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The European system of central banks

  • Mark A. Wynne

On January 1, 1999, the European System of Central Banks (ESCB) began conducting monetary policy for eleven of the fifteen nations of the European Union, formally creating an economic and monetary union. The ESCB is governed by the decision-making bodies of the European Central Bank (ECB) and manages Europe's new currency, the euro. The structure of the ESCB is in many ways similar to that of the Federal Reserve System, with the ECB playing a role similar to that of the Board of Governors and the various national central banks occupying positions not unlike those of the regional Reserve Banks. In this article, Mark Wynne compares the two central banks, drawing on the insights of economic theory to shed light on how monetary policy is likely to be made in Europe under monetary union. He documents two key differences between the ESCB and the Federal Reserve System. First, the ESCB has a much stronger price stability mandate. Second, power is much more diffusely distributed in the ESCB. The strong mandate for price stability will enhance the euro's credibility. But the diffuse power structure may make it difficult to resolve conflicts, which will undermine credibility. The monetary union's fate depends on which of these two features of the monetary policy process dominates.

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File URL: http://www.dallasfed.org/assets/documents/research/er/1999/er9901a.pdf
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Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1999)
Issue (Month): Q I ()
Pages: 2-14

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Handle: RePEc:fip:fedder:y:1999:i:qi:p:2-14
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  1. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc.
  2. Robert L. Hetzel, 1990. "A mandate for price stability," Economic Review, Federal Reserve Bank of Richmond, issue Mar, pages 45-53.
  3. Eijffinger, S-C-W & de Haan, J, 1996. "The Political Economy of Central-Bank Independence," Princeton Studies in International Economics 19, International Economics Section, Departement of Economics Princeton University,.
  4. Lars Ljungqvist & Thomas J. Sargent, 1995. "The European unemployment dilemma," Working Paper Series, Macroeconomic Issues 95-17, Federal Reserve Bank of Chicago.
  5. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  6. Alberto Alesina & Vittorio Grilli, 1991. "The European Central Bank: Reshaping Monetary Politics in Europe," NBER Working Papers 3860, National Bureau of Economic Research, Inc.
  7. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  8. Charles Wyplosz, 1997. "EMU: Why and How It Might Happen," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 3-21, Fall.
  9. Giovanni, Alberto, 1993. "Central banking in a monetary union: reflections on the proposed statute of the European Central Bank," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 191-230, June.
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