Research Discussion Papers, Bank of Finland
No 2/1998:
Evolving Voluntary Rules for the Operation of the European Central Bank
David Mayes ()
Abstract: This paper argues that, despite the substantial
independence offered by the Maastricht Treaty, the ESCB will wish to bind
itself by a set of voluntary rules in the conduct of monetary policy. This
binding will occur because of the demands of policy itself. The ESCB as
such has no history of a successful pursuit of price stability, although it
can borrow some reputation in this from the existing national central
banks. The ESCB will therefore need to make a H5 and verifiable
precommitment about how it will run monetary policy if it is to be seen as
highly credible by all those who can affect prices. The paper surveys the
types of rules and rule systems adopted by other central banks and draws
conclusions for the ESCB, which require it to be open, straightforward and
highly transparent in its conduct of policy. This openness will not only
help to dispel any fears that the ESCB will be subject to covert influence
to follow objectives other than price stability but it will at the same
time help fill the "democratic deficit" attached to such an independent
institution. It will need to persuade the public at large and governments,
the European Parliament and financial markets in particular that it is
pursuing price stability effectively and at minimum cost. Thus, although
external sanctions may appear limited, the ESCB is likely to choose to make
itself highly "accountable" in the conduct of policy and hence dispel much
of the deficit. The paper concludes that action is required now to commit
the ESCB to this approach.
Keywords: European Central Bank; monetary policy; transparency; accountability; voluntary rules; (follow links to similar papers)
35 pages, March 16, 1998
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