What Good Is a Monetary Policy Strategy?

A central bank’s strategy provides the framework for monetary policy decisions. It specifies monetary policy objectives, the instruments available for the implementation of these objectives as well as the indicators which form the basis for monetary policy decisions. 

How a central bank formulates its monetary policy strategy and whether it publicly announces the strategy differs across countries.  The Eurosystem chose to inform the public about its strategy with the intention of presenting a clear and transparent account of its monetary policy framework in order to promote confidence and stability. The Eurosystem’s monetary policy strategy is forward looking and has a medium-term orientation. The use of a variety of indicators and analyses guarantees a comprehensive and robust overall assessment of the economic situation.

On October 13, 1998, the Governing Council of the ECB adopted the monetary policy strategy for the Eurosystem and presented it to the public. Then, on May 8, 2003, the Governing Council performed a thorough evaluation of the monetary policy strategy and adapted it accordingly.

The decision to formulate and publicly announce a strategy is by no means international practice.  However, the ESCB took this step for a variety of reasons. 

Publicly announcing its strategy is an important step a newly founded institution can take to establish a high degree of trust from the beginning.  Moreover, it is an essential move in providing for transparency and accountability.  Finally, unlike other economic regions, Europa has a history of formulating and announcing monetary policy strategies.

The following considerations were taken into account in formulating the strategy:

• The strategy is intended to be a clear and transparent framework for communicating monetary policy decisions and the underlying inputs to the public.  Thus, the strategy is to build confidence and stabilize financial market expectations. 
• The strategy is to provide a clear insight into the instruments used to reach objectives.  It is to be forward looking and to have a medium-term orientation. 
• The strategy, which is to ensure that decision makers receive the information and analyses they need to make decisions,  should utilize the most up-to-date economic methods and theoretical insights. 
• The strategy should not induce a mechanical reaction by monetary policymakers to changes in individual indicators, but is to provide a clearer overall picture by monitoring a broad variety of indicators.  The strategy must also be able to take into account the uncertainty involved in the data, in particular in connection with the transition to EMU. 
• The strategy must be compatible with the requirement of central bank independence.  Moreover, the strategy should make monetary policy implementation easier to assess and hence support accountability. 
• Finally, the strategy should reflect historical experience and traditions in European monetary policymaking.