Rethinking the role of NCBs in the EMU

Five years after the introduction of unified monetary policy in the EMU, some member countries are wondering whether they have ceded too much of their policy-making powers. The fact that National Central Banks no longer carry out sizable expansionary open market or foreign exchange market operations...

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Bibliographic Details
Published in:	Journal of international money and finance 2004-11, Vol.23 (7), p.977-996
Main Author:	Boyer, Russell S.
Format:	Article
Language:	eng
Subjects:	Central banks Currencies Currency union Economic and Monetary Union Europe European Monetary Union Exchange Rate Mechanism Finance Fixed exchange rate regime Fixed exchange rates Foreign exchange markets Globalization Monetary policy Monetary policy rule Policy making Studies
Online Access:	Get full text
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Summary:	Five years after the introduction of unified monetary policy in the EMU, some member countries are wondering whether they have ceded too much of their policy-making powers. The fact that National Central Banks no longer carry out sizable expansionary open market or foreign exchange market operations suggests that they face substantially reduced abilities to set economic policy. This paper demonstrates that, in fact, very little power has been yielded: on the fiscal front, the force of such policy initiatives is enhanced by the fixity of the exchange rate. On the monetary front, we show that there is an observational equivalence between all Central Bank actions under fixed exchange rates. This implies that the authorities retain the same amount of policy flexibility as before. So long as they use an alternative form of policy initiative, carrying out what previously would have been characterized as sterilized foreign exchange market operations, their ability to influence the macro performance of their economy is undiminished.
ISSN:	0261-5606 1873-0639