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The European Central Bank (ECB) assigns greater weight to the role of money in its monetary policy strategy than most, if not all, other major central banks. Nevertheless, reflecting the view that the demand for money became unstable in the early 2000s, some commentators have reported that the ECB has "downgraded" the role of money demand functions in its strategy. This paper explains the ECB's monetary policy strategy and shows the considerable influence of Milton Friedman's contributions on the formulation of that strategy. The paper also provides new evidence on the stability of euro area money demand. Following a conjecture made by Friedman (1956), the authors assign a role to uncertainty in the money demand function. They find that although uncertainty is nonstationary and subject to wide swings, it is nonetheless mean reverting and has substantial effects on the demand for money. [ABSTRACT FROM AUTHOR]

This paper reviews some of the recent studies on international capital flows with a focus on the role of European global banks. It presents a revision to the commonly held "global saving glut" view that East Asian economies (along with oil-rich nations) were the dominant suppliers of capital that fueled the asset price boom in many parts of the world in the early 2000s. It argues that the role of funding costs and a "liberal" regulatory regime that allowed for an unprecedented expansion of the balance sheets of European banks was no less important. Finally, we describe the aftermath of the crisis in terms of some of the challenges faced by Europe as a whole and European banks in particular. [ABSTRACT FROM AUTHOR]

In this paper, the authors document a growing divergence between current account imbalances in northern and southern euro area countries from 1992 to 2007. The imbalance occurred without a concomitant rise in productivity and growth in the southern (deficit) countries. The authors argue that systematic monitoring of external imbalances and implementation of better coordinated policies to prevent the emergence of unsustainably large imbalances in the euro area is advisable because (i) country heterogeneity and the absence of optimal currency area characteristics may lead to the emergence of large current account imbalances without automatic gains in productivity and economic growth to sustain these imbalances, (ii) the absence of sufficient market-based adjustment mechanisms substantially increases the costs of ultimate adjustment toward more sustainable current account positions, and (iii) large external imbalances--particularly through the major role of the banking system--potentially have strong negative consequences for fiscal policy. [ABSTRACT FROM AUTHOR]

The article presents the author's insight regarding challenges for monetary policy that the European Monetary Union (EMU) faces. He states that EMU will find it difficult to ensure monetary policy stability if membership requirement will not be met in the union. He mentions that in order for the policy not continually be challenged by financial crisis, the central bankers should take into consideration the implication of monetary policy in the financial stability as well as the price stability.