Theory and practice of monetary policy

The treatise engages in the ongoing debate regarding the definition and importance of price stability within economic policy targets in market economies. It examines the theoretical foundations and the role of monetary policy from both medium- and long-term perspectives. Drawing on Milton Friedman’s insights about inflationary processes, it identifies five key elements of a stability-oriented monetary policy, comparing them with the European Central Bank's (ECB) strategy, particularly its liquidity management and refinancing tools. The analysis reveals that while the ECB's strategy, reaffirmed in May 2003, remains a form of monetary control, the emphasis on money has diminished. The ECB's approach accommodates real economic developments, as illustrated by the Taylor rule. The two-pillar framework now prioritizes economic analysis over monetary analysis. The discussion surrounding monetary versus inflation targeting is deemed somewhat overstated. Additionally, potential future concepts of targeting are explored, rooted in the understanding that inflation is fundamentally a monetary phenomenon. The treatise emphasizes that a monetary policy addressing empirical complexities should not rely too rigidly on inflation forecasts, reflecting a nuanced view of monetary policy in the Eurozone.