A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Moutot, Philippe; Jung, Alexander; Mongelli, Francesco Paolo Research Report The working of the eurosystem - monetary policy preparations and decision-making – selected issues ECB Occasional Paper, No. 79 Provided in Cooperation with: European Central Bank (ECB) Suggested Citation: Moutot, Philippe; Jung, Alexander; Mongelli, Francesco Paolo (2008) : The working of the eurosystem - monetary policy preparations and decision-making – selected issues, ECB Occasional Paper, No. 79, European Central Bank (ECB), Frankfurt a. M. This Version is available at: http://hdl.handle.net/10419/154532 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu OCCASIONAL PAPER SERIES NO 79/JANUARY2008 THE WORKINGS OF THE EUROSYSTEM MONETARYPOLICY PREPARATIONS AND DECISION-MAKING – SELECTED ISSUES byPhilippe Moutot,AlexanderJung and FrancescoPaolo Mongelli OCCASIONAL PAPER SERIES NO 79 / JANUARY 2008 THE WORKINGS OF THE EUROSYSTEM MONETARY POLICY PREPARATIONS AND DECISION-MAKING – SELECTED ISSUES by Philippe Moutot, Alexander Jung and Francesco Paolo Mongelli1 In 2008 all ECB publications This paper can be downloaded without charge from feature a motif http://www.ecb.europa.eu or from the Social Science Research Network taken from the €10 banknote. electronic library at http://ssrn.com/abstract_id=1005946. 1 For their comments and suggestions, we would like to thank Hans-Joachim Klöckers, Frank Moss, Georges Pineau, Koenraad De Geest, Ad van Riet, Bernhard Winkler, Jean-Pierre Vidal, Luigi Ferrara, Elisabeth Keable, an anonymous referee and several other colleagues. Juliette Cuvry and Clara Young provided excellent assistance. We remain responsible for any errors or omissions; the views expressed are our own and do not necessarily refl ect those of the ECB. © European Central Bank 2008 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main Germany Telephone +49 69 1344 0 Website http://www.ecb.europa.eu Fax +49 69 1344 6000 All rights reserved. Any reproduction, publication or reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the ECB or the author(s). The views expressed in this paper do not necessarily refl ect those of the European Central Bank. ISSN 1607-1484 (print) ISSN 1725-6534 (online) CONTENTS CONTENTS ABSTRACT 4 6 CONCLUSIONS 51 NON-TECHNICAL SUMMARY 5 ANNEXES 1 The benefi ts of central bank 1 INTRODUCTION 7 independence 53 2 The role of transparency 55 2 THE FACTORS UNDERPINNING 3 Organisational principles for the MONETARY INTEGRATION AND THE Eurosystem 57 EUROSYSTEM 9 REFERENCES 58 2.1 General factors underpinning monetary integration 9 EUROPEAN CENTRAL BANK OCCASIONAL 2.2 Critical components for the PAPER SERIES 66 success of a central banking system in a monetary union 12 3 THE DESIGN(ING) OF THE EUROSYSTEM 14 3.1 The creation of the Eurosystem 14 3.2 A decentralised structure and centralised decision-making 17 3.3 Establishing the Eurosystem’s committee structure 19 3.4 Other sources of cohesion for encouraging best practice and team spirit 23 4 MONETARY POLICY BY COMMITTEES: GENERAL RATIONALE, PRACTICE AND THE ECB’S CHOICES 24 4.1 The decision-making bodies of the ECB 24 4.2 The role of monetary policy committees 27 4.3 The monetary policy decision-making process and regional diversity 31 4.4 An international comparison of monetary policy committees 33 5 THE WORKINGS OF THE EUROSYSTEM’S COMMITTEES AND SUBSTRUCTURES 38 5.1 The role of the Eurosystem’s committees 38 5.2 Interaction between the ECB and the NCBs 39 5.3 The preparation of monetary policy decisions 42 5.4 Preparation for euro area enlargement 48 ECB Occasional Paper No 79 January 2008 3 ABSTRACT The ECB’s monetary policy has received considerable attention in recent years. This is less the case, however, for its regular monetary policy preparation and decision-making process. This paper reviews how the factors usually considered as critical for the success of a central banking system and the federal nature of the Eurosystem are intertwined with its overall design and the functioning of its committee architecture. In particular, it examines the procedures for preparing monetary policy decisions and the role of the decision-making bodies and the committees therein. We suggest that technical committees, involving all national central banks (NCBs), usefully contribute to the regular processing of a vast amount of economic, fi nancial and monetary data, as well as to the consensus building at the level of the Governing Council. A federal organisational structure, including a two-tier committee structure with the Executive Board taking the lead in preparing the monetary policy decisions and the Governing Council in charge of the decisions with collective responsibility for them, as well as committee work at the various hierarchical levels, contributes to the effi ciency of the ECB’s monetary policy decision-making, and thereby facilitates the maintenance of price stability in the euro area. A fully-fl edged committee structure has also contributed to the smooth integration of non-euro area Member States into the Eurosystem’s monetary policy decision-making process. JEL classifi cation: E42, E58, F33 and F42 Keywords: European economic and monetary integration, monetary arrangements, central banks and their policies. ECB Occasional Paper No 79 4 January 2008 NON-TECHNICAL SUMMARY NON-TECHNICAL SUMMARY implementation was chosen. Within the Eurosystem, the euro area NCBs perform almost With the launch of the euro in January 1999, all the Eurosystem’s operational tasks. On the responsibility for the single monetary policy in one hand, this federal structure is effective as the euro area was transferred to a supranational a number of these tasks need an underlying central banking system: the Eurosystem. It regional and national infrastructure that has comprises the European Central Bank (ECB) already been established by NCBs. On the other and the national central banks (NCBs) of those hand, a centralised agreement by the Governing EU Member States that have adopted the euro. Council of the ECB on monetary policy and The Eurosystem is led by a decision-making other Eurosystem-wide matters ensures that body, the Governing Council of the ECB, which decisions are timely and effi cient. is in charge of formulating the monetary policy of the euro area and sets the necessary guidelines Monetary policy decision-making in the for the implementation of its decisions. Eurosystem is based on a two-tier “hub- and-spoke” committee structure, with the The monetary policy of the ECB has received Executive Board of the ECB taking the lead in considerable attention in recent years. This is preparing the monetary policy decisions and the less the case, however, for the regular monetary Governing Council in charge of the decisions policy preparations and the decision-making with collective responsibility for them. This process. This paper explains the workings of hub-and-spoke structure ensures both timely the Eurosystem’s monetary policy process monetary policy decision-making and regional and the role that decision-making bodies and involvement, and at the same time avoids the Eurosystem committees play therein. In this unnecessary duplication of tasks. Monetary paper, we also look at the evolution of and the policy decisions are based on the ECB’s economic rationale underlying the Eurosystem’s monetary policy strategy. In this regard, the structure, as well as explain its federal nature. Executive Board plays a special role, because its members take the lead in the monetary To start with, the founders of EMU faced the policy preparations and, as members of the challenge of having no historical blueprint for Governing Council, vote on the monetary designing a supranational monetary union among policy decisions. sovereign states. Yet some historical lessons from other past monetary arrangements provided Overall, our international comparison suggests some important underpinning, such as that time that there are many similarities between the is an essential element in the establishment of decision-making bodies of the ECB and the a monetary union, and that monetary unions monetary policy committees of other central are always subject to heterogeneity, in the banks but also notable