Functions, targets, and risks of the European Central Bank's monetary policy

On January 1, 1999, Europe entered a new era with the adoption of a single currency - the euro - by 11 of the European Union's 15 member states. In this paper, the author describes the framework for conducting monetary policy in the euro era. The Eurosystem's basic tasks are directly related to achieving price stability. They include: 1) defining and implementing the euro area's monetary policy; 2) conducting foreign exchange operations; 3) holding and managing the official foreign reserves of participating EU countries; 4) promoting the smooth operation of payment systems; and 5) promoting the smooth execution of the policies of those in charge of supervising credit institutions and ensuring the stability of the financial system. The Eurosystem has a range of instruments at its disposal for implementing monetary policy. To manage liquidity in the money market and steer short-term interest rates, it uses open market operation, through which liquidity is provided to the banking system against adequate collateral. In addition, two standing facilities allow eligible counterparts to invest their daily liquidity surpluses or cover their overnight liquidity needs. Furthermore, credit institutions are required to hold a minimum amount of reserves with the national central banks of the Eurosystem.