In the assessment of the Monetary Policy Strategy of the European Central Bank (ECB) 2003, monetary analysis is highlighted with the prominent role which concentrates on the evaluation of medium to long term tendency in price growth based on the relationship between monetary growth and inflation [1] . Notably, cross-checking between monetary analysis and economic analysis has become the essential feature in two pillar framework which helps the ECB fulfill successfully its mandate in order to pursuit of the primary objective of price stability over the medium term. However, the financial crisis in 2008 had led all economic areas into the turbulence which is aggregated by low interest rate, securitization and bubble of housing market. The crisis woke the European monetary policy makers up out of the illusion of constant monetary development and required them to review the monetary policy strategy for recent years. The huge consequences of crisis spread widely over the world addressed the European Central Bank (ECB) supervisors and regulators many questions like that "What experience the ECB monetary policy makers should learn and avoid repeating in future?" or "What should they construct the European Monetary Policy Strategy in order to stabilize price stability in the future?"
To answer the above questions, we need to review and analyze encompassment of the European Monetary Policy Strategy as well as the roles of their own elements. This assignment will be divided into two main parts to discuss the role of monetary analysis in the European Monetary Policy Strategy and what lessons they derive from the financial crisis. In the first part, I will focus on the definition, the objective and the function of monetary analysis in monetary policy strategy in the Euro area. In the second one, the lessons from the financial crisis will be analyzed to emphasize what they should change or attain in future.
To begin with, some definitions about monetary analysis and its constitutions need to be clarified. According to Nielsen E. F. (2006, p.4), the ECB uses two pillar strategy to assess risks to price stability in the Euro area, including monetary analysis (or "monetary pillar") and economic analysis (or "economic pillar"). The former is known as "a means of cross-checking" from a medium to long-term outlook (over three years) to check whether monetary developments allocate risks to the price growth in order to help the Governing Council have indispensable information to regulate monetary policy and maintain price stability [2] . The latter is concentrated on the short- and medium run inflation prospect (up to 3 years) based on non-monetary factors such as supply and demand in the goods, services. Particularly, two pillars are constructed differently, but they are compulsory to the effective operation of this strategy, facilitating the ECB to have well preparation to reach price stability. We could illustrate the two pillar framework and the role of monetary analysis that the ECB use to determine and examine information that is related to inclusive and sufficient evaluation of risks to price stability.
Primary objective of price stability
Governing Council cross-checks the information and takes monetary policy decisions based on an overall assessment of the risks to price stability
Analysis of economic dynamics and shocks
Analysis of monetary trends
Technical input to cross-checking
Full set of information
Economic analysis
Monetary analysis
Sources: ECB, Enhancing Monetary Analysis (2010), p. 59.
Specifically, monetary analysis is composed of two components: the first one is macroeconomic perspective which is achieved effectively by comparing annual nominal M3 growth with a reference value that is employed to determine inflationary strain over the time (4.5% annual growth rate) [3] , and the second one is the importance of disaggregate outlook which the ECB would concentrate on other factors of liquidity developments than M3 such as private credit growth or their counterparts in the aggregate balance sheet of monetary and financial institutions.
The ECB's monetary analysis based on a number of econometric tools for model-based evaluation and specific institutional analysis. In reality, the former is composed by factual money and credit demand figure, analytical filters, forecasting models and small to medium scale structural models whist the latter includes the analysis the bank balance sheet: the elements and complements to M3 [4] . The complicated nature of monetary analysis pointed that it could not based on one individual analysis framework, and it needs to be researched with a range of approaches.
The below chart is the monetary analysis process, including four steps of monetary analysis from the description of latest trend to the implications for the perspective for price growth. The first step is constructed on the data analysis of the Monetary Financial Institutions (MFIs) balance sheet, not only the monetary aggregate M3, which is combined the specific control of growth in elements and complements to the M3. In the second step, monetary developments are demonstrated to find the data fluctuation which is irrelevant to medium and long term price, including econometric instruments to model evaluation with specific analysis. The third step focuses on developing outlook on the monetary dynamics, which is followed by the general evaluation gained from the assessment of whether the elements of monetary development has changed known as the final step. The monetary analysis illustrated here is cross-checked with the economic analysis by the Governing Council before it become the final decision of monetary policy.
1. Describe latest monetary developments
2. Explain latest monetary developments
3. Develop view on underlying trend in monetary dynamics
4. Draw implications for outlook for price developments
Source: ECB (2010), Enhancing monetary analysis, p. 80.
The role of "monetary analysis" in the European Monetary Policy Strategy
The relationship between monetary developments and inflation in short term are often influenced by various non monetary elements as well as the transitory change. On the other hand, monetary policy is applied to react with the information in monetary aggregates which is related to the enhancement of price stability over the medium period. Therefore, the mission for monetary analysis is thus to identify, statistic and analyze institutionally the signal included in monetary development in real time in order to prepare contingency plan in future. We could understand explicitly that discovering the progress of money aggregate development against the estimated money demand model is the crucial factor of monetary analysis.
