I have talked mainly about statistical requirements and their
provision, but this is only part of the story. The Treaty (specifically in
Article 5 of the Statute of the ESCB and the ECB) clearly envisaged that
the ECB would perform statistical functions, assisted by and in co-
operation with national central banks, other national authorities, the
Commission (meaning in this context in particular Eurostat), and
international organisations. A large part of the preparatory work carried
out by the EMI consisted of sorting out who would do what, avoiding so far
as possible duplication, wasted effort and conflicting data, and keeping
the whole development consistent with international statistical
conventions. Much of this had to be framed in legal instruments, which
would complete the statutory framework provided by the Treaty and the
ESCB/ECB Statute. Although work on an EU Council Regulation concerning ECB
statistics began as early as 1996, the Regulation could not be finalised
until last autumn and the ECB could not adopt legal instruments on
statistics in advance of that event - much work in this area therefore had
to be done at the last minute.
Information Technology is another of my responsibilities at the ECB.
I am glad to say that essential elements of our data transfer and
statistical processing systems were in place when I arrived, or brought
into operation soon afterwards. But here, too, there is room for further
improvement - the EMI and the ECB in these early months have had so much to
do in relation to the resources available that, broadly speaking, only the
essentials have been provided so far.
Conclusion
"Nothing is more important for monetary policy than good statistics."
The formation of Monetary Union has shifted the focus of interest on to
data covering the euro area as a whole. This has required substantial
changes to statistics, which need time to settle down and are some way
short of completion. At the same time, the adoption of the single currency
is itself a massive structural change. This will surely affect economic and
financial relationships and make any data harder to interpret, although
these deeper effects may occur over a period and take some time to become
apparent. What is clear, however, is that the ECB must take policy
decisions and explain them publicly in terms of the data available relating
to its policy responsibility. What we continue to strive to do, through our
own efforts and with the help of Eurostat, is to improve the quality of the
data underlying policy decisions, which are so important in gaining public
understanding and acceptance for them.
***
The tasks and limitations of monetary policy
Speech delivered by Christian Noyer
Vice-President of the European Central Bank, at the Volkswirtschaftliche Tagung of the Oesterreichische
Nationalbank, on 10 June 1999 in Vienna
Ladies and Gentlemen,
It is a pleasure for me to be here in Vienna today and I should like to start by thanking the conference organisers for giving me the opportunity to elaborate on the tasks and limitations of monetary policy.
This topic is extremely important. Looking back over the history of economic thought, it is clear that the perception of what monetary policy can do and what it cannot or should not do has changed. This has clearly shaped the role of monetary policy in economic policy. In the 1960s economic theories suggested a long-run trade-off between inflation and output. These theories provided the intellectual basis for policy-makers to pursue monetary policies biased towards higher inflation. The high inflation experience of the 1970s together with new theoretical findings, especially on the role of expectations, led policy-makers to move towards lowering and stabilising inflation.
Theoretical considerations as well as empirical evidence over several decades suggest that high rates of inflation are clearly unhelpful - indeed detrimental - to growth and employment in the long term. A large number of economic arguments point to the benefits of price stability for economic growth and employment prospects. Stable prices eliminate economic costs such as those arising from unnecessary uncertainty about the outcome of investment decisions, the distortionary effects on the tax system, rising risk premia in long-term interest rates and the reduced allocative effectiveness of the price and market systems. To quote Alan Greenspan, chairman of the United States Federal Reserve, "Price stability is achieved when the public no longer takes account of actual or prospective inflation in its decision-making." Monetary policy must take into account the fact that the horizon for decisions by economic agents is rather long-term in nature. By guaranteeing price stability, monetary policy supports the efficient functioning of the price mechanism, which is conducive to the allocation of scarce resources. Price stability is a means of promoting sustainable economic growth and employment creation and of improving productivity levels and living standards.
Against this background, the predominant view has emerged that the best and most lasting contribution that monetary policy can make to long- term economic welfare in the broader sense is that of safeguarding price stability. Central banks throughout the world have been moving towards adopting long-term price stability as their primary goal.
In order to achieve this goal most successfully, independence from political interference and a clear legal mandate for price stability are of the utmost importance. A lack of central bank independence and an ambiguous mandate can easily force central banks to focus on the short term and, thus, fail to adopt the forward-looking, medium-term orientation that is crucial for a successful monetary strategy.
All these issues were taken into consideration by policy-makers when drafting the Treaty establishing the European Community and designing the blueprint for the European Central Bank. Both central bank independence and an unequivocal commitment to price stability are therefore tenets of the monetary policy framework enshrined in the Treaty. There can be no doubt that the European Central Bank (ECB) is determined and well-equipped to tackle its main task, namely, that of maintaining price stability in the euro area over the medium term. It will thereby make a significant contribution to the achievement of other Community objectives such as high employment and sustainable non-inflationary growth. In this connection, the pursuit of sound macroeconomic policies by the EU Member States would considerably facilitate the task of the ECB. The room for manoeuvre in monetary policy and the degree of success in terms of maintaining price stability are crucially dependent on the support of sound fiscal policies and responsible wage settlements in the euro area.
The Treaty establishing the European Community states that the primary objective of the European System of Central Banks (ESCB) is to maintain price stability. Without prejudice to this objective, the ESCB shall support the general economic policies in the European Community. It shall operate in a manner that is consistent with the establishment of free and competitive markets. The Treaty states explicitly how the ESCB shall set its priorities. Price stability is the first goal of the monetary policy of the Eurosystem, and a contribution to the achievement of the other objectives of the European Community can only be made if this primary objective is not compromised. However, there is ultimately no incompatibility between maintaining price stability and pursuing these other objectives. By maintaining price stability, the ECB will also contribute to the achievement of other Community objectives.
