The most important contribution that the Eurosystem’s monetary policy can make to maximising the benefits of EMU is to fulfil its primary objective of maintaining price stability, as laid down in the socalled Maastricht Treaty; the Treaty on European Union. As has long been argued by central bankers and is increasingly accepted by academic economists, inflation and deflation are economically and socially costly. EMU is a tool with which to consolidate the progress made towards price stability in recent years and to firmly anchor expectations in line with price stability, thereby establishing the framework necessary to fully exploit the opportunities of Monetary Union. The Eurosystem enjoys full independence in determining the appropriate level of interest rates so as to satisfy its primary objective of price stability. Moreover, the members of the Governing Council of the ECB have long terms of office and may only be dismissed on grounds of serious misconduct or inability to perform their duties. These provisions imply that the concept of monetary stability benefits from explicit legal protection. 1  BIS Review 50/1999  A further important benefit of EMU is that it has removed the risk of serious real exchange rate misalignments within the euro area. This contributes to economic growth and helps to avoid any misallocation of resources. In fact, it enables the European Single Market to function smoothly and thereby makes it possible to reap all the rewards, to the benefit of producers and consumers.

Rather monetary policy actions need to be calibrated to impart the  Page 8  appropriate impulse to inflation at the 18-24 month horizon when the lags in policy transmission unwind. Fourth, emphasis of the need for a nominal framework within which to analyse and communicate monetary policy. And fifth, adherence to the view that monetary quantities (i.e. specific safe and liquid liabilities on the balance sheets of the central bank and/or commercial banks) play an important and distinct role in the transmission mechanism of monetary policy actions to the price level. The key assertion here is not that the central bank should use a quantity measure of money as its policy instrument rather than a short-term interest rate – that is something resolved pragmatically through the Poole considerations discussed above. Instead it is the contention that failure to incorporate monetary quantities in models of monetary transmission excludes important channels through which monetary policy works: policy analysis without money is subject to specification bias. Viewed from today’s perspective, the striking thing about this list – in particular, given the doctrinal tensions between monetarist and Keynesian camps of monetary and macro economists in the 1970s – is how many of the monetarist tenets have become mainstream. Any reputable modern monetary policy framework or strategy purports to embrace the first four of these elements, albeit with some of the flexibility needed to turn an academic argument into a policy programme. For sure, how these elements are presented and communicated varies across jurisdictions, reflecting different histories, experiences and contexts.