Monetary Policy (objectives and instruments)

Abstract Monetary policy became the exclusive competence of the Community in the Maastricht Treaty, but the Treaty was not very explicit on what this exclusive monetary policy competence included. The Treaty provisions on monetary policy did rely on some general idea of what monetary policy consisted of and what it did not. However, instead of trying to assess what this ‘consensus’ view on monetary policy was in the early 1990s, it is more convenient to look directly at the key concepts related to monetary policy and how they were manifested in the setting-up and actual conduct of monetary policy by the Eurosystem. In this regard, three different but interlinked concepts need to be clarified: the monetary policy strategy, the monetary policy transmission mechanism, and the operational framework. Monetary policy strategy describes the way the Eurosystem sees its role in the economy and how it achieves the objectives it has been assigned. The monetary policy transmission mechanism is embedded in the monetary policy strategy. It seeks to explain how the central bank policy decision are transmitted to the economy and how they help to fulfil central bank’s objectives, particularly price stability. The operational framework facilitates this transmission by setting up the framework through which the Eurosystem interacts with financial markets and ultimately the economy at large.