the eurosystem is first and foremost based on a modern institutional framework, founded on the principles of independence, transparency and accountability and, lastly, operational decentralisation. 1. 1. the independence of the eurosystem fosters price stability the eurosystem ’ s primary objective, as enshrined in the maastricht treaty, is to achieve and maintain price stability. as many empirical studies have shown, a country ’ s ability to fight inflation appears very closely correlated to the degree of independence of its central bank. the independence of the european central bank and the 12 national central banks of the member states of the euro area is therefore anchored in the treaty. in operational terms, this means that, in the conduct of their duties, neither the european central bank nor the national central banks of the eurosystem may request or take instructions from the community institutions, national governments or any other body. they are entirely institutionally, operationally and financially independent. 1. 2. transparency and accountability are also essential for gaining credibility naturally, the independence of these institutions requires transparency in their decision - making processes and accountability vis - a - vis the general public and their representatives. as regards new institutions such as the ecb, transparency is even more important for gaining credibility and building up economic agents ’ confidence in the new currency. in order to establish this credibility and gain the confidence of agents, it is imperative to be understood, which in turn calls for transparency. for the sake of transparency, the governing council has specified and quantified its definition of price stability ( inflation below but close to 2 % over the medium - term ). second, the ecb has gone beyond the accountability requirements laid down by the treaty by instituting regular testimonies by the president of the ecb before the european parliament and regular informal meetings with the eurogroup of finance ministers. another channel for transparency is constituted by the regular publication of reports on economic developments and central bank analysis, of the eurosystem ’ s and ecb ’ s staff projections exercises, most prominently in the ecb ’ s monthly bulletin. finally and most importantly, following monetary policy decisions, the president and vice - president of the ecb hold a press conference followed by an open discussion with journalists, the transcript of which is published on the ecb ’ s website. it should be recalled that the ecb was the first central bank to adopt such a procedure, which provides a unique opportunity to fully explain and comment monetary decisions immediately

to the ecb ’ s definition of price stability, that is to say a rate of inflation close to, but below, 2 % over the medium term ( 1. 8 % in this application ) ; the output gap and the neutral rate, which is a time - varying short - term natural rate, are both derived from mesonnier and renne ( 2004 ). inflation expectations are updated according to the eurosystem ’ s and ecb ’ s staff projection exercises, published in the ecb ’ s monthly bulletin. figure 4 – deviations ( % ) of m3 from the reference value in real terms real money gap estimates source : ecb monthly bulletin - september 2005 note : the real money gap is calculated as the deviation of the actual stock of real m3 ( deflated by the hicp ) from the level consistent with real monetary growth at 3 %, taking december 1998 as the base period. the eurosystem ’ s predictability figure 5 interest rate cuts basis points - 10 - 20 - 30 - 40 - 50 - 14 - 13 - 12 - 11 - 10 - 9 - 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1 days ecb minimal bid rate euribor 1m euribor 6m euribor 9m euribor 3m figure 6 : interest rate hikes basis points - 10 - 14 - 13 - 12 - 11 - 10 - 9 - 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1 days ecb minimal bid rate euribor 1m euribor 6m euribor 9m euribor 3m source : banque de france – production : banque de france