klaus liebscher : challenges for the eurosystem ’ s monetary policy contribution by dr klaus liebscher, governor of the oesterreichische nationalbank, to the panel discussion on monetary policy, 28th economics conference of the oesterreichische nationalbank, held in vienna, on 15 june 2000. * * * ladies and gentlemen! central bankers are used to acting under uncertainty - in fact, this is a major rationale for their existence. the eurosystem - i. e. the ecb and the euro area national central banks - has undergone and, i believe, successfully passed - a special test on “ monetary policy under uncertainty ” in managing the transition to emu and in conducting monetary policy during the first one and a half years of the euro area ’ s existence. indeed, emu represents a major regime shift, with a number of associated uncertainties, such as data uncertainties, uncertainties about the monetary transmission mechanism across the euro area, uncertainties about the economic structure of the euro economy as it is adapting to the new, more competitive environment, and, last but not least, uncertainties about the interaction between the various economic policymakers. ladies and gentlemen, let me contribute six observations to the issue of our panel discussion which were obviously similar. the first observation relates to the role of monetary policy in a situation when the economy is possibly entering a new era. some proponents of the new economy claim that monetary policy should be relaxed to “ give growth a chance ”. now, while i certainly have sympathy with economic policies supporting economic growth, employment and welfare, i think this categoric claim is beside the point. monetary policy should always and unambiguously - with or without a “ new economy ” - pursue its primary objective of maintaining price stability. a stable anchor for price expectations is particularly important in a period of heightened uncertainty. it is common wisdom by now that, by credibly sticking to price stability, monetary policy serves growth best. indeed, it has been argued - and i would subscribe to this assessment - that the low inflation of the 1990s was among the contributing favorable framework conditions which laid the ground for the recent emergence of dynamic entrepreneurship and innovation in the united states. in addition, the highly competitive and far less regulated market structure of the us economy has contributed substantially to new businesses and new technologies. this does, however, not mean that monetary policy should be blind and ignorant vis - a - vis the changes brought about by a

, and in excess of, the growth effects actually materializing. in this case, the temporary excess demand would spur inflation, and monetary policy should intervene in order to cool off demand to a pace consistent with the increase in the economy ’ s productive capacity. by contrast, if demand and supply effects from a new economy developed broadly in parallel, monetary policy could pursue a neutral stance. this does not mean that the central bank should keep nominal short - term interest rates constant. rather, it should see that overall monetary conditions, including the exchange rate and long - term interest rates, remain neutral. it also follows from what i said before, that monetary policy should not try to target a specific level of stock prices or to put a lid on stock prices. particularly in an era of a potential substantial regime change, it is impossible to judge with any confidence on the appropriate level of stock prices. monetary policy should, however, take into account the current - and potential future - aggregate demand effects arising from rising - and potentially falling - stock prices. concluding, ladies and gentlemen, let me finally observe that the factors behind the new economy applicable to the us could also have a similar positive effect on europe. as regards technology, as i already pointed out in my opening remarks, there is the chance for europe - based on the us experience - to achieve good results. a second argument consists in the benefits of the european integration into the global economy and the advantages of the common market - like deregulation in areas such as telecommunications and in the public utilities sector. finally, the establishment of the monetary union forces a restructuring in the corporate sector and facilitates new economic policies. all in all, the latter requires a much stricter approach on the european level to abandon rigidities in the labor, goods and services markets, to create a more favorable environment for entrepreneurship and to improve the structures and techniques of the risk capital markets. compared with the situation a few years ago, we are heading forward in these crucial areas. therefore, i am very much convinced that europe has also the potential for a new economy if we are willing to adopt the process of further structural reform. but there are many and good reasons for optimism. an important one is the well - functioning monetary union, which opens up many opportunities. thank you very much for your attention. references brainard, william ( 1966 ), uncertainty and the effectiveness of policy, american economic review, vol. lvii, no. 2, may. estrella, arturo,