ECB Monetary Strategy

The European Central Bank (ECB) Framework

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              | Primary Objective is Price Stability |
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               *  Governing Council systematically  *
              *   combines all information in order  *
               *  to take monetary policy decision  *
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  FIRST         /                                  \            SECOND
  PILLAR      /                                      \          PILLAR
  __________/_________                         ________\______________
 | Analysis assigning |                       | Analysis focused on   |
 | a prominent role   | /___   Cross    ___\  | a wide range of other |
 | to money           | \     Checking     /  | Financial indicators  |
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                /|\                                /|\
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             |  E C O N O M I C  I N F O R M A T I O N  |
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First Pillar of ECB's monetary strategy

Money is measured more accurately than other economic indicators, therefore M3 and other aggregates seem to have good leading indicator properties for future price developments

ECB announced a ‘Reference Value’ for the broad monetary aggregate M3 (which will act as a benchmark). This will help analyse and explain monetary developments and the ‘Risks’ to price stability.

The first pillar involves an analysis of the components and counterparts of M3. This will give an insight to:

1. Behaviour of M3 with relation to the reference value
2. Liquidity condition in the economy

Such analysis help assess the possible existence and effects of bubbles (large movements) in the financial market.

Second Pillar of ECB's monetary strategy

It is important to know whether shocks originate on the supply or demand side, have an external or domestic origin or are temporary or permanent

The focus is on revealing the affects of a host of factors some of which influence price developments.

This analysis is often centred around supply and demand and/or cost pressures on pricing behaviour.

Developments in financial market indicators and asset prices are closely monitored.

Macro-economic projections produced both inside and outside the euro-system also plays an important role.

- Condensed notes taken from ECB report