The ECB decision of Aug 31 2000
1. The minimum bid rate on the main refinancing  operations of the Eurosystem will be raised by 0.25 percentage point to 4.50%, starting from the operation   to be settled on 6 September 2000.   2. The interest rate on the marginal lending facility will be raised by 0.25 percentage point to 5.50%, with effect from 1 September 2000.  3. The interest rate on the deposit facility will be raised  by 0.25 percentage point to 3.50%, with effect from 1  September 2000.

Motivation:

The Governing Council is of the view that economic   growth conditions and prospects in the euro area are  very favourable. In order to maintain this benign environment, price stability over the medium term must  be ensured. While present conditions are largely influenced by oil price and exchange rate developments  and cannot be remedied by monetary policy in the short  term, it is imperative that medium-term upward  pressure on prices be contained. Today's policy  decisions support the favourable prospects for high  economic growth in the euro area.

In the context of the first pillar of the monetary policy  strategy of the ECB, although the measures taken since  November 1999 are gradually feeding their way  through, the latest available information indicates that  M3 growth has continued to deviate on the upside from  the reference value of 4½%. At the same time, the  expansion of credit to the private sector, at around 10%, suggests that households and firms regard  financing conditions in the euro area as being very favourable. In the context of the robust expansion of  economic activity, a continuation of ample liquidity  conditions would constitute a risk to price stability.

Developments in key indicators related to the second  pillar point in the same direction. The protracted  depreciation of the exchange rate of the euro and the   renewed rise in oil prices have increasingly put upward  pressure on import prices and consumer prices in the  euro area. At the same time, recent data have confirmed that the euro area has entered a period of strong growth and that the outlook remains very positive.

The Governing Council will continue to ensure that  price stability is maintained in the euro area and will  remain alert to all emerging risks to price stability. At  the same time, it stresses that both sound public  finances, in particular strict adherence to the criteria laid  down in the Stability and Growth Pact, and the  continuation of structural measures to enhance the  flexibility of labour and goods markets will be the key to a lasting increase in the growth potential of the euro  area.

                        * * *

Comments

Thomas Mayer, chief  European economist at Goldman Sachs: "The ECB is doing a very delicate balancing act here,'' it must be careful "not  to go over the top with inflation concerns and damage the economy.''    "They are behind the curve," said Thomas Mayer, who argues that the bank is getting tougher just as the European economic growth shows signs of getting weaker. "In April 1999, they reduced interest rates even though the economy already seemed to be taking off. We could very well be in a similar situation right now."

Bloomberg reports the following comments by Thomas Straubhaar,  president of the Hamburg-based HWWA economic research institute. He does not "share the fear of some that the ECB's decision may hurt German growth." Moreover, he thinks that the ECB decision ``won't have that much of an effect on the euro's external value  for two reasons: Firstly, the markets have long ago priced in this small rate step. And, secondly, we have learned over the course of this year that exchange rates react less to moves on interest rates than to economic growth expectations, for example for the gap between growth in the U.S. compared with the euro region." Finally, he expects that "the ECB will have to make further adjustments in the coming months. Towards fall, it will probably have to raise interest rates again by around 25 basis points.''

Also from Bloomberg: Gernot Nerb, chief  economist of Germany's Ifo Institute, said: ``The message is in the dosage, which was just right. The bank is saying  something like this: we're not monetarist, otherwise we'd have hiked further. A rate rise of 50 basis points wouldn't slow euro-zone price trends now, nor would it  hurt German economic acceleration, which is anyway slowing. The rate move  was neutral, rather a message designed to impress international markets that  the bank is prepared to rise to the inevitable -- money market rates were already  at 4.5 percent -- but not overreact. It follows that today's rate move might be the  last this year if world oil prices eased.''

``The ECB's anti-inflation crusade is counter-productive,'' said Gustav-Adolf Horn, chief economist of the German DIW Institute. ``The ECB is obviously focused on  supporting the euro. That strategy can't work as it also weakens growth and  therefore hurts, rather than strengthens, the euro.''

David Turner in The Financial Times stresses that "In raising rates by only 0.25 percentage points, rather than the 0.50 percentage points expected by many market participants, the ECB's Governing Council has clearly taken into account some recent weak data. These include last week's news of a second consecutive  monthly decline in Germany's Ifo index of business confidence, and disappointing French figures released earlier on Thursday showing a rise in unemployment and fall in industrial  production.  The moderate rise in rates leaves the possibility that the ECB will raise interest rates again later this year if inflation fails to fall significantly. The new interest rate is still 0.25  percentage points below what many economists consider a neutral rate."

``I'm not a great believer in a rate increase,'' said Michael Groeller, chief executive at Mayr-Melnhof Karton AG, Europe's largest maker of recycled carton board. ``It's clear that inflation isn't rising because of economic conditions heating up, it's rising because of oil prices'' and because of the euro's weakness against the dollar, he added.

