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The European system of central banks

Author

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  • Mark A. Wynne

Abstract

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.

Suggested Citation

  • Mark A. Wynne, 1999. "The European system of central banks," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 2-14.
  • Handle: RePEc:fip:fedder:y:1999:i:qi:p:2-14
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    File URL: http://www.dallasfed.org/assets/documents/research/er/1999/er9901a.pdf
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    References listed on IDEAS

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    1. Lars Ljungqvist & Thomas J. Sargent, 1998. "The European Unemployment Dilemma," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 514-550, June.
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    3. 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.
    4. 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 151-162, May.
    5. Eijffinger, S. & De Hann, J., 1995. "The Political Economy of Central Bank Independence," Papers 9587, Tilburg - Center for Economic Research.
    6. 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 353-398, September.
    7. Robert L. Hetzel, 1990. "A mandate for price stability," Economic Review, Federal Reserve Bank of Richmond, issue Mar, pages 45-53.
    8. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
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    Citations

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    Cited by:

    1. Jeffrey M. Wrase, 1999. "The euro and the European Central Bank," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-14.
    2. Marvin Goodfriend, 2000. "The role of a regional bank in a system of central banks," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 7-25.
    3. Kathryn M. E. Dominguez, 2006. "The European Central Bank, the Euro, and Global Financial Markets," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 67-88, Fall.
    4. Agnès Bénassy-Quéré & Edouard Turkisch, 2005. "ECB Governance in an Enlarged Eurozone," Working Papers 2005-20, CEPII research center.
    5. Armin J. Kammel, 2005. "A Proposal for the Governance of Financial Regulation and Supervision in Europe," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 74(4), pages 167-181.

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