To achieve its primary objective of price stability, the European Central Bank (ECB) uses a strategy based on two "pillars". One of these pillars, referred to as the monetary analysis, exploits the long-run link between money and inflation. In particular, to signal its commitment to price stability and to provide a benchmark for the assessment of monetary developments, the ECB announces a reference value for the growth rate of the broad monetary aggregate M3. This prominent role assigned to money has been subject to intense criticism from the very beginning. Besides theoretical motivations for not considering monetary aggregates (e.g. Galí 2003, Woodford 2007), it has been frequently argued that money might be an unreliable indicator in an environment of low inflation (e.g. Estrella and Mishkin 1997, De Grauwe and Polan 2005). Since the introduction of the euro, the annual growth rate of M3 has almost continuously been above its reference value of 4.5% without a corresponding tightening of monetary policy or an acceleration of inflation, which supports doubts about the usefulness of money aggregates as an indicator of risks to price stability.

The ECB claims, however, that the analysis of monetary developments goes well beyond the assessment of M3 growth in relation to its reference value. The monetary analysis uses a comprehensive assessment of the liquidity situation based on information about the balance sheet context as well as the composition of M3 growth (ECB 2004). It is intended to shed light on the outlook for price stability and the implications for monetary policy eschewing a mechanical policy response to a monetary aggregate. For instance, the Governing Council has repeatedly stated that some episodes of rapid money growth were due to special factors and shifts in the demand for money arising from e.g. portfolio shifts or changes in the opportunity cost of holding money. As a consequence, such episodes were disregarded and not considered as signalling risks to price stability. On the other hand, there were cases where excess money growth did warrant a tightening of policy, especially when combined with information obtained from the other pillar of ECB’s monetary policy strategy, the economic analysis (Gerlach 2007). This illustrates that the link between excess money growth or excess liquidity and future inflation is probably not constant over time and depends on other factors as well, such as the source of increased liquidity and general economic conditions.