The central bank of the 17 countries within the Eurozone.
The European Central Bank was formed in 1998 and headquartered in Frankfurt. The ECB was the de facto successor of the European Monetary Institute (EMI).
The ECB along with the individual national central banks of each nation form the European System of Central Banks (ESCB).
The ECB main responsibility is to maintain price stability within the eurozone, which means keeping inflation low. The bank’s preferred target of inflation is a little bit below 2%. Maintaining price stability is the sole mandate of the ECB – it does not have a dual mandate like the US which also has to try an maintain full employment.
The legacy of the ECB comes from the German central bank – the Bundesbank – which had been very strong on controllig inflation ever since Germany had a period of hyperinflation in the wake of WW2. In order for Germany to agree to joining, that tough stance on inflation had to be enshrined as the bank’s main priority.
The ECB battles inflation with its main monetary policy tool – either raising or lowering interest rates.
The ECB controls the money supply by letting member banks bid for short term repo contracts of two weeks to three months duration. The banks are in effect borrowing cash and must pay it back. The short term durations of the loans means that interest rates can be changed to reflect current conditions.
An increase in the quantity of notes offered at auction allows for increased liquidity. An increase in deposits in member banks, is carried as a liability by the central bank, and that there is more money in the economy.
History:
“The establishment of the ECB was the culmination of many decades of work for which the express purpose was to create a pan-European monetary-policy making institution. The explicit path to the establishment of the ECB was set out in the Delors report in the late 1980’s, which specified a three-stage approach to monetary union and a single central bank for participating members. The first of these steps involved the setting up of a work program to achieve monetary union and included the passing of the Maastricht Treaty, which came into force in 1993. This facilitated the establishment of the European Monetary Institute (EMI), which marked the start of the second stage. The task of the EMI was to make preparations for the establishment of a single currency, the introduction of which would signal the start of stage three in 1999. The ECB officially came into existence in June 1998, when the 11 original participating countries appointed the members of its Executive Board.”
Source: PDF
