uncertainty are a)so si(nificant for the transmission of monetary po)icy to the economy" 9f a(ents can #roa$)y anticipate po)icy responses8 this a))o!s a rapi$ incorporation of any Ae1pecte$B chan(es in monetary po)icy into financia) 'aria#)es" 5his in turn can shorten the process #y !hich monetary po)icy is transmitte$ into in'estment an$
D i&+!ses se#$< .is,i+#ine !n +!#i,*< &"(e%s D

First an$ foremost8 transparency re/uires the centra) #ank to c)ear)y e1p)ain ho! it interprets its man$ate an$ to #e forthcomin( a#out its po)icy (oa)s" 5his he)ps the pu#)ic to monitor an$ e'a)uate the centra) #ank+s performance" 9n a$$ition8 the centra) #ank nee$s to e1p)ain the ana)ytica) frame!ork use$ for its interna) $ecision=makin( an$ its assessment of the state of the economy8 an$ to fre/uent)y make c)ear the economic rationa)e un$er)yin( its po)icy $ecisions" 9n this respect8 transparency can #e enhance$ #y pro'i$in( a systematic frame!ork for #oth interna) $ecision= makin( an$ e1terna) communication !ith the pu#)ic8 in particu)ar #y means of a pu#)ic)y announce$ monetary po)icy strate(y" 5he #ank+s o'erri$in( concern !ith re(ar$ to transparency must #e the effecti'eness of monetary po)icy in meetin( its statutory o#&ecti'es" 5ransparency can ren$er monetary po)icy more effecti'e for se'era) reasons" First8 #ein( c)ear a#out its man$ate an$ ho! it (oes a#out fu)fi))in( it he)ps a centra) #ank to foster cre$i#i)ity" @hen a centra) #ank is percei'e$ as #ein(

D"n. +%!:i.es ) i."n,e t! the &"%(ets

T%"ns+"% en,* $!ste%s ,%e.i8i#it*9 D

consumption $ecisions an$ acce)erate any necessary economic a$&ustments8 thus potentia))y enhancin( the effecti'eness of monetary po)icy" The ,!&& ni,"ti!n %!#e !$ the EC/0s &!net"%* +!#i,* st%"te)* 9n or$er to promote a #etter un$erstan$in( of monetary po)icy8 the main aspects of the process of monetary po)icy=makin( shou)$ #e ma$e un$erstan$a#)e for the (enera) pu#)ic" 9n practice8 ho!e'er8 it is $ifficu)t to pro'i$e the pu#)ic !ith a comp)ete)y e1hausti'e an$ inte))i(i#)e communication of a)) the $etai)e$ e)ements an$ aspects of the interna) monetary po)icy=makin( process !hi)e at the same time ensurin( that this information is proper)y un$erstoo$" 5herefore8 in presentin( monetary po)icy to the pu#)ic8 'arious choices ha'e to #e ma$e" 5ransparency means more than simp)y re)easin( information" 9t a)so re/uires structurin( that information in such a !ay that it can #e un$erstoo$ #y the pu#)ic" 5ransparency has he)pe$ to so)i$)y anchor inf)ation e1pectations" 6y pu#)ic)y announcin( its monetary po)icy strate(y an$ communicatin( its re(u)ar assessments of the risks to price sta#i)ity in a transparent manner8 the *.6 has achie'e$ a hi(h $e(ree of pre$icta#i)ity8 thus makin( monetary po)icy more effecti'e" 9n$ee$8 the a#i)ity of financia)

markets to pre$ict monetary po)icy $ecisions has (enera))y increase$ o'er the )ast $eca$e" 5he *.6+s transparent approach has enhance$ the markets+ un$erstan$in( of monetary po)icy" <o!e'er8 efforts to con'ey a c)ear messa(e shou)$ not $etract from the nee$ to e1p)ain the actua) nature of po)icy=makin(" :ny communication must ref)ect the fact that monetary po)icy has to operate in a comp)e18 uncertain an$ constant)y e'o)'in( en'ironment" 5he e1terna) communication of the *.6+s monetary po)icy strate(y p)aces a premium on faithfu))y ref)ectin( this en'ironment" 5he e1terna) presentation of the *.6+s strate(y may #e re)ati'e)y comp)e1 compare$ !ith some other strate(ies Asuch as monetary tar(etin( or inf)ation tar(etin(8 see 6o1 3"3B8 #ut it rea)istica))y ref)ects the $i'ersifie$ approach to monetary po)icy that the *.6 has a$opte$ for its interna) $ecision= makin(" *ffecti'e communication a)so re/uires the centra) #ank to a$$ress a 'ariety of au$iences an$ to use a 'ariety of channe)s" 5o this en$8 in its communication acti'ities8 the *.6 has (one #eyon$ the forma) re/uirements of the 5reaty on the Functionin( of the *uropean ;nion in a$optin( a$$itiona) means of ensurin( accounta#i)ity an$ transparency Asee 6o1 3"4B"
D"n. 8e ,!nsiste nt 'ith inte%n"# .e,isi!n< &"(in)

P%esent" ti!n !$ &!net"%* +!#i,* t! the + 8#i,D

Dnee.s t! t"(e int! ",,! nt the ,!&+#e;it* !$ +!#i,*< &"(in)D

/!; 3=8 7e* ,!&& ni,"ti!n ,h"nne#s se. 8* the EC/

5he month)y press conferences he)$ #y the Presi$ent an$ the Dice=Presi$ent an$ the Month)y 6u))etin are t!o of the most important communication channe)s use$ #y the *.6" 5he Presi$ent+s intro$uctory statement at the press conference pro'i$es a comprehensi'e summary of the po)icy=re)e'ant assessment of economic $e'e)opments" 9t is structure$ a)on( the )ines of the *.6+s monetary po)icy strate(y an$ its te1t is a(ree$ #y the Go'ernin( .ounci)" 5he month)y press conference inc)u$es a /uestion an$ ans!er session8 !hich is atten$e$ #y 'arious me$ia representati'es from across the euro area an$ #eyon$8 an$ pro'i$es a p)atform for a time)y an$ e'en=han$e$ e1p)anation of monetary po)icy $ecisions to the pu#)ic" 5ranscripts of the press conference are ma$e a'ai)a#)e on the *.6+s !e#site on)y a fe! hours )ater" 5he press conference is therefore an effecti'e means of presentin( an$ e1p)ainin( the $iscussions in the Go'ernin( .ounci) an$ thus the monetary po)icy $ecision=makin( process" 5he Month)y 6u))etin pro'i$es the (enera) pu#)ic an$ the financia) markets !ith a $etai)e$ an$ comprehensi'e ana)ysis of the economic en'ironment" 9t is usua))y pu#)ishe$ one !eek after the meetin( of the Go'ernin( .ounci) an$ contains the information that the Go'ernin( .ounci) possesse$ !hen it took its po)icy $ecisions" 5he Month)y 6u))etin a)so contains artic)es !hich pro'i$e insi(hts into )on(=term $e'e)opments8 (enera) topics or into the ana)ytica) too)s use$ #y the *urosystem !ithin the frame!ork of the monetary po)icy strate(y" 9n a$$ition8 the Presi$ent of the *.6 appears four times a year #efore the *uropean Par)iament+s .ommittee on *conomic an$ Monetary :ffairs" 5he Presi$ent e1p)ains the *.6+s po)icy $ecisions an$ then ans!ers /uestions pose$ #y .ommittee mem#ers" 5he .ommittee meetin(s are open to the pu#)ic an$ the transcripts of the Presi$ent+s testimonies are su#se/uent)y pu#)ishe$ on the !e#sites of #oth the *uropean Par)iament an$ the *.6" %ther mem#ers of the *1ecuti'e 6oar$ of the *.6 a)so appear #efore the .ommittee" 5he mem#ers of the Go'ernin( .ounci) take on numerous pu#)ic en(a(ements" -peeches #y the Presi$ent an$ other mem#ers of the *1ecuti'e 6oar$ an$ Go'ernin( .ounci) are important too)s for e1p)ainin( the *.6+s 'ie!s to the pu#)ic" :nother ma&or channe) for reachin( internationa) as !e)) as )oca) tar(et (roups is inter'ie!s (rante$ #y Go'ernin( .ounci) mem#ers" 5he *.6 a)so recei'es a )ar(e num#er of 'isits from mem#ers of the (enera) pu#)ic as !e)) as e1perts from a 'ariety of institutions" 9t is committe$ to open $ia)o(ue !ith the aca$emic !or)$" Cesearch resu)ts of a technica) nature an$ po)icy= re)ate$ stu$ies of (enera) interest are pu#)ishe$ #y staff mem#ers in the *.6+s @orkin( Paper an$ %ccasiona) Paper series respecti'e)y" Fina))y8 the transparency of monetary po)icy a)so re/uires that the statistica) $ata co))ecte$ #y the centra) #ank Asee 6o1 3"4B #e pu#)ishe$8 once their re)ia#i)ity has #een confirme$" 5he time)y pu#)ication of the $ata ena#)es the *.6 to share !ith the pu#)ic the information it possesses on economic $e'e)opments in the euro area an$ there#y faci)itates the communication of monetary po)icy $ecisions #y the Go'ernin( .ounci)" Gi'en that the *urosystem is o#)i(e$ to communicate in a mu)ticu)tura) an$ mu)ti)in(ua) en'ironment8 the >.6s are essentia) p)ayers in the communication strate(y" 5hey maintain c)ose contact !ith nationa) an$ re(iona) au$iences8 trans)atin( the po)icy si(na)s into $ifferent )an(ua(es an$ tai)orin( them to the nationa) conte1t"

3=8 THE EC/0S 1ONETAR6 PO5IC6 STRATE46F A 4UIDEPOST IN THE FINANCIA5 CRISIS The EC/0s %es+!nse t! the $in"n,i"# ,%isis : (oo$ strate(y shou)$ #e appropriate #oth in norma) times an$ !hen po)icy= makers face hei(htene$ uncertainty" ?urin( the financia) crisis8 the *.6+s monetary po)icy strate(y continue$ to perform its ro)e as a (ui$epost for monetary po)icy $ecisions" 5he e1perience (aine$ throu(hout the crisis has $emonstrate$ the ro#ustness an$ effecti'eness of the t!o=pi))ar frame!ork" 9t ena#)e$ the Go'ernin( .ounci) to a$opt a #roa$ set of measures an$ to focus on price sta#i)ity o'er the me$ium term" 9n$ee$8 the main e)ements of the strate(y ha'e pro'i$e$ usefu) (ui$ance in formu)atin( an$ e1p)ainin( the *.6+s monetary po)icy since the intro$uction of the euro Asee .hapter ,B" 9n response to the financia) crisis8 the *urosystem has taken measures that are unprece$ente$ in nature8 scope an$ ma(nitu$e" 5hey represent an e1traor$inary response to e1ceptiona) circumstances in a conte1t of unusa))y hi(h uncertainty an$ insta#i)ity in financia) markets" 9n a$$ition to con'entiona) interest rate cuts to historica))y )o! )e'e)s8 the Go'ernin( .ounci) $eci$e$ to a$opt non=stan$ar$ measures comprisin( *nhance$ .re$it -upport an$ the -ecurities Markets Pro(ramme Asee 6o1 ,"1B" 5he *.6+s forma) e1it strate(y comprises a set of princip)es to (ui$e it in phasin( out the 'arious non=stan$ar$ measures a$opte$ $urin( the financia) crisis" :n accommo$ati'e monetary

N!n< st"n." %. &e"s %es

The EC/+s e;it st%"te )*

po)icy for an o'er)y )on( perio$ risks in the future the emer(ence of inf)ationary pressures an$ a)so pa'es the !ay for im#a)ances in the financia) markets" :(ainst the #ack(roun$ of e1treme)y )o! interest rates an$ a#un$ant )i/ui$ity8 the centra) #ank+s cre$i#)e commitment to un!in$ the stan$ar$ an$ non=stan$ar$ measures once con$itions returne$ to norma) !as of the essence" 9n$ee$8 it !as emphasise$ #y the *.6 that the non= stan$ar$ measures !ere $esi(ne$ !ith e1it consi$erations in min$" :t the same time8 to a'oi$ premature e1pectations of an e1it8 the *.6 stresse$ that ha'in( an e1it strate(y in p)ace !as not to #e confuse$ !ith acti'atin( this e1it" 5he *.6 a)so e1p)aine$ in $etai) the rationa)e un$er)yin( the

intro$uction an$ phasin(= out of its non=stan$ar$ measures" The EC/ 0s ,!& & n i,"ti !n . %i n) the $in" n,i" # ,%isi s :s e1p)aine$ in -ection 3"08 communicati on is an important e)ement of the *.6+s monetary po)icy strate(y" :s an essentia) too) for mana(in( the e1pectations of the pri'ate sector8 it makes a si(nificant contri#ution to enhancin( the effecti'enes s an$ cre$i#i)ity of monetary po)icy" 5his is particu)ar)y important $urin(

perio$s of hei(htene$ uncertainty" 5hrou(hout the financia) crisis an$ in its aftermath8 the aim of the *.6+s communication has #een to e1p)ain the reasonin( #ehin$ the e1ceptiona) measures intro$uce$ an$ to contri#ute to restorin( pri'ate sector confi$ence in the economy an$ the functionin( of markets" 9n this respect8 the *.6 has pro'i$e$ time)y an$ factua) information in or$er to #e as transparent as possi#)e (i'en the e1traor$inary circumstances" 5he *.6+s communication since the onset of the financia) turmoi) in :u(ust 2000 has )ar(e)y contri#ute$ to keepin( )on(er=term inf)ation e1pectations in the euro area firm)y anchore$ at )e'e)s

C!&& ni,"ti!n "s " t!!# t! +%ese%:e ,!n$i.en,e

consistent !ith the *.6+s $efinition of price sta#i)ity Asee .hart 3"4B"
C!%ne%st !nes !$ the e;it st%"te) *

5he *.6 has communicate$ that its e1it from the non=stan$ar$ measures re)ies on four cornerstones"

mechanisms" 5he o'er!he)min( ma&ority of measures !ere $esi(ne$ to phase out automatica))y un)ess e1press)y maintaine$"

5he thir$ conceptua) cornerstone of the e1it strate(y is the *.6+s permanent %ne cornerstone of the e1it strate(y is a#i)ity to act8 i"e" the technica) an$ the c)ose )ink to the *.6+s monetary institutiona) capa#i)ity to take po)icy strate(y an$ the primary appropriate $ecisions an$ to imp)ement !hene'er circumstances o#&ecti'e of price sta#i)ity" 5his them imp)ies that the non=stan$ar$ !arrant" 5his con$ition is supporte$ measures cou)$ #e maintaine$ as )on( #y the operationa) frame!ork of as si(nificant)y a#norma) tensions8 the *urosystem an$ the institutiona) cre$it $istortions an$ the impairment of in$epen$ence pro'i$e$ #y the 5reaties" the monetary po)icy transmission mechanism persist" :s soon as their 5he fourth cornerstone is the cre$i#i)ity continuation poses a threat to the of the *urosystem an$ its reputation for achie'ement of price sta#i)ity8 actin( !hen $eeme$ appropriate" 5he ho!e'er8 their prompt !ith$ra!a) is *.6 has earne$ this reputation thanks una'oi$a#)e" to its c)ear track recor$ esta#)ishe$ o'er the first $eca$e of *M;" 5he *.6+s : secon$ cornerstone is the for!ar$= cre$i#)e commitment to maintainin( )ookin( initia) $esi(n of the measures" price sta#i)ity he)pe$ to sta#i)ise :)) non=stan$ar$ measures are of a inf)ation e1pectations in the euro area temporary nature an$8 to a certain throu(hout the crisis" $e(ree8 ha'e #ui)t=in an$ se)f= correctin(

Ch"%t 3=4 In$#"ti!n e;+e,t"ti!ns in the e %! "%e"

Aannua) percenta(e chan(esB <9.P inf)ation fi'e=year for!ar$ fi'e years ahea$ 6*9C upper #oun$ of $efinition of price sta#i)ity <9.P inf)ation e1pectations A-PFB for the fi'e=year perio$ ahea$ )on(er=term inf)ation e1pectations Asi1 to ten yearsB 6 , 4 3 2 1 0 =1 6 , 4 3 2 1 0 =1

%ta6e Three of E"!

1990

1992

1994

1996

1994

2000

2002

2004

2006

2004

2010

-ources: *.68 *urostat8 Ceuters an$ .onsensus *conomics"

>ote: 6*9C refers to #reak=e'en inf)ation rate"

4 1ONETAR6 I1P5E1ENTATION

PO5IC6

,hi! &hapter e-plain! ho) the Euro!y!te" i"ple"ent! "onetary poli&y #e&i!ion! u!in' it! "onetary poli&y in!tru"ent!+ ,he %ir!t !e&tion 'i.e! an o.er.ie) o% the o$0e&ti.e! an# 'eneral prin&iple! that 'o.ern the %un&tionin' o% the Euro!y!te"4! operational %ra"e)or + ,he !e&on# !e&tion $rie%ly #e!&ri$e! the "ain "onetary poli&y in!tru"ent! (open "ar et operation!/ the "ini"u" re!er.e !y!te" an# the !tan#in' %a&ilitie!)/ )hile the !u$!e1uent !e&tion! e-a"ine the!e in 'reater #etail an# pre!ent the intera&tion $et)een the "onetary poli&y in!tru"ent! an# the $an !4 li1ui#ity nee#! in the &onte-t o% a &entral $an $alan&e !heet+ ,he %inal !e&tion pro.i#e! a $rie% a!!e!!"ent o% the operational %ra"e)or 4! per%or"an&e in the %ir!t 12 year! o% the !in'le "onetary poli&y+
&!net"%* +!#i,* st%"te)*

The &!ne* &"%(et "n. the t%"ns&issi! n !$ &!net"%* +!#i,*

4=1 O/CECTI>ES AND 4ENERA5 PRINCIP5ES /EHIND THE DESI4N OF THE OPERATIONA5 FRA1EWOR7 :s $iscusse$ in .hapter 38 short=term money market rates p)ay a pi'ota) ro)e in the transmission of monetary po)icy" 6y steerin( such rates8 monetary po)icy e1erts si(nificant inf)uence o'er short=term nomina) market interest rates an$8 throu(h 'arious channe)s8 o'er the spen$in( $ecisions of companies an$ househo)$s8 monetary an$ financia) $e'e)opments an$8 u)timate)y8 the price )e'e)" 9n or$er to achie'e its primary o#&ecti'e of maintainin( price sta#i)ity for the euro area as a !ho)e8 the *urosystem uses a set of monetary po)icy instruments an$ proce$ures" 5hese pro'i$e the operationa) frame!ork for the imp)ementation of monetary po)icy $ecisions in practice" 5he operationa) frame!ork an$ the monetary po)icy strate(y each ha'e a specific ro)e in the imp)ementation of monetary po)icy" 5he strate(y $etermines !hich )e'e) of money market 93

interest rates is re/uire$ to maintain price sta#i)ity o'er the me$ium term8

The !+e%"ti!n "# $%"&e'!%( D

D"n. the

!hereas the operationa) frame!ork $etermines ho! to achie'e this interest rate )e'e) usin( the a'ai)a#)e monetary po)icy instruments an$ proce$ures" : centra) #ank steers short= term money market rates #y si(na))in( its monetary po)icy stance throu(h its $ecisions on key interest rates an$ #y mana(in( the )i/ui$ity situation in the money market" 5he centra) #ank8 as the so)e issuer of #anknotes an$ #ank reser'es8 is the monopo)y supp)ier of the monetary #ase" 5he monetary #ase of the euro area consists of currency A#anknotes an$ coinsB in circu)ation8 the reser'es he)$ #y counterparties !ith the

*urosystem an$ recourse #y cre$it institutions to the *urosystem+s $eposit faci)ity" 5hese items are )ia#i)ities on the *urosystem+s #a)ance sheet" Ceser'es can #e #roken $o!n further into re/uire$ an$ e1cess reser'es" 9n the *urosystem+s minimum reser'e system8 counterparties are o#)i(e$ to ho)$ reser'es !ith the nationa) centra) #anks A>.6sB Asee -ection 4"3B" 9n a$$ition to these re/uire$ reser'es8 cre$it institutions usua))y ho)$ on)y a sma)) amount of 'o)untary e1cess reser'es !ith the *urosystem" 5his may8 ho!e'er8 #e $ifferent in perio$s

The $ n,ti!ns !$ the !+e%"ti!n"# $%"&e'!%( in,# .e stee%in) sh!%t<te%& inte%est %"tes "n. &"n")in) #iE i.it*9 D

94

of acute financia) market tensions" 6y 'irtue of its monopo)y8 a centra) #ank is a#)e to mana(e the )i/ui$ity situation in the money market an$ inf)uence money market interest rates" 6roa$)y speakin(8 the *urosystem a))ocates an amount of )i/ui$ity that a))o!s euro area cre$it institutions to fu)fi) their )i/ui$ity nee$s at a price that is in )ine !ith its si(na))e$ po)icy intentions8 as ref)ecte$ in the key interest rates set #y the *.6" 9n a$$ition to steerin( interest rates #y mana(in( )i/ui$ity8 a centra) #ank can a)so si(na) its monetary po)icy stance to the money market" 5o si(na) a chan(e in the monetary po)icy stance8 a centra) #ank usua))y chan(es the con$itions un$er !hich it is !i))in( to enter into transactions !ith cre$it institutions" 5he most o#'ious of these are the key interest rates set #y the centra) #ank" 9n its operations8 a centra) #ank a)so aims to ensure an or$er)y functionin( of the money market an$ to he)p cre$it institutions to meet their )i/ui$ity nee$s in a smooth manner" 5his is achie'e$ #y pro'i$in( re(u)ar refinancin( to cre$it institutions8 as !e)) as faci)ities that a))o! them to $ea) !ith en$=of=$ay im#a)ances an$ transitory )i/ui$ity f)uctuations" 5he operationa) frame!ork of the *urosystem is #ase$ on a num#er of (ui$in( princip)es" 5hese princip)es act in a comp)ementary an$ mutua))y reinforcin( manner" 5he o'erri$in( princip)e is operationa) efficiency" 5his can #e $efine$ as the capacity of the operationa) frame!ork to ena#)e monetary po)icy $ecisions to fee$ throu(h as precise)y an$ as /uick)y as possi#)e to short=term money market rates" 5hese in turn affect the price )e'e) throu(h the 'arious channe)s of

the monetary po)icy transmission mechanism" 9n other !or$s8 operationa) efficiency ensures the si(na))in( an$ transmission of monetary po)icy" :s re(ar$s effecti'e si(na))in(8 the operationa) frame!ork nee$s to a))o! the $etermination of the monetary po)icy stance to #e kept separate from )i/ui$ity mana(ement" -pecifica))y8 this imp)ies a strict $istinction #et!een8 on the one han$8 monetary po)icy $ecisions that are (eare$ to!ar$s the maintenance of price sta#i)ity an$8 on the other han$8 )i/ui$ity operations inten$e$ to keep market interest rates c)ose to the )e'e) $etermine$ #y the monetary po)icy stance" 5o ensure the efficient transmission of monetary po)icy8 the operationa) frame!ork has to #e consistent !ith

D si)n"##in) the &!net"%* +!#i,* st"n,e9 D

D"n. ens %in ) "n !%.e%#* $ n,ti!n in) !$ the &!n e* &"%( et

The (e* +%in,i+#e s !$ the !+e%"ti!n" # $%"&e'!%( "%e !+e%"ti!n" # e$$i,ien,*9

the princip)es of a market= oriente$ economy in !hich competition is key to ensurin( the efficient a))ocation of resources" 5his princip)e is enshrine$ in the 5reaty on the Functionin( of the *uropean ;nion" :rtic)e 120 of the 5reaty states that8 in pursuin( its o#&ecti'es8 the *urosystem GM sha)) act in accor$ance !ith the princip)e of an open market economy !ith free competition8 fa'ourin( an efficient a))ocation of resources MH" 5he proper functionin( of the inter#ank market is 'ita) to the transmission of monetary po)icy from the 'ery short en$ of the money market to the rea) economy an$ prices" %ther important

princip)es are e/ua) treatment of financia) institutions an$ the harmonisation of ru)es an$ proce$ures throu(hout the euro area" Gi'en the area=!i$e focus8 cre$it institutions must #e treate$ e/ua))y across the euro area8 irrespecti'e of their siEe or )ocation" 5his harmonisation of ru)es an$ proce$ures aims to ensure e/ua) treatment #y pro'i$in( i$entica)

Dse+"%"ti!n 8et'een &!net"%* +!#i,* $!%& #"ti!n "n. i&+#e&ent"ti!n9 D

D"n. &"%(et !%ient"ti!n

Othe% ) i.in) +%in,i+#es "%e eE "# t%e"t&ent9 h"%&!nis"ti!n9 D

con$itions for a)) cre$it institutions in the euro area in connection !ith transactions !ith the *urosystem"
D si&+#i,it*9 t%"ns+"%en ,*9 ,!ntin it*9 s"$et* "n. ,!st e$$i,ien,*D

5he operationa) frame!ork a)so nee$s to #e consistent !ith the princip)es of simp)icity8 transparency8 continuity8 safety an$ cost efficiency" -imp)icity an$ transparency ensure that financia) market participants un$erstan$ the intentions #ehin$ monetary po)icy operations" 5he princip)e of continuity re/uires the a'oi$ance of fre/uent

an$ ma&or a$&ustments in instruments an$ proce$ures8 so that centra) #anks an$ their counterparties can re)y on past e1perience !hen participatin( in monetary po)icy operations" 5he princip)e of safety re/uires the *urosystem+s financia) an$ operationa) risks to #e kept to a minimum8 !hi)e cost efficiency shou)$ ensure )o! operationa) costs for #oth the *urosystem an$ its counterparties arisin( from the operationa) frame!ork"

T"8#e 4=1 E %!s*ste& &!net"%* +!#i,* !+e%"ti!ns "onetar4 pol,.4 operat,ons T4pe of transa.t,on 1: 9,>u,d,t45 9,>u,d,t45 prov,d,n6 a$sor$,n6 'pen #arket operat,ons Main K Ce'erse 7 refinancin( transactions operations 3on(er=term K Ce'erse 7 refinancin( transactions operations Fine=tunin( K Ce'erse K Ce'erse operations transactions transactions K Forei(n K .o))ection of e1chan(e fi1e$=term s!aps $eposits K Forei(n e1chan(e s!aps -tructura) K Ce'erse K 9ssuance of operations transactions *.6 $e#t certificates K %utri(ht K %utri(ht purchases sa)es %tand,n6 fa.,l,t,es Mar(ina) K Ce'erse 7 )en$in( transactions faci)ity ?eposit faci)ity 7 K ?eposits "atur,t4 Fre>uen.4

K %ne !eek 2B

K @eek)y

K 5hree months K Month)y K >on= stan$ar$ise$ K >on=re(u)ar

K -tan$ar$ise$ non= stan$ar$ise$ 7

K Ce(u)ar an$ non=re(u)ar K >on=re(u)ar

K %'erni(ht

K %'erni(ht

K :ccess at the $iscretion of counterparties K :ccess at the $iscretion of counterparties

1B -ee 6o1 4"3 for $escriptions of the 'arious types of open market transaction" 2B 5he maturity has #een one !eek since 10 March 2004" Prior to that $ate it !as t!o !eeks Asee 6o1 4"2B"

D"s 'e## "s .e,ent%"#is e. i&+#e&ent "ti!n

Fina))y8 one princip)e that is specific to the *urosystem is the $ecentra)isation of the imp)ementation of monetary po)icy" 9n accor$ance !ith this princip)e8 the *urosystem+s monetary po)icy operations are norma))y imp)emente$ throu(h the >.6s8 !hich means that the *.6 coor$inates the operations8 !hi)e the transactions are carrie$ out #y the >.6s" 4=- O>ER>IEW OF THE EUROS6STE10S OPERATIONA5 FRA1EWOR7 5he *urosystem+s operationa) frame!ork is $escri#e$ in (reater $etai) in the *.6 pu#)ication entit)e$ G5he imp)ementation of monetary po)icy in the euro area 7 Genera) $ocumentation on *urosystem monetary po)icy instruments an$ proce$uresH"

are con$ucte$ on the initiati'e of the *.68 usua))y in the money market" :s $escri#e$ in -ection 2"68 Gmoney marketH refers to the market in !hich the maturity of transactions is (enera))y )ess than one year" %pen market operations inc)u$e main refinancin( operations AMC%sB8 )on(er=term refinancin( operations A35C%sB8 fine= tunin( operations AF5%sB an$ structura) operations" 5hese operations p)ay an important ro)e in steerin( interest rates8 si(na))in( the stance of monetary po)icy an$ mana(in( the )i/ui$ity con$itions for the euro area #ankin( sector" MC%s are the most important open market operations an$ represent the key monetary po)icy instrument of the *urosystem" 5hrou(h MC%s8 the *urosystem )en$s fun$s to its counterparties" 9n or$er to protect the *urosystem a(ainst financia) risks8 )en$in( is a)!ays a(ainst a$e/uate co))atera)" For more $etai)e$ information on the *urosystem+s counterparties an$ on the co))atera) re/uire$ in its )i/ui$ity=pro'i$in( operations8 see 6o1 4"1"
1"in %e$in"n,in) !+e%"ti!ns

