The European Central Bank’s Monetary Policy Strategy

The European Central Bank (ECB) pursues a hybrid monetary policy strategy that has elements in common with the monetary targeting strategy previously used by the Bundesbank but also includes some elements of inflation targeting.* Like inflation targeting, the ECB has an announced goal for inflation over the medium term of “below, but close to, 2%.” The ECB’s strategy has two key “pillars.” First, monetary and credit aggregates are assessed for “their implications for future inflation and economic growth.” Second, many other economic variables are used to assess the future economic outlook. (Until 2003, the ECB employed something closer to a monetary target, setting a “reference value” for the growth rate of the M3 monetary aggregate.) The ECB’s strategy is somewhat unclear and has been subject to criticism for this reason. Although the “below, but close to, 2%” goal for inflation sounds like an inflation target, the ECB has repeatedly stated that it does not have an inflation target. This central bank seems to have decided to try to “have its cake and eat it, too” by not committing too strongly to either a monetary targeting strategy or an inflation targeting strategy. The resulting difficulty of assessing the ECB’s strategy has the potential to reduce the accountability of the institution.