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European monetary policy

The European Central Bank

The European Central Bank (ECB) oversees EU monetary policy.

Activities of the ECB

1. Ensuring that EU prices are stable, that is below 2% but also close to 2% to avoid the danger of deflation

2. Managing EU interest rates and money supply

3. Providing liquidity to the system when needed

If an EU country joins the Euro zone its central bank cedes much of its power to the ECB.

Long run neutrality of money

The underlying economic philosophy of the ECB is that, in the long run, real income and the level of employment - that is, the real economy - is not determined by the money supply. The main objective of monetary policy is to achieve short term price stability as this is seen as the way to provide an economic framework for supply side growth.

The policy instruments used is short term interest rates.

See: monetary union

See: European Financial Stability Fund