Note

According to the International Monetary Fund, The U.S. economy is likely to expand by 4.9 percent this year compared with 3.4  percent in the euro zone. According to some estimates, productivity gains in the world's largest economy are outstripping those of the 11  European nations by 1 percentage point.On August 31, reports showed unemployment in France, the region's second-largest economy, rose for the first time in 11 months, to 9.7 percent in July from 9.6  percent. Another report showed industrial production fell 0.6 percent in June, the biggest monthly decline since December. Germany's Ifo research institute   reported last week that business confidence in July fell to the lowest level in eight  months.

The Euro exchange rate

Sirkka Hämäläinen, What are the  benefits of the single currency for  competition and growth in the euro area? EN October 2000

Rate rises in Europe weaken euro The Guardian (Oct 6, 2000)
Euro Slips Lower Reuters (Oct 6, 2000)

Interventions

Martin Wolf FT Sept 27: Catching the falling Euro FT.com | News and Analysis | World Article  - Global economy

Financial Times on the intervention on Sept. 22: Euro's fall prompts central banks to step in  Participation of US Fed was critical  Currency markets caught by surprise  Euro finds safety in numbers  Speculators are no euro villains

Paul Krugman on: why interventions make sense NYtimes Sept 20

Some views of the euro:

Is a dollar crisis just around the corner? See "Perspectives on OECD Economic Integration: Implications for US  Current Account Adjustment" Maurice Obstfeld and Kenneth Rogoff  PDF

 The euro dollar exchange rate: in search of fundamentals by Paul de Grauwe

A perpective on the euro by Giancarlo Corsetti (CESifo Forum, Summer 2000)

House of Commons - Treasury - Eighth Report  REPORT SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS  The Value of the Euro  External Value  Possible Explanations

Rudi Dornbusch  Euro Troubles May 2000

Contributions to the informal workshop organized by the Bundesbank on the "Equilibrium Exchange Rate of the Euro" in March 2000 are now available online. Among these contributions:

- The Empirical Determinants of the Euro: Short and Long Run by M. Chinn

- Global Equilibrium Exchange Rates: Euro, Dollar, 'ins', 'outs', and Other Major Currencies in a Panel Cointegration Framework by Alberola, Cervero, Lopez and Udibe.

Richard Clarida: "G3 Exchange Rate Relationships: A Recap of the Record and a Review of Proposals for Change"

Exchange Rate Regimes in an Increasingly Integrated World Economy Mussa, Michael;Masson Paul;Swoboda, Alexander;Jadresic, Esteban;Mauro, Paolo;and Berg, Andy Series: IMF Occasional Paper No. 193 Published: August 10, 2000

ECB PRESS RELEASE Statement on the euro by Dr. Willem F. Duisenberg, President of the European Central Bank, 8 June 2000

The previous hikes in interest rates may have had an effect on the turn-around in the sentiment about the  exchange rate. If that is so, then it is only welcome. But those interest rate moves and the one of today were in no way a  reaction to the exchange rate developments, because we do not have, as you know, an exchange rate target. Yet, as a side  effect, if they have helped to change the sentiment, then we are only grateful. The current forecasts for growth for both years,  as I have said, by many institutions, and our own analysis, point to a rate of growth in excess of 3%, both in 2000 and in 2001. But there still is under-utilisation of capacity - the output gap may be closing, but I would not say that we would want to cap growth in any way at this stage and at this rate. On the contrary, we believe that the interest rate move of today creates  the conditions for a sustained period of non-inflationary but high growth.

On the Euro-11: that is still an informal organisation, with which the ECB is in a continuous dialogue. The organisation of the Euro-11 is a matter for ministers and not for the European Central Bank. The position of the European Central Bank is very clear and well-defined in the Treaty of Maastricht. So, whatever way the ministers organise themselves, it does not - I am inclined to say - affect the position or the co-operation of the European Central Bank.

The competence for exchange rates is also clearly defined in the Treaty. For  day-to-day business, and if there are no specific exchange rate arrangements, there is only one institution competent for   exchange rates - and that is the European Central Bank. What ministers can do, and may do at some point, perhaps, is to give general orientations. They can only do so in consultation with, or on a proposal from, the European Central Bank. So I do not   see any problem there. I must say that, in the continuous dialogue which the European Central Bank has with the Euro-11, we  have managed to an ever greater degree, let me put it that way, to restrain ourselves, both governors and ministers, from  making comments about monetary or exchange rate developments. Admittedly, we may not be 100% successful, but to my  mind, we are increasingly successful in speaking with one voice - both ministers and governors.

Question: Mr. Milton Friedman, the Nobel prize-winning economist, has said that the euro is up to 25% undervalued against the dollar. Is that something you could adjust to?
Duisenberg: I know that the exchange rate of the euro, even after the recent appreciation, does not yet reflect the  fundamentals, whatever they may be. But I am not in a position to declare a certain value to be the right value. That is what the  markets decide. And when it does reflect the fundamentals, you will not hear me saying anything either.