O+en &"%(et !+e%"ti !ns

5he *urosystem uses t!o types of operation: open market operations an$ stan$in( faci)ities" 5a#)e 4"1 pro'i$es an o'er'ie! of the essentia) features of these operations" 5he most important operations are open market operations" 5his is the term use$ for operations that

/!; 4=1 C! nte%+"%ties "n. ,!##"te%"#

1= C! nte%+"%ti es 5he *urosystem+s monetary po)icy frame!ork is formu)ate$ !ith a 'ie! to ensurin( the participation of a #roa$ ran(e of counterparties" .ounterparties to *urosystem monetary po)icy operations must fu)fi) certain e)i(i#i)ity criteria" 5hese criteria are $efine$ in such a !ay as to ensure e/ua) treatment for institutions across the euro area an$ that counterparties fu)fi) certain operationa) an$ pru$entia) re/uirements" 5he (enera) e)i(i#i)ity criteria are uniform throu(hout the euro area" 5o #e an e)i(i#)e counterparty8 a cre$it institution must #e su#&ect to the *urosystem+s

minimum reser'e system an$ at )east one form of harmonise$ *uropean ;nion *uropean *conomic :rea A*; **:B super'ision #y nationa) authorities8 as !e)) as #ein( financia))y soun$" Financia))y soun$ institutions operatin( in the euro area an$ su#&ect to non=harmonise$ super'ision #y competent nationa) authorities of a stan$ar$ compara#)e to harmonise$ *; **: super'ision may a)so #e accepte$ as counterparties Ae"(" #ranches

esta#)ishe$ in the euro area of institutions incorporate$ outsi$e the **:B" 9n a$$ition8 counterparties must fu)fi) any operationa) criteria specifie$ in the re)e'ant contractua) or re(u)atory arran(ements app)ie$ #y their >.6 Aor #y the *.6B8 so as to ensure the efficient con$uct of *urosystem monetary po)icy operations" :t the en$ of 2anuary 2011 there !ere 68334 cre$it institutions esta#)ishe$ in the euro area" <o!e'er8 on)y 28260 fu)fi))e$ the operationa) criteria for participation in open market operations8 2839, the operationa) criteria for access to the mar(ina) )en$in( faci)ity an$ 28049 the operationa) criteria for access to the $eposit faci)ity" 5he num#er of counterparties actua))y participatin( in open market operations is norma))y much )o!er than the num#er of e)i(i#)e counterparties" 9n the secon$ ha)f of 2010 the num#er of counterparties participatin( in ten$ers for MC%s a'era(e$ 14," 5he a'era(e num#er of counterparties participatin( in 35C%s !as 94" 5he *urosystem may se)ect a )imite$ num#er of counterparties to participate in F5%s" For forei(n e1chan(e s!aps con$ucte$ for monetary po)icy purposes8 the *urosystem uses acti'e p)ayers in the forei(n e1chan(e market !hich are esta#)ishe$ in the euro area" : cre$it institution fu)fi))in( the (enera) e)i(i#i)ity criteria may access the *urosystem stan$in( faci)ities an$ participate in *urosystem open market operations #ase$ on stan$ar$ ten$ers throu(h the >.6 of the Mem#er -tate in !hich it is incorporate$" 9f a cre$it institution has esta#)ishments Aa hea$ office or #ranchesB in more than one Mem#er -tate8 each esta#)ishment has access to these operations throu(h the >.6 of the Mem#er -tate in !hich it is esta#)ishe$" <o!e'er8 in each Mem#er -tate8 the #i$s of an institution may #e su#mitte$ #y on)y one esta#)ishment Aeither the hea$ office or a $esi(nate$ #ranchB" 9n accor$ance !ith the pro'isions in the contractua) or re(u)atory arran(ements app)ie$ #y the respecti'e >.6 or #y the *.68 the *urosystem may suspen$8 )imit or e1c)u$e counterparties+ access to monetary po)icy instruments on the (roun$s of pru$ence" 5he *urosystem imp)ements its monetary po)icy operations in a $ecentra)ise$ manner" 5he $ecentra)ise$ approach has #een 'ery efficient an$ has run smooth)y thanks to carefu) preparation an$ efficient information systems" 5he *urosystem continues to #enefit (reat)y from the c)ose contacts !hich the >.6s ha'e #ui)t up o'er the $eca$es !ith their )oca) counterparties" -= C!##"te%"# 5he )i/ui$ity=pro'i$in( operations of the *urosystem are #ase$ on a #roa$ ran(e of assets that counterparties can use as co))atera) in their cre$it operations" :rtic)e 14"1 of the -tatute of the *-.68 accor$in( to !hich the *.6 an$ the >.6s are a))o!e$ to transact in financia) markets #y #uyin( an$ se))in( un$er)yin( assets outri(ht or un$er repurchase a(reements8 re/uires a)) *urosystem cre$it operations to #e #ase$ on a$e/uate co))atera)" 9n or$er to protect the *urosystem from )osses8 ensure the e/ua) treatment of counterparties an$ enhance operationa) efficiency8 un$er)yin( assets pro'i$e$ #y counterparties ha'e

to fu)fi) certain criteria in or$er to #e e)i(i#)e for use in *urosystem monetary po)icy operations" 5he *urosystem accepts instruments issue$ #y #oth pri'ate an$ pu#)ic $e#tors as co))atera) in or$er to respect the princip)e of e/ua) treatment" 5he *urosystem has $e'e)ope$ a sin()e frame!ork for e)i(i#)e assets common to a)) *urosystem cre$it operations" 5his sin()e frame!ork8 a)so referre$ to as the G-in()e 3istH8 entere$ into effect on 1 2anuary 20008 rep)acin( the t!o=tier system !hich ha$ #een in p)ace since the start of -ta(e 5hree of *M;" 5he sin()e frame!ork comprises t!o $istinct asset c)asses 7 marketa#)e assets an$ non=marketa#)e assets" >o $istinction is ma$e #et!een the t!o asset c)asses !ith re(ar$ to their e)i(i#i)ity for the 'arious types of *urosystem monetary po)icy operation8 e1cept that non=marketa#)e assets are not use$ #y the *urosystem for outri(ht transactions" 5he assets e)i(i#)e for *urosystem monetary po)icy operations can a)so #e use$ as un$er)yin( assets for intra$ay cre$it" 5he e)i(i#i)ity criteria for the t!o asset c)asses are uniform across the euro area" .hart 4"1 sho!s that the amount of co))atera) su#mitte$ e1pan$e$ su#stantia))y o'er the perio$ from 2000 to 2009" 5his e1pansion may )ar(e)y ref)ect the financia) market tensions seen $urin( this perio$" 5he )ar(est increase !as in structure$ finance pro$ucts8 such as asset=#acke$ securities an$ co'ere$ #on$s8 !hich account for near)y 40F of tota) co))atera) su#mitte$"

Ch"%t 4=1 /%e"(.!'n !$ "ssets s 8&itte. "s ,!##"te%"#

A*;C #i))ionsJ annua) a'era(esB non=marketa#)e assets other marketa#)e assets :6corporate #on$s co'ere$ #ank #on$s unco'ere$ #ank #on$s (o'ernment securities 28,00 28,00

28000

28000

18,00

18,00

18000

18000

,00

,00

2004

200,

2006

2000

2004

2009

2010

-ource: *.6"

*urosystem counterparties may use e)i(i#)e assets on a cross=#or$er #asis8 i"e" they may o#tain fun$s from the >.6 of the Mem#er -tate in !hich they are esta#)ishe$ usin( assets $eposite$ in another Mem#er -tate" 3= Ris( ,!nt%!# &e"s %es :)) assets e)i(i#)e for *urosystem cre$it operations are su#&ect to specific risk contro) measures in or$er to protect the *urosystem a(ainst financia) )oss if un$er)yin( assets ha'e to #e rea)ise$ Ai"e" so)$B o!in( to the $efau)t of a counterparty" 5he *urosystem app)ies specific risk contro) measures accor$in( to the type of un$er)yin( asset offere$ #y the counterparty" 5he *.6 $etermines the appropriate risk contro) measures for #oth marketa#)e an$ non=marketa#)e e)i(i#)e assets" 5he risk contro) measures are #roa$)y harmonise$ across the euro area to ensure consistent8 transparent an$ non=$iscriminatory con$itions for a)) types of e)i(i#)e asset" 5hese risk contro) measures inc)u$e 'a)uation haircuts8 meanin( that the 'a)ue of the un$er)yin( asset is ca)cu)ate$ as the market 'a)ue of the asset minus a certain percenta(e Athe GhaircutHB" 5he *urosystem a)so re/uires the haircut=a$&uste$ market 'a)ue of the co))atera) to #e maintaine$ o'er time #y app)yin( 'ariation mar(ins Amarkin(= to=marketB" Fina))y8 the risk contro) measures inc)u$e )imits on the use of unsecure$ $e#t instruments" 5he *urosystem can app)y a$$itiona) risk contro) measures if these are re/uire$ to ensure a$e/uate risk protection" %n the (roun$s of pru$ence8 the *urosystem may a)so re&ect assets8 )imit the use of assets or app)y supp)ementary haircuts to assets su#mitte$ as co))atera) in *urosystem cre$it operations #y specific counterparties"

Re:e %se t%"ns",ti !ns

3en$in( throu(h open market operations norma))y takes p)ace in the form of re'erse transactions" 9n these re'erse transactions8 the centra) #ank #uys assets un$er a repurchase a(reement or (rants a )oan a(ainst assets p)e$(e$ as co))atera) Asee 6o1 4"3B" Ce'erse transactions are therefore temporary open market operations !hich pro'i$e fun$s for a )imite$8 pre=specifie$ perio$ on)y" For the purpose of contro))in( short= term interest rates in the money market an$8 in particu)ar8 restrictin( their 'o)ati)ity8 the *urosystem a)so offers t!o stan$in( faci)ities to its counterparties: the mar(ina) )en$in( faci)ity an$ the $eposit faci)ity" 6oth faci)ities ha'e an o'erni(ht maturity an$ are a'ai)a#)e to counterparties on

their

St"n.i n) $",i#iti es

o!n initiati' e" 5he interest rate on the mar(in a) )en$in( faci)ity is norma)) y su#sta ntia))y hi(her than the corresp on$in( money market rate8 an$ the interest rate on the $eposit faci)ity is norma)) y su#stan tia))y )o!er than the money market rate" :s a resu)t8 cre$it instituti ons norma)) y on)y use the stan$in ( faci)itie

s in the a#sence of other a)ternati'es" :s there are no )imits on access to these faci)ities Ae1cept for the co))atera) re/uirements of the mar(ina) )en$in( faci)ityB8 the rate on the mar(ina) )en$in( faci)ity an$ the rate on the $eposit faci)ity norma))y pro'i$e a cei)in( an$ a f)oor8 respecti'e)y8 for the o'erni(ht rate in the money market" 5hese instruments are e1amine$ in more $etai) in -ection 4","

Ch"%t 4=- 7e* EC/ inte%est %"tes "n. the EONIA sin,e 1999
Apercenta(es per annumJ $ai)y $ataB mar(ina) )en$in( rate $eposit rate *%>9: main refinancin( minimum #i$ rate 0 6 , 4 3 2 1 0 0 6 , 4 3 2 1 0

1999

2000

2001

2002

2003

2004

200,

2006

2000

2004

2009

2010

-ource: *.6" 1B 6efore 24 2une 2000 MC%s !ere con$ucte$ as fi1e$ rate ten$ers" -tartin( !ith the operation sett)e$ on 24 2une 20008 an$ unti) the operation sett)e$ on 1, %cto#er 20048 MC%s !ere con$ucte$ as 'aria#)e rate ten$ers !ith a pre=announce$ minimum #i$ rate" -ince the operation sett)e$ on 1, %cto#er 20048 MC%s ha'e #een con$ucte$ as fi1e$ rate ten$ers !ith fu)) a))otment" 5his proce$ure is sche$u)e$ to remain in p)ace at )east unti) the maintenance perio$ en$in( on 12 2u)y 2011" 5he minimum #i$ rate refers to the minimum interest rate at !hich counterparties may p)ace their #i$s Asee -ection 4"4B"

C!%%i.! % !$ st"n.in) $",i#it* inte%est %"tes

6y settin( the rates on the stan$in( faci)ities8 the Go'ernin( .ounci) effecti'e)y $etermines the corri$or !ithin !hich the o'erni(ht money market rate can f)uctuate" .hart 4"2 sho!s the $e'e)opment of key *.6 interest rates since 2anuary 1999 an$ ho! the interest rates on the stan$in( faci)ities ha'e pro'i$e$ a cei)in( an$ a f)oor for the o'erni(ht market interest rate8 measure$ #y the euro o'erni(ht in$e1 a'era(e A*%>9:B" .hart 4"2 sho!s that8 in norma) times8 the *%>9: has (enera))y remaine$ c)ose to the rate on the MC%s8 thus $emonstratin( the importance of these operations as the main monetary po)icy instrument of the *urosystem" 5his #eha'iour chan(e$ in %cto#er 20048 !hen the *urosystem a$opte$ non= stan$ar$ measures to counter the

ne(ati'e effects of the intensification of the financia) crisis Asee 6o1 ,"1 an$ .hapter ,B" .hart 4"2 a)so sho!s that the *%>9: e1hi#its a pattern of occasiona) spikes" 5his pattern is re)ate$ to the *urosystem+s minimum reser'e system8 as e1p)aine$ further in -ection 4"3" Fina))y8 .hart 4"2 sho!s that the $ifferences #et!een the stan$in( faci)ity interest rates an$ the rate on the MC%s !ere kept unchan(e$ #et!een :pri) 1999 an$ %cto#er 2004 at U1 percenta(e point" 5he !i$th of the corri$or !as then temporari)y narro!e$ to U0", percenta(e point8 #efore #ein( !i$ene$ a(ain to U0"0, percenta(e point in May 20098 !hen the Go'ernin( .ounci) $eci$e$ to set the rate for the MC%s at 1"0F"

EONIA9 (e* EC/ inte%est %"tes "n. the &ini& & %ese%:e s*ste&

4=3 1INI1U1 RESER>ES

St"8i#is"ti !n !$ &!ne* &"%(et inte%est %"tes

5he first key function of the minimum reser'e system is to sta#i)ise money market interest rates" 5his function is performe$ #y the a'era(in( pro'ision" 5he a'era(in( pro'ision a))o!s cre$it institutions to smooth out $ai)y )i/ui$ity f)uctuations Ae"(" those arisin( from f)uctuations in the $eman$ for #anknotesB8 since transitory reser'e im#a)ances can #e offset #y opposite reser'e im#a)ances (enerate$ !ithin the same maintenance perio$" 5he a'era(in( pro'ision imp)ies that institutions can profit from )en$in( in the market an$ run a reser'e $eficit !hene'er the shortest money market rates are a#o'e those e1pecte$ to pre'ai) for the remain$er of the maintenance perio$" 9n the opposite scenario8 they can #orro! in the market an$ run a reser'e surp)us" 9n theory8 this Gintertempora) ar#itra(eH shou)$ ensure e/ua)ity throu(hout the maintenance perio$ #et!een the current )e'e) of the shortest money market rates an$ their e1pecte$ )e'e) at the en$ of the maintenance perio$" 5his mechanism sta#i)ises the o'erni(ht interest rate $urin( the maintenance perio$ an$ makes it unnecessary for the centra) #ank to inter'ene fre/uent)y in the money market"

spikes in the *%>9: to!ar$s the en$ of each maintenance perio$8 !hich can #e seen in .hart 4"2" : secon$ important function assi(ne$ to the minimum reser'e system is the en)ar(ement of the structura) )i/ui$ity shorta(e of the #ankin( system" 5he nee$ for cre$it institutions to ho)$ reser'es !ith the >.6s contri#utes to increasin( the $eman$ for centra) #ank cre$it !hich8 in turn8 makes it easier for the *.6 to steer money market rates throu(h re(u)ar )i/ui$ity= pro'i$in( operations" Des,%i+ti!n !$ the s*ste& 5he *.6 re/uires cre$it institutions in the euro area to ho)$ compu)sory $eposits on accounts !ith the >.6s: these are ca))e$ GminimumH or Gre/uire$H reser'es" 4 5he amount of re/uire$ reser'es to #e he)$ #y each institution is $etermine$ #y its reser'e #ase" 5he reser'e #ase of an institution is $efine$ in re)ation to the e)ements of its #a)ance sheet" 5a#)e 4"2 sho!s the main )ia#i)ity items inc)u$e$ in the reser'e #ase"9
En#"%)e&e nt !$ the st% ,t %"# #iE i.it* sh!%t")e

ReE i%e. %ese%:es "n. the %ese%:e 8"se

9n or$er to $etermine an institution+s reser'e re/uirement8 the reser'e #ase is mu)tip)ie$ #y a reser'e ratio" 5he *.6 app)ies a uniform positi'e reser'e ratio to most of the items inc)u$e$ in the reser'e #ase" 5his reser'e ratio !as set 5he a'era(in( pro'ision !orks 'ery at 2F at the start of -ta(e 5hree of smooth)y $urin( the maintenance *M;" Most of the short=term )ia#i)ities perio$" <o!e'er8 at the en$ of the on cre$it institutions+ #a)ance sheets perio$8 the reser'e re/uirement are su#&ect to a positi'e reser'e ratio" #ecomes #in$in( an$ #anks can no :s can #e seen from 5a#)e 4"28 neither )on(er transfer a )i/ui$ity surp)us or )on(=term )ia#i)ities nor repurchase $eficit into the future" 5his e1p)ains the
4

Rese%:e %"ti!

5he )e(a) frame!ork for the *urosystem+s minimum reser'e system is #ase$ on :rtic)e 19 of the -tatute of the *-.6" 5he $etai)s of the minimum reser'e system are containe$ in se'era) )e(a) acts8 the most important #ein( .ounci) Ce(u)ation A*.B >o 2,31 94 concernin( the app)ication of minimum reser'es #y the *uropean .entra) 6ank an$ Ce(u)ation A*.B >o 2414 94 of the *uropean .entra) 6ank on the app)ication of minimum reser'es A*.6 1994 1,B8 as amen$e$" 3ia#i)ities 'is=T='is other cre$it institutions inc)u$e$ in the )ist of institutions su#&ect to the *urosystem+s minimum reser'e system an$ )ia#i)ities 'is=T='is the *.6 an$ the >.6s are not inc)u$e$ in the reser'e #ase"

T"8#e 4=- C%e.it instit ti!ns0 #i"8i#ities in,# .e. in the %ese%:e 8"se
Astock )e'e)s as at the en$ of 2anuary 2011J *;C #i))ionsB

@A: 9,a$,l,t,es to ?h,.h a 2/ reserve rat,o ,s appl,ed

?eposits Ainc)u$in( o'erni(ht $eposits8 $eposits !ith an a(ree$ maturity up to t!o years an$ $eposits re$eema#)e at a perio$ of notice of up to t!o yearsB ?e#t securities issue$ !ith a maturity of up to t!o years Ainc)u$in( money market paperB -u#=tota) A:B
@B: 9,a$,l,t,es to ?h,.h a Aero reserve rat,o ,s appl,ed

98440"2 6,1"6 108491"4

?eposits Ainc)u$in( $eposits !ith an a(ree$ maturity of o'er t!o years an$ $eposits re$eema#)e at a perio$ of notice of o'er t!o yearsB ?e#t securities issue$ !ith a maturity of o'er t!o years Cepurchase a(reements -u#=tota) A6B Total reserve $ase @A:B@B:
-ource: *.6"

28040"6 483,6"0 1839,"4 48,32"4 10,028=1

a(reements are su#&ect to a positi'e reser'e ratio"

5 &+< s & "##!'" n,e

9nstitutions can $e$uct a uniform )ump=sum a))o!ance from their reser'e re/uirement" -ince the intro$uction of the euro they ha'e #een entit)e$ to $e$uct P1008000" 5his a))o!ance is $esi(ne$ to re$uce the a$ministrati'e costs arisin( from mana(in( 'ery sma)) reser'e re/uirements" 9n or$er to meet their reser'e re/uirements8 cre$it institutions ha'e to ho)$ #a)ances on their current accounts !ith the >.6s" 9n this respect8 the *urosystem+s minimum reser'e system ena#)es counterparties to make use of a'era(in( pro'isions" 5his means that comp)iance !ith reser'e re/uirements is $etermine$ on the #asis of the a'era(e of the $ai)y #a)ances on the institutions+ reser'e accounts o'er the maintenance perio$ of aroun$ one month"

stance is sche$u)e$ an$ en$s on the $ay prece$in( the correspon$in( sett)ement $ay in the fo))o!in( month" : $ifferent sche$u)e !as in p)ace #efore March 2004 Asee 6o1 4"2B" 5o he)p cre$it institutions prepare their reser'es mana(ement8 a maintenance perio$ sche$u)e for the ca)en$ar year8 to(ether !ith an in$icati'e sche$u)e for the MC%s8 is pu#)ishe$ three months #efore the start of each year"
Re& ne%" ti!n !$ %eE i%e. %ese%:es

A:e%") in) +%!:isi !ns

Rese %:e &"inten" n,e +e%i!.

5he *urosystem aims to ensure that the minimum reser'e system neither puts a #ur$en on the #ankin( system in the euro area nor hin$ers the efficient a))ocation of resources" For this reason8 cre$it institutions+ ho)$in(s of re/uire$ reser'es are remunerate$" 5he remuneration correspon$s to the a'era(e8 o'er the maintenance perio$8 of the Gmar(ina) rate of a))otmentH A!ei(hte$ accor$in( to the num#er of ca)en$ar $aysB of the MC%s Asee a)so -ection 4"4B" :s the mar(ina) ten$er rates are norma))y 'ery c)ose : maintenance perio$ starts on the to the short=term money market sett)ement $ay of the first MC% interest rates8 the re/uire$ reser'es are fo))o!in( the Go'ernin( .ounci) norma))y remunerate$ at c)ose to the meetin( at !hich the month)y market rate" assessment of the monetary po)icy

/!; 4=Ch"n)es t! the &"t !$ the &"in Ch"%t 4=3 The $ n,ti!nin) !$ %it* the E %!s*ste&0s %ese%:e %eE i%e&ent s*ste& %e$in"n,in) !+e%"ti!ns "n. the %ese%:e &"inten"n,e +e%i!. "s !$ 1"%,h -004
:s note$ in -ection 4"48 there ha'e #een perio$s of tension in the past !hen pronounce$ specu)ation on an imminent interest rate chan(e has affecte$ counterparties+ #i$$in( in the MC%s" %n se'era) occasions in sprin( 20008 !hen e1pectations !ere hi(h that the key *.6 interest rates !ere a#out to #e increase$8 counterparties su#mitte$ increasin()y e1cessi'e #i$s in the MC%s !hich8 at the time8 !ere con$ucte$ as fi1e$ rate ten$ers A)ea$in( to Go'er#i$$in(HB" -imi)ar)y8 on occasion8 e1pectations of an imminent cut in the key *.6 rates )e$ counterparties to su#mit #i$s that8 on a((re(ate8 fe)) short of the amount nee$e$ to ensure that the reser'e re/uirements !ere met AGun$er#i$$in(HB" 6oth pro#)ems stemme$ main)y from the fact that the timin( of the reser'e maintenance perio$s 7 !hich starte$ on the 24th ca)en$ar $ay of each month an$ en$e$ on the 23r$ ca)en$ar $ay of the fo))o!in( month 7 !as in$epen$ent of the $ates of the Go'ernin( .ounci) meetin(s at !hich chan(es in key *.6 rates !ere $eci$e$" 5hus chan(es in key *.6 interest rates cou)$ occur $urin( a reser'e maintenance perio$" 9n a$$ition8 the maturity of the !eek)y MC%s A!hich !as t!o !eeksB !as such that at )east the )ast operation of each reser'e maintenance perio$ o'er)appe$ !ith the su#se/uent reser'e maintenance perio$" :s a resu)t8 #i$$in( #eha'iour in MC%s con$ucte$ at the en$ of a maintenance perio$ cou)$ #e affecte$ #y e1pectations of chan(es in key *.6 interest rates in the ne1t reser'e maintenance perio$" 9n response to this pro#)em8 the Go'ernin( .ounci) $eci$e$ on t!o measures !hich came into effect in March 2004 to pre'ent rate chan(e specu)ation $urin( a maintenance perio$ from affectin( 'ery short=term money market con$itions: AiB the timin( of the reser'e maintenance perio$s !as chan(e$8 an$ AiiB the maturity of the MC%s !as shortene$ to one !eek" -pecifica))y8 it !as $eci$e$ that maintenance perio$s !ou)$ start on the sett)ement $ay of the first MC% fo))o!in( the Go'ernin( .ounci) meetin( at !hich the month)y assessment of the monetary po)icy stance !as pre=sche$u)e$8 an$ !ou)$ en$ on the $ay prece$in( the correspon$in( sett)ement $ay in the fo))o!in( month" 5his $irect )ink #et!een the Go'ernin( .ounci) meetin( an$ the start of the reser'e maintenance perio$ shou)$ ensure that8 as a ru)e8 there can #e no e1pectation that chan(es in key *.6 rates mi(ht occur $urin( a reser'e maintenance perio$" 5he shortenin( of the maturity of the MC%s !as aime$ at e)iminatin( the spi))o'er of interest rate specu)ation from one reser'e maintenance perio$ to the ne1t" 5he o#&ecti'e of the com#ine$ measures !as to contri#ute to!ar$s sta#i)isin( the con$itions in !hich cre$it institutions #i$ in the MC%s"

Dete%&in" ti!n !$ %ese%:e %eE i%e& ents

.hart 4"3 i))ustrates ho! the *urosystem+s reser'e re/uirement is $etermine$" 9n this e1amp)e8 the a((re(ate reser'e #ase of the cre$it institutions is ca)cu)ate$ on the #asis of the )ia#i)ities on their #a)ance sheets as at 31 May 2000" 6y app)yin( the 2F reser'e ratio to the re)e'ant reser'e #ase of P98,44 #i))ion

an$ $e$uctin( the a((re(ate )ump=sum a))o!ance of P0", #i))ion8 the a((re(ate reser'e re/uirement is $etermine$ for the maintenance perio$ startin( in the secon$ su#se/uent ca)en$ar month Ain this case8 the perio$ startin( on 11 2u)y an$ en$in( on 0 :u(ust 2000B" 5he $ark #)ue )ine in .hart 4"3 sho!s ho!

