THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 497

CHAPTER 18 GLOBAL The Conduct of Monetary Policy: Strategy and Tactics 465 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 * For a description of the ECB s monetary policy strategy, go to the ECB s website at www.ecb.int Germany s central bank, the Bundesbank, chose to focus on a narrow monetary aggregate called central bank money, the sum of currency in circulation and bank deposits weighted by the 1974 required reserve ratios In 1988, the Bundesbank switched targets from central bank money to M3 The key fact about the monetary targeting regime in Germany is that it was not a Friedman-type monetary targeting rule in which a monetary aggregate is kept on a constant-growth-rate path and is the primary focus of monetary policy The Bundesbank allowed growth outside of its target ranges for periods of two to three years, and overshoots of its targets were subsequently reversed Monetary targeting in Germany was instead primarily a method of communicating the strategy of monetary policy focused on long-run considerations and the control of inflation The calculation of monetary target ranges puts great stress on making policy transparent (clear, simple, and understandable) and on regular communication with the public First and foremost, a numerical inflation goal was prominently featured in the setting of target ranges Second, monetary targeting, far from being a rigid policy rule, was flexible in practice The target ranges for money growth were missed about 50% of the time in Germany, often because of the Bundesbank s concern about other objectives, including output and exchange rates Furthermore, the Bundesbank demonstrated its flexibility by allowing its inflation goal to vary over time and to converge gradually to the long-run inflation goal The monetary targeting regime in Germany demonstrated a strong commitment to clear communication of the strategy to the general public The money growth targets were continually used as a framework to explain the monetary policy strategy, and the Bundesbank expended tremendous effort in its publications and in frequent speeches by central bank officials to communicate to the public what the central