Question: Mr. Duisenberg, in May you said you will only talk about interventions when you do so. So, did you do so   today, or in the last four weeks?      Duisenberg: I did not talk about intervention today. So you may conclude that we did not  intervene. And I said that I would only talk about interventions ex post, i.e. after we have intervened and, then, immediately   thereafter. So, no discussions about interventions.

ECB PRESS RELEASE Statement on the euro by Dr. Willem F. Duisenberg, President of the European Central Bank, 5 May 2000

The current development of the euro's exchange rate has given rise to questions from European citizens who are concerned about the value of their currency. To them, I would like to say the following: I understand their concerns, since a persistently lower euro exchange rate might ultimately lead to higher prices in the shops. It may also undermine the perception of the euro as a stable currency. Therefore, we at the ECB monitor the euro exchange rate very closely.

Citizens should feel reassured by the fact that prices are currently stable in the euro area. Indeed, over the last decades there  have been few periods in which prices have been stable for so long. This internal stability of the euro means that people can be confident that their savings and pensions will keep their value over time.

In order to counter risks to price stability the ECB has over the past six months taken measures and increased interest rates four  times already. It will continue to do all it can to maintain price stability in the euro area. This will also help to turn the current  economic upswing into a long period of high economic growth and falling unemployment. European citizens can be assured that  the future of the euro is that of a strong currency, based on price stability and the strength of the European economy.

The April 2000 monetary policy decision

Comments by European Central Bank Vice-President Christian Noyer on euro-zone economic growth. Noyer, a member of the ECB's 17-member Governing  Council, spoke to the European Parliament's monetary affairs committee.
`We are very optimistic about the picking up of growth in  the euro zone,'' Noyer said. ``We want it to pick up without creating an inflationary bubble which later on we would we have to burst.'' ``The ECB does not intend to limit growth.'' He said the  latest increase in interest rates ``was intended to counter  inflation pressure from overliquidity'' and from ``falls in the exchange rate.''``Forecasts of growth for the medium term in euro zone will depend on how significant structural reform is,'' he added.

From the news before the decision to increase rates in April:
International Herald Tribune (April 27th) :Is the ECB Tumbling Along With Euro? Is the European Central Bank irrelevant?
At least in the foreign exchange markets, the answer seems to be yes. With the single European currency testing new lows against the dollar, economists expect the bank to raise interest rates soon - if not Thursday April 27th, then at its next meeting, in two weeks. But instead of rebounding, they quickly add, the euro may well continue a decline that has seen it fall more  than 20 percent since its introduction Jan. 1, 1999. ''I've come to the conclusion that it doesn't really matter what they do,'' said  Adolf Rosenstock, an economist at Nomura International in Frankfurt.  With momentum stacked against the euro, he and other economists said, any move by the central bank will be interpreted in a negative light. ''They will be accused of panicking if they act, or accused of neglect if they  don't,'' said Holger Schmieding, senior economist in London at Merrill   Lynch.

The main question is what size the increase will be. Some economists say a  precipitous decline by the euro Tuesday increased the possibility that the   bank could opt for a half-point increase in the benchmark interest rate,   bringing it to 4 percent. Until recently, anything more than a quarter-point had been seen as too much, too soon, for economies that are only beginning  to show robust growth.

Although the bank's official mandate is not to manage exchange-rate policy  but simply to ensure price stability within the euro zone, economists say the   bank is growing concerned about perceptions of the euro as a weak  currency.''If they were not to act now or in two weeks, there would be a huge  scream,'' Mr. Schmieding said. A half-point increase would send a strong  signal to the markets.

But it could be drowned out by louder news from the other side of the  Atlantic: Washington is expected to report Thursday that the economy grew  at a rate of about 7 percent in the first quarter, about twice the prevailing  rate in Europe. That, economists say, will reinforce the notion that the  United States is the better place to put money to work.

For the euro to rebound, Mr. Schmieding said, the U.S. Federal Reserve Board would have to raise interest rates even more aggressively than the  ECB to slow potentially inflationary growth.  ''We would have to see Alan Greenspan taking the exuberance out of the  U.S. economy,'' he said, referring to the Fed chairman.

Some economists argue that foreign-exchange traders have been focusing  too much on the negatives in the European economy. European economies have made great strides since the mid-1990s, Mr. Schmieding points out,  when the dollar was weak against the euro's predecessor currencies. Governments have moved aggressively to deregulate and privatize  economies, significant cuts have been proposed in corporate and income taxes, and unemployment has fallen sharply.  The problem, Mr. Rosenstock says, is more one of political weakness. In particular, he said, the entry of the far right into the governing coalition in Austria - ''and even more the shortsighted and naive reaction by the other 14 governments'' - highlighted the impression that European policymakers  do not speak with one voice on broad EU issues. With the euro plunging and the ECB seemingly powerless to stem the slide,   the central bankers' credibility may be the price. ''They are bashed for  things they are not responsible for,'' Mr. Rosenstock said.