A*;C #i))ionsB reser'e #ase A)eft=han$ sca)eB reser'e re/uirement Ari(ht=han$ sca)eB $ai)y reser'e ho)$in(s Ari(ht=han$ sca)eB 128000 108000 48000 68000 48000 28000 0 *n$ of month &eserve $ase V reserve rat,o 5 lu#p allo?an.es C reserve re>u,re#ent e"(" P98,44 #i))ion V 2F 5 P0", #i))ion W P191"3 #i))ion ,00 4,0 400 3,0 300 2,0 200 1,0 100 ,0 -tart of maintenance perio$ 0 *n$ of maintenance perio$

-ource: *.6" >ote: 5he e1amp)e is #ase$ on $ata referrin( to the )ast maintenance perio$ #efore the out#reak of the financia) market tensions in :u(ust 20008 i"e" the perio$ from 11 2u)y to 0 :u(ust 2000" ?urin( the financia) market tensions8 the #eha'iour of market participants chan(e$8 as there !as a $esire to front)oa$ the fu)fi)ment of reser'e re/uirements"

a'era(in( pro'isions !ork in the *urosystem+s minimum reser'e system" : cre$it institution+s current account ho)$in( may f)uctuate free)y aroun$ its reser'e re/uirement8 #ut the a'era(e current account ho)$in( must #e at )east e/ua) to the reser'e re/uirement o'er the maintenance perio$ as a !ho)e" 9n the e1amp)e8 the a'era(e of the cre$it institutions+ a((re(ate ho)$in(s on current accounts !ith the *urosystem amounte$ to P192"0 #i))ion8 imp)yin( 'o)untary e1cess reser'es of P0"0 #i))ion o'er the a((re(ate reser'e re/uirement of P191"3 #i))ion" 4=4 OPEN 1AR7ET OPERATIONS
F! % ,"te)!%ies !$ !+en &"%(et !+e%"ti!n

operations A35C%sB8 fine=tunin( operations AF5%sB an$ structura) operations Asee 5a#)e 4"1 an$ 6o1 4"3B" 1"in %e$in"n,in) !+e%"ti!ns :s mentione$ a#o'e8 MC%s are the most important open market operations con$ucte$ #y the *urosystem" 5hey p)ay a pi'ota) ro)e in steerin( interest rates8 mana(in( the )i/ui$ity situation in the market an$ si(na))in( the stance of monetary po)icy throu(h the main refinancin( rate set #y the Go'ernin( .ounci)" 5hey a)so norma))y pro'i$e the #u)k of )i/ui$ity to the #ankin( system" MC%s are e1ecute$ in a $ecentra)ise$ manner #y the >.6s" MC%s are )i/ui$ity=pro'i$in( operations that are con$ucte$ re(u)ar)y on a !eek)y #asis" 5hey (enera))y ha'e a maturity of one !eek" A6efore March 20048 the maturity of the MC%s

F n,ti !ns !$ 1ROs

5he *urosystem+s open market operations can #e $i'i$e$ into the fo))o!in( four cate(ories accor$in( to aims8 re(u)arity an$ proce$ures fo))o!e$: main refinancin( operations AMC%sB8 )on(er=term refinancin(

F%eE en,* "n. &"t %it*

!as t!o !eeks8 see 6o1 4"2B" 5he maturity of the MC%s an$ 35C%s may a)so 'ary occasiona))y8 $epen$in( on8 inter a)ia8 #ank ho)i$ays in Mem#er -tates"
St"n."%. ten.e%s

MC%s are e1ecute$ throu(h stan$ar$ ten$ers" 9n the conte1t of the operationa) frame!ork of the *urosystem8 Gstan$ar$H in$icates ten$er operations that are con$ucte$ in accor$ance !ith a pre=announce$ sche$u)e8 !hich is comp)ete$ !ithin a perio$ of 24 hours from the announcement of the ten$er to the communication of the resu)ts" :)) counterparties fu)fi))in( (enera) e)i(i#i)ity criteria may participate in these operations" 9n princip)e8 a)) cre$it institutions )ocate$ in the euro area are potentia))y e)i(i#)e counterparties of the *urosystem Asee 6o1 4"1B" 5he *urosystem may e1ecute its ten$ers in the form of fi1e$ rate or 'aria#)e rate ten$ers" 9n the former8 the *.6 specifies the interest rate in a$'ance an$ participatin( counterparties #i$8 the amount of money they !ish to transact at the fi1e$ interest rate" 9n the )atter8 counterparties #i$ #oth the amount of money they !ish to transact an$ the interest rate at !hich they !ish to enter into the transaction" .ounterparties may su#mit mu)tip)e #i$s !ith $ifferent interest rate )e'e)s" 9n each #i$8 they must state the amount of money that they are !i))in( to transact at the respecti'e interest rate" 5he Go'ernin( .ounci) may set a minimum #i$ rate for 'aria#)e rate ten$ers in or$er to si(na) the monetary po)icy stance" ;n$er #oth ten$er proce$ures8 the *.6 $eci$es the amount of )i/ui$ity to #e pro'i$e$" 9n a fi1e$ rate ten$er8 this norma))y imp)ies a pro rata a))otment to the participatin( #anks8 $epen$in(

Fi;e. "n. :"%i"8#e %"te ten.e%s

on the ratio #et!een tota) #i$s an$ tota) )i/ui$ity to #e a))otte$" 9n a 'aria#)e rate ten$er8 the #i$s !ith the hi(hest interest rates are satisfie$ first8 fo))o!e$ #y #i$s !ith successi'e)y )o!er rates8 unti) the tota) amount of )i/ui$ity to #e pro'i$e$ is e1hauste$" :t the )o!est accepte$ rate8 the Gmar(ina) rate of a))otmentH8 #i$s are satisfie$ pro rata in )ine !ith the *.6+s $ecision on the tota) amount of )i/ui$ity to #e a))otte$" For each in$i'i$ua) a))otment8 the interest rate is e/ua) to the interest rate #i$" 9n e1ceptiona) circumstance s8 the *.6 may $eci$e to a))ot a))

the )i/ui$ity re/ueste$ #y counterparties8 i"e" to accommo$ate a)) #i$s in fu))" 5his fu)) a))otment proce$ure !as intro$uce$ $urin( the perio$ of acute financia) market tensions !hich #e(an in 2000" From the #e(innin( of 1999 to 2une 2000 the *urosystem con$ucte$ its MC%s as fi1e$ rate ten$ers" From 20 2une 2000 the MC%s !ere con$ucte$ as 'aria#)e rate ten$ers !ith a minimum #i$ rate usin( a mu)tip)e rate proce$ure" -tartin( from the operation sett)e$ on 1, %cto#er 20048 the MC%s !ere con$ucte$ as fi1e$ rate ten$ers !ith fu)) a))otment" 5he reason for the chan(e in 2000 !as se'ere Go'er#i$$in(H in the fi1e$ rate MC%s8 !hich !as the resu)t

of a !i$e an$ persistent sprea$ #et!een money market interest rates an$ the fi1e$ rate app)ie$ to the MC%s in ear)y 2000" 5his sprea$ !as8 in turn8 )ar(e)y $ri'en #y market e1pectations of further increases in *.6 interest rates8 especia))y in the sprin( of 2000" 5he sprea$ #et!een market rates an$ the *.6+s main refinancin( rate ma$e it 'ery attracti'e for #anks to o#tain fun$s from the centra) #ank an$ )e$ to 'ery hi(h #i$s #y the #anks" 9n a 'aria#)e rate ten$er8 #y contrast8 #anks ha'e no incenti'e to o'er#i$8 since they !ou)$ ha'e to pay a

Use !$ ten.e% +%!,e. %es sin,e 1999

P 8#i,"ti! n !$ #iE i.it* nee.s

5TR Os

5hese operations are aime$ at F5%s may #e pro'i$in( )on(er=term )i/ui$ity to the con$ucte$ on #ankin( system" 5his is $eeme$ usefu) the )ast $ay <o!e'er8 a $ifferent pro#)em arose in or$er to pre'ent a)) the )i/ui$ity in !ith 'aria#)e rate ten$ers !ith a the money market from ha'in( to #e minimum #i$ rate" 9n a fe! cases8 ro))e$ o'er each !eek an$ to (i'e the a((re(ate of a)) #i$s su#mitte$ in counterparties access to )on(er=term the ten$er !as )o!er than the amount refinancin(" 3ike the MC%s8 these nee$e$ for the smooth fu)fi)ment of 35C%s are con$ucte$ as stan$ar$ reser'e re/uirements ten$ers in a $ecentra)ise$ manner8 an$ AGun$er#i$$in(HB" :s these episo$es a)) counterparties fu)fi))in( (enera) a)so stemme$ from si(nificant interest e)i(i#i)ity criteria may participate Asee rate specu)ation8 the Go'ernin( 6o1 4"1B" .ounci) $eci$e$ to a$&ust its operationa) frame!ork as of March -ince it !as not consi$ere$ $esira#)e 2004 Asee 6o1 4"2B" 9n %cto#er for the *urosystem to inf)uence money 2004 a fi1e$ rate fu)) a))otment market rates at more than one point proce$ure !as intro$uce$ for a)) a)on( the maturity spectrum8 the refinancin( operations for a certain 35C%s ha'e #een $esi(ne$ to ensure perio$ Asee 6o1 ,"1B" 5his !as that the *urosystem acts as a Grate inten$e$ to miti(ate the a$'erse effects takerH in these operations" 9n or$er not that $ysfunctiona) money markets to #)ur the si(na) arisin( from the !ere ha'in( on the )i/ui$ity situation *urosystem+s MC%s8 35C%s are of so)'ent #anks in the euro area an$ to norma))y e1ecute$ in the form of pure support the f)o! of cre$it to firms an$ 'aria#)e rate ten$ers !ith pre= househo)$s" announce$ a))otment 'o)umes" 5he Go'ernin( .ounci) norma))y in$icates @hen it s!itche$ to 'aria#)e rate in a$'ance the 'o)ume to #e a))otte$ in ten$ers" ;n$er ten$ers8 the *urosystem a)so starte$ to forthcomin( circumstances8 the announce8 each !eek8 the estimate$ e1ceptiona) *urosystem may a)so e1ecute 35C%s )i/ui$ity nee$s of the #ankin( system for the perio$ unti) the $ay #efore throu(h fi1e$ rate ten$ers an$ may the sett)ement of the ne1t MC%" $eci$e to accommo$ate a)) #i$s in the 5he pu#)ication of this estimate assists operations Afu)) a))otment proce$ureB counterparties in preparin( their Asee 6o1 ,"1B" #i$s for the forthcomin( MC%" -ection 4"6 $escri#es the factors !hich Fine<t nin) $etermine the )i/ui$ity nee$s of the !+e%"ti!ns 5he *urosystem may a)so carry out #ankin( system" open market operations on an a$ hoc #asis8 i"e" F5%s" 5he fre/uency an$ 5!n)e%<te%& %e$in"n,in) maturity of such operations are not !+e%"ti!ns 9n a$$ition to the !eek)y MC%s8 stan$ar$ise$" F5%s can #e )i/ui$ity= the *urosystem a)so e1ecutes re(u)ar a#sor#in( or )i/ui$ity=pro'i$in(" month)y 35C%s !ith a three=month 5hey are aime$ at mana(in( the maturity" 5he *urosystem may a)so )i/ui$ity situation in the money market steerin( interest rates8 con$uct a$$itiona) 35C%s !hich an$ can ha'e other maturities Ae"(" one in particu)ar in or$er to smooth the maintenance perio$8 si1 months effects on interest rates of une1pecte$ or t!e)'e monthsB Asee 6o1 ,"1B" )i/ui$ity f)uctuations in the market" hi(her price if they !ante$ to o#tain more )i/ui$ity"

E %!s*ste& "s " H%"te t"(e%I

FTOs

of a reser'e maintenance perio$ to counter )i/ui$ity im#a)ances !hich may ha'e accumu)ate$ since the a))otment of the )ast MC%" F5%s are primari)y e1ecute$ as re'erse transactions8 #ut may a)so take the form of forei(n e1chan(e s!aps or the co))ection of fi1e$=term $eposits Asee 6o1 4"3B"

9n 'ie! of their purpose8 F5%s are norma))y e1ecute$ throu(h G/uickH ten$ers" 5hese take one hour from their announcement to the communication of the a))otment resu)ts" F5%s can a)so #e e1ecute$ throu(h #i)atera) proce$ures8 !here the *urosystem con$ucts a transaction !ith a )imite$ num#er of counterparties !ithout a ten$er"

G i,( ten.e%s "n. 8i#"te%"# +%!,e. %e s

/!; 4=3 T*+es !$ !+en &"%(et t%"ns",ti!n

Ce'erse transactions are the main open market instrument of the *urosystem an$ can #e use$ for a)) kin$s of )i/ui$ity=pro'i$in( open market operation" 5he *urosystem has four other instruments a'ai)a#)e to it for the con$uct of F5%s an$ structura) operations: outri(ht transactions8 the issuance of *.6 $e#t certificates8 forei(n e1chan(e s!aps an$ the co))ection of fi1e$=term $eposits Asee 5a#)e 4"1B" 1= Re:e%se t%"ns",ti!ns Ce'erse transactions refer to operations !here the *urosystem #uys or se))s e)i(i#)e assets un$er repurchase a(reements or con$ucts cre$it operations a(ainst e)i(i#)e assets as co))atera)" Ce'erse transactions are use$ for MC%s an$ 35C%s" 9n a$$ition8 the *urosystem can use re'erse transactions for F5%s an$ structura) operations" @here re'erse transactions take the form of a repurchase a(reement8 the $ifference #et!een the purchase price an$ the repurchase price correspon$s to the interest $ue on the amount of money #orro!e$ or )ent o'er the maturity of the operation8 i"e" the repurchase price inc)u$es the interest to #e pai$" 5he interest rate on a re'erse transaction in the form of a co))atera)ise$ )oan is $etermine$ #y app)yin( the specifie$ interest rate on the cre$it amount o'er the maturity of the operation" -= O t%i)ht t%"ns",ti!ns %utri(ht open market transactions refer to operations !here the *urosystem #uys or se))s e)i(i#)e assets outri(ht on the market" 3= F!%ei)n e;,h"n)e s'"+s Forei(n e1chan(e s!aps e1ecute$ for monetary po)icy purposes consist of simu)taneous spot an$ for!ar$ transactions in euro a(ainst a forei(n currency" 5hey can #e use$ for fine=tunin( purposes8 main)y aime$ at mana(in( the )i/ui$ity situation in the market an$ steerin( interest rates" 4= C!##e,ti!n !$ $i;e.<te%& .e+!sits 5he *urosystem may in'ite counterparties to p)ace remunerate$ fi1e$=term $eposits !ith the >.6 in the Mem#er -tate in !hich the counterparty is esta#)ishe$" 5= Iss "n,e !$ EC/ ,e%ti$i,"tes .e8t

5he *.6 may issue $e#t certificates !ith the aim of a$&ustin( the structura) position of the *urosystem 'is=T='is the financia) sector so as to create Aor en)ar(eB a )i/ui$ity shorta(e in the market"

Hi)h .e)%ee !$ $#e;i8i#it *

1"%)in"# #en.in) "n. .e+!sit $",i#ities "%eD

5he potentia) nee$ for rapi$ action in the e'ent of une1pecte$ market $e'e)opments makes it $esira#)e for the *urosystem to retain a hi(h $e(ree of f)e1i#i)ity in the specification of F5%s" 5hey are norma))y e1ecute$ in a $ecentra)ise$ manner #y the >.6s8 #ut the Go'ernin( .ounci) can $eci$e8 un$er e1ceptiona) circumstances8 to ha'e #i)atera) F5%s e1ecute$ #y the *.6" For operationa) reasons8 on)y a )imite$ num#er of se)ecte$ counterparties may participate in F5%s" 9n or$er to faci)itate access $urin( the financia) crisis8 the )ist of counterparties e)i(i#)e for F5%s !as e1ten$e$8 increasin( from aroun$ 140 to aroun$ 28000 e)i(i#)e counterparties" St% ,t %"# !+e%"ti!ns 5he operationa) frame!ork a)so pro'i$es the *urosystem !ith the possi#i)ity of con$uctin( Gstructura) operationsH" 5hese operations are e1ecute$ at the initiati'e of the *.6 to a$&ust the structura) )i/ui$ity position of the *urosystem 'is=T='is the financia) sector8 i"e" the amount of )i/ui$ity in the market o'er the )on(er term" 5hese operations can #e con$ucte$ usin( re'erse transactions8 outri(ht operations or the issuance of *.6 $e#t certificates Asee 6o1 4"3B" 9n princip)e8 structura) operations can #e )i/ui$ity=pro'i$in( or )i/ui$ity= a#sor#in( an$ their fre/uency can #e re(u)ar or non=re(u)ar" -tructura) operations in the form of re'erse transactions an$ the issuance of $e#t instruments are norma))y carrie$ out throu(h stan$ar$ ten$ers" -tructura) operations in the form of outri(ht transactions are norma))y e1ecute$ throu(h #i)atera) proce$ures" 4=5 STANDIN4 FACI5ITIES

:s mentione$ a#o'e8 the *urosystem a)so imp)ements monetary po)icy #y

St% ,t %"# !+e%"ti !ns

settin( the interest rates on its stan$in( faci)ities" -tan$in( faci)ities pro'i$e or a#sor# )i/ui$ity !ith an o'erni(ht maturity on the initiati'e of counterparties" 5!o stan$in( faci)ities are a'ai)a#)e to e)i(i#)e counterparties: the mar(ina) )en$in( faci)ity an$ the $eposit faci)ity" 9n norma) circumstances8 there is )itt)e incenti'e for #anks to use stan$in( faci)ities8 as the interest rates app)ie$ to them are norma))y unfa'oura#)e !hen compare$ !ith market rates" .hart 4"4AaB sho!s the a'era(e $ai)y use of the stan$in( faci)ities from 2anuary 1999 to :u(ust 2004" 5heir use )ar(e)y remaine$

#e)o! P1 #i))ion #efore the onset of the financia) turmoi) in :u(ust 20008 $emonstratin( that the faci)ities ser'e main)y to pro'i$e an$ a#sor# )i/ui$ity in e1ceptiona) circumstances" .hart 4"4A#B i))ustrates that the use of the stan$in( faci)ities increase$ a#rupt)y $urin( the financia) crisis as a num#er of #anks preferre$ to keep more centra) #ank reser'es than re/uire$ an$ to $eposit the a$$itiona) reser'es in the $eposit faci)ity instea$ of )en$in( them out to other #anks" 5he reasons for this inc)u$e$ uncertainty an$ percei'e$ counterparty risk" ;n$er the fu)) a))otment proce$ure intro$uce$ #y the *urosystem in %cto#er 20048 the tota) amount of )i/ui$ity pro'i$e$ #y the *urosystem is the sum of the amounts of )i/ui$ity re/ueste$ #y in$i'i$ua) #anks" :s the o'era)) amounts re/ueste$ #y #anks !ere hi(her than the )i/ui$ity nee$s of the #ankin( system $urin( this perio$8 the e1cess )i/ui$ity !as $eposite$ in the $eposit faci)ity" 5his points #oth to precautionary )i/ui$ity hoar$in( an$ to market se(mentation Aas the #anks re/uestin( )i/ui$ity may not #e the same as those $epositin( e1cess )i/ui$ity !ith the *urosystemB"

Di&+!%t"nt in e;,e+ti!n"# ,i%, &st"n,esD

Ch"%t 4=4 Re,! %se t! st"n.in) $",i#ities

A*;C #i))ionsJ a'era(es of $ai)y positions o'er the maintenance perio$B mar(ina) )en$in( faci)ity $eposit faci)ity @a: Fro# -anuar4 1000 to Au6ust 2003 3 2 1 0 =1 =2 =3 1999 2000 2001 2002 2003 2004 200, 2006 2000 3 2 1 0 =1 =2 =3 2004

@$: Fro# %epte#$er 2003 to -anuar4 2011 ,0 0 =,0 =100 =1,0 =200 =2,0 =300 -ep" 2004 -ource: *.6" ,0 0 =,0 =100 =1,0 =200 =2,0 =300

2an"

May 2009

-ep"

2an"

May 2010

-ep"

2an" 2011

D"n. "t the en. !$ the %ese%:e &"inten" n,e +e%i!.

.hart 4",AaB ref)ects the typica) pattern of recourse to the stan$in( faci)ities !ithin a reser'e maintenance perio$ #efore the onset of the financia) crisis" :s can #e seen from the chart8 unti) :u(ust 2004 the use of the stan$in( faci)ities !as (reatest at the en$ of the reser'e maintenance perio$" 5his is $ue to the a'era(in( mechanism of the minimum reser'e system8 !hich a))o!s cre$it institutions to run $ai)y )i/ui$ity $eficits an$ surp)uses8

an$ either #rin( for!ar$ the fu)fi)ment of reser'e re/uirements or postpone it unti) the en$ of the maintenance perio$" :s pre'ious)y note$8 reser'e re/uirements #ecome #in$in( on)y on the )ast $ay of the maintenance perio$8 !hen )i/ui$ity $eficits or surp)uses can no )on(er #e offset #y opposite im#a)ances !ithin the same maintenance perio$" .hart 4",A#B i))ustrates the typica) pattern of recourse to the stan$in( faci)ities since

the onset of the financia) crisis" 5he most strikin( $ifference is the sca)e of use of the $eposit faci)ity8 ref)ectin( the 'ery hi(h amounts of e1cess )i/ui$ity" 5his in$icates that the markets !ere not functionin( proper)y" 9n a$$ition8 a pattern of

Gfront)oa$in(H can #e o#ser'e$8 !here#y #anks try to fu)fi) their reser'e re/uirements ear)y in the cyc)e an$ thus $eposit )ess fun$s in the $eposit faci)ity at the #e(innin( of the maintenance perio$ than at the en$"

Ch"%t 4=5 Re,! %se t! st"n.in) $",i#ities 'ithin " &"inten"n,e +e%i!.
A*;C #i))ionsJ a'era(e of $ai)y positions on the )ast 24 $ays of maintenance perio$sB mar(ina) )en$in( faci)ity $eposit faci)ity @a: Before the start of the .r,s,s @fro# Fe$ruar4 1000 to Au6ust 2003: 3 2 1 0 =1 =2 =3 3 2 1 0 =1 =2 =3

24 20 26 2, 24 23 22 21 20 19 14 10 16 1, 14 13 12 11 10 9 Cemainin( $ays of maintenance perio$

@$: After the start of the .r,s,s @fro# %epte#$er 2003 to -anuar4 2011: ,0 ,0

=,0

=,0

=100

=100

=1,0

=1,0

=200 24 20 26 2, 24 23 22 21 20 19 14 10 16 1, 14 13 12 11 10 9 4 0 6 , 4 3 Cemainin( $ays of maintenance perio$ -ource: *.6" 2 1

=200

The E %!s*ste & "s " s ++#ie% !$ #iE i.it*

4=6 CENTRA5 /AN7 5IGUIDIT6 AND 5IGUIDIT6 NEEDS OF THE /AN7IN4 S6STE1 5o sum up8 the operationa) frame!ork comprises a set of instruments an$ proce$ures !hich the *urosystem uses to steer interest rates8 mana(e )i/ui$ity in the money market an$ si(na) monetary po)icy intentions" 5he euro area #ankin( system 7 on account of its nee$ for #anknotes an$ the o#)i(ation to fu)fi) reser'e re/uirements8 in particu)ar 7 has an a((re(ate )i/ui$ity $eficit in norma) times an$ is re)iant on refinancin( from the *urosystem" 5hus the *urosystem acts as a supp)ier of )i/ui$ity an$ can steer money market interest rates8 as !e)) as transmittin( monetary po)icy impu)ses across the euro area" 5he interaction #et!een the *urosystem an$ the #ankin( system can #e i))ustrate$ !ith the he)p of the conso)i$ate$ #a)ance sheet of the *urosystem" 5a#)e 4"3 presents a simp)ifie$ i))ustration of the structure of a stan$ar$ise$ centra) #ank #a)ance sheet" %n the assets si$e8 there are three main )i/ui$ity=pro'i$in( items: Grefinancin( to cre$it institutionsH8 Gmar(ina) )en$in( faci)ityH an$ Gnet forei(n assetsH" GCefinancin( to cre$it institutionsH refers to the outstan$in( amount of )i/ui$ity=pro'i$in( open market operations" 9n the case of the *urosystem8 these operations a)!ays inc)u$e MC%s an$ 35C%s" :ny )i/ui$ity=pro'i$in( F5%s an$ structura) operations are a)so inc)u$e$ un$er this item" GMar(ina) )en$in( faci)ityH refers to o'erni(ht cre$it pro'i$e$ #y the centra) #ank to those cre$it institutions that ha'e recourse to this faci)ity" G>et forei(n assetsH refers to assets in

forei(n currency o!ne$ #y the centra) #ank8 net of any centra) #ank )ia#i)ities $enominate$ in forei(n currency" %n the )ia#i)ities si$e8 there are fi'e main items: Gcre$it institutions+ ho)$in(s on current accountsH8 G$eposit faci)ityH8 G#anknotes in circu)ationH8 G(o'ernment $epositsH an$ Gother factors AnetBH" G.re$it institutions+ ho)$in(s on current accountsH Aa)so kno!n as Greser'esHB refers to #a)ances he)$ #y cre$it institutions !ith the centra) #ank in or$er to meet sett)ement o#)i(ations from inter#ank transactions an$ to fu)fi) reser'e re/uirements" G?eposit faci)ityH refers to the tota) o'erni(ht recourse to this stan$in(

C!ns!#i. "te. 8"#"n,e sheet !$ the E %!s*ste&

Assets

faci)ity" G6anknotes in circu)ationH in$icates the 'a)ue of the #anknotes put into circu)ation #y the centra) #ank at the re/uest of cre$it institutions" 5his is usua))y the )ar(est item on the )ia#i)ities si$e" GGo'ernment $epositsH ref)ects the e1istence of current account #a)ances he)$ #y nationa) treasuries !ith >.6s" Fina))y8 Gother factors AnetBH is a #a)ancin( item encompassin( the remainin( items on the #a)ance sheet" From an accountin( point of 'ie!8 the respecti'e amounts of tota) assets an$ )ia#i)ities must a)!ays #e e/ua)" 9n or$er to un$erstan$ ho! a centra) #ank operates8 it is con'enient to sp)it the #a)ance sheet into three

e)ements8 as in$icate$ #y the )o!er three pane)s of 5a#)e 4"3" :s sho!n in the ta#)e8 the net amount of )i/ui$ity that is actua))y supp)ie$ #y the centra) #ank to cre$it institutions is the sum of t!o e)ements" 5he first e)ement is ma$e up of the Gautonomous factorsH Athe sum of G#anknotes in circu)ationH p)us G(o'ernment $epositsH minus Gnet forei(n assetsH p)us Gother factors AnetBH8 !hich is the net effect of the remainin( #a)ance sheet items affectin( money market )i/ui$ityB" 5hese factors inf)uence

5i"8i#ities

5iE i.it* s ++#* "n. .e&"n.

the )i/ui$ity of the #ankin( system an$ are )a#e))e$ GautonomousH in centra) #ank &ar(on #ecause they are not norma))y the resu)t of the use of monetary po)icy instruments" -ome of the autonomous factors are not un$er the contro) of the monetary authorities AG#anknotes in circu)ationH an$ G(o'ernment $epositsHB" %ther factors8 such as Gnet forei(n assetsH8 can #e contro))e$ #y the monetary authorities8 #ut transactions in these assets are not norma))y re)ate$ to monetary po)icy operations Ae1cept in the case of forei(n e1chan(e s!apsJ see 6o1 4"1B" 5he secon$ e)ement is ma$e up of cre$it institutions+ reser'es AGcre$it institutions+ ho)$in(s on current accountsHB" 5he sum of the autonomous factors p)us the reser'es e/ua)s the supp)y of )i/ui$ity throu(h monetary po)icy operations Athe sum of Grefinancin( to cre$it

institutionsH p)us Gmar(ina) )en$in( faci)ityH minus G$eposit faci)ityHB" Mo'in( from this schematic ana)ysis to the *urosystem+s actua) #a)ance sheet8 5a#)e 4"4 sho!s the contri#utions of the main items to the #ankin( system+s )i/ui$ity in the reser'e maintenance perio$ from 19 2anuary 2011 to 4 Fe#ruary 2011" 5he #u)k of the )i/ui$ity !as pro'i$e$ throu(h the MC%s an$ 35C%s" :$$itiona) )i/ui$ity !as pro'i$e$ throu(h other operations8 nota#)y the co'ere$ #on$ purchase pro(ramme A.6PPB an$ the -ecurities Markets Pro(ramme A-MPB" -tan$in( faci)ities norma))y ha'e on)y a mar(ina) impact on the #ankin( system+s )i/ui$ity" %!in( to the )i/ui$ity surp)us of the #ankin( sector in the conte1t of cre$it operations at fi1e$ rate !ith fu)) a))otment8 #anks
C!nt%i8 ti! ns !$ the &"in ite&s

T"8#e 4=3 Cent%"# 8"n( 8"#"n,e sheet st% ,t %e A standard,sed .entral $ank $alan.e sheetD Assets 9,a$,l,t,es Cefinancin( to cre$it institutions .re$it institutions+ ho)$in(s on current accounts Areser'esB Mar(ina) )en$in( faci)ity ?eposit faci)ity >et forei(n assets 6anknotes in circu)ation Go'ernment $eposits %ther factors AnetB Can $e rearran6ed as follo?sD 9,>u,d,t4 suppl4 throu6h #onetar4 pol,.4 operat,ons refinancin( to cre$it institutions + mar(ina) )en$in( faci)ity = $eposit faci)ity C Autono#ous fa.tors #anknotes in circu)ation + (o'ernment $eposits = net forei(n assets + other factors AnetB B &eserves cre$it institutions+ ho)$in(s on current accounts

ha'e ma$e )ar(er recourse to the nee$ for )i/ui$ity=pro'i$in( monetary $eposit faci)ity than in norma) times" po)icy operations" Ce/uire$ reser'es ha'e a )i/ui$ity=a#sor#in( effect !hich 5he secon$ part of 5a#)e 4"4 sho!s is simi)ar in siEe to the effect of a)) the autonomous factors" 5he )i/ui$ity= the autonomous factors to(ether" 5he a#sor#in( effect of autonomous factors $ifference #et!een cre$it institutions+ is main)y (enerate$ #y #anknotes in ho)$in(s on current accounts !ith the circu)ation an$ (o'ernment $eposits *urosystem an$ reser'e re/uirements !ith the *urosystem" 6anknotes makes up the e1cess reser'es in circu)ation a#sor# the #ankin( A!hich ha'e (enera))y #een 'ery )o!8 system+s )i/ui$ity #ecause they ha'e at aroun$ 0",F of re/uire$ reser'es in to #e o#taine$ from the centra) #ank8 the euro areaB" an$ cre$it institutions ha'e to #orro! fun$s from the centra) #ank #ecause of .harts 4"6 an$ 4"0 sho! ho! the main this" 5here is a)so a counter=effect on )i/ui$ity=pro'i$in( an$ )i/ui$ity= the #ankin( system+s )i/ui$ity re)atin( a#sor#in( factors $e'e)ope$ from to the net forei(n assets he)$ #y the 2anuary 1999 to 2anuary 2011" .hart 4"6 *urosystem" Purchases of forei(n sho!s that the #u)k of the )i/ui$ity up assets #y the *urosystem in&ect to -eptem#er 2004 !as pro'i$e$ )i/ui$ity into the #ankin( system throu(h the MC%s8 ref)ectin( the key an$ re$uce the T"8#e 4=4 C!nt%i8 ti!ns t! the 8"n(in) s*ste&0s #iE i.it*
A*;C #i))ionsJ $ai)y a'era(e stocks from 19 2anuary 2011 to 4 Fe#ruary 2011B