Especially, the ECB's monetary analysis is integrated between various institutional analysis and models to retrieve the information in monetary development appropriate with monetary policy making progress. Focusing on monetary analysis in real time, the ECB illustrated mainly on the analysis of monetary aggregate development and some methods to analyze the signal in that progress in order to reach price stability [5] . In particular, they measure monetary development and their implications based on the estimation of M3 measures adjusted for the estimated impact of portfolio shifts which has more and more influenced to monetary development in recent years. The first one is conducted by using "structural filter" to analyze information from the change in price, M3 growth and determinants in reality, proved that monetary development influence inflation over the medium to longer term. Meanwhile, the second method is formed to evaluate the significance of portfolio shifts more precisely and thus use its results to settle the official series. Notably, the latter is preferred with its own specific to the real time situation related to the portfolio changes recorded in recent period and its reliance strongly on the institutional analysis.
The following chart demonstrates the M3 growth from 1999 to 2010, which is remarkable with the sustainable increase from around 5% in mid 2004 to the highest level about 12% in 2007. After the onset of financial crisis, it declined dramatically to below 0% in the end of 2009 with the collapse of Lehman Brothers.
Source: ECB Monthly Bulletin Febuary 2011, p. 15.
Regarding the counterparts of M3, we could see clearly at the chart in which the annual flows of credit to the household played the main role in M3 growth from the beginning 2007 to the end of 2008, which reached to the peak of 1,400 EUR billions in the first quarter of 2008, followed by the dramatic decline to the lowest level approximately 50 EUR billions in the first 6 months in 2010.
Source: ECB Monthly Bulletin Febuary 2011, p. 20. (Annual flows, EUR billions)
Besides the counterparts of M3, we could analyze the contribution of overnight deposits, deposits with an agreed maturity up to 2 years and other components to M3 of euro area at the end of December 2010 which is shown in the pie chart. Particularly, total deposit accounted for 81% excluding repurchase agreements which were calculated just 4%. By comparison, debt securities took 1% whist money market fund accounted for 6%.
Source: ECB Monthy Bulletin Febuary 2011, p. 17.
Lesson from the Financial Crisis:
Before the financial crisis, the Governing Council perceived the significance of finding shortcomings in the ECB's monetary analysis as well as the benefit of enhancing it successfully, from the evaluation of risks to price stability to the policy decision making progress. Therefore, they conduct the research agenda in July 2007 to improve the ECB's monetary analysis in order to enhance the effectiveness of monetary analysis, which includes four main avenues which are illustrated in the below graph.
Incorporate money and credit in structural general equilibrium models
Monetary Analysis
Develop money-based indicators of riks to price stability
Improve models of Euro area money demand
Extend the framework for cross-checking and risk analysis
However, in my opinion, after we analyze carefully the significance of monetary analysis in the European Monetary Policy Strategy, we could point out a number of lessons that the ECB's monetary policy makers should consider carefully when they review and improve their monetary policy strategy to achieve the stable development in future which are illustrated clearly in the below framework.
Lessons from the Financial Crisis
Analysis the quantitative growth in credit and M3
Maintenance two-pillar system composed by the interest rate and policy instruments
Control monetary analysis in real time
Find out which sector plays the main role in controlling M3
Well institutional knowledge about MFI balance sheet
Improvement the effective supervisory framework in the Euro zone
Advancement of using M3 in policy making progress
Cross-checking carefully and consistently
Contingency planning
Combination deeply the institutional analysis and econometric techniques
Resolve and evaluation the trade off between price stability and the financial stability
The first one I want to emphasize here is the financial crisis in 2007 placed an interest in monetary development goes beyond the medium to longer term link with price developments, according to ECB [6] . Therefore, in order to control the financial stability in future, it is perceptible that the policy makers of ECB need to analysis the quantitative growth in credit and broad money for satisfy the financing condition as well as the long term development of banking sector where banks adjust their own balance sheets with the deceleration of assets through credit institutions. Moreover, the ECB could use the annualized three-month growth rate to study the short term movement of annual growth rate in order to know clearly about the pace of monetary expansion.
Secondly, for the long term development of the ECB, they should maintain efficiently two-pillar system which is composed by the interest rate and policy instruments. The former is used to attain the inflation objective whist the latter would be considered as the tool to obtain financial stability. Especially, achieving the effective control to the financial stability requires the integration of responsibility between the central bank as well as the supervisors in obtaining two above instruments: legal reserve requirement and macro-prudential control. In reality, the ECB policy makers could apply this system to control any distress in bank credit growth or any turmoil in asset markets could happen in future; for instance, ECB could raise the minimum reserve requirements, decline the loan to value ratio and so on. This might transfer bank credit into asset market, but it also could contract the spread of bubbles in asset market. Explicitly, this method could improve the ECB strength to counter with asset bubbles which is the root of financial crisis 2007-2008 without raising interest rate, which helps ECB avoid any emerging political issues and criticism.