February 2000

Weakness of the euro was not the  decisive factor behind the decision by the European Central Bank (ECB) to raise its key interest rates earlier this month, the bank's chief economist Otmar Issing said on Feb 14. Issing told the newspaper Frankfurter Allgemeine Zeitung (FAZ)  that the ECB had taken the exchange rate into account when making its monetary policy decisions, but only as part of a broader assessment of the risks to price stability.  "Last year we raised rates only once. Otherwise we left them  unchanged in a period when the external value of the euro fell," he said. Issing stressed that the exchange rate was only one of a number  of factors considered when assessing price developments.

Issing did, however, concede that the exchange rate had assumed  greater prominence since the launch of the euro last year. "The significance of the exchange rate has naturally changed  during the past 12 months. The euro is currently weaker than at the beginning and the whole environment has changed," Issing said. Issing said the weakness of the euro had had an effect on import  prices. But "we have never sounded the alarm and said that inflation  pressures coming in from the trade side were such that we were being forced to act. The exchange rate was only one element in our analysis." It was "open to discussion whether we have succeeded in  communicating this connection sufficiently," Issing added.

From the ECB press conference February 3 2000:

Question: I have two questions. The first one goes back to what you said about the benefit of hindsight and the reasons for the euro's erosion. Could it be partly political, such as the diplomatic situation with Austria within the EU or the financing scandal in Germany? That is one question. The other question is: do you have any concerns that the euro, which fell more than most people expected, could have an effect on public confidence?
Duisenberg: I am repeating myself, but - with the benefit of hindsight - you can find many factors that explain the movements  in the exchange rate. The main factor is still, I believe, the different cyclical situations in the euro area compared with the  United States, which make it quite normal for the exchange rate to move as it has. But then, of course, in modern financial markets, political factors, like those you have mentioned, do not fail to have their impact on the exchange rates either.

Question: Mr. President, according to all external accounts that I am aware of, the whole of the European System of  Central Banks is holding far more US dollar reserves than they would need for monetary policy purposes. Now, given  that you are so firmly convinced that the US dollar should depreciate against the euro again, can the public expect of  its asset managers at the central banks that they will sell their assets when they are likely to depreciate?
Duisenberg: The reserves that the Eurosystem holds are a legacy of the past. We have them and we hold them as a  responsible "head of household". So you can assume nothing about efforts on our part to try to spend them. There is no need  for it. It would even be dangerous if we did that.

DEC 21: In an interview with the daily Die Welt,  ECB executive board member and chief economist Issing remained cagey about the possibility of direct intervention on the part of the central bank. Asked whether it would be appropriate for the ECB to intervene  directly on the forex markets and prop up the euro, Issing said: "We know from monetary history that intervention is only successful if it is coordinated between the big players and if it is carried out at the right moment.

"But we as a central bank will not determine in advance or even  say at all whether and when the right moment has come." Issing insisted that the euro had potential to rise again. Issing described the euro as "a currency with an internal  stability which has only rarely been seen this century. "As a currency with a stable internal value, there is great  potential that the euro's external value will rise." It was more important for the ECB to pursue its primary task to  safeguard price stability in the 11-country euro zone, Issing argued.

Christian Noyer: The short past and long future of the euro  London, 6 December 1999.
Exchange rates play a role in the European Central Bank's efforts to keep the euro stable, and the bank will consider the effect of changes in exchange rates if  they threaten the stability of the single currency, said European Central Bank Vice President Christian Noyer. ``The exchange rate is an important variable for the Eurosystem, as it is one of the determinants of the outlook for price stability,'' Noyer, a member of the ECB's 17-member  Governing Council, said in a speech on the euro at the London  School of Economics. ``If exchange rate developments pose a threat to price stability in the euro area, this threat will be taken into account.'' The success of the single currency, he said, ``demands that  the clear distribution of responsibilities'' between the central  bank and the EU's member governments be observed ``This clear separation of responsibilities is efficient,  transparent and conducive to accountability,'' Noyer said. ``Monetary policy makes its best possible contribution to the achievement of other goals by focusing on the primary objective of maintaining prices stability over the medium term.'' Noyer said growth in the euro region has the potential to reach 3.5 to 4.0 percent if structural reforms covering its labor, capital and product markets can be achieved.