Re#"ti:e i&+!%t"n ,e !$ #iE i.it*< +%!:i.in) $",t!%s

9,>u,d,t45 prov,d,n6

Assets "onetar4 pol,.4 operat,ons of the Euros4ste# Main refinancin( operations 14,"4 7 3on(er=term refinancin( operations 314"2 7 %ther open market operations 1B 130"2 41"3 -tan$in( faci)ities 0"1 39"2 %u$5total @a: 708=0 120=1 Autono#ous fa.tors affe.t,n6 the $ank,n6 s4ste#Es l,>u,d,t4 6anknotes in circu)ation 7 422 Go'ernment $eposits 7 101"2 !ith the *urosystem >et forei(n assets ,49"0 7 %ther factors AnetB 7 =66"0 %u$5total @$: 180=2 317=1 &eserves C .red,t ,nst,tut,onsE hold,n6s on .urrent a..ounts ?,th the Euros4ste# Ce/uire$ reser'es AcB *1cess reser'es A$B Total @a:B@$: C @.:B@d:

9,>u,d,t45 et a$sor$,n6 .ontr,$ut,on 9,a$,l,t,es +14,"4 +314"2 +,,"9 =39"2 B120=8 5422 5101"2 +,49"0 +66"0 5;07=3

+212"3 +1"3 B21;=7

-ource: *.6" 1B G%ther open market operationsH inc)u$e securities he)$ for monetary po)icy purposes an$ forei(n currency )i/ui$ity operations" 5he )atter operations actua))y a#sor#e$ )i/ui$ity"

Ch"%t 4=6 >!# &e !$ &"in "n. #!n)e%<te%& %e$in"n,in) !+e%"ti!ns

A*;C #i))ionsJ a'era(es of $ai)y positions o'er maintenance perio$B outstan$in( main refinancin( operations AMC%sB outstan$in( )on(er=term refinancin( operations A35C%sB tota) refinancin( operations 900 400 000 600 ,00 400 300 200 100 0 1999 2000 2001 2002 2003 2004 200, 2006 2000 2004 2009 2010 900 400 000 600 ,00 400 300 200 100 0

-ource: *.6"

ro)e p)aye$ #y this monetary po)icy instrument" Fo))o!in( the intro$uction of a fi1e$ rate fu)) a))otment proce$ure from %cto#er 2004 on!ar$s for a))

refinancin( operations8 the !ei(ht of the refinancin( operations shifte$ to!ar$s 35C%s" :s can #e seen from .hart 4"68 35C%s reache$ a 'o)ume of

Ch"%t 4=7 ReE i%e. %ese%:es "n. " t!n!&! s #iE i.it* $",t!%s
A*;C #i))ions8 a'era(es of $ai)y positions o'er maintenance perio$B reser'e re/uirements autonomous factors 1B tota) )i/ui$ity nee$s in the #ankin( system 000 600 ,00 400 300 200 100 0 000 600 ,00 400 300 200 100 0

1999

2000

2001

2002

2003

2004

200,

2006

2000

2004

2009

2010

-ource: *.6" 1B :utonomous factors inc)u$e #anknotes in circu)ation p)us (o'ernment $eposits p)us other factors )ess net forei(n assets"

C#e"% si)n"##in) !$ the &!net"%* +!#i,* st"n,e in n!%&"# ti&es

Re#"ti :e i&+!%t" n,e !$ #iE i.it*< "8s!%8in ) $",t!%s

P310 #i))ion at the en$ of 2anuary as 20118 compare$ !ith a 'o)ume of P102 in$icate$ #i))ion for MC%s at the same time" #y the re)ati'e)y .hart 4"0 sho!s the $e'e)opment of sma)) the t!o main factors that create a sprea$ structura) )i/ui$ity $eficit in the #et!een #ankin( system" ;nti) 2004 reser'e the re/uirements usua))y accounte$ for mar(ina) of more than ha)f of the tota) )i/ui$ity rate nee$s of the #ankin( system" From a))otment the 2004 on!ar$s8 the tota) )i/ui$ity= an$ a#sor#in( effect of autonomous factors minimum rate e1cee$e$ the effect from reser'e #i$ re/uirements8 main)y o!in( to the #efore continue$ (ro!th in the stock of euro :u(ust 2004" #anknotes" 4=7 E2PERIENCE CANUAR6 1999 SINCE Fina))y8 !ith #oth !eek)y MC%s an$ month)y 35C%s at the *urosyste m+s $isposa)8 as !e)) as 'arious other measures8 the operationa) frame!ork has met the t!o o#&ecti'es of pro'i$in( )on(er= term )i/ui$ity to cre$it institution s an$ a))o!in( the *urosyste m to steer

5!' :!#"ti#it* !$ sh!%t< te%& inte%est %"tes

5he *urosystem+s operationa) frame!ork has #een functionin( !e)) since the start of -ta(e 5hree of *M;" 5he operationa) frame!ork has (enera))y a))o!e$ the *.6 to steer )i/ui$ity con$itions an$ short=term interest rates in a smooth fashion" 5he a'era(e 'o)ati)ity of short=term interest rates in the euro area money market since 2anuary 1999 has remaine$ )o! #y internationa) stan$ar$s" 5his )o! 'o)ati)ity of short= term money market rates !as achie'e$ !ith 'ery )itt)e recourse to F5%s in norma) times8 i"e" a)most entire)y throu(h a com#ination of a minimum reser'e system !ith an a'era(in( pro'ision an$ !eek)y open market operations" -ta#)e money market con$itions are he)pfu) for the efficient transmission of monetary po)icy to the economy" 9n a$$ition8 they ref)ect a hi(h $e(ree of cre$i#i)ity of the operationa) an$ )i/ui$ity mana(ement capa#i)ities of the *.6" 5he interest rate for the MC%s si(na)s the monetary po)icy stance in norma) times" 5his system has !orke$ !e))8

)i/ui$ity $e'e)opments !ith sufficient precision in the short term" 5he operationa) frame!ork has a)so pro'e$ ro#ust !hen face$ !ith e1ceptiona) cha))en(es8 e"(" the transition to the year 20008 an$ it has sho!n a 'ery hi(h $e(ree of f)e1i#i)ity to $ea) !ith unforeseen circumstances8 such as the terrorist attacks of 11 -eptem#er 20018 the financia) market turmoi) that starte$ in :u(ust 2000 an$ the su#se/uent financia) crisis Asee 6o1 ,"1B" For instance8 since the turmoi) starte$8 the !i$e ran(e of e)i(i#)e counterparties for re(u)ar refinancin( operations has a))o!e$ many counterparties to take part in refinancin(

operations" :)so8 o'erni(ht F5%s ha'e #een use$ to contro) short=term money market rates" >ota#)y8 on 9 :u(ust 20008 the $ay the financia) turmoi) set in8 the *.6 pro'i$e$ P9, #i))ion of o'erni(ht cre$it8 a(ainst co))atera)8 to euro area #anks at the then pre'ai)in( main refinancin( rate to offset tensions in the short=term se(ment of the money market" More (enera))y8 $urin( the turmoi)8 the *urosystem initia))y a$apte$ an intra=maintenance perio$ pattern in the supp)y of )i/ui$ity8 a))o!in( #anks to Gfront)oa$H reser'es in the first ha)f of the maintenance perio$ an$ then compensate for this #y ho)$in( )o!er )e'e)s of reser'es in the secon$ ha)f" 5he *urosystem a)so

F#e;i8#e !+e%"ti!n"# $%"&e'!%(

increase$ the amount of )i/ui$ity pro'i$e$ in 35C%s #y intro$ucin( supp)ementary refinancin( operations !ith maturities of three an$ si1 months A)ater e1ten$e$ to 12 months $urin( the financia) crisisB"

5 THE CONDUCT PO5IC6 SINCE 1999

OF

1ONETAR6

,hi! &hapter illu!trate! ho) "onetary poli&y ha! $een &on#u&te# in the euro area !in&e 1999+ ,he perio# ha! $een &hallen'in' %or the euro area/ 'i.en that it )a! &on%ronte# )ith a ho!t o% e&ono"i& an# %inan&ial !ho& !/ the nature/ !i5e an# per!i!ten&e o% )hi&h .arie# o.er ti"e+ 6'ain!t thi! $a& #rop/ the 7o.ernin' Coun&il too it! "onetary poli&y #e&i!ion! )ith a &lear %o&u! on the nee# to "aintain pri&e !ta$ility o.er the "e#iu" ter"+
5=1 INTRODUCTI ON monetary po)icy stance at meetin(s he)$ e'ery t!o !eeks" 9n >o'em#er 20018 ho!e'er8 the Go'ernin( .ounci) $eci$e$ that 7 as a ru)e 7 it !ou)$ henceforth assess the monetary po)icy stance at its first meetin( of the month" :ccor$in()y8 it !as announce$ that interest rate $ecisions !ou)$ norma))y #e taken at that meetin(8 !hi)e the secon$ meetin( of the month !ou)$ focus on issues re)ate$ to the other tasks an$ responsi#i)ities of the *.6 an$ the *urosystem"

P%i!%it* $!% the &"inten"n ,e !$ +%i,e st"8i#it* !:e% the &e.i & te%&

F%eE ent 4!:e%nin) C! n,i# &eetin)s t! "ssess the &!net"%* +!#i,* st"n,e

-ince the #e(innin( of -ta(e 5hree of *M; in 19998 the con$uct of monetary po)icy in the euro area has #een (ui$e$ #y the o'erri$in( o#&ecti'e of maintainin( price sta#i)ity o'er the me$ium term" 9n assessin( risks to price sta#i)ity in the euro area8 the Go'ernin( .ounci) has a)!ays re)ie$ on the frame!ork )ai$ $o!n in its monetary po)icy strate(y8 imp)yin( a comprehensi'e ana)ysis of #oth %'era))8 si1 phases can #e economic an$ monetary $e'e)opments $istin(uishe$ as re(ar$s the con$uct of in the euro area Asee .hapter 3B" monetary po)icy Asee .hart ,"1B" 5he cha))en(es face$ #y the sin()e 9n the first years of Monetary ;nion8 monetary po)icy the Go'ernin( .ounci) assesse$ the

Si; +h"ses ,"n 8e .istin) ishe. F t%"nsiti!n t! 1!net"%* Uni!n9 +e%i!. nti# &i.<1999D

Ch"%t 5=1 7e* EC/ inte%est %"tes in the si; +h"ses

Aannua) percenta(e chan(esJ $ai)y $ataB mar(ina) )en$in( rate $eposit rate main refinancin( minimum #i$ rate 0 1 6 , 4 3 2 3 4 , 6 0 6 , 4 3

2 1 0 1999 2000 2001 2002 2003 2004 200, 2006 2000 2004 2009 2010

2 1 0

-ource: *.6"

$urin( these si1 phases are e1p)aine$ in the ne1t section" : first phase !as the transition to Monetary ;nion: in response to $o!n!ar$ risks to price sta#i)ity8 the Go'ernin( .ounci) )o!ere$ the *.6+s main refinancin( rate #y ,0 #asis points to 2",F in :pri) 1999"
D&i.<1999 t! en.< -000D

De"%#* -001 t! &i.< -003D

D&i.<-003 t! en.< -005D

Den.<-005 t! the s &&e% !$ -008D

-i1th8 takin( account of su#$ue$ inf)ationary pressures in a settin( in !hich financia) strains ha$ !eakene$ the economic out)ook an$ si(nificant)y $iminishe$ upsi$e risks to price sta#i)ity8 the Go'ernin( .ounci) re$uce$ the main refinancin( rate rapi$)y #y 32, #asis points to 1F #et!een %cto#er 2004 an$ May 2009" -econ$8 in or$er to contain inf)ationary 9n a$$ition8 the Go'ernin( .ounci) has pressures a(ainst the #ack$rop of a$opte$ a num#er of temporary non= stron( economic (ro!th8 increasin( stan$ar$ measures8 referre$ to as the import prices an$ hi(h monetary *nhance$ .re$it -upport an$ the (ro!th8 the Go'ernin( .ounci) raise$ -ecurities Markets Pro(ramme" the key interest rates #y a tota) of 22, #asis points in the perio$ from 5=1AIN >o'em#er 1999 to %cto#er 2000" 5his DE>E5OP1ENTS #rou(ht the main refinancin( rate to Ph"se 1 3 T%"nsiti!n t! 4"0,F in that month" 1!net"%* Uni!n 5hir$8 in response to rece$in( A&i.<1998 t! &i.< inf)ationary pressures in an 1999B en'ironment of su#$ue$ economic 5he con'er(ence process )ea$in( to (ro!th8 marke$ a$&ustments in -ta(e 5hree of *M; !as successfu))y financia) markets an$ hi(h comp)ete$ !hen the *.6 assume$ (eopo)itica) uncertainty8 the responsi#i)ity for monetary po)icy in Go'ernin( .ounci) cut the key interest the euro area on 1 2anuary 1999" Price rates #y a tota) of 20, #asis points sta#i)ity ha$ #een achie'e$ in the countries formin( the euro area8 #et!een May 2001 an$ 2une 20038 there#y re$ucin( the main a))o!in( the Go'ernin( .ounci) to start its operations at a time !hen refinancin( rate to 2F" interest rates !ere at )o! )e'e)s" 5he Fourth8 (i'en containe$ price first interest rate on the main pressures8 the Go'ernin( .ounci) refinancin( operations !as set at 3F8 then )eft the key *.6 interest rates !ith the rates on the mar(ina) )en$in( an$ $eposit faci)ities set at 4",F an$ unchan(e$ unti) ?ecem#er 200," 2F respecti'e)y" 5hese rates8 announce$ on 22 ?ecem#er 19948 Fifth8 !ith inf)ation increasin( a(ainst the #ack(roun$ of soun$ economic fo))o!e$ the coor$inate$ re$uction on (ro!th an$ a rapi$ e1pansion of the 3 ?ecem#er of key interest rates #y a)) supp)y of money an$ cre$it in the euro the >.6s of the countries set to a$opt area8 the $e(ree of monetary po)icy the euro from the outset" accommo$ation !as (ra$ua))y re$uce$" @ith upsi$e risks to price sta#i)ity pre'ai)in( unti) mi$=20048 the Go'ernin( .ounci) raise$ the key interest rates #y a tota) of 22, #asis points8 #rin(in( the main refinancin( rate to 4"2,F in 2u)y 2004" :t the #e(innin( of 19998 a com#ination of factors that ha$ a)rea$y #een affectin( the countries that !ere &oinin( the euro area contri#ute$ to $o!n!ar$ risks to price sta#i)ity" <9.P inf)ation !as #e)o! 1F Asee .hart ,"2B as a resu)t of8 in part8

a si(nificant $rop in oi) prices Asee .hart ,"3B an$

D"n. " si;th +h"se st"%tin) in the " t &n !$ -008

st"8i#it* in e"%#* 1999

T%"ns$e% !$ %es+!nsi8i# it* $!% &!net"%* +!#i,* t! the EC/

Re. ,ti!n !$ (e* EC/ inte%est %"tes in %es+!nse t! .!'n'"%. %is(s t! +%i,e

Ch"%t 5=- HICP In$#"ti!n

Aannua) percenta(e chan(esB <9.P 7 o'era)) in$e1 <9.P e1c)u$in( foo$ an$ ener(y , ,

=1

1994

1999

2000

2001

2002

2003

2004

200,

2006

2000

2004

2009

2010

=1

-ource: *urostat"

$ere(u)ation in the ser'ices sector" 9n this )o!=inf)ation en'ironment8 $o!nsi$e risks to economic (ro!th emer(e$ as a conse/uence of !eaker

e1terna) $eman$ stemmin( from the :sian crisis of )ate 1990 an$ the $rop in confi$ence that fo))o!e$ the financia) market turmoi) after the Cussian crisis

Ch"%t 5=3 N!&in"# e$$e,ti:e e;,h"n)e %"te !$ the e %! "n. !i# +%i,es
Amonth)y a'era(es: in$e1 S1 1999 W 100B nomina) effecti'e e1chan(e rate A)eft=han$ sca)eB 6rent cru$e oi) Ain ;-? per #arre)B Ari(ht=han$ sca)eB

120 11, 110 10, 100 9, 90 4, 40

160 140 120 100 40 60 40 20 0

1994

1999

2000

2001

2002

2003

2004

200,

2006

2000

2004

2009

2010

-ources: *.6 an$ 5homson Ceuters"

Ch"%t 5=4 11 "n. #!"ns t! +%i:"te se,t!%

Aannua) percenta(e chan(esB M1 )oans to the pri'ate sector 16 14 12 10 4 6 4 2 0 =2 1994 -ource: *.6" 1999 2000 2001 2002 2003 2004 200, 2006 2000 2004 2009 2010 16 14 12 10 4 6 4 2 0 =2

in the summer of 1994" Monetary $e'e)opments !ere not seen to imp)y up!ar$ risks to price sta#i)ity o'er the me$ium term Asee .harts ,"4 an$ ,",B" .onse/uent)y8 !ith risks to price sta#i)ity on the $o!nsi$e8 the key *.6

interest rates8 i"e" the fi1e$ rate on the *urosystem+s main refinancin( operations8 the interest rate on the mar(ina) )en$in( faci)ity an$ the interest rate on the $eposit faci)ity8 !ere re$uce$ #y ,0 #asis points on

Ch"%t 5=5 13 )%!'th

Aannua) percenta(e chan(esB M3 M3 Athree=month centre$ mo'in( a'era(eB 14 12 10 4 6 4 2 0 =2 1994 -ource: *.6" 1999 2000 2001 2002 2003 2004 200, 2006 2000 2004 2009 2010 14 12 10 4 6 4 2 0 =2

Ch"%t 5=6 Re"# 4DP9 in. st%i"# +%!. ,ti!n "n. in. st%i"# ,!n$i.en,e $!% the e %! "%e"
Ain$ustria) pro$uction an$ rea) G?P8 annua) percenta(e chan(esJ in$ustria) confi$ence8 percenta(e #a)anceB rea) G?P (ro!th A)eft=han$ sca)eB in$ustria) pro$uction Ari(ht=han$ sca)eB in$ustria) confi$ence Ari(ht=han$ sca)eB 1B 6 30

20

10

=2

=10

=4

=20

=6

1994

1999

2000

2001

2002

2003

2004

200,

2006

2000

2004

2009

2010

=30

-ources: *urostat an$ *uropean .ommission 6usiness an$ .onsumer -ur'eys" 1B ?e'iations from the a'era(e since 2anuary 194,"

4 :pri) 1999" :s a resu)t8 the fi1e$ rate in the *urosystem+s main refinancin( operation stoo$ at 2",F" Ph"se - 3 R"tes %"ise. t! ,!nt"in in$#"ti!n"%* +%ess %es A&i.<1999 t! en.<-000B Gra$ua))y increasin( price pressures in an en'ironment of rapi$ economic (ro!th Asee .hart ,"6B8 a $epreciation of the euro e1chan(e rate Asee .hart ,"3B an$ protracte$ monetary e1pansion !ere reasons for the Go'ernin( .ounci) to raise rates #y a tota) of 22, #asis points #et!een >o'em#er 1999 an$ %cto#er 2000" :s a conse/uence8

4%". "# in,%e"ses in (e* EC/ inte%est %"tes $%!& en.<1999 t! #"te -000

the minimum #i$ rate in the main refinancin( operations of the *urosystem reache$ 4"0,F in %cto#er 2000" 9n particu)ar8 there !ere increasin( concerns that inf)ationary pressures from import prices cou)$ ha'e #roa$)y #ase$ secon$=roun$ effects 'ia !a(e an$ price=settin( #eha'iour8 an$ mi(ht thus )ea$ to an increase in the )on(=term inf)ation e1pectations of the pu#)ic at )ar(e Asee .hart ,"0B" :nother cause for concern !as the pro(ressi'e accumu)ation of )i/ui$ity8 as in$icate$ #y the protracte$ e1pansion of the supp)y of money an$ cre$it"

Ch"%t 5=7 In.i,"t!%s !$ #!n)<te%& in$#"ti!n e;+e,t"ti!ns in the e %! "%e"

Aannua) percenta(e chan(esB .onsensus *conomics 1B -PF fi'e=years=ahea$ 2B fi'e=year for!ar$ #reak=e'en inf)ation rate fi'e years ahea$ 3B ten=year #reak=e'en inf)ation rate 3B8 4B
3"0 3"0

2",

2",

2"0

2"0

1",

1",

1"0

1"0

0",

1999

2000

2001

2002

2003

2004

200,

2006

2000

2004

2009

2010

0",

-ources: 5homson Ceuters8 *uroM5-8 .onsensus *conomics an$ the *.6" 1B -ur'ey of prominent financia) an$ economic forecasters8 as pu#)ishe$ #y .onsensus *conomics" 2B -ur'ey of Professiona) Forecasters con$ucte$ #y the *.6 on $ifferent 'aria#)es at $ifferent horiEons" Participants are e1perts affi)iate$ !ith institutions #ase$ !ithin the *uropean ;nion" 3B 5he #reak=e'en inf)ation rate ref)ects the a'era(e 'a)ue of inf)ation e1pectations o'er the (i'en horiEon" From 20048 it is a constant maturity #reak=e'en inf)ation rate8 estimate$ from the euro area nomina) an$ rea) (o'ernment #on$ yie)$ cur'es" 6efore 20048 it is ca)cu)ate$ as the $ifference #et!een the nomina) yie)$ on a stan$ar$ #on$ an$ the rea) yie)$ on an inf)ation in$e1e$=)inke$ #on$8 issue$ #y the same issuer an$ !ith simi)ar maturity" 4B 5he ten=year #reak=e'en inf)ation rate in the perio$ from 2anuary 1999 to %cto#er 2001 is the ten=year #reak= e'en inf)ation rate for France8 !hi)e that in the perio$ from >o'em#er 2001 to %cto#er 2010 is the ten=year #reak=e'en inf)ation rate for the euro area"

7e* EC/ inte%est %"tes %e. ,e. in %es+!nse t! %e,e.in) +%i,e +%ess %es 8et'een e"%#* -001 "n. &i.< -003D

Ph"se 3 3 D!'n'"%. ".? st&ents t! (e* EC/ inte%est %"tes Ae"%#* -001 t! &i.<-003B 6et!een ear)y 2001 an$ mi$=20038 the Go'ernin( .ounci) re$uce$ the *.6+s key rates #y a tota) of 20, #asis points8 #rin(in( the main refinancin( rate to 2F in 2une 2003" 5his !as a reaction to the continue$ $ec)ine in inf)ationary pressures o'er this perio$8 !hich ha$ #een tri((ere$ main)y #y $eterioratin( prospects for economic (ro!th in the !ake of se'ere shocks that ha$ hit the !or)$ economy an$ ()o#a) financia) markets" 9n particu)ar8 the terrorist attacks on the ;nite$ -tates on 11 -eptem#er 2001 )e$ to hi(h uncertainty an$ a )oss of confi$ence across the ()o#e" 9n$ee$8

this e'ent ha$ the potentia) acce)erate the $o!n!ar$

to tren$ in economic acti'ity an$ $isrupt the functionin( of financia) markets" Gi'en the hi(h uncertainty pre'ai)in( in the aftermath of the terrorist attacks of -eptem#er 20018 the stron( monetary e1pansion

!as not seen as an in$ication of upsi$e risks to price sta#i)ity o'er the me$ium term" 9t !as foun$ that hi(h 'o)ati)ity in financia) markets cause$ many in'estors to shift in'estment a!ay from risky financia) assets into monetary assets8 i"e" safer an$ more )i/ui$ short= term assets" :t the same time8 the (ro!th of )en$in( to the pri'ate sector8 especia))y that to non= financia) corporations8 continue$ to $ec)ine in an en'ironment of su#$ue$ economic acti'ity"

D'hi#e .e&"n. $!% #iE i. "ssets %!se in ti&es !$ hei)htene. n,e%t"int*

C!nt"ine. +%i,e +%ess %es ," se. the 4!:e%nin) C! n,i# t! (ee+ EC/ inte%est %"tes n,h"n)e. nti# en.< -005

Dt%i))e%e. 8* si)n"#s $%!& &!net"%* "n"#*sisD

Ph"se 4 3 N! ,h"n)es t! (e* EC/ inte%est %"tes A&i.<-003 t! en.<-005B .ontaine$ price pressures in$uce$ the *.6 to keep interest rates unchan(e$ #et!een mi$=2003 an$ en$=200," 9n$ee$8 $espite )ar(e increases in commo$ity an$ ener(y prices8 as !e)) as rises in in$irect ta1es an$ a$ministere$ prices8 un$er)yin( $omestic inf)ationary pressures remaine$ containe$ o'er the perio$" 5he reco'ery of economic acti'ity in the euro area !as re)ati'e)y mo$est an$ (aine$ momentum on)y (ra$ua))y" 9t starte$ in the secon$ ha)f of 20038 $ri'en #y e1ports a(ainst the #ack$rop of a rene!e$ $ynamism of the !or)$ economy" 9t then continue$ in 2004 an$ 200,8 a)so #enefitin( from 'ery fa'oura#)e financin( con$itions" *'i$ence from the monetary si$e confirme$ the 'ie! that the )e'e)s of uncertainty an$ risk a'ersion !ere (ra$ua))y norma)isin(8 as ref)ecte$ in the un!in$in( of past portfo)io shifts into monetary assets" :s a conse/uence8 monetary $ynamics mo$erate$ in 2003 an$ ear)y 20048 #efore (ainin( momentum as from mi$=2004" Ph"se 5 3 With.%"'"# !$ &!net"%* ",,!&&!."ti!n Aen.<-005 t! &i.<-008B 6et!een ?ecem#er 200, an$ 2u)y 20048 the Go'ernin( .ounci) raise$ interest rates #y a tota) of 22, #asis points8 esta#)ishin( the main refinancin( rate at 4"2,F in 2u)y 2004" 5his a$&ustment of the accommo$ati'e stance !as !arrante$ to a$$ress upsi$e risks to price sta#i)ity in a settin( of soun$ economic (ro!th an$ a rapi$ e1pansion of the supp)y of money an$ cre$it in the euro area" :t the start of the a$&ustment cyc)e8 it !as monetary ana)ysis that pro'i$e$ ear)y si(na)s of upsi$e risks to price

sta#i)ity at me$ium to )on(er=term horiEons" Co#ust cre$it (ro!th as

4%". "# %e. ,ti!n !$ the .e)%ee !$ &!net"%* +!#i,* ",,!&&!. "ti!n 8et'een en.<-005 "n. &i.< -008D

from mi$=2004 ref)ecte$ the stimu)ati'e effect #oth of the 'ery )o! pre'ai)in( )e'e) of interest rates in the euro area an$8 at a )ater sta(e8 of the rene!e$ $ynamism of the euro area economy" 5he stron( monetary e1pansion contri#ute$ further to the a)rea$y amp)e )i/ui$ity in the euro area" 9n$ications from economic ana)ysis8 #y contrast8 !ere rather mi1e$ at the #e(innin( of the a$&ustment of key interest rates" <o!e'er8 in the first ha)f of 20068 economic (ro!th in the euro area (aine$ momentum an$ (ra$ua))y #ecame more #roa$)y #ase$ an$ increasin()y se)f=sustainin(8 !ith $omestic $eman$ actin( as the main