Of course, the ECB is concerned about the intolerably high level of unemployment in Europe, but we should realise that the role of monetary policy in reducing unemployment in Europe can only be very limited. Many empirical studies show that the high unemployment rate is mostly the consequence of structural rigidities within the European labour and product markets. The European unemployment rate has, indeed, been high and stable over the business cycles in the past decade. Only structural reforms, preferably of a comprehensive nature, can therefore tackle the underlying impediments to employment growth.
The monetary policy of the Eurosystem is geared towards the euro area as a whole and, thus, cannot take into account purely national and regional developments. The cyclical positions of participating countries have not yet completely converged, although, with the single currency in place, some national differences may disappear over time. This requires national policies and labour and goods markets to be increasingly flexible in order to be able to respond effectively to economic shocks. Well-functioning labour and product markets are therefore needed to allow adjustments to wages and prices to be made if local economic conditions change.
Budgetary policies play a major role in conditioning monetary policy.
National fiscal authorities have to demonstrate their commitment to the
maintenance of price stability in the euro area over the medium term. In
this context, the Stability and Growth Pact is a crucial element. Its aim
is to encourage the pursuit of disciplined and sustainable fiscal policies
by the participating EU Member States and the prospective members. Sound
public finances, with lower public debt and tax burdens, contribute to a
lowering of long-term interest rates, reduce uncertainty and increase
private capital formation. They not only facilitate the task of monetary
policy with regard to the maintenance of price stability, but also
strengthen the conditions for sustainable growth conducive to employment
creation. Conversely, unsound fiscal policies tend to increase inflation
expectations and force monetary policy to keep short-term rates higher than
would otherwise be necessary.
The single monetary policy has to be conducted independently of the short-term political considerations of national governments. In this context, the ECB cannot commit itself to move its interest rates in a certain way in response to specific actions or plans of other policy- makers. Monetary policy has to take into account the overall economic situation to assess the risks to price stability. Direct ex ante co- ordination with fiscal authorities might endanger meeting the primary objective and would set the wrong incentives for the conduct of sound macroeconomic policies. This does not, of course, exclude a constructive dialogue between the Eurosystem and government authorities which clearly respects the independence of the ECB.
When dealing with one of the major world currencies and with the
currency of one of the two main world economies, it is inconceivable that
price stability might be maintained by setting an exchange rate target as
an intermediate objective. However, external developments including the
exchange rate are taken into account in accordance with our strategy, as
they may have an impact on domestic economic developments and thereby on
price stability. Referring to recent exchange rate developments in this
context, it is appropriate for me to quote the President of the ECB, Dr. W.
F. Duisenberg, who recently said that "the euro is a currency firmly based
on internal price stability, and therefore has a clear potential for a
stronger external value".
The absence of exchange rate targets for the euro vis-а-vis other
major currencies should not be misunderstood. For smaller, very open
economies, fixed exchange rates may be a very reasonable choice. The
Austrian example is one of the most prominent in this respect. By pegging
the Austrian schilling to the Deutsche mark for over twenty years, it
proved possible to import credibility and price stability. The increasingly
close pegging of the Austrian currency to the currency of its main trading
partner was, among other features of the Austrian policy mix, the driving
force behind the economic convergence process in the run-up to Stage Three
of Economic and Monetary Union (EMU). The credibility of the Austrian
exchange rate target was also underpinned by an income policy aiming at
relatively high real wage flexibility and a fiscal policy geared towards
consolidation. All in all, the Austrian model, which set out to guarantee
stability in nominal and real terms, has turned out to be very successful.
The example given by past Austrian experience is, I believe, very
valuable. It shows that the achievement of sustainable convergence with the
euro area can be assisted by means of an exchange rate target. The new
Exchange Rate Mechanism of the European Union, ERM II, may play a similar
role for those current and prospective EU Member States which have not yet
joined Stage Three of EMU.
The achievement of price stability is also of high importance for the stability of the financial system. The financial system of the euro area showed a high degree of stability during last year's period of financial turbulence as well as during the rather dramatic structural shift connected to the changeover to the euro. At the ECB, we play our part in the evolution of the euro area financial system by providing it with stable monetary conditions. By creating an environment of price stability, we allow private sector agents to focus their attention on the questions that are most relevant to their activities and to take advantage of benefits of this stable environment, such as the lengthening of their planning horizons. There is a lot of empirical evidence that safeguarding price stability is the optimal contribution that a central bank can make to the maintenance of financial stability and that those two goals are actually complementary.
I should like to conclude by saying that the main contribution of the single monetary policy to the welfare of the people in the euro area will be the maintenance of price stability in the medium term. The ECB is determined to tackle this task and is well-equipped to do so. Our conviction is that the economic performance of the euro area will benefit significantly from price stability. This will ultimately facilitate the achievement of those objectives, which underlie the general economic policies of the European Community and the individual governments at the national level. However, the economic problems in the euro area cannot be tackled by monetary policy alone. We have to be realistic about the goals which can be achieved by monetary policy. Neglecting the limitations of monetary policy and promising too much could, in the long term, be detrimental to the establishment of a stability culture in Europe, and could also lead to delays in implementing the economic reforms that are crucial to achieving high growth and employment.
***
European Central Bank
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