The politics of Parity FT Dec 4 1999

Underlying unease over German reform FT Dec 4 1999

Duisenberg: Introductory statement delivered at the hearing before the European Parliament's Committee on Economic and Monetary Affairs Brussels, 29 November 1999:
The European Central Bank won't react to the euro's decline to a record low against the dollar, as the slide is unlikely to spur inflation, ECB President Wim Duisenberg said. ``The euro has demonstrated signs of weakness over the past few weeks, including today,'' Duisenberg told the European  Parliament's monetary affairs committee. ``If you ask me whether we will take monetary action, the answer will be no.'' On November 29, the euro fell to an all-time low of $1.0039 after Duisenberg's remarks, down 14 percent since its debut on Jan. 1. It last bought $1.0093. Duisenberg said the currency has the  potential to gain, and that its slide doesn't endanger price stability in the region. While the euro's drop isn't a concern from an economic standpoint, it could erode confidence in the currency,  Duisenberg said. Duisenberg wouldn't rule out the possibility of buying euros in the foreign exchange market to support the currency, and said the bank has ``the potential weapons to do so: foreign  exchange reserves.'' The bank has $237 billion euros of reserves. He said he believes such purchases work best when the currency is already moving in the desired direction. Should the bank decide to intervene, it wouldn't announce the plans ahead of time, but would explain the move afterwards, Duisenberg said.

The debate on the monetary decision on November 4 1999

Monetary decision by the ECB. The interest rate on the main refinancing operations of the Eurosystem is  raised by 0.5 percentage point to 3%, with effect from the operation to be settled on 10 November 1999. The interest rate on the marginal lending facility will be raised by 0.5 percentage point to 4%, with effect from 5 November 1999. The interest rate on the deposit facility will be raised by 0.5 percentage point to 2%, with effect from 5 November 1999.

Wim Duisenber explains the reasons for the increase in the interest rate: Introductory statement to the press conference and ECB press conference - 4 November 1999. More in the November monthly bulletin of the ECB: November monthly bulletin of the ECB.

The Chief Economist of the ECB Otmar Issing said, in Les Echos, that the policy council was split on whether to  raise rates 25 or 50bp when they met On November 4th. The central bank finally opted for a 50bp raise and Mr Issing noted that he was in favour of this larger move. “A smaller hike would have given the impression that we  were just taking a first step in a series of rate hikes” Issing said.

EMU-Monitor: Press Statement No. 4 by ZEI. WOLFGANG MUNCHAU - Financial Times: Don't do it, Mr Duisenberg.  See also the Daily chronology  for additional comments.

A move toward a neutral monetary stance?

June 8th 2000

Question: Mr. President, two questions for you. One, you said the current level of interest rates still promotes growth.  Would you say that the current monetary policy is still accommodative or have we reached a neutral stance? The second question is: comparing today's moves with the last two interest rate hikes in February and March when you  raised rates by 25 basis points, whereas - today - you have raised them by 50 basis points, something must have accelerated in the last six weeks. Can you be a little bit more precise on what exactly triggered today's 50 basis point  move?

Duisenberg. On the first question: not knowing what the neutral rate is, I cannot answer the question whether or not we are   still accommodative. I think we are. But even after this interest rate hike, one thing is certain: we are less accommodative than   we were before. On your second question: well, an assessment, as I gave it to you, of all recent indicators and comparing   them with the assessment we had made towards the end of last year, they increasingly point to significantly higher future   inflation than we thought only four months ago. And these are the monetary indicators: the forecasts made by others, the  development of the exchange rates up until two weeks ago, the development of oil prices - there has been some decline, but   an immediate rebound after that - all make us increasingly concerned that, over the medium term, inflation might - if we did not act decisively - exceed the 2% limit which we have set for ourselves. We believe that, with this move, combined with the  moves we have made since November last year, we will avoid that danger.

From the ECB press conference Nov. 4 1999:

Question: Do you - after the 50 basis point rise - do you see this level as neutral on interest rates?

Duisenberg: We don't precisely know what level would be the neutral rate. That is a well-known topic. We don't precisely know what it is. What we were sure of is that, whatever the so-called neutral or balanced rate might be, the level of 2.5% prevailing until today was below it. So we can say that this move of today is a move in the direction of the so-called neutral rate, even though we do not know where the neutral rate precisely finds itself.

Otmar Issing was reported to have said that following the rate hike earlier this month, the central bank is conducting a “less expansive” policy and “does not constitute a shift from an expansionist policy to a restrictive one”. ECB Vice President Christian) Noyer called the current monetary policy ``accommodative''. Bundesbank President Ernst Welteke agrees with Noyer: "The rate decision cannot be seen as going on the brakes but rather as taking the foot off the gas.''

Also in an interview with business paper Handelszeitung, European Central Bank Chief Economist Otmar Issing said that consumer prices in the 11 nations sharing the euro currency will likely rise gradually, though it's unclear whether there are bigger dangers lurking in the future. He said that the ``strong increase in oil prices'' wasn't yet fully included in the consumer price index. Exports are the main engine of economic expansion in the euro zone, and the region's  economy is likely to grow between 2.5 percent and 3 percent next  year. Issing saide that the recent ECB rate increase won't endanger the expansion and will instead contribute to continuous, non-inflationary growth.

