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The European Central Bank: A Bank or a Monetary Policy Rule

  • David Folkerts-Landau
  • Peter M. Garber

A European central banking institution will be an essential feature of the final stage of the European Economic and Monetary Union. The EC Committee of Central Bank Governors has recently produced a Draft Statute of the European System of Central Banks and of the European Central Bank. The draft Statute mandates the maintenance of price stability as the explicit primary objective of the ECB. and the necessary monetary functions and operations of the system are defined in accordance with standard practice. The maintenance of a stable financial and payments system, however. is not an explicit objective of the ECB. and only limited banking functions are admitted as one of the system's tasks. The draft Statute clearly subscribes to a "narrow" concept of the System of Central Banks with a single objective-monetary stability-rather than a "broad" concept with the additional objective of financial-market stability. In this paper we examine the consequences of a "narrow" central banking system for Community financial markets, We conclude that in the absence of such banking functions it will be necessary to slow or even prevent the ongoing development of Community-wide liquid. securitized financial markets, supported by a large-volume wholesale payments system. Instead, the historically prevalent bank-intermediated financial system will have to be maintained to lower the likelihood of liquidity crises that demand central bank intervention.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4016.

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Date of creation: Mar 1992
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Handle: RePEc:nbr:nberwo:4016
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  1. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-36, December.
  2. Grossman, Sanford J & Miller, Merton H, 1988. " Liquidity and Market Structure," Journal of Finance, American Finance Association, vol. 43(3), pages 617-37, July.
  3. Peter Garber & Steven Weisbrod, 1990. "Banks in the Market for Liquidity," NBER Working Papers 3381, National Bureau of Economic Research, Inc.
  4. Paul A. Volcker, 1984. "The Federal Reserve position on restructuring of financial regulation responsibilities," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 547-557.
  5. Thomas J. Sargent & Neil Wallace, 1981. "The real bills doctrine vs. the quantity theory: a reconsideration," Staff Report 64, Federal Reserve Bank of Minneapolis.
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