Certain key elements - for example, affirming a commitment to the objective of price stability; defining this objective clearly; evaluating a broad range of indicators, including monetary aggregates, real and financial variables and macroeconomic forecasts - were, in fact, common to all successful strategies. Taking note of these two observations, the Governing Council of the ECB adopted a strategy which aimed to maintain some continuity with the strategies pursued by NCBs in the euro area prior to Monetary Union while, at the same time, ensuring that the new and distinct challenges facing monetary policy in a wholly new currency area were appropriately addressed. We recognised at the outset that the key feature of a successful strategic framework for monetary policy can be described in very simple terms. Monetary policy must always be determined in the manner which best serves the maintenance of price stability over the medium term. In taking monetary policy decisions with the goal of price stability in mind, the Governing Council relies on the information about the economic situation and the threats to price stability that is revealed by a thorough analysis of a very broad range of economic indicators. As NCB experience has demonstrated, the relevant set of indicators is potentially very wide. In consequence, the ECB adopts a “full information” approach, ensuring all the relevant information is encompassed in the analysis. To impose some structure on this body of information, these indicators are organised in the context of the strategy’s two pillars.

However, in the euro area, all the available evidence so far points to the existence of a stable relationship between M3 and price developments over the medium term. M3 and other monetary and credit aggregates also demonstrate leading indicator properties for future price developments. In the end, it is this evidence which makes us confident that monetary and credit aggregates are an important indicator for assessing risks to price stability. The second pillar of the strategy is associated with a complementary, but more eclectic, approach, which implies that a wide range of indicators is of relevance for monetary policy. While inflation is a 3  BIS Review 44/2000  monetary phenomenon over the medium term, at shorter horizons it will be influenced by many other variables. Changes in international commodity prices, such as the price of oil, will influence developments in consumer price inflation. Demand and cost pressures can also influence price developments in the shorter term. Moreover, policymakers will generally need to tailor their actions to the prevailing economic circumstances, since the impact of monetary policy on the future evolution of the price level at any specific time will depend on a host of factors which are not captured by monetary data. Analysis under the second pillar is intended to reveal this information, giving policymakers greater insight into shorter-run price dynamics and their implications for monetary policy. Monetary policymaking in the euro area has to reflect the complexities and uncertainties which surround the transmission mechanism of monetary policy in a wholly new economic entity.