On its November monthly report, the Bundesbank said the European Central Bank's interest rate policy is "relaxed": "Even after the rate rise monetary policy remains  relaxed." This comment has revived concern about the possibility of another rate increase.

How does the ECB implement its monetary strategy?

June 8 2000
Two questions. Is my impression right that the first pillar of your strategy is gaining more and   more in importance because it is reliable? Second question: the reference level of 4 1/2%. You have a trend rate of  growth of 2 1/2% as being calculated into that. Now, does that mean that over 3% economic growth at the moment is  the reason why inflation could be above 2%? Or are you expecting a higher potential rate of growth?

Duisenberg: There is no change in weighting, since we have never weighted the first and the second pillars. And, if we could give you a ratio, a mathematical ratio between the weight of the first and that of the second pillar, then we would also be in a position mathematically to reduce the two pillars to one. It is as simple as that. So, there is no change in the weighting - which is a qualitative assessment. The strong growth we foresee goes along also with what we are observing - a rather strong increase in productivity. And whether that will lead to a higher potential growth rate is something we do not know yet. The  reference value of 4 1/2% was indeed based, as you say, on an estimate of the trend rate of growth, or the potential rate of growth of output, of about 2 1/4%, which is the trend rate observed over the past 25 years. It is a reference value only, something to use for comparison from which conclusions can be drawn. It will be reviewed every year. And then, we have to  come to a judgement on whether or not that 2 1/2% hypothesis can still be regarded as valid. But we will only do that in December this year.

On Feb 14, The ECB's chief economist Issing told the newspaper Frankfurter Allgemeine Zeitung (FAZ) that the ECB did not intend to change its current two-pillar monetary policy strategy to a system tied directly to a target value for either money-supply growth or inflation. He reiterated the central bank's view that the relationship  between monetary growth and price developments in the euro area was still too uncertain to allow the ECB to follow a rule-based monetary policy, even if the understood the desire sometimes expressed for a rules-based system. "It's just that there is the question of where we get reliable  rules from," Issing said. Neither did the ECB have any intention of adopting a direct  inflation target, he said. Furthermore, the central bank should carefully consider whether to publish its internal inflation forecasts. "We have to consider how we can create more clarity through  publication of a forecast and not spread confusion," Issing said.

From the ECB press conference Nov. 4 1999:

Duisenberg:
(on predictability)
The surprise in April was a surprise not so much about the fact of moving, but about the size. The fact that we were moving in April was already widely discounted in the markets. The size may have been a surprise. And I would like to repeat that it is not our policy to catch markets by surprise. We do want to be predictable.[...]
(on the use of two pillars)
We have deliberately adopted a two-pillar strategy in which we look at a broad range of other indicators - and I have mentioned quite a few to you today - which also determines our attitude, together with the assessment of monetary developments. To my mind, we were and we are very predictable. The major difference between, let us say, the underlying situation in April and that of today was that in April we had two pillars, so to speak, pointing in different directions, which made the situation  more difficult to both interpret and to act upon. Today, we have both pillars suddenly pointing in the same direction, namely in the direction of an increased risk towards price stability as we perceive it.
(What is new relative to April?)
The forecasts by all institutions that we have available, including our own internal forecasts, in as far as we have them, point to an inflation rate which, on average, in the year 2000 - on average, I say - will remain safely below 2%. However, all indicators, as we assessed them today, - and I am talking about wage demands, I am talking about producer prices, and I am talking about the liquidity situation - point in a direction that the risks on the upside are increasing and have already increased, i.e. the risk of that figure of 1½% to 1¾% being threatened.
(on the role of wage demands)
In assessing all the indicators we had, we paid due attention to the fact that in various regions of euro area there seems to be an acceleration in wage demands which, by itself, is adding to our conviction that it is about time to raise interest rates.

From the ECB press conference Feb. 3 2000:

(on the two pillars)
Mr. President, why did you not believe it advisable to wait a little longer to see whether the increase in interest rates of November leads to lower M3 growth rates?

Duisenberg: Because what we expect regarding the movements in M3 in the coming months is that they will be very much  influenced by base effects and that they will be very difficult to interpret. That is one thing. We expect - just for statistical  reasons - to see lower figures in the coming months. And why wait? If you are convinced that all indicators, as well as the two pillars on which our monetary policy strategy is based, are already now pointing towards increased risks to price stability - and that does include recent developments in the exchange rate, which cannot be ignored and which is one of the main indicators  we look at - then we were afraid to wait. If we had waited, we would have run the risk, honestly, of being forced to do more than we are currently doing in the future.

