Introduction

Central banks are usually assigned two main goals: the most recent one, which has become their priority objective over the last three decades, is price stability; the second one, which is historically their raison d’être, is to ensure the integrity of payments. In modern economies, this takes the form of the smooth functioning of interbank exchanges on the money market, which contributes to and depends on the maintenance of financial stability.

In accordance with economic theory, central banks have assigned specific instruments to each of these two objectives. The short-term interest rate has emerged, over the last three decades, as the main instrument with which monetary policy pursues its price stability objective. Central banks support the functioning of the money market through a continuum of instruments, ranging from their marginal standing facilities to the granting of liquidity assistance to troubled money-issuing institutions or lender of last resort (LOLR) to the financial system as a whole. These operations can, however, be sterilised in order to insulate the stance of monetary policy. Looking back at the first twelve years of the euro, this separation in the pursuit of the two objectives, which is consistent with the Tinbergen principle, has not been challenged until recently when short-term nominal interest rates reached their (zero) lower bound in 2009. The Eurosystem then, along with many other central banks throughout the world, embarked on non-conventional policies. The circumstances of the financial crisis and the great recession blurred the separation between the means mobilised by the euro area central bank in the pursuit of its two objectives.