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THE EUROPEAN CENTRAL BANK – OBJECTIVE OF MONETARY POLICY

To maintain price stability is the primary objective of the Euro system and of the single monetary policy for which it is responsible. This is laid down in the Treaty establishing the European Community, Article 105 (1).

“Without prejudice to the objective of price stability”, the Euro system will also “support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community”. These include a “high level of employment” and “sustainable and non-inflationary growth”.

The Treaty establishes a clear hierarchy of objectives for the Euro system. It assigns overriding importance to price stability. The Treaty makes clear that ensuring price stability is the most important contribution that monetary policy can make to achieve a favourable economic environment and a high level of employment.

These Treaty provisions reflect the broad consensus that:

  • the benefits of price stability are substantial. Maintaining stable prices on a sustained basis is a crucial pre-condition for increasing economic welfare and the growth potential of an economy.
  • the natural role of monetary policy in the economy is to maintain price stability. Monetary policy can affect real activity only in the shorter term (see the transmission mechanism). But ultimately it can only influence the price level in the economy.

The Treaty provisions also imply that, in the actual implementation of monetary policy decisions aimed at maintaining price stability, the Euro system should also take into account the broader economic goals of the Community. In particular, given that monetary policy can affect real activity in the shorter term, the ECB typically should avoid generating excessive fluctuations in output and employment if this is in line with the pursuit of its primary objective.

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