(on the definition of price stability)
Question: Mr. Duisenberg, your goal is an inflation rate of below 2%, the goal of the ECB. Now you see price risks.  Can inflation, will inflation rise above 2% in the next few months? What are your expectations and what are your  expectations for the whole year?
Duisenberg: As higher oil prices are working their way through and as import prices are higher due to the exchange rate, we do expect inflation in the coming months to continue to increase somewhat and to taper off a few months later, so as to remain - on average - well below the maximum of 2% in the year as a whole and in the next year. And that time horizon is what we are looking at when we take monetary policy decisions today.
Question: But there may be some months in which we could have more than 2% inflation?
Duisenberg: Well, there are some countries where it is above 2%. And there are other countries where it is still far below  that. But, looking at the whole of the euro area, I doubt whether your prediction will come true.

(on the role of wage demands)
Question: Mr. Duisenberg, you underlined in your statement the importance of wage settlements twice. But in the great majority of European countries we already have very reasonable wage settlements and quite slow wage growth. Why did you send this signal?
Duisenberg: Because I do not agree with your statement that we already have wage settlements in the great majority of the  euro area countries. The process is still very much underway and we are not just looking at one country, we are looking at 11  countries simultaneously. And with a view to this process our decision is, on the one hand, giving a warning to the social  partners. On the other hand, by our actions, we are also giving assurance to the social partners that they can - so to speak - rely on the European Central Bank to deliver price stability over the medium term and that they should also take that into account in their wage negotiations.

Why don't they vote?

June 8th 2000

Question: I have a question for each of you, if I may? Mr. President, was there anybody at today's meeting among the 17 members who thought that the rise would be possible by just going up by 0.25 basis points rather than a whole half  percentage point? And, for the Vice-President: summing up the refinancing procedure that is starting at the end of   this month, could you say that it represents a decisive shift in favour of letting the market influence the interest rate  more than the central bank. I was struck by what the President said to the effect that the ECB still wanted to have  quite a bit influence over this. But, on the face of it, it looks like a move more toward the markets.
Duisenberg: If I may answer the question first. When we started the discussion, there was more than one who was inclined  more to go for 25 than for 50 basis points. But then you have a discussion, which takes hours, and you exchange all the  arguments. And in the end, as I said, we reached a consensus that the measures would be what they are and as they have  been decided.

From the ECB press conference October 7 1999:

Question: Mr. Duisenberg, I have to go back to the question about the vote, whether the decision taken today to leave the rates unchanged was taken without a vote. Because I did not exactly understand. You talked about a great harmony, but you did not say whether it was a harmony with a vote or without.
Duisenberg: But the problem - if I answer this question - is that I have to answer it every time, which I do not want to do, but - for this time - I will make an exception. There was no vote.

From the ECB press conference Nov. 4 1999:

Question: Could you tell us whether the Council was entirely in agreement on doing 50 basis points or whether there was some disagreement?
Duisenberg: Today's decision was a decision taken by consensus. Is that enough?

(the Chief Economist of the ECB Otmar Issing nonetheless stated that the policy council was split on whether to  raise rates 25 or 50bp).

From the ECB press conference February 3 2000:

Duisenberg: First, there was no formal vote. Again, as I had hoped and as it was, it was a consensus decision. Of course, we did discuss the size and the timing of the increase. There was no discussion of the direction. But, of course, we discussed the size and the timing. Well, with regard to the timing, the outcome of the discussion - by consensus - was that it was to be today, rather than later. And, with regard to the size, the outcome of the discussion - also by consensus - was that a ¼  percentage point, i.e. 25 basis points, was by far the preferable option.

Internal Inflation forecasts. Is the ECB going to publish them?

BBC online. Business: The Economy Publish and be praised, ECB told, Nov. 3 1999, BBC News | The Economy | Publish and be praised, ECB told

To publish or not to publish - the kind of decision that comes naturally to some central bankers, and not others. What to tell, and when. This is why the president of the European Central Bank, Wim Duisenberg, has recently had such difficulty squeezing out the concession that the ECB will publish internal economic forecasts - not in a rush, but sometime within the next year.

The Bank has also conceded that it will eventually  publish the economic models it uses to come to its decisions - a big step towards the transparency so  beloved of economists and bond market analysts.

From the Financial Times, Friday Nov. 12, 1999. "ECB: Bank opposes short-term rate changes", By Tony Barber in Frankfurt: (ft.com - ECB: Bank opposes short-term rate changes)

Otmar Issing, ECB chief economist, yesterday seemed to distance himself from the ECB's president, Wim Duisenberg, by suggesting that the ECB might not be able to publish an inflation forecast. In a speech in Bonn, Mr Issing said the ECB used a wide range of indicators as well as "various forecasts of the  outlook for price developments" when shaping its monetary  policy. This distinguished the ECB from other central banks which used a specific inflation forecast as centrepiece of  anti-inflationary strategies, he said.
 

