Foundations of European Central Bank Policy

This study attempts to uncover the theoretical foundations of the central bank policy of a future European Central Bank. In part 1, the Bundesbank's current monetary policy is described as an example for a pragmatic monetarist approach to central bank policy. This approach is criticized from an "endogenous money" point of view, which is defined, econometrically elaborated and historically exemplified. Part 2 analyzes the way to a European Monetary Union (EMU) in general and its relation to the proposed central bank policy. The role of fiscal policy for a successful EMU is stressed and a suggestion for modelling the transmission mechanism in an "endogenous money" framework is made. Furthermore, the instruments of a European Central Bank and the role of private ECUSs are analyzed. The contributions in Part 3 discuss the widening of the EC and the EMS to northern and eastern Europe, plus the role of the ECU as an international reserve currency for the countries of eastern Europe during their transition to a market economy.