$ri'er" :s a resu)t of su#stantia) increases in internationa) oi) an$ foo$ prices in the secon$ ha)f of 20008 annua) inf)ation rose sharp)y8 an$ it continue$ to $o so in the first ha)f of 2004" 9t reache$ )e'e)s si(nificant)y a#o'e 2F aroun$ the turn of 2004" ?espite these price shocks8 !a(e $e'e)opments remaine$ rather mo$erate an$ me$ium to )on(er=term inf)ation e1pectations staye$ anchore$ at )e'e)s consistent !ith price sta#i)ity" 9n the first ha)f of 20048 ho!e'er8 the risks to price sta#i)ity o'er the me$ium term remaine$ c)ear)y on the upsi$e" 9n particu)ar8 the possi#)e emer(ence of secon$=roun$ effects in !a(e an$ price=settin( as a conse/uence of hi(her commo$ity prices an$ e)e'ate$ hea$)ine inf)ation rates pose$ su#stantia) upsi$e risks to price sta#i)ity" 5he e1pansion of money an$ cre$it remaine$ 'ery $ynamic throu(hout this perio$" 5his !as supporte$ #y a persistent)y stron( (ro!th of )oans to the pri'ate sector8 !hich a$$e$ further to the )i/ui$ity a)rea$y accumu)ate$"

D8e$!%e the %e,!:e%* )"ine. &!&ent &

U+si.e %is(s t! +%i,e st"8i#it* ,!ntin e. t! +%e:"i# nti# &i.< -008D

D,!n$i%&e. 8* " ,%!ss<,he,( 'ith &!net"%* "n"#*sis

EC/ "#s! t!!( &e"s % es t! "..%ess e&e%)in ) tensi!n s in $in"n,i"# &"%(ets in -007 "n. the $i%st h"#$ !$ -008

D(e* EC/ inte%est %"tes 'e%e , t t! " hist!%i,"# #!'D

@hen the first si(ns of financia) market tensions emer(e$ in :u(ust 20008 the *.6 acte$ s!ift)y an$ $ecisi'e)y to a'oi$ a $isruption of the inter#ank market" 9t $e facto pro'i$e$ un)imite$ o'erni(ht )i/ui$ity throu(h fine=tunin( operations" 9n a$$ition8 the pro'ision of )i/ui$ity to financia) institutions !as front)oa$e$" 9n the months that fo))o!e$8 temporary reciproca) currency arran(ements As!ap )inesB !ere moreo'er esta#)ishe$ !ith other centra) #anks8 primari)y to a$$ress the mountin( pressure in short=term ;$o))ar fun$in( markets" 5his cause$ the tensions in the short=term se(ment of the euro area money market to a#ate consi$era#)y Asee 6o1 ,"1 for an o'er'ie! of the non=stan$ar$ measures taken #y the *urosystemB" Ph"se 6 3 The EC/0s %es+!nse t! the $in"n,i"# ,%isis Asin,e " t &n -008B Fo))o!in( the co))apse of 3ehman 6rothers8 a ;financia) institution8 on 1, -eptem#er 20048 the financia) turmoi) turne$ into a ()o#a) financia) an$ economic crisis" Gro!in( uncertainty a#out the financia) hea)th of ma&or #anks !or)$!i$e )e$ to a co))apse in acti'ity in a )ar(e num#er of financia) market se(ments" 5he crisis a)so #e(an to sprea$ to the rea) sector8 !ith a rapi$ an$ synchronise$ $eterioration in economic con$itions in most ma&or economies an$ a free fa)) in ()o#a) tra$e" 5he *.68 )ike other ma&or centra) #anks8 re$uce$ its key interest rates to historica))y )o! )e'e)s an$ em#arke$ on a series of non=stan$ar$ po)icy measures8 !ith a 'ie! to preser'in( price sta#i)ity8 sta#i)isin( the financia) situation an$ )imitin( conta(ion 'is=T='is the rea) economy" :s re(ar$s the stan$ar$ con$uct of monetary po)icy8 the *.6 first re$uce$

Fin"n,i"# t %&!i# t %ne. int! " ,%isis in " t &n -008

EC/ %es+!n.e . 'ith 8!th st"n."%. "n. n!n< st"n."%. &e"s %es D

the key interest rates #y ,0 #asis points on 4 %cto#er 20048 in a concerte$ an$ historic mo'e to(ether !ith other ma&or centra) #anks8 name)y the 6ank of .ana$a8 the 6ank of *n()an$8 the Fe$era) Ceser'e -ystem8 -'eri(es Ciks#ank an$ the -!iss >ationa) 6ank" -u#se/uent)y8 takin( into account the !eakene$ economic out)ook an$ si(nificant)y $iminishe$ upsi$e risks to price sta#i)ity o'er the me$ium term8 the Go'ernin( .ounci) re$uce$ the key interest rates further" 5he main refinancin( rate !as cut #y a tota) of 32, #asis points to 1F !ithin a perio$ of on)y se'en months8 i"e" #et!een %cto#er 2004 an$ May 2009 Asee .hart ,"1B"

:t the same time8 an$ fu))y in )ine !ith its primary o#&ecti'e of maintainin( price sta#i)ity8 the Go'ernin( .ounci) a$opte$ a num#er of temporary non= stan$ar$ measures to support financin( con$itions an$ cre$it f)o!s to the euro area economy o'er an$ #eyon$ !hat cou)$ #e achie'e$ throu(h re$uctions in key interest rates a)one" @ithout a$$ressin( the persistent fun$in( pro#)ems of financia) institutions8 the *.6 !ou)$ ha'e run the risk of the chan(es in key interest rates #ein( si(nificant)y )ess effecti'e than in norma) times" 5hese measures !ere su#se/uent)y referre$ to as the *nhance$ .re$it -upport" 5he approach comprise$ the fi'e key e)ements $escri#e$ in 6o1 ,"1" 9n the course of 20098 there !ere increasin( si(ns of impro'ement in

financia) market con$itions8 !ith uncertainty sti)) pre'ai)in(" 5hus8 in )ine !ith its e1it strate(y Asee -ection 3"4B8 in ?ecem#er 2009 the Go'ernin( .ounci) initiate$ a (ra$ua) phasin(=out of those non=stan$ar$ measures that !ere no

D"n. n!n<st"n."%. &e"s %es 'e%e int%!. ,e. t! ens %e the +%!+e% t%"ns&issi!n !$ these %"te , ts "n. t! enh"n,e ,%e.it s ++!%t

S!&e !$ the n!n<st"n."%. &e"s %es st"%te. t! 8e +h"se. ! t in #"te -009

)on(er nee$e$8 !hi)e keepin( other e)ements of the *nhance$ .re$it -upport in p)ace" 9n particu)ar8 it announce$ the en$in( of the one=year refinancin( operations8 after three such operations ha$ #een )aunche$ $urin( 2009" : num#er of other measures !ere a)so phase$ out8 #ut this pro'e$ short=)i'e$ in 'ie! of the su#se/uent emer(ence of tensions in some so'erei(n $e#t markets"
Tensi!n s in s!:e%ei)n 8!n. &"%(ets in s+%in) -010D

D ,"##e. $!% " ne' n!n< st"n. "%. &e"s %e

Asee 6o1 ,"1B" 9n a$$ition8 the Go'ernin( .ounci) re=intro$uce$ some of the non=stan$ar$ measures that ha$ #een !ith$ra!n ear)ier8 in or$er to a'oi$ spi))o'ers from $omestic so'erei(n #on$ markets to other financia) markets" %'era))8 the measures imp)emente$ #y the *urosystem in response to the financia) crisis he)pe$ to sustain financia) interme$iation in the euro area #y safe(uar$in( the refinancin( 9n ear)y 2010 tensions re=emer(e$ in of so)'ent #anks an$ restorin( some financia) market se(ments8 confi$ence amon( financia) market in particu)ar in the (o'ernment #on$ participants" 9n turn8 preser'in( the markets of some euro area countries 'ia#i)ity of the #ankin( system an$ Asee .hart 4"10B" 5his !as main)y the important se(ments of the financia) resu)t of increasin( market concerns market !as instrumenta) in keepin( a#out the sustaina#i)ity of pu#)ic cre$it a'ai)a#)e to househo)$s an$ finances in 'ie! of risin( (o'ernment companies at accessi#)e rates an$8 $eficits an$ $e#t8 causin( some u)timate)y8 in maintainin( price sta#i)ity" secon$ary markets to $ry up" >on=stan$ar$ monetary po)icy For purposes of ensurin( $epth an$ measures are e1traor$inary steps )i/ui$ity in those market se(ments that taken in response to e1ceptiona) !ere $ysfunctiona) an$ restorin( the circumstances" 5hey are temporary in proper functionin( of the monetary nature an$ are separate from8 an$ po)icy transmission mechanism8 the comp)ement8 the stan$ar$ interest rate Go'ernin( .ounci) announce$ a instrument8 an$ they can #e a$&uste$ num#er of measures on 10 May 2010" re(ar$)ess of the pre'ai)in( )e'e) of 9n particu)ar8 it intro$uce$ the interest rates" :t the #e(innin( of 20118 -ecurities Markets Pro(ramme !ith the the emer(ence of short=term up!ar$ aim of inter'enin( in the euro area pressure on o'era)) inf)ation8 main)y pu#)ic an$ pri'ate $e#t securities o!in( to ener(y prices8 !arrante$ 'ery c)ose monitorin( of a)) $e'e)opments" markets

The &!net"%* +!#i,* st"n,e "n. the +%!:isi!n !$ #iE i.it* 'i## ,!ntin e t! 8e ".? ste. "s "++%!+%i"t e

/!; 5=1 The E %!s*ste&0s n!n<st"n."%. &e"s %es sin,e A ) st -007

5he ()o#a) financia) crisis that #e(an !ith financia) tensions in :u(ust 20008 an$ the su#se/uent economic $o!nturn ha'e ca))e$ for unprece$ente$ po)icy responses8 inc)u$in( in the area of monetary po)icy" 5his #o1 $escri#es the non=stan$ar$ monetary po)icy measures taken #y the *urosystem in response to the financia) crisis" 5hese measures are aime$ at supportin( the effecti'e transmission of interest rate $ecisions to the !i$er economy" 5he intensity of the financia) crisis can #e measure$ usin( se'era) in$icators" %ne i))ustrati'e in$icator is the sprea$ #et!een the three=month *;C96%C an$ the o'erni(ht in$e1e$ s!ap rate Asee .hart ,"4B" @hi)e rare)y e1cee$in( a fe! #asis points #efore :u(ust 20008 the sprea$ reache$ 'ery hi(h )e'e)s in 'arious phases of the financia) crisis" :)) the non=stan$ar$ monetary po)icy measures taken $urin( the perio$ of acute financia) market tensions ha'e #een fu))y consistent !ith the *.6+s man$ate of maintainin( price sta#i)ity an$ are8 #y construction8 temporary in nature" 5he non=stan$ar$ measures taken #y the *urosystem ha'e #een tar(ete$ main)y at the #ankin( sector8 o!in( to its important ro)e in the transmission of monetary po)icy an$ the financin( of the economy in the euro area Ain comparison !ith8 for instance8 the situation in the ;nite$ -tatesB" Many of the non=stan$ar$ measures ha'e e1p)oite$ the f)e1i#i)ity of the e1istin( operationa) frame!ork of the *urosystem" 5he non=stan$ar$ measures taken as the financia) turmoi) turne$ into a crisis comprise the *nhance$ .re$it -upport an$ the -ecurities Markets Pro(ramme" 1= ENHANCED CREDIT SUPPORT 5he co))apse of the ;- financia) institution 3ehman 6rothers on 1, -eptem#er 2004 ha$ cause$ a GseiEin( upH of the money markets" 9f )eft unreso)'e$8 this !ou)$ ha'e

Ch"%t 5=8 S+%e". 8et'een the th%ee<&!nth EURI/OR "n. the !:e%ni)ht in.e;e. s'"+ %"te
A#asis pointsB sprea$ a'era(e sprea$ #et!een 2anuary 1999 an$ 2u)y 2000 2,0 200 1,0 100 ,0 0 2an" 2,0 200 1,0 100 ,0 0

2u)y 2000

2an"

2u)y 2004

2an"

2u)y 2009

2an"

2u)y 2010

2an 2011

-ources: 6)oom#er(8 5homson Ceuters8 an$ *.6 ca)cu)ations" >ote: 5he s!ap rate is the fi1e$ rate that #anks are !i))in( to pay in e1chan(e for recei'in( the a'era(e o'erni(ht rate for the $uration of the s!ap a(reement" 9t ref)ects the same ne()i(i#)e cre$it an$ )i/ui$ity risk premia as the o'erni(ht rate" 5he o'erni(ht in$e1 s!ap rate is therefore re)ati'e)y immune to chan(es in )i/ui$ity or cre$it risk

!hi)e the *;C96%C is not"

ma$e the refinancin( of many #ank assets impossi#)e8 riskin( a massi'e an$ $isor$er)y $e)e'era(in( #y cre$it institutions8 !ith se'ere conse/uences for the rea) economy an$ price sta#i)ity" 5he *.6+s *nhance$ .re$it -upport is a set of non=stan$ar$ measures to support financin( con$itions an$ the f)o! of cre$it #eyon$ !hat cou)$ #e achie'e$ throu(h re$uctions in key *.6 interest rates a)one" 5hese measures !ere a$opte$ in %cto#er 2004 an$ comp)emente$ in May 2009" Cef)ectin( the financia) structure of the euro area8 these measures are primari)y #ank=#ase$ an$ he)p to ensure a more norma) functionin( of money markets" E;tensi!n !$ the &"t %it* !$ #iE i.it* +%!:isi!n 5he *urosystem ha$ a)rea$y increase$ the amount of )i/ui$ity pro'i$e$ in )on(er=term refinancin( operations A35C%sB after the *.6+s $ecision to intro$uce supp)ementary refinancin( operations !ith maturities of three an$ si1 months $urin( the perio$ of financia) turmoi)" :fter the co))apse of 3ehman 6rothers8 the ma1imum maturity of the 35C%s !as temporari)y e1ten$e$ to t!e)'e months" 5his increase$ the *urosystem+s interme$iation ro)e aime$ at easin( refinancin( concerns of the euro area #ankin( system8 especia))y for term maturities" Ce$uce$ uncertainty an$ a )on(er )i/ui$ity p)annin( horiEon !as e1pecte$ to encoura(e #anks to continue pro'i$in( cre$it to the economy" Moreo'er8 the measures !ere e1pecte$ to contri#ute to keepin( money market interest rates at )o! )e'e)s" Fi;e. %"te $ ## "##!t&ent : fi1e$ rate fu)) a))otment ten$er proce$ure !as a)so a$opte$ for a)) refinancin( operations $urin( the financia) crisis" 5hus8 contrary to norma) practice8 e)i(i#)e euro area financia) institutions ha$ un)imite$ access to centra) #ank )i/ui$ity at the main refinancin( rate8 su#&ect to a$e/uate co))atera)" C %%en,* s'"+ ")%ee&ents 5he *urosystem a)so temporari)y pro'i$e$ )i/ui$ity in forei(n currencies $urin( the financia) crisis8 most nota#)y in ;- $o))ars8 at 'arious maturities" 9t use$ reciproca) currency arran(ements !ith the Fe$era) Ceser'e -ystem to pro'i$e fun$in( in ;- $o))ars a(ainst *urosystem e)i(i#)e co))atera) at 'arious maturities at fi1e$ interest rates !ith fu)) a))otment" 5his measure supporte$ #anks !hich other!ise face$ a massi'e shortfa)) in ;- $o))ar fun$in( $urin( the perio$ of financia) crisis" C!##"te%"# %eE i%e&ents 5he )ist of e)i(i#)e co))atera) accepte$ in *urosystem refinancin( operations !as e1ten$e$ $urin( the financia) crisis8 an$ this a))o!e$ #anks to use a )ar(er ran(e an$ proportion of their assets to o#tain centra) #ank )i/ui$ity" 5he a#i)ity to refinance i))i/ui$ assets throu(h the centra) #ank pro'i$es an effecti'e reme$y to )i/ui$ity shorta(es cause$ #y a su$$en ha)t in inter#ank )en$in(" 5his inc)u$es8 for instance8 asset=#acke$ securities8 !hich #ecame i))i/ui$ !hen the market co))apse$ after the $efau)t of 3ehman 6rothers" C!:e%e. 8!n. + %,h"se +%!)%"&&e @ithin the scope of this pro(ramme8 the *urosystem purchase$ euro=$enominate$ co'ere$ #on$s issue$ in the euro area at a 'a)ue of P60 #i))ion o'er the perio$ #et!een May 2009 an$ 2une 2010" 5he co'ere$ #on$s market ha$ 'irtua))y $rie$ up in terms of )i/ui$ity8 issuance an$ sprea$s" 5he aim of the co'ere$ #on$ purchase pro(ramme !as

to re'i'e the co'ere$ #on$ market8 !hich is a 'ery important financia) market in *urope an$ a primary source of financin( for #anks"

:s a resu)t of the non=stan$ar$ measures taken $urin( the financia) crisis8 the re)ationship #et!een the main refinancin( rate an$ money market rates temporari)y chan(e$" @hereas in norma) circumstances the *%>9: rate c)ose)y fo))o!s mo'ements in the main refinancin( rate8 the hi(h $eman$ from #anks for centra) #ank )i/ui$ity in refinancin( operations !ith fu)) a))otment has resu)te$ in the $eposit rate p)ayin( a (reater ro)e in steerin( the *%>9:8 as can #e seen in .hart 4"2" -= SECURITIES PRO4RA11E 1AR7ETS

5he -ecurities Markets Pro(ramme !as intro$uce$ in response to tensions in some se(ments of the financia) market8 in particu)ar in the euro area so'erei(n #on$ markets8 in May 2010" .hart ,"9 i))ustrates the )ar(e increases in the sprea$s #et!een the yie)$s on ten=year #on$s of some euro area (o'ernments an$ the German 6un$ yie)$" ;n$er the pro(ramme8 *urosystem inter'entions can #e carrie$ out in the euro area pu#)ic an$ pri'ate $e#t securities markets to ensure $epth an$ )i/ui$ity in $ysfunctiona) market se(ments an$ to restore the proper functionin( of the monetary po)icy transmission mechanism" 9n )ine !ith the pro'isions of the 5reaty on the Functionin( of the *uropean ;nion8 *urosystem purchases of (o'ernment #on$s are strict)y )imite$ to secon$ary markets" 5o ensure that )i/ui$ity con$itions are not affecte$8 a)) purchases are fu))y neutra)ise$ throu(h )i/ui$ity=a#sor#in( operations"

Ch"%t 5=9 S+%e".s !$ the ten<*e"% )!:e%n&ent 8!n.s !$ se#e,te. e %! "%e" ,! nt%ies ")"inst the 4e%&"n / n.
A#asis pointsB Greece 9re)an$ 9ta)y Portu(a) -pain 18000 18000

0,0

0,0

,00

,00

2,0

2,0

0 2an"

0 2u)y 2000 2an" 2u)y 2004 2an" 2u)y 2009 2an" 2u)y 2010 2an" 2011

-ource: 5homson Ceuters an$ *.6 ca)cu)ations"

,%e.i8i#it* in $ #$i##in) its +%i,e st"8i#it* &"n."te

5=3 AN ASSESS1ENT OF 1ONETAR6 PO5IC6 SINCE THE INTRODUCTION OF THE EURO IN 1999 -ince the intro$uction of the euro in 19998 the sin()e monetary po)icy has ha$ to !eather a num#er of $ifferent shocks" : series of su#stantia) a$'erse upsi$e price shocks has hit the economy $urin( this time8 nota#)y the si(nificant increase in oi) prices8 su#stantia) rises in internationa) foo$ prices an$8 on the $omestic si$e8 a)most re(u)ar increases in in$irect ta1es an$ marke$ increases in a$ministere$ prices in most euro area countries" :t the same time8 the #urstin( of the Gne! economyH #u##)e in 2000=20018 the terrorist attacks on the ;nite$ -tates in -eptem#er 2001 an$ acute financia) market tensions from 2000 on!ar$s ha'e hi(h)i(hte$ the 'u)nera#i)ity of the !or)$ economy an$ the internationa) financia) system" Monetary po)icy ha$ to react to these shocks !ith the appropriate me$ium=term orientation to ensure a so)i$ anchorin( of inf)ation e1pectations in )ine !ith the *.6+s $efinition of price sta#i)ity" 5his me$ium=term orientation a)so imp)ie$ that monetary po)icy ha$ to )ook #eyon$ short=term mo'ements in prices an$8 at times8 miti(ate $ysfunctiona)ities in the monetary po)icy transmission mechanism" 5he monetary ana)ysis8 in particu)ar8 ensure$ such a me$ium= term orientation in the con$uct of monetary po)icy" ?espite a series of a$'erse shocks to the inf)ation rate an$8 as of autumn 20048 a crisis perio$ of a ma(nitu$e that has not #een seen since at )east the Great ?epression in the 1930s8 a'era(e annua) <9.P inf)ation in the euro area #et!een 2anuary 1999 an$ ear)y 2011

In " ,h"##en)i n) en:i%!n& ent !$ e,!n!&i , "n. $in"n,i"# sh!,(sD

Dthe EC/ ",te. 'ith " &e.i &< te%& +e%s+e,ti: e9 n.e%+inne . 8* its &!net"%* "n"#*sis9D

D "n. &"int"ine .

has #een fu))y in )ine !ith the aim of the Go'ernin( .ounci) to keep inf)ation rates #e)o!8 #ut c)ose to8 2F o'er the me$ium term" -ince the #e(innin( of 19998 a)) in$icators of )on(= term inf)ation e1pectatio ns in the euro area ha'e moreo'er remaine$ firm)y anchore$ in )ine !ith price sta#i)ity" 9t is a)so nota#)e that inf)ation e1pectatio ns remaine$ at those )e'e)s in perio$s of #oth risin( an$ fa))in( inf)ationar y pressures"

5his in$icates that the (enera) pu#)ic an$ the markets ha'e ha$ faith in the *.6+s $etermination to maintain price sta#i)ity o'er the me$ium term" 5his not on)y ho)$s true for the )on(=term inf)ation e1pectations re'ea)e$ #y sur'eys of pri'ate economists8 #ut can a)so #e seen in the )on(= term inf)ation e1pectations em#e$$e$ in #on$ prices Asee .hart ,"0B" 5hese are positi'e in$ications that the *.6 has #een a#)e8 from the outset8 to (ain cre$i#i)ity an$ to con'ince the pu#)ic an$ the markets that it !as committe$ to maintainin( price sta#i)ity o'er the me$ium term"

ANN E2
HISTOR6 3 THE THREE STA4ES OF ECONO1IC AND 1ONETAR6 UNION 9n 2une 1944 the *uropean .ounci) confirme$ the o#&ecti'e of a pro(ressi'e rea)isation of economic union an$ man$ate$ a .ommittee chaire$ #y 2ac/ues ?e)ors APresi$ent of the *uropean .ommission at the timeB to stu$y an$ propose concrete sta(es )ea$in( to this union" 5he .ommittee !as compose$ of the (o'ernors of the centra) #anks of the Mem#er -tates of the *uropean .ommunity8 :)e1an$re 3amfa)ussy AGenera) Mana(er of the 6ank for 9nternationa) -ett)ements at the timeB8 >ie)s 5hy(esen AProfessor of *conomics in .openha(enB an$ Mi(ue) 6oyer APresi$ent of the 6anco *1terior $e *spaXaB" 5he resu)tin( G?e)ors CeportH propose$ that economic an$ monetary union shou)$ #e achie'e$ in three $iscrete #ut e'o)utionary steps" St")e One !$ E,!n!&i, "n. 1!net"%* Uni!n %n the #asis of the ?e)ors Ceport8 the *uropean .ounci) $eci$e$ in 2une 1949 that the first sta(e of the rea)isation of *conomic an$ Monetary ;nion A*M;B shou)$ #e(in on 1 2u)y 1990 7 the $ate on !hich8 in princip)e8 a)) restrictions on the mo'ement of capita) #et!een Mem#er -tates !ere a#o)ishe$" :t that time8 the .ommittee of Go'ernors of the .entra) 6anks of the Mem#er -tates of the *uropean *conomic .ommunity8 !hich ha$ p)aye$ an increasin()y important ro)e in monetary cooperation since its creation in May 19648 !as (i'en a$$itiona) responsi#i)ities" 5hese !ere )ai$ $o!n in a .ounci) ?ecision $ate$ 12 March 1990 an$ inc)u$e$ ho)$in( consu)tations on8 an$ promotin( the coor$ination of8 the monetary po)icies of the Mem#er -tates8 !ith the aim of achie'in( price sta#i)ity" 9n 'ie! of the re)ati'e)y short time a'ai)a#)e an$ the comp)e1ity of the tasks in'o)'e$8 the preparatory !ork for -ta(e 5hree of *M; !as a)so initiate$ #y the .ommittee of Go'ernors" 5he first step !as to i$entify a)) the issues that shou)$ #e e1amine$ at an ear)y sta(e8 to esta#)ish a !ork pro(ramme #y the en$ of 1993 an$8 on the #asis thereof8 to $efine the man$ates of the e1istin( su#= committees an$ the !orkin( (roups esta#)ishe$ for that purpose" For the rea)isation of -ta(es 5!o an$ 5hree8 it !as necessary to re'ise the 5reaty esta#)ishin( the *uropean *conomic .ommunity Athe G5reaty of ComeHB in or$er to esta#)ish the re/uire$ institutiona) structure" 5o this en$8 an 9nter(o'ernmenta) .onference on *M; !as con'ene$8 !hich !as he)$ in 19918 in para))e) !ith the 9nter(o'ernmenta) .onference on po)itica) union" 5he ne(otiations resu)te$ in the 5reaty on *uropean ;nion !hich !as a(ree$ upon in ?ecem#er 1991 an$ si(ne$ in Maastricht on 0 Fe#ruary 1992" %n account of $e)ays in the ratification process8 ho!e'er8 the 5reaty A!hich amen$e$ the 5reaty esta#)ishin( the *uropean *conomic .ommunity 7 chan(in( its name to the 5reaty esta#)ishin( the *uropean .ommunity 7 an$ intro$uce$8 inter a)ia8 the Protoco) on the -tatute of the *uropean -ystem of .entra) 6anks an$ of the *uropean .entra) 6ank an$ the Protoco) on the -tatute of the *uropean Monetary 9nstituteB $i$ not come into force unti) 1 >o'em#er 1993"

