christian noyer : monetary policy formulation in the euro area speech by mr christian noyer, vice - president of the european central bank, at the " monetary policy and the markets " conference of the national association for business economics, washington, dc, 21 may 2001. * * * introduction ladies and gentlemen, it is a pleasure, and a very great honour, to have been invited to address this special meeting of the national association for business economics and to present the monetary policy of the ecb before this distinguished audience of business economists and policy - makers. the theme of the conference, " monetary policy and the markets " is of the greatest interest – i believe – both to market participants endeavouring to discern and assess central banks'policy directions, and to the ecb, which, since its creation almost three years ago, has been assigning a prominent role to transparency and openness in its policy - making. in my brief remarks today, i will first elaborate on the institutional set - up of the ecb and its objectives. against this background, i will then attempt to explain the ecb's decision - making process as it is structured by our monetary policy strategy. the institutional set - up and the objective of the ecb the body collectively responsible for monetary policy decisions in the euro area is the governing council of the ecb, which consists of the ecb's president and vice - president, the remaining four members of the executive board of the ecb and the governors of the national central banks of those member states that have adopted the euro as their currency. the executive board is responsible for the preparation of the meetings of the governing council and the implementation of the decisions the governing council takes. in particular, the executive board instructs the national central banks on the operations to be completed in accordance with the governing council's directions, making sure that the entire process develops in a consistent and fully harmonised manner. the treaty establishing the european community assigned to the ecb the maintenance of price stability in the euro area as the primary objective and unambiguous mandate. rooted in the long - standing experience of the participating national central banks, there rests the conviction that it is with the credible and lasting maintenance of price stability that the ecb could best enhance the welfare of eu citizens. given the uncertainties surrounding the monetary policy transmission mechanism that arise from the complexity and the continuous evolution of economic behaviour and institutional structures, the ecb is ill - suited to fine - tune economic developments

. this reflects the need for our monetary policy to have a forward - looking, medium - term orientation. it also acknowledges that short - term volatility in prices owing to non - monetary shocks cannot be controlled by monetary policy and that monetary policy should therefore only be held accountable for price developments over a longer horizon. it is important to recognise the role of the definition of price stability in the conduct of monetary policy. the governing council attempts to set the ecb's interest rates in a way that makes, conditional on the available information, the maintenance of price stability over the medium term in the euro area most likely. it is widely acknowledged that central banks are called on to operate in an environment characterised by substantial uncertainty, not only with regard to current and future developments, but also concerning the actual functioning of the economy. this is particularly true in the context of the euro area where the regime shift entailed by the introduction of a single currency may affect economic behaviour and institutional structures. under these conditions it is crucial to ensure that policy decisions be robust and all - encompassing. therefore, the ecb not only acts with a forward - looking orientation, but also relies on a number of models, approaches and on a judgement appraisal. the ecb designed a two - pillar structure for its strategy, with the objective of capturing and providing all of the relevant pieces of information on the euro area economy for the assessment of the governing council, thus enabling it to take its monetary policy decisions on the basis of full information. the first pillar foresees a prominent role for money, while the second envisages the analysis of a wide range of other economic and financial indicators. the ecb devoted the first pillar of its monetary policy strategy to the appraisal of monetary developments and models that accord an important role to monetary and credit developments. this recognises the fact that inflation is ultimately a monetary phenomenon and allows to take advantage of the stability that characterises the relationship between broad monetary aggregates and the price level in the euro area. as a form of visible public commitment, the ecb also announced a reference value for the rate of growth of the monetary aggregate m3 that is consistent with its definition of price stability. the governing council regularly receives a comprehensive analysis of current developments in monetary and credit aggregates. the information revealed by the analysis of monetary developments has proved until now to be an important and reliable guide for monetary policy decisions. under the second pillar of its monetary policy strategy, the ecb regularly