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

central banks are mostly government institutions or publicly owned companies, their capital is mostly limited by domestic laws. in cases of substantial balance sheet growth, existing rules might not fit anymore. at such times the financial reporting framework might have to provide possibilities for new appropriate solutions. one such solution might be for recapitalisation by domestic governments after losses, or for potential future losses, to be made mandatory, however such requirements are often difficult to get approved by parliament and by public opinion. designing the adequate level and composition of the capital of a central bank is a sensitive challenge. one has, among a number of other internal and external factors, to take account of the central bank ‘ s legal environment, the relationship to the government, and its special tasks, like lender - of - last - resort function, or a fiscal agent - function vis - a - vis the state. in any event, a central bank ’ s capital must be sufficient to maintain its independence from the political sphere, and to provide a buffer for the inevitable price volatility resulting from the current investment environment. the individually adequate balance for each central bank between a suitable accounting framework, profit distribution rules and the ability to hold or reserve adequate amounts for loss coverage is the key for financial independence. when you apply the accounting rules to arrive at the annual financial result, you are then confronted with the question of applying rules for the distribution of profits. these rules can be classified in six general legal profit and loss schemes according to a recent ecb study on profit distribution and loss coverage of central banks ( by werner studener and his colleagues ). the study, based on the experience of 57 central banks that provided data for the ecb analysis, confirms what the bis found in 2013, namely that there is no one - size - fits - all solution for central banks, neither for the level of capital and financial buffers nor for profit distribution and loss coverage ; nor, indeed, for recapitalisation rules. however, there is evidence that these topics are interconnected and a set of guiding principles have been identified, which help to find an individual balance. 2. commercial banks and corporates as i said earlier, financial reporting is a key issue, not only for central banks, but for all kinds of businesses and, of course, commercial banks as well. modern historians agree that the invention of double entry bookkeeping in the fifteenth century was a major driver for modern economic pursuit and capitalism, as it first introduced the maxim “ increase your equity