13 1

St")e T'! !$ E,!n!&i, "n. 1!net"%* Uni!n 3 est"8#ish&ent !$ the E1I "n. the EC/ 5he esta#)ishment of the *uropean Monetary 9nstitute A*M9B on 1 2anuary 1994 marke$ the start of the secon$ sta(e of *M; an$8 conse/uent)y8 the .ommittee of Go'ernors cease$ to e1ist" 5he *M9+s transitory e1istence a)so mirrore$ the state of monetary inte(ration !ithin the .ommunity" 5he *M9 ha$ no responsi#i)ity for the con$uct of monetary po)icy in the *uropean ;nion 7 this remaine$ the preser'e of the nationa) authorities 7 nor ha$ it any competence for carryin( out forei(n e1chan(e inter'ention" 5he t!o main tasks of the *M9 !ere: i" to stren(then centra) #ank cooperation an$ monetary po)icy coor$inationJ an$ ii" to make the preparations re/uire$ for the esta#)ishment of the *uropean -ystem of .entra) 6anks A*-.6B8 for the con$uct of the sin()e monetary po)icy an$ for the creation of a sin()e currency in the thir$ sta(e" 5o this en$8 the *M9 pro'i$e$ a forum for consu)tation an$ for the e1chan(e of 'ie!s an$ information on po)icy issues8 an$ it specifie$ the re(u)atory8 or(anisationa) an$ )o(istica) frame!ork necessary for the *-.6 to perform its tasks in -ta(e 5hree" 9n ?ecem#er 199, the *uropean .ounci) a(ree$ to name the *uropean currency unit to #e intro$uce$ at the start of -ta(e 5hree the GeuroH8 an$ confirme$ that -ta(e 5hree of *M; !ou)$ start on 1 2anuary 1999" : chrono)o(ica) se/uence of e'ents !as pre=announce$ for the chan(eo'er to the euro" 5his scenario !as #ase$ main)y on $etai)e$ proposa)s put for!ar$ #y the *M9" :t the same time8 the *M9 !as (i'en the task of carryin( out preparatory !ork on the future monetary an$ e1chan(e rate re)ationships #et!een the euro area an$ other *; countries" 9n ?ecem#er 1996 the *M9 presente$ its report to the *uropean .ounci)" 5his report #ecame the #asis of a Ceso)ution of the *uropean .ounci) on the princip)es an$ fun$amenta) e)ements of the ne! e1chan(e rate mechanism A*CM 99B8 !hich !as a$opte$ in 2une 1990" 9n ?ecem#er 1996 the *M9 a)so presente$ to the *uropean .ounci) 7 an$8 su#se/uent)y8 to the pu#)ic 7 the $esi(n series se)ecte$ for the euro #anknotes to #e put into circu)ation on 1 2anuary 2002" 9n or$er to comp)ement an$ f)esh out the 5reaty pro'isions on *M;8 the *uropean .ounci) a$opte$ the -ta#i)ity an$ Gro!th Pact in 2une 1990 7 t!o Ce(u)ations form part of the -ta#i)ity an$ Gro!th Pact8 !hich aims to ensure #u$(etary $iscip)ine in respect of *M;" 5he Pact !as supp)emente$8 an$ the respecti'e commitments enhance$8 #y a ?ec)aration of the .ounci) in May 1994" %n 2 May 1994 the .ounci) of the *uropean ;nion 7 in the composition of the <ea$s of -tate or Go'ernment 7 unanimous)y $eci$e$ that 11 Mem#er -tates A6e)(ium8 Germany8 -pain8 France8 9re)an$8 9ta)y8 3u1em#our(8 the >ether)an$s8 :ustria8 Portu(a) an$ Fin)an$B ha$ fu)fi))e$ the con$itions necessary for the a$option of the sin()e currency on 1 2anuary 1999" 5hese countries !ere therefore to participate 13 -

in the thir$ sta(e of *M;" 5he <ea$s of -tate or Go'ernment a)so reache$ a po)itica) un$erstan$in( on the persons to #e recommen$e$ for appointment as mem#ers of the *1ecuti'e 6oar$ of the *.6" :t the same time8 the ministers of finance of the Mem#er -tates a$optin( the sin()e currency a(ree$8 to(ether !ith the (o'ernors of the nationa) centra) #anks of these Mem#er -tates8 the *uropean .ommission an$ the *M98 that the current #i)atera) centra) rates of the currencies of the participatin( Mem#er -tates in the *CM !ou)$ #e use$ in $eterminin( the irre'oca#)e con'ersion rates for the euro" %n 2, May 1994 the (o'ernments of the 11 participatin( Mem#er -tates appointe$ the Presi$ent8 the Dice=Presi$ent an$ the four other mem#ers of the *1ecuti'e 6oar$ of the *.6" 5heir appointment took effect from 1 2une 1994 an$ marke$ the esta#)ishment of the *.6" 5he *.6 an$ the nationa) centra) #anks of the participatin( Mem#er -tates constitute the *urosystem8 !hich formu)ates an$ $efines the sin()e monetary po)icy in -ta(e 5hree of *M;" @ith the esta#)ishment of the *.6 on 1 2une 19948 the *M9 ha$ comp)ete$ its tasks" 9n accor$ance !ith :rtic)e 123 Ae1 :rtic)e 109)B of the 5reaty esta#)ishin( the *uropean .ommunity8 the *M9 !ent into )i/ui$ation on the esta#)ishment of the *.6" :)) the preparatory !ork entruste$ to the *M9 !as conc)u$e$ in (oo$ time8 an$ the rest of 1994 !as $e'ote$ #y the *.6 to the fina) testin( of systems an$ proce$ures" St")e Th%ee !$ E,!n!&i, "n. 1!net"%* Uni!n 3 i%%e:!,"8#e $i;in) !$ e;,h"n)e %"tes %n 1 2anuary 1999 the thir$ an$ fina) sta(e of *M; commence$ !ith the irre'oca#)e fi1in( of the e1chan(e rates of the currencies of the 11 Mem#er -tates initia))y participatin( in Monetary ;nion an$ !ith the con$uct of a sin()e monetary po)icy un$er the responsi#i)ity of the *.6" 5he num#er of participatin( Mem#er -tates increase$ to 12 on 1 2anuary 20018 !hen Greece entere$ the thir$ sta(e of *M;" -)o'enia #ecame the 13th mem#er of the euro area on 1 2anuary 20008 fo))o!e$ one year )ater #y .yprus an$ Ma)ta8 #y -)o'akia on 1 2anuary 2009 an$ #y *stonia on 1 2anuary 2011" %n the $ay each country &oine$ the euro area8 its centra) #ank automatica))y #ecame part of the *urosystem"

13 3

45OSS AR6
A..ounta$,l,t4D the o#)i(ation of an in$epen$ent institution to proper)y e1p)ain an$ &ustify its $ecisions to the citiEens an$ their e)ecte$ representati'es8 there#y makin( it responsi#)e for fu)fi))in( its o#&ecti'es" AssetD a resource contro))e$ #y an enterprise as a resu)t of past e'ents8 from !hich future economic #enefits are e1pecte$ to f)o! to the enterprise" Bank lend,n6 surve4 @B9%:D a /uarter)y sur'ey on )en$in( po)icies that has #een con$ucte$ #y the *urosystem since 2anuary 2003" 9t a$$resses /ua)itati'e /uestions on $e'e)opments in cre$it stan$ar$s8 terms an$ con$itions of )oans an$ )oan $eman$ for #oth enterprises an$ househo)$s to a pre$efine$ samp)e (roup of #anks in the euro area" Bond #arketD the market in !hich )on(er=term de$t se.ur,t,es are issue$ an$ tra$e$" Break5even ,nflat,on rate @BEI&:D the sprea$ #et!een the yie)$ on a nomina) #on$ an$ that on an inf)ation=)inke$ #on$ of the same Aor as simi)ar as possi#)eB maturity" Broad E.ono#,. Pol,.4 Gu,del,nes @BEPGs:D (ui$e)ines a$opte$ #y the Coun.,l of the European !n,on in )ine !ith :rtic)e 121A2B of the TFE! to pro'i$e the frame!ork for $efinin( the economic po)icies of the "e#$er %tates an$ of the *;" Central $ank ,ndependen.eD the )e(a) pro'ision !hich (uarantees that a centra) #ank can carry out its tasks an$ $uties !ithout po)itica) interference" :rtic)e 130 of the TFE! esta#)ishes the princip)e of centra) #ank in$epen$ence for the euro area" CollateralD an asset or thir$=party commitment that is use$ #y a co))atera) pro'i$er to secure an o#)i(ation 'is=T='is a co))atera) taker" Consol,dated $alan.e sheet of the "FI se.torD a #a)ance sheet o#taine$ #y nettin( out inter=MF9 positions Ae"(" inter=MF9 )oans an$ $epositsB on the a((re(ate$ "FI #a)ance sheet" 9t pro'i$es statistica) information on the MF9 sector+s assets an$ )ia#i)ities 'is=T='is resi$ents of the euro area not #e)on(in( to this sector Ai"e" the 6eneral 6overn#ent an$ other euro area resi$entsB an$ 'is=T='is non=euro area resi$ents" 9t is the main statistica) source for the ca)cu)ation of #onetar4 a66re6ates an$ pro'i$es the #asis for the re(u)ar ana)ysis of the counterparts of ";" Conver6en.e .r,ter,aD the four criteria set out in :rtic)e 140A1B of the TFE! that must #e fu)fi))e$ #y each Mem#er -tate #efore it can a$opt the euro8 name)y a sta#)e price )e'e)8 soun$ pu#)ic finances Aa $eficit an$ a )e'e) of $e#t that are #oth )imite$ in terms of G?PB8 a sta#)e e1chan(e rate an$ )o! an$ sta#)e )on(=term 13 5

interest rates" 9n a$$ition8 each Mem#er -tate must ensure the compati#i)ity of its nationa) )e(is)ation8 inc)u$in( the statutes of the nationa) centra) #ank8 !ith #oth the Treat4 on the Fun.t,on,n6 of the European !n,on an$ the -tatute of the *uropean -ystem of .entra) 6anks an$ of the *uropean .entra) 6ank" Coun.,lD see Coun.,l of the European !n,on" Coun.,l of the European !n,on @Coun.,l:D the institution of the *; ma$e up of representati'es of the (o'ernments of the *; "e#$er %tates8 norma))y the ministers responsi#)e for the matters un$er consi$eration8 an$ the re)ate$ *uropean .ommissioner" 5he .ounci) meetin( in the composition of the ministers of economics an$ finance is often referre$ to as the GEC'FI Coun.,lH" Counterpart4D the opposite party in a financia) transaction Ae"(" any party transactin( !ith a centra) #ankB" Cred,t ,nst,tut,onD AiB an un$ertakin( !hose #usiness is to recei'e $eposits or other repaya#)e fun$s from the pu#)ic an$ to (rant cre$it for its o!n accountJ or AiiB an un$ertakin( or any other )e(a) person8 other than those un$er iB8 !hich issues means of payment in the form of e)ectronic money" Cred,t to euro area res,dentsD a #roa$ measure of the financin( of non= #onetar4 f,nan.,al ,nst,tut,on AMF9B euro area resi$ents Ainc)u$in( 6eneral 6overn#ent an$ the pri'ate sectorB pro'i$e$ #y the MF9 sector" 9t is $efine$ as inc)u$in( MF9 loans to euro area res,dents an$ MF9 ho)$in(s of securities issue$ #y euro area resi$ents" 5he )atter inc)u$e shares8 other e/uity an$ de$t se.ur,t,es" :s securities can #e seen as an a)ternati'e source of fun$s to )oans8 an$ as some )oans can #e securitise$8 this $efinition pro'i$es more accurate information on the tota) amount of financin( pro'i$e$ #y the MF9 sector to the economy than a narro! $efinition comprisin( )oans on)y" Curren.4 ,n .,r.ulat,onD #anknotes an$ coins in circu)ation that are common)y use$ to make payments" .urrency in circu)ation as inc)u$e$ in "; is a net concept8 meanin( that it refers on)y to #anknotes an$ coins in circu)ation that are he)$ outsi$e the "FI sector Ai"e" currency he)$ #y MF9s or G'au)t cashH has #een su#tracte$B" *1c)u$e$ are centra) #anks+ stocks of o!n #anknotes Aas they ha'e not #een put into circu)ationB an$ co))ector coins Aas they are not inten$e$ for use in makin( paymentsB" +e$t #arketD the market in !hich $e#t instruments are issue$ an$ tra$e$" -ecuritise$ $e#t has to #e repai$ #y the issuer at maturity" +e$t rat,oD one of the fisca) criteria use$ to $etermine the e1istence of an e1cessi'e $eficit8 as )ai$ $o!n in :rtic)e 126A2B of the TFE!" 9t is $efine$ as the ratio of (o'ernment $e#t to (ross $omestic pro$uct at current market prices8 !hi)e (o'ernment $e#t is $efine$ in Protoco) >o 12 Aon the ex.ess,ve def,.,t pro.edureB as the tota) (ross $e#t at nomina) 'a)ue outstan$in( at the en$ of the year an$ conso)i$ate$ #et!een an$ !ithin the sectors of 6eneral 6overn#ent" 13 6

+e$t se.ur,t4D a promise on the part of the issuer Ai"e" the #orro!erB to make one or more paymentAsB to the ho)$er Athe )en$erB at a specifie$ future $ate or $ates" -uch securities usua))y carry a specific rate of interest Athe couponB an$ or are so)$ at a $iscount to the amount that !i)) #e repai$ at maturity" ?e#t securities issue$ !ith an ori(ina) maturity of more than one year are c)assifie$ as )on(=term" Money market paper an$8 in princip)e8 pri'ate p)acements are inc)u$e$ in the $e#t securities statistics of the European Central Bank A*.6B" +ef,.,t rat,oD one of the fisca) criteria use$ to $etermine the e1istence of an e1cessi'e $eficit8 as )ai$ $o!n in :rtic)e 126A2B of the TFE!" 9t is $efine$ as the ratio of the p)anne$ or actua) (o'ernment $eficit to (ross $omestic pro$uct at current market prices" 5he (o'ernment $eficit is $efine$ in Protoco) >o 12 Aon the ex.ess,ve def,.,t pro.edureB as net #orro!in( of the 6eneral 6overn#ent" +eflat,onD a (enera)ise$8 persistent an$ se)f=reinforcin( $ec)ine in a #roa$ set of prices that resu)ts from a $rop in a((re(ate $eman$ an$ #ecomes entrenche$ in e1pectations" +e6ree of opennessD a measure of the e1tent to !hich an economy $epen$s on tra$e !ith other countries or re(ions8 e"(" the ratio of the sum of tota) imports an$ e1ports to G?P" +epos,t fa.,l,t4D a stand,n6 fa.,l,t4 of the Euros4ste# !hich .ounterpart,es may use to make overn,6ht depos,ts at a nat,onal .entral $ank" -uch $eposits are remunerate$ at a pre=specifie$ interest rate Asee ke4 ECB ,nterest ratesB" +epos,ts redee#a$le at not,.eD sa'in(s $eposits for !hich the ho)$er must respect a fi1e$ perio$ of notice #efore !ith$ra!in( the fun$s" 9n some cases there is the possi#i)ity of !ith$ra!in( on $eman$ a certain fi1e$ amount in a specifie$ perio$ or of ear)y !ith$ra!a) su#&ect to the payment of a pena)ty" ?eposits re$eema#)e at a perio$ of notice of up to three months are inc)u$e$ in "2 Aan$ hence in ";B8 !hi)e those !ith a )on(er perio$ of notice are inc)u$e$ in the Anon=monetaryB )on(er=term financia) )ia#i)ities of the "FI sector" +epos,ts ?,th an a6reed #atur,t4D main)y time $eposits !ith a (i'en maturity that8 $epen$in( on nationa) practices8 may #e su#&ect to the payment of a pena)ty in the e'ent of ear)y !ith$ra!a)" -ome non=marketa#)e $e#t instruments8 such as non=transfera#)e Aretai)B certificates of $eposit8 are a)so inc)u$e$" ?eposits !ith an a(ree$ maturity of up to t!o years are inc)u$e$ in "2 Aan$ hence in ";B8 !hi)e those !ith an a(ree$ maturity of o'er t!o years are inc)u$e$ in the Anon=monetaryB )on(er=term financia) )ia#i)ities of the "FI sector" +er,vat,veD a financia) contract !hose 'a)ue $epen$s on the 'a)ue of one or more un$er)yin( reference assets8 rates or in$ices8 on a measure of economic 'a)ue or on factua) e'ents" EC'FI Coun.,lD see Coun.,l of the European !n,on"

13 7

E.ono#,. and F,nan.,al Co##,ttee @EFC:D a committee !hich contri#utes to the preparation of the !ork of the EC'FI Coun.,l an$ the *uropean .ommmission" :rtic)e 134A2B of the TFE! contains a )ist of the tasks of the *F. !hich inc)u$e re'ie!in( the economic an$ financia) situation of #oth the "e#$er %tates an$ the *;8 an$ contri#utin( to #u$(etary sur'ei))ance" E.ono#,. and "onetar4 !n,on @E"!:D the process that )e$ to the sin()e currency8 the euro8 an$ the sin()e monetary po)icy in the euro area8 as !e)) as the coor$ination of the economic po)icies of the *; "e#$er %tates" 5his process8 as )ai$ $o!n in the 5reaty esta#)ishin( the *uropean .ommunity8 took p)ace in three sta(es" -ta(e 5hree8 the fina) sta(e8 starte$ on 1 2anuary 1999 !ith the transfer of monetary competence to the European Central Bank an$ the intro$uction of the euro" 5he cash chan(eo'er on 1 2anuary 2002 comp)ete$ the process of settin( up *M;" EC! @European Curren.4 !n,t :D prior to -ta(e 5hree of E"!8 the *.; !as a #asket currency ma$e up of the sum of fi1e$ amounts of 12 out of the 1, currencies of the "e#$er %tates" 5he 'a)ue of the *.; !as ca)cu)ate$ as a !ei(hte$ a'era(e of the 'a)ue of its component currencies" 5he *.; !as rep)ace$ #y the euro on a one=for=one #asis on 1 2anuary 1999" El,6,$le assets @el,6,$le .ollateral:D assets !hich can #e use$ as co))atera) in or$er to o#tain cre$it from the Euros4ste#" E#plo4#ent Gu,del,nesD (ui$e)ines a$opte$ #y the Coun.,l of the European !n,on in )ine !ith :rtic)e 144A2B of the TFE! to pro'i$e the frame!ork for $efinin( the emp)oyment po)icies of the "e#$er %tates an$ of the *;" Enhan.ed Cred,t %upportD the non=stan$ar$ measures taken #y the ECBFEuros4ste# $urin( the financia) crisis !ith a 'ie! to supportin( financin( con$itions an$ cre$it f)o!s a#o'e an$ #eyon$ !hat cou)$ #e achie'e$ throu(h re$uctions in ke4 ECB ,nterest rates a)one" E' IA @euro overn,6ht ,ndex avera6e:D a measure of the effecti'e interest rate pre'ai)in( in the euro inter#ank o'erni(ht market" 9t is ca)cu)ate$ as a !ei(hte$ a'era(e of the interest rates on unsecure$ o'erni(ht )en$in( transactions $enominate$ in euro8 as reporte$ #y a pane) of contri#utin( #anks" E>u,t4 #arketD the market in !hich e/uities are issue$ an$ tra$e$" E&" II @ex.han6e rate #e.han,s# II:D the e1chan(e rate arran(ement !hich pro'i$es the frame!ork for e1chan(e rate po)icy cooperation #et!een the euro area countries an$ the non=euro area *; Mem#er -tates" *CM 99 is a mu)ti)atera) arran(ement !ith fi1e$8 #ut a$&usta#)e8 centra) rates an$ a stan$ar$ f)uctuation #an$ of U1,F" ?ecisions concernin( centra) rates an$8 possi#)y8 narro!er f)uctuation #an$s are taken #y mutua) a(reement #et!een the *; "e#$er %tate concerne$8 the euro area countries8 the European Central Bank A*.6B an$

13 8

the other *; "e#$er %tates participatin( in the mechanism" :)) participants in *CM 998 inc)u$in( the *.68 ha'e the ri(ht to initiate a confi$entia) proce$ure aime$ at chan(in( the centra) rates Area)i(nmentB" E!&IB'& @euro ,nter$ank offered rate:D the rate at !hich a prime #ank is !i))in( to )en$ fun$s in euro to another prime #ank" 5he *;C96%C is compute$ $ai)y8 #ase$ on the rates of a samp)e of se)ecte$ #anks8 for $ifferent maturities of up to 12 months" EuroD the name of the *uropean sin()e currency a$opte$ #y the European Coun.,l at its meetin( in Ma$ri$ on 1, an$ 16 ?ecem#er 199," Euro areaD the area forme$ #y the *; "e#$er %tates !hose currency is the euro an$ in !hich a sin()e monetary po)icy is con$ucte$ un$er the responsi#i)ity of the Govern,n6 Coun.,l of the European Central Bank A*.6B" 9n 2011 the euro area comprises 6e)(ium8 Germany8 *stonia8 9re)an$8 Greece8 -pain8 France8 9ta)y8 .yprus8 3u1em#our(8 Ma)ta8 the >ether)an$s8 :ustria8 Portu(a)8 -)o'enia8 -)o'akia an$ Fin)an$" Euro6roupD an informa) (atherin( of the ministers of economics an$ finance of the *; "e#$er %tates !hose currency is the euro" 9ts status is reco(nise$ un$er :rtic)e 130 of the TFE! an$ in Protoco) >o 14 Aon the *uro GroupB" 5he European Co##,ss,on an$ the ECB are re(u)ar)y in'ite$ to take part in its meetin(s" European Central Bank @ECB:D the *.6 )ies at the centre of the Euros4ste# an$ the European %4ste# of Central Banks A*-.6B an$ has its o!n )e(a) persona)ity in accor$ance !ith the 5reaty A:rtic)e 242A3BB" 9t ensures that the tasks conferre$ upon the *urosystem an$ the *-.6 are imp)emente$ either throu(h its o!n acti'ities or throu(h those of the CBs8 pursuant to the -tatute of the *-.6" 5he *.6 is (o'erne$ #y the Govern,n6 Coun.,l an$ the Exe.ut,ve Board8 an$8 as a thir$ $ecision=makin( #o$y8 #y the General Coun.,l" European Co##,ss,onD the ;nion institution !hich ensures the app)ication of the pro'isions of the 5reaty" 5he .ommission $e'e)ops *; po)icies8 proposes *; )e(is)ation an$ e1ercises po!ers in specific areas" 9n the area of economic po)icy8 the .ommission pro$uces Inte6rated Gu,del,nes for Gro?th and -o$s8 containin( the Broad E.ono#,. Pol,.4 Gu,del,nes an$ the E#plo4#ent Gu,del,nes8 an$ reports to the Coun.,l of the European !n,on A.ounci)B on economic $e'e)opments an$ po)icies" 9t monitors pu#)ic finances !ithin the frame!ork of mu)ti)atera) sur'ei))ance an$ su#mits reports to the .ounci)" European Coun.,lD the institution of the *; consistin( of the <ea$s of -tate or Go'ernment of the *; "e#$er %tates an$8 as non='otin( mem#ers8 the Presi$ent of the European Co##,ss,on an$ the European Coun.,l+s o!n Presi$ent" 9t pro'i$es the *; !ith the necessary impetus for its $e'e)opment an$ $efines the (enera) po)itica) $irections an$ priorities thereof" 9t $oes not ha'e a )e(is)ati'e function"

13 9

European "onetar4 Inst,tute @E"I:D a temporary institution esta#)ishe$ at the start of -ta(e 5!o of E.ono#,. and "onetar4 !n,on on 1 2anuary 1994" 9t !ent into )i/ui$ation fo))o!in( the esta#)ishment of the European Central Bank on 1 2une 1994" European Parl,a#entD an *; institution that current)y consists of 036 $irect)y e)ecte$ representati'es of the citiEens of the "e#$er %tates" 9t p)ays a ro)e in the *;+s )e(is)ati'e process8 a)thou(h !ith $ifferin( prero(ati'es that $epen$ on the proce$ures throu(h !hich the respecti'e *; )e(is)ation is to #e enacte$" @here monetary po)icy an$ the *-.6 are concerne$8 the po!ers of the *uropean Par)iament are main)y consu)tati'e in character8 a)thou(h the Treat4 on the Fun.t,on,n6 of the European !n,on pro'i$es for certain proce$ures !ith respect to the $emocratic accounta#i)ity of the *.6 'is=T='is the Par)iament Apresentation of the *.6+s :nnua) Ceport8 inc)u$in( a (enera) $e#ate on monetary po)icy8 an$ hearin(s #efore the competent par)iamentary committeesB" European %4ste# of A..ounts 1001 @E%A 01:D a comprehensi'e an$ inte(rate$ system of macroeconomic accounts #ase$ on a set of internationa))y a(ree$ statistica) concepts8 $efinitions8 c)assifications an$ accountin( ru)es aime$ at achie'in( a harmonise$ /uantitati'e $escription of the economies of the *; "e#$er %tates" 5he *-: 9, is the *;+s current 'ersion of the !or)$ -ystem of >ationa) :ccounts 1993 A->: 93B" European %4ste# of Central Banks @E%CB:D compose$ of the European Central Bank an$ the nat,onal .entral $anks of a)) *; "e#$er %tates8 i"e" it inc)u$es8 in a$$ition to the mem#ers of the Euros4ste#8 the nationa) centra) #anks of those Mem#er -tates !hose currency is not the euro" EurostatD the -tatistica) %ffice of the *;" *urostat is part of the European Co##,ss,on an$ responsi#)e for the pro$uction of *; statistics" Euros4ste#D the centra) #ankin( system of the euro area" 9t comprises the European Central Bank an$ the nat,onal .entral $anks of the *; "e#$er %tates !hose currency is the euro" Euros4ste#FECB staff proGe.t,onsD the resu)ts of e1ercises con$ucte$ #y Euros4ste#FECB staff to pro&ect possi#)e future macroeconomic $e'e)opments in the euro area as part of the economic ana)ysis" Ex.ess,ve def,.,t pro.edureD the pro'ision set out in :rtic)e 126 of the TFE! an$ specifie$ in Protoco) A>o 12B on the e1cessi'e $eficit proce$ure re/uires *; "e#$er %tates to maintain #u$(etary $iscip)ine8 $efines the criteria for a #u$(etary position to #e consi$ere$ an e1cessi'e $eficit an$ re(u)ates steps to #e taken fo))o!in( the o#ser'ation that the re/uirements for the #u$(etary #a)ance or (o'ernment $e#t ha'e not #een fu)fi))e$" :rtic)e 126 is supp)emente$ #y Coun.,l Ce(u)ation A*.B >o 1460 90 of 0 2u)y 1990 on spee$in( up an$ c)arifyin( the imp)ementation of the e1cessi'e $eficit proce$ure Aas amen$e$ #y .ounci) Ce(u)ation A*.B >o 10,6 200, of 20 2une 200,B8 !hich is one e)ement of the %ta$,l,t4 and Gro?th Pa.t" 14 0

Ex.han6e rate tar6et,n6D a monetary po)icy strate(y that aims for a (i'en Ausua))y a sta#)e or e'en fi1e$B e1chan(e rate a(ainst another currency or (roup of currencies" Exe.ut,ve BoardD one of the $ecision=makin( #o$ies of the European Central Bank A*.6B" 9t comprises the Presi$ent an$ the Dice=Presi$ent of the *.6 an$ four other mem#ers appointe$ #y the European Coun.,l8 actin( #y a /ua)ifie$ ma&ority8 on a recommen$ation from the Coun.,l of the European !n,on8 after it has consu)te$ the European Parl,a#ent an$ the *.6" F,nan.,al #arketsD markets in !hich those !ho ha'e a surp)us of fun$s )en$ to those !ho ha'e a shorta(e" F,nan.,al sta$,l,t4D the con$ition in !hich the financia) system 7 comprisin( financia) interme$iaries8 markets an$ market infrastructures 7 is capa#)e of !ithstan$in( shocks an$ the unra'e))in( of financia) im#a)ances8 there#y miti(atin( the )ike)ihoo$ of $isruptions in the financia) interme$iation process !hich are se'ere enou(h to si(nificant)y impair the a))ocation of sa'in(s to profita#)e in'estment opportunities" F,ne5tun,n6 operat,onD an open #arket operat,on e1ecute$ #y the Euros4ste# in or$er to $ea) !ith une1pecte$ )i/ui$ity f)uctuations in the market" 5he fre/uency an$ maturity of fine=tunin( operations are not stan$ar$ise$" F,xed rate tenderD a ten$er proce$ure8 in !hich the interest rate is specifie$ in a$'ance #y the centra) #ank an$ in !hich participatin( .ounterpart,es #i$ the amount of money they !ant to transact at the fi1e$ interest rate" Fore,6n ex.han6e s?apD simu)taneous spot an$ for!ar$ transactions e1chan(in( one currency a(ainst another" For?ard rate a6ree#ent @F&A:D an a(reement !here#y one party un$ertakes to pay another party a certain interest rate on a certain principa) amount for a certain perio$ of time #e(innin( at some point in the future" Futures .ontra.tD a contract to #uy or se)) securities or a commo$ity at a pre$etermine$ price on a specifie$ future $ate" General Coun.,l of the ECBD one of the $ecision=makin( #o$ies of the *.6" 9t comprises the Presi$ent an$ the Dice=Presi$ent of the *.6 an$ the (o'ernors of a)) *; nat,onal .entral $anks" General 6overn#entD a sector $efine$ in the European %4ste# of A..ounts 1001 @E%A 01: as comprisin( resi$ent entities that are en(a(e$ primari)y in the pro$uction of non=market (oo$s an$ ser'ices inten$e$ for in$i'i$ua) an$ co))ecti'e consumption an$ or in the re$istri#ution of nationa) income an$ !ea)th" 9nc)u$e$ are centra)8 re(iona) an$ )oca) (o'ernment authorities8 as !e)) as socia) security fun$s" *1c)u$e$ are (o'ernment=o!ne$ entities that con$uct commercia) operations8 such as pu#)ic enterprises" 14 1

