Two possible strategies have been selected by the EMI Council as potential candidates to be recommended to the ECB, namely monetary targeting and direct inflation targeting.2 In the case of direct inflation targeting, the inflation forecast made by the central bank can be viewed as fulfilling the role of the intermediate target.3 Let me dwell a moment on the choice the ECB will have to make between direct inflation targeting and monetary targeting, unless it chooses to combine elements of both strategies. Inflation targeting stresses the responsibility of the ESCB for achieving and maintaining price stability. However, there are some difficulties in the process of forecasting inflation over the medium and longer term. As Mervyn King recently stated, “such a forecast cannot be a single number. It must be presented for what it is, namely a probability distribution”.4 Furthermore, inflation targeting could imply more formal cooperation with the Government since the latter is in a position to influence price developments. Finally, inflation targeting has admittedly proven useful in progressing towards price stability, as the experience of the United Kingdom has shown. Nevertheless, the track record of inflation targeting is fairly short and has mostly taken place in a context of world-wide disinflation. Monetary targeting (in concrete terms, targeting a broad money aggregate such as M3) clearly indicates the responsibility of the central bank for developments that are more directly under its control and would therefore correspond better to the independence of the ECB. Moreover, it is based on observed information, which makes it more transparent.
To reach this objective, three conditions need, in my view, to be fulfilled: •  firstly, the monetary strategy should be set in a medium-term framework. More generally, the European policy mix should consist both of a medium-term stability-oriented monetary policy and of a medium-term fiscal policy aiming at a balanced budget (or “close to balance” as stated in the Stability Pact).1 This medium-term stability-oriented policy mix is the best we can do to create the conditions for durable growth in the euro area. And it is now widely agreed in the European Union that the policy mix should not give the illusion that it can fine tune the economy;  1 By urging governments to aim for a fiscal position close to balance or in surplus in the medium term, the Stability Pact enables them to let automatic fiscal stabilizers come into play during recessions without exceeding the 3% reference value. In short, it allows them to create a fiscal buffer during normal economic periods that can be drawn on if an asymmetric shock occurs. BIS Review 112/1997  -2-  •  secondly, the strategy pursued should provide a clear anchor to inflation expectations. This implies the public announcement of a quantified definition of the final objective of price stability; for instance, the Banque de France aims at an inflation rate not exceeding 2%;  •  thirdly, the strategy should be based on a forward-looking approach.