Third, through the preceding analysis of the growth rate of M3, it is conceivable that monetary analysis need to be controlled and determined in real time whether the observed movement in monetary growth indicate a long term change in strong-growing and lasting balance sheet settlement of banks, corporations and households or just be the short term effect and not lead to any changes to monetary growth [7] . In order to gauge effectively the fundamental monetary growth, I think that it is really significant and compulsory to consider carefully the relationship between income, interest rate and the uncertain feature of market.
Fourth, the ECB should identify which sector plays the main role in controlling M3, and then adjust the policy for sustainable development scheme, which could be non-monetary financial intermediaries, households and so on. Moreover, they also need to concentrate on the portfolio reallocations into money which is caused by the interest rate configuration, not the uncertainty [8] .
In addition, the crisis addressed the entail of having well institutional knowledge about MFI balance sheet in order to evaluate the tendency of broad money and credit aggregates for the development in future. After researching the turmoil of the crisis, monetary development is regarded as the "noise" in the data [9] , as the signal for detection of breaks in monetary trends, the change in financing condition over the business cycle and the adjustments in banking sector. Therefore, I think that the ECB should improve the analysis of collected information, and then they could distinguish any change in behaviors and the affect to the mutual impact of money and credit aggregates as well as the movement of CPI, asset prices and economic activity.
Moreover, we could highlight the fact that the ECB could not resist to the crisis without the integration and support of all members. They should improve the more effective supervisory framework in euro zone in order to maintain the financial stability at par with the price stability, which is facilitated by the vigilance and willing to act of governments. Notably, they should reinforce the operation of European Systemic Risk Council out of the limitation of issuing materials of recommendations to against the possibility of future turbulence. The ECB policy makers need to be well prepared and consistent in dealing with the future turmoil. According to Nielsen E. F. (2006), although the monetary analysis could move in the right route, no one could ensure that it predicts exactly the movement in future period. If the policy making progress is based entirely on that, it could lead the ECB into bad situation. They also suggest the replacement M3 by the more systematic with the target of controlling inflation in future.
Another point that should be noticed is the ECB should attempt to conduct the monetary analysis with the improvement of using M3 in policy making progress by referencing the fluctuation of inflation, GDP, asset prices and so on, not only on their own economic area but also the world. To guarantee the object of price stability, they need to establish and maintain the scheme in which they focus to keep the inflation within the target zone that they desire. Particularly, Nielsen E. F. (2006) suggest that the target zone should be addressed with the measures expectation of inflation in different horizons, which is used to evaluate the credibility of the official target, then they could present an analytical plan target to the objective of price stability maintained by the ECB.
Additionally, the ECB should guarantee to implement cross-checking carefully and consistently in order to control the risk effectively. Notably, they should not be over-reliance on any individual indicator or model in theories. A single determinant could not lead to the successful method of analyzing information in monetary developments which affect to monetary policy making process. Taking together cross checking with the complex group of indicators as well as the other fundamental macroeconomic factors, they could improve their power of monetary policy strategy in unavoidably changeable economic context. In reality, the ECB clarified that the monetary policy strategy could enhance the stable orientation if policy makers undertake the application of monetary analysis in policy making progress.
Furthermore, the ECB should prepare contingency planning for different scenarios when they estimate inflationary risks come from monetary development by facilitating the plan to act in case of liquidity crisis or the deep change in interest rate fluctuation. To predict the future risk in monetary growth, ECB also need to combine deeply the institutional analysis and econometric techniques, aim to improve the analysis of monetary development in real time over different periods, especially the basic root of changes in M3 growth and their potential signal for the price growth in future.
According to Grauwe P. D. and Gros D. (2009), before 2007, price stability is known as the magic could control the risk in financial market and this responsibility belongs to the supervisors and regulators. They argue that the central banks need to resolve and evaluate the trade off between price stability and the financial stability, and then act with supervisors and regulators to maintain the stability of financial market. After their research, they suggest that the ECB should not keep the order of their own objectives in the fix pattern. Their opinion is that if the interference between inflation target and the financial stability emerges, the latter should have precedence. Financial crisis should be predicted not only on national credit growth but also on the credit growth at the global level [10] . In my opinion, ECB and central banks could control the risk of financial crisis effectively by concentration on the group of indicators, including money aggregate, stock prices, housing prices and bank credit.
In conclusion, conducting the successful monetary analysis is regarded as the complicated task, which is composed by statistical methods, econometric models and economic analysis.
