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The Monetary Policies of the European Central Bank and the Euro's (Mal-)Performance: A stability-oriented assessment

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  • Jorg Bibow
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    Abstract

    The stability-oriented macroeconomic framework established in the Treaties on European Union, especially the unparalleled status of independence and peculiar mandate of the European Central Bank (ECB), were promised virtually to guarantee price stability and a strong euro. Shattering these hopes and promises in a rather drastic way, the euro's external value has declined markedly while consumer price inflation has quadrupled since the new currency's inception. This paper assesses the ECB's role in relation to the euro's (mal-)performance. It challenges the truly odd conventional wisdom that, despite these dismal monetary developments, neither the Maastricht regime nor the ECB might possibly be at fault. Reviewing the ECB's interest rate policies and scrutinising its rationale, a conspicuous anti-growth bias is diagnosed that has produced rather perverse consequences.This stability-oriented assessment concludes that the ECB has been key to the 'euro puzzle', propagating euro weakness and pushing up inflation. Euroland's democratically elected representatives are therefore urged to reform Europe's key structural problem, namely, the ECB, an independent monetary policymaker whose unbounded discretion allows it to pursue ill-guided and thoroughly idiosyncratic policies without being held to account for the consequences.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

    Volume (Year): 16 (2002)
    Issue (Month): 1 ()
    Pages: 31-50

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    Handle: RePEc:taf:irapec:v:16:y:2002:i:1:p:31-50

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    1. Philip Arestis & Kevin McCauley & Malcolm Sawyer, 2000. "An Alternative Stability Pact for the European Union," Macroeconomics 0004043, EconWPA.
    2. Jeff Fuhrer & Brian Madigan, 1994. "Monetary policy when interest rates are bounded at zero," Working Papers in Applied Economic Theory 94-06, Federal Reserve Bank of San Francisco.
    3. Jörg Bibow, 2001. "Easy Money through the Back Door: The Markets vs. the ECB," Macroeconomics 0103004, EconWPA.
    4. Bibow, Jorg, 1998. "On Keynesian Theories of Liquidity Preference," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(2), pages 238-73, March.
    5. Philip Arestis & Malcolm Sawyer, 2001. "Will The Euro Bring Economic Crisis to Europe?," Economics Working Paper Archive wp_322, Levy Economics Institute.
    6. Lorenzo Bini Smaghi & Claudio Casini, 2000. "Monetary and Fiscal Policy Co-operation: Institutions and Procedures in EMU," Journal of Common Market Studies, Wiley Blackwell, vol. 38(3), pages 375-391, 09.
    7. De Grauwe, Paul, 2000. "Exchange Rates in Search of Fundamentals: The Case of the Euro-Dollar Rate," International Finance, Wiley Blackwell, vol. 3(3), pages 329-56, November.
    8. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    9. Ugo Marani & Carlo Altavilla, 1999. "The Monetary Policy of the European Central Bank and the Euro-US Dollar Exchange Rate," Center for Economic Studies - Discussion papers ces9923, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
    10. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-31, August.
    11. Eichengreen, Barry, 2000. "The Euro One Year On," Journal of Policy Modeling, Elsevier, vol. 22(3), pages 355-368, May.
    12. Jorg Bibow, 2000. "On exogenous money and bank behaviour: the Pandora's box kept shut in Keynes' theory of liquidity preference?," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 7(4), pages 532-568.
    13. De Grauwe, Paul, 2000. "Exchange Rates in Search of Fundamentals: The Case of the Euro-Dollar Rate," CEPR Discussion Papers 2575, C.E.P.R. Discussion Papers.
    14. Laurence Ball, 1999. "Aggregate demand and Long-Run Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 189-252.
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    Cited by:
    1. Jorg Bibow, 2005. "Europe’s Quest for Monetary Stability: Central Banking Gone Astray," Macroeconomics 0508029, EconWPA.
    2. Jorg Bibow, 2005. "Europe's Quest for Monetary Stability: Central Banking Gone Astray," Economics Working Paper Archive wp_428, Levy Economics Institute.

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