Govern,n6 Coun.,l of the ECBD the supreme $ecision=makin( #o$y of the European Central Bank A*.6B" 9t comprises a)) the mem#ers of the Exe.ut,ve Board of the *.6 an$ the (o'ernors of the nat,onal .entral $anks of the "e#$er %tates !hose currency is the euro" (a,r.utD a risk contro) measure app)ie$ to un$er)yin( assets !here#y the 'a)ue of those un$er)yin( assets is ca)cu)ate$ as the market 'a)ue of the assets re$uce$ #y a certain percenta(e Athe GhaircutHB" <aircuts are app)ie$ #y a co))atera) taker in or$er to protect itse)f from )osses resu)tin( from $ec)ines in the market 'a)ue of a security in the e'ent that it nee$s to )i/ui$ate that .ollateral" (ar#on,sed Index of Consu#er Pr,.es @(ICP:D a measure of the $e'e)opment of consumer prices that is compi)e$ #y Eurostat an$ is harmonise$ across for a)) *; "e#$er %tates" 5he <9.P is the measure of prices use$ #y the *.6 to $efine pr,.e sta$,l,t4 in /uantitati'e terms" (ouseholdsD one of the institutiona) sectors in the European %4ste# of A..ounts 1001 A*-: 9,B" 5he househo)$ sector co'ers in$i'i$ua)s or (roups of in$i'i$ua)s as consumers8 #ut a)so as entrepreneurs Ai"e" so)e proprietorships an$ partnershipsB" >on=profit institutions ser'in( househo)$s are a separate institutiona) sector accor$in( to the *-: 9,8 a)thou(h they are often reporte$ to(ether !ith househo)$s" Inflat,onD an increase in the (enera) price )e'e)8 e"(" in the consumer price in$e1" Inflat,on r,sk pre#,u#D compensation of in'estors for the risks associate$ !ith ho)$in( assets A$enominate$ in nomina) termsB o'er the )on(er term" Inflat,on tar6et,n6D a monetary po)icy strate(y aime$ at maintainin( pr,.e sta$,l,t4 #y focusin( on $e'iations in pu#)ishe$ inf)ation forecasts from an announce$ inf)ation tar(et" Inflat,on5,ndexed 6overn#ent $ondsD $e#t securities issue$ #y the (enera) (o'ernment8 the coupon payments an$ principa) of !hich are )inke$ to a specific consumer price in$e1" Inte6rated Gu,del,nesD (ui$e)ines a$opte$ #y the Coun.,l of the European !n,on A.ounci)B to promote (ro!th an$ &o#s8 #rin(in( to(ether the Broad E.ono#,. Pol,.4 Gu,del,nes an$ the *mp)oyment Gui$e)ines" Inter$ank #one4 #arketD the market for short=term )en$in( #et!een #anks8 usua))y in'o)'in( the tra$in( of fun$s !ith a maturity of #et!een one $ay Ao'erni(ht or e'en shorterB an$ one year" He4 ECB ,nterest ratesD the interest rates8 set #y the Govern,n6 Coun.,l8 !hich ref)ect the monetary po)icy stance of the European Central Bank= 5hey are the rates on the #a,n ref,nan.,n6 operat,ons8 the #ar6,nal lend,n6 fa.,l,t4 an$ the depos,t fa.,l,t4" 14 -

9a$our for.eD the sum tota) of persons in emp)oyment an$ the num#er of unemp)oye$" 9a$our for.e part,.,pat,on rateD the )a#our force as a proportion of the tota) !orkin( a(e popu)ation" 5he !orkin( a(e popu)ation is norma))y $efine$ as the popu)ation a(e$ #et!een 1, an$ 64 years of a(e" 5he )a#our force comprises #oth emp)oye$ an$ unemp)oye$ persons" 9ead,n6 ,nd,.atorsD economic 'aria#)es !hich anticipate or contain usefu) information for pre$ictin( future $e'e)opments in other 'aria#)es" 9,a$,l,t4D a present o#)i(ation of the enterprise arisin( from past e'ents8 the sett)ement of !hich is e1pecte$ to resu)t in an outf)o! from the enterprise of resources em#o$yin( economic #enefits" 9oans to euro area res,dentsD fun$s )ent #y #onetar4 f,nan.,al ,nst,tut,ons @"FIs: to #orro!ers an$ not e'i$ence$ #y ne(otia#)e $ocuments or represente$ #y one sin()e $ocument Aif it has #ecome ne(otia#)eB" 5his $escription inc)u$es )oans (rante$ to househo)$s8 non=financia) corporations an$ (o'ernment" 3oans to househo)$s can take the form of consumer cre$it A)oans (rante$ for persona) use in the consumption of (oo$s an$ ser'icesB8 )en$in( for house purchases Acre$it e1ten$e$ for the purpose of in'estin( in housin(8 inc)u$in( #ui)$in( an$ home impro'ementsB an$ other )en$in( A)oans (rante$ for purposes such as $e#t conso)i$ation8 e$ucation8 etc"B Asee a)so .red,t to euro area res,dentsB" 9on65ter# ,nterest ratesD the rates of interest or the yie)$ on interest=#earin( financia) assets !ith a re)ati'e)y )on( perio$ to maturity8 for !hich the yie)$ on (o'ernment #on$s !ith a maturity of ten years are often use$ as a #enchmark" 9on6er5ter# ref,nan.,n6 operat,onD a cre$it operation !ith a maturity of more than one !eek that is e1ecute$ #y the Euros4ste# in the form of reverse transa.t,ons" 5he re(u)ar month)y operations ha'e a maturity of three months" ?urin( the financia) market crisis8 supp)ementary operations !ith maturities ran(in( from one maintenance perio$ to one year !ere con$ucte$8 the fre/uency of !hich 'arie$" "1D a narro! monetary a((re(ate that comprises .urren.4 ,n .,r.ulat,on p)us o'erni(ht $eposits he)$ !ith "FIs an$ centra) (o'ernment Ae"(" at the post office or treasuryB" "2D an interme$iate monetary a((re(ate that comprises "1 p)us $eposits re$eema#)e at a perio$ of notice of up to an$ inc)u$in( three months Ai"e" short= term sa'in(s $epositsB an$ $eposits !ith an a(ree$ maturity of up to an$ inc)u$in( t!o years Ai"e" short=term time $epositsB he)$ !ith "FIs an$ centra) (o'ernment" ";D a #roa$ monetary a((re(ate that comprises "2 p)us marketa#)e instruments8 in particu)ar repurchase a(reements8 money market fun$ shares units8 an$ $e#t securities !ith a maturity of up to an$ inc)u$in( t!o years issue$ #y "FIs"

14 3

"a,n ref,nan.,n6 operat,onD a re(u)ar open #arket operat,on e1ecute$ #y the Euros4ste# in the form of reverse transa.t,ons= -uch operations are con$ucte$ throu(h a !eek)y standard tender an$ norma))y ha'e a maturity of one !eek" "a,ntenan.e per,odD the perio$ o'er !hich .red,t ,nst,tut,ons+ comp)iance !ith reserve re>u,re#ents is ca)cu)ate$" 5he maintenance perio$ #e(ins on the sett)ement $ay of the first #a,n ref,nan.,n6 operat,on fo))o!in( the meetin( of the Govern,n6 Coun.,l at !hich the month)y assessment of the monetary po)icy stance is pre=sche$u)e$" 5he European Central Bank pu#)ishes a ca)en$ar of the reser'e maintenance perio$s at )east three months #efore the start of the year" "ar6,nal ,nterest rateD the interest rate at !hich the tota) ten$er a))otment is e1hauste$" "ar6,nal lend,n6 fa.,l,t4D a stand,n6 fa.,l,t4 of the Euros4ste# !hich .ounterpart,es may use to recei'e o'erni(ht cre$it from a nat,onal .entral $ank at a pre=specifie$ interest rate a(ainst e)i(i#)e assets Asee ke4 ECB ,nterest ratesB" "e#$er %tateD a country that is a mem#er of the *uropean ;nion" "FID see #onetar4 f,nan.,al ,nst,tut,on" ",n,#u# $,d rateD the )o!er )imit to the interest rates at !hich .ounterpart,es may su#mit #i$s in the 'aria#)e rate ten$ers Asee ke4 ECB ,nterest ratesB" ",n,#u# reservesD the minimum amount of reser'es a .red,t ,nst,tut,on is re/uire$ to ho)$ !ith a centra) #ank" 9n the minimum reser'e frame!ork of the Euros4ste#8 the reser'e re/uirement of a cre$it institution is ca)cu)ate$ #y mu)tip)yin( the reserve rat,o for each cate(ory of items in the reserve $ase #y the amount of those items on the institution+s #a)ance sheet" 9n a$$ition8 institutions are a))o!e$ to $e$uct a )ump=sum a))o!ance from their reser'e re/uirement" "onetar4 a66re6ateD .urren.4 ,n .,r.ulat,on p)us outstan$in( amounts of certain )ia#i)ities of #onetar4 f,nan.,al ,nst,tut,ons AMF9sB that ha'e a re)ati'e)y hi(h $e(ree of )i/ui$ity an$ are he)$ #y non=MF9 euro area resi$ents outsi$e the centra) (o'ernment sector" 5he Govern,n6 Coun.,l has announce$ a reference 'a)ue for the (ro!th of "; Asee a)so referen.e value for #onetar4 6ro?thB" "onetar4 $aseD currency A#anknotes an$ coinsB in circu)ation p)us the #,n,#u# reserves cre$it institutions are re/uire$ to ho)$ !ith the Euros4ste# an$ any e1cess reser'es they may 'o)untari)y ho)$ in the *urosystem+s $eposit faci)ity8 a)) of !hich are )ia#i)ities on the *urosystem+s #a)ance sheet" 5he monetary #ase is sometimes a)so referre$ to as G#ase moneyH" "onetar4 f,nan.,al ,nst,tut,ons @"FIs:D financia) institutions !hich to(ether form the money=issuin( sector of the euro area" 5hese inc)u$e the Euros4ste#8 resi$ent .red,t ,nst,tut,ons Aas $efine$ in *; )a!B an$ a)) other resi$ent financia) institutions !hose #usiness is to recei'e $eposits an$ or c)ose su#stitutes for 14 4

$eposits from entities other than MF9s an$8 for their o!n account Aat )east in economic termsB8 to (rant cre$it an$ or in'est in securities" 5he )atter (roup consists pre$ominant)y of #one4 #arket funds, i"e" fun$s that in'est in short=term an$ )o!=risk instruments usua))y !ith a maturity of one year or )ess" "onetar4 pol,.4 strate64D the (enera) approach to the con$uct of monetary po)icy" 5he monetary po)icy strate(y of the *.6 comprises a /uantitati'e $efinition of the primary o#&ecti'e of price sta#i)ity an$ an ana)ytica) frame!ork #ase$ on t!o pi))ars 7 economic ana)ysis an$ monetary ana)ysis 7 !hich forms the #asis of the Go'ernin( .ounci)+s o'era)) assessment of the risks to price sta#i)ity an$ its monetary po)icy $ecisions" 9t a)so pro'i$es the frame!ork for e1p)ainin( monetary po)icy $ecisions to the pu#)ic" "onetar4 pol,.4 trans#,ss,on #e.han,s#D the process throu(h !hich monetary po)icy $ecisions8 e"(" the interest rate $ecisions taken #y the Go'ernin( .ounci) in the case of the euro area8 affect the economy in (enera) an$ the price )e'e) in particu)ar" "onetar4 tar6et,n6D a #onetar4 pol,.4 strate64 aime$ at maintainin( pr,.e sta$,l,t4 #y focusin( on the $e'iations of money (ro!th from a pre=announce$ tar(et" "one4 de#andD a key economic re)ationship that represents the $eman$ for money #a)ances #y non="FIs" 5he $eman$ for money is often e1presse$ as a function of prices an$ economic acti'ity8 !hich ser'es as a pro1y for the )e'e) of transactions in the economy8 an$ certain interest rate 'aria#)es8 !hich measure the opportunity costs of ho)$in( money" "one4 #arketD the market in !hich short=term fun$s are raise$8 in'este$ an$ tra$e$ usin( instruments !hich (enera))y ha'e an ori(ina) maturity of up to an$ inc)u$in( one year" "one4 #arket fundD a co))ecti'e in'estment un$ertakin( that primari)y in'ests in money market instruments an$ or other transfera#)e $e#t instruments !ith a resi$ua) maturity of up to an$ inc)u$in( one year8 an$ or that pursues a rate of return that approaches the interest rates on money market instruments" at,onal .entral $ank @ CB:D a centra) #ank of a "e#$er %tate of the *uropean ;nion" eutral,t4 of #one4D a #asic economic princip)e statin( that8 in the )on( run8 chan(es in the money supp)y on)y )ea$ to chan(es in nomina) 'aria#)es8 #ut not in rea) 'aria#)es" .han(es in the money supp)y !i)) therefore ha'e no )on(=term effect on 'aria#)es such as rea) output8 unemp)oyment or rea) interest rates" o#,nal effe.t,ve ex.han6e rate @EE&: of the euroD nomina) euro **Cs are !ei(hte$ a'era(es of #i)atera) euro e1chan(e rates a(ainst the currencies of the euro area+s main tra$in( partners" 5he *.6 pu#)ishes nomina) **C in$ices for

14 5

the euro a(ainst the currencies of a narro! an$ a #roa$ (roup of tra$in( partners" 5he !ei(hts use$ ref)ect the share of each partner country in euro area tra$e" on5f,nan.,al .orporat,onD a corporation or /uasi=corporation that is not en(a(e$ in financia) interme$iation8 #ut is acti'e primari)y in the pro$uction of market (oo$s an$ non=financia) ser'ices" on5standard #easuresD measures taken #y the *.6 to support the effecti'e transmission of interest rate $ecisions to the !i$er euro area economy8 in a conte1t of a $ysfunctiona) situation in some financia) market se(ments an$ the financia) system" 'pen #arket operat,onD an operation e1ecute$ on the initiati'e of the centra) #ank in the financia) market" @ith re(ar$ to their aims8 re(u)arity an$ proce$ures8 Euros4ste# open market operations can #e $i'i$e$ into four cate(ories: #a,n ref,nan.,n6 operat,ons8 lon6er5ter# ref,nan.,n6 operat,ons8 f,ne5tun,n6 operat,ons an$ stru.tural operat,ons" :s for the instruments use$8 reverse transa.t,ons are the main open market instrument of the Euros4ste# an$ can #e emp)oye$ in a)) four cate(ories of operations" 9n a$$ition8 the issuance of $e#t certificates an$ outri(ht transactions are a'ai)a#)e for structura) operations8 !hi)e outri(ht transactions8 fore,6n ex.han6e s?aps an$ the co))ection of fi1e$=term $eposits are a'ai)a#)e for the con$uct of f,ne5tun,n6 operat,ons" 'pportun,t4 .ostD a measure of the costs of ho)$in( an asset8 typica))y measure$ as the sprea$ #et!een its o!n return an$ the return on an a)ternati'e asset" 'pt,onsD financia) instruments that (i'e the o!ner the ri(ht8 #ut not the o#)i(ation8 to #uy or se)) specific assets Ae"(" a #on$ or a stockB at a pre$etermine$ price Athe strike or e1ercise priceB at or up to a certain future $ate Athe e1ercise or maturity $ateB" 'utput 6apD the $ifference #et!een the actua) an$ potentia) )e'e)s of output of an economy8 e1presse$ as a percenta(e of potentia) output" Potentia) output is the )e'e) of output that can #e achie'e$ !hen the factors of pro$uction are uti)ise$ at non=inf)ationary )e'e)s" 'utr,6ht transa.t,onD a transaction !here#y assets are #ou(ht or so)$ outri(ht in the market Aspot or for!ar$B" 'ther f,nan.,al ,nter#ed,ar,es @'FIs:D corporations or /uasi=corporations Aother than an insurance corporation an$ pension fun$B that are en(a(e$ main)y in financia) interme$iation #y incurrin( )ia#i)ities in forms other than currency8 $eposits an$ or c)ose su#stitutes for $eposits from institutiona) entities other than "FIs= %F9s inc)u$e8 in particu)ar8 corporations en(a(e$ primari)y in )on(=term financin( Asuch as financia) )easin(B8 securitise$ asset ho)$in(s8 other financia) ho)$in(s8 securities an$ $eri'ati'es $ea)in( Aon their o!n accountB8 'enture capita) an$ $e'e)opment capita)" 'vern,6ht depos,tsD $eposits !ith ne1t=$ay maturity" 5his instrument cate(ory comprises main)y those si(ht $eman$ $eposits that are fu))y transfera#)e 14 6

A#y che/ue or simi)ar instrumentB" 9t a)so inc)u$es non=transfera#)e $eposits that are con'erti#)e on $eman$ or #y c)ose of #usiness the fo))o!in( $ay" %'erni(ht $eposits are inc)u$e$ in "1 Aan$ hence in "2 an$ ";B" Pens,on fundD a pro'ision or simi)ar fun$ set asi$e #y non=financia) corporations to pay for their emp)oyees+ pensions" Pr,.e sta$,l,t4D the maintenance of price sta#i)ity is the primary o#&ecti'e of the Euros4ste#= 5he Go'ernin( .ounci) $efines price sta#i)ity as a year=on=year increase in the (ar#on,sed Index of Consu#er Pr,.es A<9.PB for the euro area of #e)o! 2F" 5he Go'ernin( .ounci) has a)so ma$e it c)ear that8 in the pursuit of price sta#i)ity8 it aims to maintain inf)ation rates #e)o!8 #ut c)ose to8 2F o'er the me$ium term" ProGe.t,onsD see Euros4ste#FECB staff proGe.t,ons" &eal effe.t,ve ex.han6e rate @EE&: of the euroD rea) euro **Cs are nomina) euro **Cs $ef)ate$ #y a !ei(hte$ a'era(e of forei(n8 re)ati'e to $omestic8 prices or costs" 5hey are8 thus8 measures of price an$ cost competiti'eness" &eferen.e value for #onetar4 6ro?thD the annua) (ro!th rate of "; (ro!th that is $eeme$ to #e compati#)e !ith price sta#i)ity o'er the me$ium term" &eferen.e value for the f,s.al pos,t,onD Protoco) >o 12 on the ex.ess,ve def,.,t pro.edure8 as anne1e$ to the Treat4 on the Fun.t,on,n6 of the European !n,on8 sets e1p)icit reference 'a)ues for the 6eneral 6overn#ent def,.,t rat,o A3F of G?PB an$ the de$t rat,o A60F of G?PB Asee a)so %ta$,l,t4 and Gro?th Pa.tB" &epur.hase a6ree#entD the process of #orro!in( money #y com#inin( the sa)e of an asset Ausua))y a fi1e$ income securityB !ith the su#se/uent repurchase of that same asset for a s)i(ht)y hi(her price A!hich ref)ects the #orro!in( rateB" &epur.hase operat,on @repo:D a )i/ui$ity=pro'i$in( reverse transa.t,on #ase$ on a repur.hase a6ree#ent" &eserve $aseD the sum of the e)(i#)e #a)ance sheet items Ain particu)ar )ia#i)itiesB that constitute the #asis for ca)cu)atin( the reserve re>u,re#ent of a .red,t ,nst,tut,on" &eserve rat,oD the ratio $efine$ #y the centra) #ank for each cate(ory of e)i(i#)e #a)ance sheet items inc)u$e$ in the reserve $ase" 5he ratio is use$ to ca)cu)ate reserve re>u,re#ents" &eserve re>u,re#entD the minimum amount of reser'es a .red,t ,nst,tut,on is re/uire$ to ho)$ !ith the Euros4ste# o'er a pre$efine$ maintenance perio$" .omp)iance !ith the re/uirement is $etermine$ on the #asis of the a'era(e of the $ai)y #a)ances in the reser'e accounts o'er the maintenance perio$"

14 7

&everse transa.t,onD an operation !here#y the centra) #ank #uys or se))s assets un$er a repur.hase a6ree#ent or con$ucts cre$it operations a(ainst .ollateral" %e.ur,t,es "arkets Pro6ra##e @%"P:D an *.6 pro(ramme for con$uctin( inter'entions in the euro area pu#)ic an$ pri'ate $e#t securities markets to ensure $epth an$ )i/ui$ity in $ysfunctiona) market se(ments !ith a 'ie! to restorin( an appropriate #onetar4 pol,.4 trans#,ss,on #e.han,s#" %ta$,l,t4 and Gro?th Pa.tD inten$e$ to ser'e as a means of safe(uar$in( soun$ (o'ernment finances in the *; "e#$er %tates in or$er to stren(then the con$itions for pr,.e sta$,l,t4 an$ for stron(8 sustaina#)e (ro!th con$uci'e to emp)oyment creation" 5o this en$8 the Pact $escri#es that Mem#er -tates specify me$ium=term #u$(etary o#&ecti'es" 9t a)so contains concrete specifications on the ex.ess,ve def,.,t pro.edure" 5he Pact consists of Ceso)ution of the :mster$am *uropean .ounci) on 10 2une 1990 on the -ta#i)ity an$ Gro!th Pact an$ t!o .ounci) Ce(u)ations8 name)y: iB Ce(u)ation A*.B >o 1466 90 of 0 2u)y 1990 on the stren(thenin( of the sur'ei))ance of #u$(etary positions an$ the sur'ei))ance an$ coor$ination of economic po)icies as amen$e$ #y Ce(u)ation A*.B >o 10,, 200, of 20 2une 200,J an$ iiB Ce(u)ation A*.B >o 1460 90 of 0 2u)y 1990 on spee$in( up an$ c)arifyin( the imp)ementation of the e1cessi'e $eficit proce$ure as amen$e$ #y Ce(u)ation A*.B >o 10,6 200, of 20 2une 200," 5he -ta#i)ity an$ Gro!th Pact is comp)emente$ #y the EC'FI Coun.,l+s report entit)e$ G9mpro'in( the 9mp)ementation of the -ta#i)ity an$ Gro!th PactG8 !hich !as en$orse$ #y the 6russe)s *uropean .ounci) of 22 an$ 23 March 200," 9t is a)so comp)emente$ #y a .o$e of .on$uct entit)e$ G-pecifications on the imp)ementation of the -ta#i)ity an$ Gro!th Pact an$ Gui$e)ines on the format an$ content of sta#i)ity an$ con'er(ence pro(rammesH8 !hich !as en$orse$ #y the *.%F9> .ounci) on 11 %cto#er 200," %ta$,l,t4 pro6ra##esD these are me$ium=term (o'ernment p)ans an$ assumptions pro'i$e$ #y euro area countries re(ar$in( the $e'e)opment of key economic 'aria#)es !ith a 'ie! to the achie'ement of the me$ium=term o#&ecti'e of a #u$(etary position c)ose to #a)ance or in surp)us8 as referre$ to in the %ta$,l,t4 and Gro?th Pa.t " 5hese pro(rammes present measures for the conso)i$ation of fisca) #a)ances as !e)) as the un$er)yin( economic scenarios" -ta#i)ity pro(rammes must #e up$ate$ annua))y" 5hey are e1amine$ #y the European Co##,ss,on an$ the E.ono#,. and F,nan.,al Co##,ttee A*F.B" 5heir reports ser'e as the #asis for an assessment #y the EC'FI Coun.,l8 focusin( in particu)ar on !hether the me$ium=term #u$(etary o#&ecti'e in the pro(ramme is in )ine !ith a #u$(etary position c)ose to #a)ance or in surp)us8 pro'i$in( for an a$e/uate safety mar(in to ensure that an e1cessi'e $eficit is a'oi$e$" "e#$er %tates !hose currency is not the euro must su#mit annua) con'er(ence pro(rammes8 in accor$ance !ith the %ta$,l,t4 and Gro?th Pa.t" %tandard tenderD a ten$er proce$ure use$ #y the Euros4ste# in its re(u)ar open #arket operat,ons" -tan$ar$ ten$ers are carrie$ out !ithin 24 hours" :)) .ounterpart,es fu)fi))in( the (enera) e)i(i#i)ity criteria are entit)e$ to su#mit #i$s"

14 8

%tand,n6 fa.,l,t4D a centra) #ank faci)ity a'ai)a#)e to .ounterpart,es at their o!n initiati'e" 5he Euros4ste# offers t!o o'erni(ht stan$in( faci)ities: the #ar6,nal lend,n6 fa.,l,t4 an$ the depos,t fa.,l,t4" %to.k #arketD see e>u,t4 #arket" %tru.tural operat,onD an open #arket operat,on e1ecute$ #y the Euros4ste# main)y in or$er to a$&ust the structura) )i/ui$ity position of the financia) sector 'is=T='is the *urosystem" %urve4 of Profess,onal Fore.asters @%PF:D a /uarter)y sur'ey that has #een con$ucte$ #y the *.6 since 1999 to co))ect macroeconomic forecasts on euro area inf)ation8 rea) G?P (ro!th an$ unemp)oyment from a pane) of e1perts affi)iate$ to financia) an$ non=financia) or(anisations #ase$ in the *;" %?apD an a(reement to e1chan(e future cash f)o!s accor$in( to a prearran(e$ formu)a Asee fore,6n ex.han6e s?apB" %4ste#,. r,skD the risk that the ina#i)ity of one participant to meet its o#)i(ations in a system !i)) cause other participants to #e una#)e to meet their o#)i(ations !hen they #ecome $ue8 potentia))y !ith spi))o'er effects Ae"(" si(nificant )i/ui$ity or cre$it pro#)emsB threatenin( the sta#i)ity of or confi$ence in the financia) system" 5hat ina#i)ity to meet o#)i(ations can #e cause$ #y operationa) or financia) pro#)ems" TA&GET @Trans5European Auto#ated &eal5t,#e Gross settle#ent Express Transfer s4ste#:D the *urosystem+s rea)=time (ross sett)ement system for the euro" 5he first=(eneration 5:CG*5 system !as rep)ace$ #y TA&GET2 in May 2004" TA&GET2D the secon$=(eneration TA&GET system" 9t sett)es payments in euro in centra) #ank money an$ functions on the #asis of a sin()e 95 p)atform8 to !hich a)) payment or$ers are su#mitte$ for processin(" TFE!D see Treat4 on the Fun.t,on,n6 of the European !n,on" Trans#,ss,on #e.han,s#D see "onetar4 pol,.4 trans#,ss,on #e.han,s#" Treat,esD un)ess state$ other!ise8 a)) references in this report to the G5reatiesH refer to #oth the Treat4 on the Fun.t,on,n6 of the European !n,on an$ the 5reaty on *uropean ;nion" Treat4D un)ess state$ other!ise8 a)) references in this report to the G5reatyH refer to the Treat4 on the Fun.t,on,n6 of the European !n,on 8 an$ the references to artic)e num#ers ref)ect the num#erin( in effect since 1 ?ecem#er 2009" Treat4 of 9,s$on @9,s$on Treat4:D the 5reaty of 3is#on amen$s the ;nion+s t!o core treaties: the 5reaty on *uropean ;nion an$ the 5reaty esta#)ishin( the *uropean .ommunity" 5he )atter has #een rename$ the Treat4 on the 14 9

Fun.t,on,n6 of the European !n,on A5F*;B" 5he 5reaty of 3is#on !as si(ne$ in 3is#on on 13 ?ecem#er 2000 an$ entere$ into force on 1 ?ecem#er 2009" Treat4 on the Fun.t,on,n6 of the European !n,on @TFE!:D fo))o!in( the entry into force of the Treat4 of 9,s$on on 1 ?ecem#er 20098 the 5reaty esta#)ishin( the *uropean .ommunity !as rename$ the 5reaty on the Functionin( of the *uropean ;nion" 5his 5reaty 7 referre$ to as the 5reaty of Come Asi(ne$ in Come on 2, March 19,0B 7 entere$ into force on 1 2anuary 19,4 to esta#)ish the *uropean *conomic .ommunity A**.B" 5he 5reaty esta#)ishin( the *uropean .ommunity !as su#se/uent)y amen$e$ #y the 5reaty on *uropean ;nion Aoften referre$ to as the Maastricht 5reatyB si(ne$ on 0 Fe#ruary 1992 an$ enterin( into force on 1 >o'em#er 19938 there#y esta#)ishin( the *uropean ;nion" 5hereafter8 #oth the 5reaty esta#)ishin( the *uropean .ommunity an$ the 5reaty on *uropean ;nion !ere amen$e$ #y the 5reaty of :mster$am8 si(ne$ in :mster$am on 2 %cto#er 1990 an$ enterin( into force on 1 May 19998 the 5reaty of >ice8 si(ne$ on 26 Fe#ruary 2001 an$ enterin( into force on 1 Fe#ruary 20038 an$ then #y the 5reaty of 3is#on" !ne#plo4edD accor$in( to the *; $efinition8 any person a(e$ 1, to 048 !ho is: AiB !ithout !ork $urin( the reference !eekJ AiiB current)y a'ai)a#)e for !orkJ an$ AiiiB acti'e)y seekin( !ork" !ne#plo4#ent rateD the num#er of unemp)oye$ persons as a percenta(e of the )a#our force" !n,t la$our .ostsD a measure of tota) )a#our costs per unit of output ca)cu)ate$ for the euro area as the ratio of tota) compensation per emp)oyee to )a#our pro$ucti'ity A$efine$ as G?P A'o)umeB per person emp)oye$B" *ar,a$le rate tenderD a ten$er proce$ure !here#y the .ounterpart,es #i$ #oth the amount of money they !ant to transact !ith the centra) #ank an$ the interest rate at !hich they !ant to enter into the transaction" I,eld .urveD a (raphica) representation of the re)ationship #et!een the interest rate or yie)$ an$ the resi$ua) maturity at a (i'en point in time for sufficient)y homo(enous $e#t securities !ith $ifferent maturity $ates" 5he s)ope of the yie)$ cur'e can #e measure$ as the $ifference #et!een the interest rates or yie)$ at t!o se)ecte$ maturities"

