The original inspiration for this volume was the Frederico Caffè Lectures I gave in Rome on December 13–14, 2011. Quite a lot of water has flown down the Tiber since then and my thinking about the monetary and fiscal policy issues I addressed in the lectures has evolved and, I hope, become more coherent.

The simple idea that motivates most of this book is that central banks make a significant, indeed at times essential, contribution to the fiscal space of the sovereign. This is because the ability to issue monetary liabilities, especially currency, is a source of profits to the central bank.

This chapter describes the monetary policy of the European Central Bank (ECB). Since the start of the monetary union in 1999, the ECB has been responsible for monetary policy making in the euro area. The ECB and the national central banks of eurozone countries make up the Eurosystem. The Maastricht Treaty defines the ECB’s primary objective as achieving ‘price stability’. The ECB specifies this objective as inflation ‘below but close to’ 2 per cent in the euro area in the medium term. The ECB has an array of instruments available to realise this objective. The chapter analyses several non-standard (or unconventional) policy measures in response to the financial crisis, the euro crisis and the low inflation. Policy decisions are the outcome of the monetary policy strategy. The ECB has a ‘two-pillar’ strategy that pairs the discussion of a broad-based analysis of the risks to price stability in the short to medium run (‘economic analysis’) with monetary factors (‘monetary analysis’).