In 1999 the European Central Bank (ECB), together with the National Central Banks (NCBs) of the countries that had just adopted the euro, launched a major research initiative to study the transmission of monetary policy. The objective was to put together, in a reasonably short time, a comprehensive body of information on how the monetary policy of the newly created central bank would affect the economy of the ‘euro area’. In December 2001 this research was presented to academics and central bankers in an international conference at the ECB. This book brings together, in revised and shortened form, all the contributions presented at that conference. It also includes a summary of the discussion and some further papers that, owing to time constraints, could not be presented then. For the reader, this book provides an overview of the project results and access to the most comprehensive set of analyses on the working of the single European monetary policy yet published.

Knowledge of the transmission mechanism is needed to determine how the monetary policy instruments should be set to achieve the desired goals. Interest rate decisions by central banks always rely on some explicit or implicit understanding of the transmission mechanism. Moreover, ideally this understanding suggests also how to efficiently achieve the monetary policy goal, i.e. limiting undesired side effects on other economic variables besides the ones the central bank is directly responsible for. Finally, understanding the transmission mechanism is critical for the external communication of policy.