15 0

/I/5IO4RAPH6
CHAPTER 1 O$$i,i"# EC/ + 8#i,"ti!ns *.6 A1999 to 2010B8 Annual Report. *.6 A2000 to 2010B8 Convergence Report. *.6 A2006B8 GMonetary an$ e1chan(e rate arran(ements of the euro area !ith se)ecte$ thir$ countries an$ territoriesH8 5onthly Bulletin8 :pri)" *.6 A2004B8 5onthly Bulletin 7 $#th anniversary of the ECB8 specia) e$ition8 May" *.6 A2004B8 G%ne monetary po)icy an$ many fisca) po)icies 7 ensurin( a smooth functionin( of *M;H8 5onthly Bulletin8 2u)y" *.6 A2009B8 GCotation of 'otin( ri(hts in the Go'ernin( .ounci) of the *.6H8 5onthly Bulletin8 2u)y" *.6 A2010B8 G5he *.6+s re)ations !ith *uropean ;nion institutions an$ #o$ies 7 tren$s an$ prospectsH8 5onthly Bulletin8 2anuary" Othe% .!, &ents 6ini -ma(hi8 3" an$ Gros8 ?" A2000B8 6pen (ssues in European Central Ban ing8 Macmi))an Press" .onstYncio8 D" A2010B8 G5he esta#)ishment of the *uropean -ystemic Cisk 6oar$ 7 cha))en(es an$ opportunitiesH8 speech presente$ at the *urofi Financia) Forum8 intro$uctory remarks at the p)enary session on G9mp)ementin( the $e 3arosiZre :(en$aH8 6russe)s8 29 -eptem#er 2010" *uropean Monetary 9nstitute A1994B8 Convergence Report8 March" 2un(8 :"8 Moutot8 P" an$ Mon(e))i8 F"P" A2010B8 G<o! are the *urosystem+s monetary po)icy $ecisions prepare$[H8 !ournal of Common 5ar et &tudies8 Do)" 44A2B8 pp" 319=346" -che))er8 <"=P" A2006B8 The European Central Ban 7 history) role and functions 8 secon$ re'ise$ 'ersion" 5umpe)=Gu(ere))8 G" A2004B8 G5en years of *uropean Monetary ;nion 7 !hat is the ro)e of nationa) centra) #anks to$ay[H8 speech at the %esterreichische >ationa)#ank+s <i(h 3e'e) *'enin( Pane) ?iscussion8 6russe)s8 6 May 2004" CHAPTER O$$i,i"# EC/ + 8#i,"ti!ns *.6 A200,B8 G.ompara#i)ity of statistics for the euro area8 the ;nite$ -tates an$ 2apanH8 5onthly Bulletin8 :pri)" *.6 A200,B8 G5he 3is#on -trate(y 7 fi'e years onH8 5onthly Bulletin8 2u)y" *.6 A200,B8 G5he reform of the -ta#i)ity an$ Gro!th PactH8 5onthly Bulletin8 :u(ust" *.6 A200,B8 G9n$icators of financia) inte(ration in the euro areaH8 Technical Report8 -eptem#er" *.6 A2006B8 GFisca) po)icies an$ financia) marketsH8 5onthly Bulletin8 Fe#ruary" *.6 A2006B8 G5he importance of pu#)ic e1pen$iture reform for economic (ro!th an$ sta#i)ityH8 5onthly Bulletin8 :pri)"

15 1

*.6 A2006B8 G?emo(raphic chan(e in the euro area: pro&ections an$ conse/uencesH8 5onthly Bulletin8 %cto#er" *.6 A2000B8 G.ha))en(es to fisca) sustaina#i)ity in the euro areaH8 5onthly Bulletin8 Fe#ruary" *.6 A2000B8 GFrom (o'ernment $eficit to $e#t 7 #ri$(in( the (apH8 5onthly Bulletin8 :pri)" *.6 A2000B8 GThe euro bonds and derivatives mar etH8 2une" *.6 A2004B8 G5he ana)ysis of the euro money market from a monetary po)icy perspecti'eH8 5onthly Bulletin8 Fe#ruary" *.6 A2004B8 5onthly Bulletin 7 $#th anniversary of the ECB8 specia) e$ition8 May" *.6 A2004B8 G%ne monetary po)icy an$ many fisca) po)icies: ensurin( a smooth functionin( of *M;H8 5onthly Bulletin8 2u)y" *.6 A2004B8 G5en years of the -ta#i)ity an$ Gro!th PactH8 5onthly Bulletin8 %cto#er" *.6 A2009B8 G5he functiona) composition of (o'ernment spen$in( in the *uropean ;nionH8 5onthly Bulletin8 :pri)" *.6 A2009B8 Euro money mar et survey8 -eptem#er" *.6 A2010B8 G*ntit)ements of househo)$s un$er (o'ernment pension schemes in the euro area 7 resu)ts on the #asis of the ne! system of nationa) accountsH8 5onthly Bulletin8 2anuary" *.6 A2010B8 G3a#our markets a$&ustments to the recession in the euro areaH8 5onthly Bulletin8 2u)y" *.6 A2010B8 G<armonise$ *.6 statistics on euro area in'estment fun$s an$ their ana)ytica) use for monetary po)icy purposesH8 5onthly Bulletin8 :u(ust" *.6 A2010B8 Euro money mar et study8 ?ecem#er" Othe% .!, &ents 6riotti8 M"G" A200,B8 G*conomic reactions to pu#)ic finance conso)i$ation: a sur'ey of the )iteratureH8 6ccasional 4aper &eries) >o 348 *.68 %cto#er" 6u)$orini8 3"8 Makry$akis8 -" an$ 5himann8 ." A2002B8 G5he effecti'e e1chan(e rates of the euroH8 6ccasional 4aper &eries8 *.68 >o 28 Fe#ruary" Giammario)i8 >"8 >icke)8 ." Cother8 P" an$ Di$a)8 2"=P" A2000B8 G:ssessin( fisca) soun$nessH8 6ccasional 4aper &eries) >o ,68 March" Morris C"8 %n(ena8 <" an$ -chuknecht8 3" A2006B8 G5he reform an$ imp)ementation of the -ta#i)ity an$ Gro!th PactH8 6ccasional 4aper &eries8 >o 408 *.68 2une" Moutot8 P" Ae$"B8 Ger$esmeier8 ?"8 3o&scho'\8 :" an$ 'on 3an$es#er(er8 2" A2000B8 G5he ro)e of other financia) interme$iaries in monetary an$ cre$it $e'e)opments in the euro areaH8 6ccasional 4aper &eries8 >o 0-8 *.68 %cto#er" 5ask Force of the Monetary Po)icy .ommittee of the *-.6 A2006B8 G.ompetition8 pro$ucti'ity an$ prices in the euro area ser'ices sectorH8 6ccasional 4aper &eries8 >o 448 *.68 :pri)" -tark8 2" A2009B8 GMonetary an$ fisca) po)icy: criteria an$ timin( for the phasin( out of crisis measuresH8 speech $e)i'ere$ at 40th Kie)er Kon&unktur(espr]ch8 6er)in8 1, -eptem#er 2009" 5richet8 2"=." A2009B8 G*uropean financia) inte(rationH8 speech $e)i'ere$ at 23" 9nternationa)es ^insF%C;M H^insen 2009H8 Frankfurt am Main8 11 ?ecem#er 2004"

15 -

Dan Ciet8 :" Ae$"B A2010B8 G*uro area fisca) po)icies an$ the crisisH8 6ccasional 4aper &eries8 >o 1098 *.68 :pri)" CHAPTER 3 O$$i,i"# EC/ + 8#i,"ti!ns *.6 A1999B8 G5he sta#i)ity=oriente$ monetary po)icy strate(y of the *urosystemH8 5onthly Bulletin8 2anuary" *.6 A1999B8 G*uro area monetary a((re(ates an$ their ro)e in the *urosystem+s monetary po)icy strate(yH8 5onthly Bulletin8 Fe#ruary" *.6 A2000B8 G5he t!o pi))ars of the *.6+s monetary po)icy strate(yH8 5onthly Bulletin8 >o'em#er" *.6 A2001B8 A guide to Eurosystem staff macroeconomic pro8ection exercises8 2une" *.6 A2002B8 G5he accounta#i)ity of the *.6H8 5onthly Bulletin8 >o'em#er" *.6 A2002B8 G5ransparency in the monetary po)icy of the *.6H8 5onthly Bulletin8 >o'em#er" *.6 A2003B8 G5he outcome of the *.6+s e'a)uation of its monetary po)icy strate(yH8 5onthly Bulletin8 2une" *.6 A2004B8 GMonetary ana)ysis in rea) timeH8 5onthly Bulletin8 %cto#er" *.6 A200,B8 GMonetary po)icy an$ inf)ation $ifferentia)s in a hetero(eneous currency areaH8 5onthly Bulletin8 May" *.6 A200,B8 G5he <armonise$ 9n$e1 of .onsumer Prices 7 concept8 properties an$ e1perience to $ateH8 5onthly Bulletin8 2u)y" *.6 A2006B8 G5he pre$icta#i)ity of the *.6+s monetary po)icyH8 5onthly Bulletin8 2anuary" *.6 A2000B8 G.ommunicatin( monetary po)icy to financia) marketsH8 5onthly Bulletin8 :pri)" *.6 A2004B8 GPrice sta#i)ity an$ (ro!thH8 5onthly Bulletin8 May" *.6 A2004B8 G5he ro)e of #anks in the monetary po)icy transmission mechanismH8 5onthly Bulletin8 :u(ust" *.6 A2009B8 G.entra) #ank communication in perio$s of hei(htene$ uncertaintyH8 5onthly Bulletin8 >o'em#er" *.6 A2009B8 GMonetary ana)ysis in an en'ironment of financia) turmoi)H8 5onthly Bulletin8 >o'em#er" *.6 A2009B8 G>e! proce$ure for constructin( *urosystem an$ *.6 staff pro&ection ran(esH8 3 ?ecem#er 2009" *.6 A2010B8 ECB statistics% a brief overview8 :pri)" *.6 A2010B8 GMonetary po)icy transmission in the euro area8 a $eca$e after the intro$ucion of the euroH8 5onthly Bulletin8 May" *.6 A2010B8 G5he OGreat 9nf)ation+ 7 )essons for monetary po)icyH8 5onthly Bulletin8 May" *.6 A2010B8 G5oo)s for preparin( short=term pro&ections of euro area inf)ationH8 5onthly Bulletin8 :pri)" *.6 A2010B8 G5he *.6+s response to the financia) crisisH8 5onthly Bulletin8 %cto#er" *.6 A2010B8 G*nhancin( the monetary ana)ysisH8 5onthly Bulletin8 >o'em#er" *.6 A2010B8 G:sset price #u##)es an$ monetary po)icy re'isite$H8 5onthly Bulletin8 >o'em#er" 15 3

Othe% .!, &ents :)tun#as8 R"8 Gam#acorta8 3" an$ Mar/u_s=9#\XeE8 ?" A2010B8 G?oes monetary po)icy affect #ank risk=takin([H8 9or ing 4aper &eries8 >o 11668 *.6" :n(e)oni8 9"8 Kashyap8 :" an$ Mo&on8 6" A2003B8 5onetary 4olicy Transmission in the Euro Area8 .am#ri$(e ;ni'ersity Press" 6eyer8 :" an$ Ceich)in8 3" Ae$s"B A2006B8 G5he ro)e of money 7 money an$ monetary po)icy in the 21st centuryH8 Fourth *.6 centra) #ankin( conference8 >o'em#er" 6orio8 ."8 ^hu8 <" A2004B8 .apita) re(u)ation8 risk=takin( an$ monetary po)icy: a missin( )ink in the transmission mechanism[8 9or ing 4aper &eries8 >o 2648 6ank for 9nternationa) -ett)ements" ?uisen#er(8 @" A2001B8 G5he *.6+s /uantitati'e $efinition of price sta#i)ity an$ its comparison !ith such $efinitions or inf)ation tar(ets app)ie$ in other )ar(e economic areasH8 )etter #y the Presi$ent of the *.6 to the .hairperson of the .ommittee on *conomic an$ Monetary :ffairs8 Mrs .hrista Can$Eio= P)ath8 16 %cto#er 2001" ?uisen#er(8 @" A2001B8 G5he *.6+s monetary po)icy strate(y an$ the /uantitati'e $efinition of price sta#i)ityH8 )etter of the Presi$ent of the *.6 to the .hairperson of the .ommittee on *conomic an$ Monetary :ffairs8 Mrs .hrista Can$Eio=P)ath8 13 ?ecem#er 2001" *.6 A2003B8 <errero8 :"8 Gaspar8 D"8 <oo($uin8 3"8 Mor(an 2" an$ @ink)er8 6" Ae$s"B A2001B8 G@hy price sta#i)ity[H8 First *.6 .entra) 6ankin( .onference8 2une" GonE\)eE=P\ramo8 2"M" A2009B8 G>ationa) :ccounts for monetary po)icy makin( 7 ref)ections on the use of the euro area accounts in the )i(ht of the financia) crisisH8 speech presente$ at the *urostat >ationa) :ccounts .onference 2009 GCea$in( the present to prepare the futureH8 6russe)s8 16 -eptem#er 2009" 9ssin(8 %" Ae$"B A2003B8 Bac ground studies for the ECB:s evaluation of its monetary policy strategy8 >o'em#er" 9ssin(8 %" A200,B8 G.ommunication8 transparency8 accounta#i)ity 7 monetary po)icy in the t!enty=first centuryH8 'ederal Reserve Ban of &t. 1ouis Review8 Do)" 40A2B8 pp" 6,=43" Moutot8 P" an$ Dita)e8 G" A2009B8 GMonetary po)icy strate(y in a ()o#a) en'ironmentH8 6ccasional 4aper &eries8 >o 1068 *.68 :u(ust" Papa$emos8 3" A2009B8 GFinancia) sta#i)ity an$ macro=pru$entia) super'ision 7 o#&ecti'es8 instruments an$ the ro)e of the *.6H8 speech presente$ at the *.6 @atchers .onference8 Frankfurt am Main8 4 -eptem#er 2009" Papa$emos8 3" an$ -tark8 2" Ae$s"B A2010B8 Enhancing the monetary analysis8 *.6" -tark8 2" A2010B8 G*nhancin( the *.6+s monetary ana)ysis 7 !hat ha'e !e )earnt[H8 speech presente$ at the *.6+s @atchers .onference8 Frankfurt am Main8 9 2u)y 2010" 5richet8 2"=." A2009B8 G.re$i#)e a)ertness re'isite$H8 speech presente$ at the annua) symposium or(anise$ #y Fe$era) Ceser'e of Kansas8 2ackson <o)e8 @yomin(8 22 :u(ust 2009" 5richet8 2"=." A2009B8 G5he *.6+s e1it strate(yH8 speech presente$ at the *.6+s @atchers .onference8 Frankfurt am Main8 4 -eptem#er 2009" 15 4

CHAPTER 4 O$$i,i"# EC/ + 8#i,"ti!ns *.6 A2002B8 G5he )i/ui$ity mana(ement of the *.6H8 5onthly Bulletin8 May" *.6 A2003B8 G.han(es to the *urosystem+s operationa) frame!ork for monetary po)icyH8 5onthly Bulletin8 :u(ust" *.6 A200,B8 G9nitia) e1perience !ith the chan(es to the *urosystem+s operationa) frame!ork for monetary po)icy imp)ementationH8 5onthly Bulletin) Fe#ruary" *.6 A2004B8 5onthly Bulletin 7 $#th anniversary of the ECB8 specia) e$ition8 May" *.6 A2009B8 G5he imp)ementation of monetary po)icy since :u(ust 2000H8 5onthly Bulletin8 2u)y" *.6 A2010B8 G5he *.6+s monetary po)icy stance $urin( the financia) crisisH8 5onthly Bulletin8 2anuary" *.6 A2010B8 G3i/ui$ity con$itions an$ monetary po)icy operations in the perio$ from 10 Fe#ruary 2010 to 11 May 2010H8 5onthly Bulletin) 2une" *.6 A2010B8 G5he *.6+s response to the financia) crisisH8 5onthly Bulletin8 %cto#er" *.6 A2011B8 The implementation of monetary policy in the euro area 7 ;eneral documentation on Eurosystem monetary policy instruments and procedures 8 Fe#ruary" Othe% .!, &ents 6in$sei)8 ;" A2004B8 5onetary 4olicy (mplementation% Theory) 4ast) and 4resent8 %1for$ ;ni'ersity Press" Mercier8 P" A2009B8 G5he 3i/ui$ity Mana(ement of the *urosystem $urin( the Financia) 5urmoi)H8 Revue Bancaire et 'inanci<re8 Do)" 2=38 pp" 96=104" Mercier8 P" an$ Papa$ia8 F" Ae$s"B A2011B8 (mplementing 5onetary 4olicy in the Euro Area8 %1for$ ;ni'ersity Press" 5richet8 2"=. A2010B8 G5he financia) crisis an$ the *.6+s responseH8 !ournal of Common 5ar et &tudies8 Do)" 448 pp" 0=19" CHAPTER 5 O$$i,i"# EC/ + 8#i,"ti!ns 4lease refer to the following official sources for detailed information on the monetary policy decisions of the ECB% 7 9ntro$uctory -tatements to the press conferences #y the Presi$ent of the *.6 7 *$itoria) sections of the *.6+s Month)y 6u))etin 7 -tatements of the Presi$ent #efore the .ommittee on *conomic an$ Monetary :ffairs of the *uropean Par)iament 7 :nnua) Ceports of the *.6

15 5

*.6 A2004B8 10th anni'ersary of the *.68 5onthly Bulletin8 specia) e$ition8 May" *.6 A2010B8 G5he *.6+s monetary po)icy stance $urin( the financia) crisisH8 5onthly Bulletin8 2anuary" *.6 A2010B8 G5he *.6+s response to the financia) crisisH8 5onthly Bulletin8 %cto#er" Othe% .!, &ents 9nternationa) Monetary Fun$8 G-taff report on the euro area po)icies in the conte1t of the :rtic)e 9D consu)tations !ith euro area countriesH8 'arious issues" 9ssin(8 %" A2000B8 G5he *.6+s Monetary Po)icy: *1perience after the First RearH8 !ournal for 4olicy 5odelling) Do)" 22A3B8 pp" 32,=343" %r(anisation for *conomic .o=operation an$ ?e'e)opment 8 G*conomic -ur'eys: *uro :reaH8 'arious issues" 5richet8 2"=." A2010B8 G5he financia) crisis an$ the *.6+s responseH8 !ournal of Common 5ar et &tudies8 Do)" 448 pp" 0=19" 5richet8 2"=." A2010B8 GCef)ections on the nature of monetary po)icy non=stan$ar$ measures an$ finance theoryH8 openin( a$$ress at the 6th *.6 .entra) 6ankin( .onference8 Frankfurt am Main8 14 >o'em#er 2010"

15 6

INDE2
:ccounta#i)ity 46=498 136 :sset 268 39=,28 ,6=618 008 04=468 90=998 1008 111=1148 122=1238 1208 136 6ank )en$in( sur'ey A63-B 038 136 6i)atera) centra) rate 134 6on$ market 468 048 12,8 120=1248 136 6reak=e'en inf)ation rate A6*9CB 04=0,8 136 6roa$ *conomic Po)icy Gui$e)ines A6*PGsB 3,8 136 .entra) #ank in$epen$ence 118 14=1,8 148 46=448 136 .o))atera) 48 ,8 268 42=438 60=618 96=998 1008 11,8 1208 136 .onso)i$ate$ #a)ance sheet of the MF9 -ector 49=,08 408 136 .on'er(ence criteria 148 136 .ounci) of the *uropean ;nion A.ounci)B 16=228 268 368 132=1338 130 .ounterparty 43=448 968 998 100=1048 130 .re$i#i)ity 08 9=108 138 3,8 ,68 618 638 408 90=918 11,8 129 .re$it 118 1,=108 23=208 3,8 39=,28 ,6=638 038 41=468 90=1208 130 .re$it institution 16=108 238 26=208 398 428 44=,28 038 93=998 101=10,8 1098 111=11,8 1208 130 .urrency in circu)ation ,0=,18 130 ?e#t market 428 12,8 130 ?e#t ratio 34=368 130 ?e#t security 134 ?e#t securities market 44=468 12,8 1248 149 ?eficit ratio 3,8 134 ?ef)ation 98 ,6=,08 668 698 448 134 ?e(ree of openness 308 134 ?eposit faci)ity 938 9,8 908 998 104=1138 1208 134 ?eposits re$eema#)e at notice ,0=,18 1028 134 ?eposits !ith an a(ree$ maturity ,0=,18 1028 134 ?eri'ati'e 40=448 ,28 0,8 134 ?o!n!ar$ nomina) ri(i$ities 31=328 60 *.%F9> .ounci) 148 130=139 *conomic an$ Financia) .ommittee A*F.B 139 *conomic an$ Monetary ;nion A*M;B 0=48 118 1,8 198 338 3,=368 438 ,08 918 948 1018 11,8 110=1148 132=1348 139 *ffecti'e e1chan(e rates 198 038 146=144 *)i(i#)e asset 94=998 1008 139 *mp)oyment Gui$e)ines 139 *nhance$ .re$it -upport 118 908 1148 124=1208 139 */uity market 438 46=448 139 *; en)ar(ement 13=148 208 448 ,3 *uro 08 9=268 29=,48 62=048 428 468 49=1028 10,=1008 1118 1138 11,8 110=1298 133=1348 140 *uro area 08 98 118 13=218 29=,48 62=608 00=048 428 468 49=998 101=1028 10,=1068 111=1148 121=1298 133=1348 140 *uro area en)ar(ement 138 ,3 *uro inter#ank offere$ rate A*;C96%CB 42=438 140 *uro o'erni(ht in$e1 a'era(e A*%>9:B 438 1008 139 *uro(roup 148 40 *uropean .entra) 6ank A*.6B 138 ,,8 140 *uropean .ommission 16=108 228 308 318 348 308 ,48 6,8 608 038 1218 1328 140 *uropean .urrency ;nit A*.;B 1338139 *uropean .ounci) Asee .ounci) of the *uropean ;nionB 16=228 268 368 132=1338 140 *uropean Monetary 9nstitute A*M9B 198 1338 141 *uropean Par)iament 168 22=268 468 498 141 *uropean -ystem of :ccounts 199, A*-: 9,B 038 141 15 7

*uropean -ystem of .entra) 6anks A*-.6B 138 248 1338 141 *uropean ;nion A*;B 98 138 198 218 22=238 268 338 3,=368 ,08 648 468 448 948 968 1228 1248 132=133 *urostat 308 328 30=348 408 ,38 6,8 608 918 1198 1218 141 *urosystem 08 48 118 13=218 248 428 44=,08 ,0=,98 64=6,8 038 068 49=1108 120=1248 1348 141 *urosystem staff pro&ections 068 141 *1cessi'e $eficit proce$ure 1,8 338 368 038 141 *1chan(e rate tar(etin( 018 142 *1ecuti'e 6oar$ of the *.6 128 198 498 1348 142 Financia) markets 118 108 268 338 398 40=448 ,28 018 038 0,8 418 49=908 908 1148 122=12,8 142 Fine=tunin( operation 9,8 1048 1068 1248 142 Fi1e$=rate ten$er 428 448 142 For!ar$ rate a(reement 428 448 142 Forei(n e1chan(e s!ap 448 9,8 908 1008 1128 142 Futures contract 142 Genera) .ounci) of the *.6 148 198 142 Genera) (o'ernment 308 34=3,8 308 40=468 142 Go'ernin( .ounci) of the *.6 08 108 198 208 438 62=6,8 143 <aircut 428 998 143 <armonise$ 9n$e1 of .onsumer Prices A<9.PB 64=6,8 143 <ouseho)$s 08 348 398 40=418 448 ,08 ,28 ,6=,08 608 03=048 068 418 938 1068 12,8 143 9nf)ation tar(etin( 00=018 448 143 9nf)ation risk premium ,68 143 9nte(rate$ Gui$e)ines 143 9nter#ank money market 143 9n'estment 338 408 448 ,28 ,68 608 038 428 408 122 Key *.6 interest rates 1008 1038 110=1148 121=1208 143 3a#our force 30=328 144 3a#our force participation rate 30=328 144

3ea$in( in$icators 144 3ia#i)ity 498 638 668 498 1018 144 3oans 108 308 40=418 438 468 498 ,1=,28 ,98 60=628 038 408 1208 1248 144 3on(=term interest rates 148 144 3on(er=term refinancin( operation 9,=968 1068 113=1148 1208 144 M1 ,08 1208 144 M2 ,08 1348 144 M3 ,0=,18 04=408 1208 136=1348 144 Maastricht 5reaty 1328 1,1 Main refinancin( operation 9,=968 103=1048 113=1148 1148 120=1218 14, Maintenance perio$ 100=11,8 14, Mar(ina) interest rate 14, Mar(ina) )en$in( faci)ity 9,8 908 998 104=1128 1208 14, Mem#er -tate 13=198 22=208 33=348 448 668 038 908 998 10,8 1008 132=1348 14, Minimum #i$ rate 1008 10,=1068 11,8 1108 1218 14, Minimum reser'es 208 ,98 038 1018 14, Monetary a((re(ate 498 ,0=,18 01=028 008 408 14, Monetary #ase ,,8 938 14, Monetary financia) institution AMF9B 298 39=,28 028 14, Monetary po)icy strate(y 08 98 10=128 ,,=928 1108 146 Monetary po)icy transmission mechanism 118 338 438 ,,8 ,4= 648 018 40=438 918 948 1018 1098 12,8 124=1298 1338 146 Monetary tar(etin( 008 44 Money $eman$ 108 008 048 41=428 146 Money market 108 40= 448 448 ,18 ,,8 ,9=628 648 038 93=948 968 998 100=1068 1118 11,8 124=1248 146 Money market fun$s 448 ,18 038 146 >ationa) centra) #ank A>.6B 238 2,8 146 >eutra)ity of money ,,8 146 >omina) effecti'e e1chan(e rates 198 038 146

>on=financia) corporations 40=418 468 ,28 038 1228 140 >on=stan$ar$ measures 118 438 90=918 1008 1148 124=1248 140 %pen market operation 1048 1008 140 %pportunity cost 140 %ptions 428 4,8 140 %ther financia) interme$iary A%F9B 298 448 ,28 140 %utput (ap 140 %utri(ht transaction 140 %'erni(ht $eposits ,0=,18 1028 140 Pension fun$ 418 144 Pre$icta#i)ity 40=44 Price sta#i)ity 0=248 298 338 3,8 ,,=028 0,=918 93=948 110=1148 120=1208 1298 1328 144 Pro&ections 068 141 Cea) effecti'e e1chan(e rates 198 038 144 Ceference 'a)ue for monetary (ro!th 408 144 Ceference 'a)ue for the fisca) position 3,=368144 Cepurchase a(reement 268 998 1008 144 Cepurchase operation ArepoB 144 Ceser'e #ase 101=1048 144 Ceser'e ratio 101=1048 144 Ceser'e re/uirement ,8 101=1068 109=11,8 144 Ce'erse transaction 9,8 998 100=1048 149 Cisks to price sta#i)ity 98 1,8 338 648 698 00=018 09=4,8 448 110=124 -ecurities Markets Pro(ramme 908 1128 1148 12,=1268 1248 149 -ur'ey of Professiona) Forecasters A-PFB 02=038 1228 1,0 -ta#i)ity an$ Gro!th Pact 08 1,8 338 368 038 1338 149 -ta#i)ity pro(rammes 368 149 -ta(e 5hree of *M; 338 368 438 918 948 1018 11,8 110=1148 132=1348 139 -tan$ar$ ten$er 908 10,=1048 149 -tan$in( faci)ity 1008 1118 1,0 -tock market ,8 46=408 608 1,0

-tructura) operation 9,=968 1048 100=1048 1118 1,0 -!ap 68 42=448 0,8 9,8 908 1008 1128 124=1208 1,0 5:CG*5 438 648 00=018 44=4,8 44=498 1268 1,0 5:CG*52 438 648 00=018 44=4,8 44=498 1268 1,0 5ransmission mechanism 118 338 438 ,,8 ,4=648 018 40=438 918 948 1018 1098 12,8 124=1298 1338 1,0 5ransparency 208 498 ,68 648 46=498 9, 5reaty of 3is#on 138 198 1,0 5reaty on *uropean ;nion A5*;B 138 1,0 5reaty on the Functionin( of the *uropean ;nion A5F*;B 138 218 228 268 338 3,=368 ,08 648 468 448 948 1248 1,1 ;nemp)oye$ 318 1,1 ;nemp)oyment rate 30=328 038 1,1 ;nit )a#our costs 1,1 Daria#)e rate ten$er 1008 10,=1068 1,1 Rie)$ cur'e 038 1228 1,1