On December 2: The European Central Bank shouldn't rush to publish its own forecast for inflation in the 11-nation euro region before having thoroughly considered all the implications of such a move, Bundesbank Chief Economist Hermann Remsperger told German daily Sueddeutsche Zeitung. Investors won't necessarily have a better clue about the ECB's interest rate moves, Remsperger warned, saying that it wasn't clear yet, for instance, how often and with what time horizon the ECB was planning to publish an inflation forecast.

Is Europe been pulled along by the US?

June 8 2000

Question: I was wondering whether the ECB is just mirroring the Fed and also whether there is a risk that this sort of  rate rise is overkill, given that there are still 18 million unemployed in Europe?
Duisenberg: On the first question: I do not think that we are mirroring the Fed. On the question of overkill, we had, of  course, thought of that, but we did not see that danger. I would like to point out that, even after the increase of today - and  now I am talking about short-term interest rates - rates are still at a level which should encourage growth, given the prospects of the non-inflationary environment promoted by this move. It will promote growth rather than stifle it, and I would also like to  point out that the case of the United States proves that you can have a very high rate of growth with considerably higher interest rates than those prevailing in Europe.
 

Duisenberg on Feb 3 2000: Pulled along by the United States? No. We are, of course, influenced by developments in the United States; we are being influenced by the startling phenomenon of a continued, extremely and even surprisingly high rate of growth in the United States, which helps to underscore the strength of the US dollar vis-à-vis the euro. Of course, that is an influence with which we have to cope, but - as I indicated in my introduction - we have the feeling that we are rapidly getting into step with the US economy and that could, and it even should, lead to a - let me call it - more balanced development of the exchange rate as well.

[...]It just so happens that the FOMC meets once every six weeks. We meet once every two weeks. And the schedule is known in advance. So, it is pure coincidence that the decision by the Federal Reserve's FOMC yesterday came one day before our decision. I can assure you that there were many contacts in the weeks that have passed and that the development of the exchange rate was not a decisive move that tipped the scales. But, of course, as I indicated in my introductory remarks, in our decision today, we carefully looked at the recent developments in the exchange rate as one of the main indicators which could have a lasting effect on future price developments and which we wanted to counteract.

Is the ECB taking the markets by surprise?

From the ECB press conference Nov. 4 1999:
Duisenberg: The surprise in April was a surprise not so much about the fact of moving, but about the size. The fact that we were moving in April was already widely discounted in the markets. The size may have been a surprise. And I would like to repeat that it is not our policy to catch markets by surprise. We do want to be predictable.[...]

From the ECB press conference Feb. 3 2000:

Question: Mr Duisenberg, you have referred to what you have said previously on your attitude in the  past months. But, clearly, you were somewhat obscure, no more or less than Mr. Greenspan, because - following the  ECOFIN meeting in Brussels - the Ministers of Finance thought that there was no risk to price stability and they  thought there would be no increase in interest rates after that ECOFIN meeting. So, clearly, your communication did  not get through to the 11 Ministers of Finance. And it does not seem to me that they got your message.
Duisenberg: [...] May I refer you to the statement I made after the meeting in Brussels last Monday, which, admittedly, I prepared rather carefully. It  did give an indication that we did see increasing dangers to price stability and I can assure you that it was in the same way, in  the same words and the same message I gave one hour earlier to the Ministers of Finance. And they understood it perfectly well.
 

Euroisation vs dollarisation

Critical review of unilateral euroization proposals: the case of Poland by Cezary Wójcik  published in Focus on Transition by Austrian National Bank page 48  Focus on Transition

Issues in Euroisation: "PAINLESS DISINFLATION? MONETARY POLICY RULES IN HUNGARY, 1991-1999 by Roberto Golinelli and Riccardo Rovelli" file

More on dollarization: Ghironi and Rebucci "Monetary Rules for Emerging Market Economies."file

Christian Noyer on euroisation: The international impact of the euro.
Rudi Dornbusch: Millenium Resolution: No More Funny Money
Paul Krugman Monomoney Mania: Why fewer currencies aren't necessarily better  (Slate 4/99)
US Senate Joint Economic Committee Encouraging Official Dollarization in Emerging Markets
US Senate  Joint Economic Committe: Dollarization
Nouriel Roubini Dollarization: A Solution for Emerging Markets?
Kurt Schuler page on Currencey Boards and Dollarisation
Francois R. Velde and Marcelo Veracierto, "Dollarization in Argentina," Chicago Fed Letter, Number 142, Federal Reserve Bank of Chicago, June 1999.
Dollarization A conference at ITAM
Transcript of IMF Economic Forum on Dollarization: Fad or Future for Latin America
Ricardo Hausmann and Andrew Powell, "Dollarization: Issues of Implementation,"
Guillermo Calvo, "On Dollarization"
Responding to Global Crises: Dollarization in Latin America - EconSouth Volume 1 Number 2 Atlanta FED