Economics
ECB Monetary Policy
The European Central Bank (ECB) monetary policy refers to the strategies and actions implemented by the ECB to control the money supply, interest rates, and inflation within the Eurozone. This includes setting key interest rates, conducting open market operations, and providing liquidity to banks. The primary goal of the ECB's monetary policy is to maintain price stability and support economic growth within the Eurozone.
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12 Key excerpts on "ECB Monetary Policy"
eBook - ePubThe History of the Bundesbank
Lessons for the European Central Bank
- Jakob De Haan(Author)
- 2012(Publication Date)
- Taylor & Francis(Publisher)
6 Monetary policy of the ECB
Strategy and instrumentsSylvester C. W. Eijffinger6.1 Introduction
The subject of this chapter is the design of European monetary policy. On 1 January 1999, the Economic and Monetary Union (EMU) started for the eleven member states of the European Union that complied with the convergence criteria set by the Maastricht Treaty. Since then, the European Central Bank (ECB) has conducted a common monetary policy for the countries that participate in the EMU. Of course, the preconditions for this European monetary policy are laid down in the Maastricht Treaty and the Statute of the ECB. However, a number of important decisions regarding the strategy and operational framework of European monetary policy have subsequently been taken by the Council of Ministers of Economics and Finance (Ecofin), the European Monetary Institute (EMI) and the ECB. In this chapter, I present an outline of the main points of discussion. I also give my personal views on how the ECB is to achieve its ultimate objective, i.e. to establish monetary stability in the EMU area. To structure the discussion, I take the transmission process (or mechanism) of monetary policy as organisational principle.1 Therefore, in Section 6.2 , I start with a discussion of the policy goal(s) of the ECB. Furthermore, the target(s) of European monetary policy are evaluated in Section 6.3 . Then, the monetary indicator(s) of the ECB are discussed (Section 6.4 ). Next, we will evaluate the monetary instruments in the EMU (Section 6.5 ). Finally, I will discuss the way that the ECB operates in the money market (Section 6.6 ), and present my conclusions (Section 6.7
eBook - ePubEconomic and Monetary Union Macroeconomic Policies
Current Practices and Alternatives
- P. Arestis, Kenneth A. Loparo, Malcolm Sawyer(Authors)
- 2013(Publication Date)
- Palgrave Macmillan(Publisher)
Source : ECB (2008, p. 60).Any currency necessarily has a corresponding central bank (or equivalent), which can issue the currency and set one or more key policy interest rates; the latter set the terms under which the central bank interacts with the banking system. The ways in which the central bank set interest rates and relates to the fiscal authorities are crucial to the success or otherwise of a currency. Furthermore, monetary policy faces an inevitable ‘one size fits all’ problem, that is a single interest rate (and more generally monetary policy) has to be set to apply to all members of the currency union; and the level of interest rate that may be appropriate for one region of the currency area may not be appropriate for other regions.The Treaty and the Statute of the ESCB (Statute of the ESCB), attached to the Treaty establishing the European Union (EU) as a protocol, endowed the ECB with the responsibility for the single monetary policy within the euro area ‘that is independent from political influence’ (ECB, 2004c, p. 12). This monetary policy comprises of two main elements: a definition of price stability, and a two-pillar system of evaluating the prospects of achieving this stability over the medium term. We begin with a brief discussion of the price stability definition and this is followed by a discussion of the two-pillar monetary strategy.The ESCB Treaty, Article 105 (1), states that ‘the primary objective of the ESCB shall be to maintain price stability’ and that ‘without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2’. The objectives of the Community mentioned in Article 2 of the Treaty are: ‘a high level of employment ... sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance’. A clear hierarchy of the objectives of the euro area is thereby established, ensuring that price stability is by far the most important objective for ECB’s monetary policy. Price stability in this definition was assigned a quantitative value, initially in the form of a 0–2 per cent target for the annual increase in the Harmonized Index of Consumer Prices (HICP) for the euro area (preferably hovering in the lower range of 0–2 per cent).1 The ECB, however, after a comprehensive review of its monetary policy since inception, announced at a press conference on 8 May, 2003, its intention to maintain inflation ‘close to but below 2 per cent’ over the medium term, although the language of the ECB Monthly Bulletin since then, indicates the phrase ‘inflation close to 2 per cent from below’ to be more appropriate.2 Issing (2003) insists on the ‘clarification’ aspect as being ‘totally different from what is normally seen as inflation targeting’. Furthermore, the ‘close to but below 2%’ inflation ‘is not a change, it is a clarification of what we have done so far, what we have achieved – namely inflation expectations remaining in a narrow range of between roughly 1.7% and 1.9% – and what we intend to do in our forward-looking monetary policy.’3
eBook - PDFThe European Central Bank and the European Macroeconomic Constitution
From Ensuring Stability to Fighting Crises
- Klaus Tuori(Author)
- 2022(Publication Date)
- Cambridge University Press(Publisher)
The starting point is that as the monopoly issuer of central bank money the ECB can affect the economy. The strategy still largely follows the model of the broad economics consensus of the 1990s with two critical assumptions. First, inflation is fundamentally a monetary phe- nomenon. After an adjustment period, monetary policy only affects the price level, not the real economy. Longer-term income and employment are based on structural features of the economy, not on issues that monetary policy could influence. Second, the ECB is assumed to have appropriate tools to influence the price level, its ultimate objective. The specific routes through which it affects the economy are described in the monetary policy transmission mechanism. Third, the longer-term neu- trality of money needs to be accompanied with some assumed benefits of price stability that the ECB sees stemming from economic and social grounds. It improves the efficiency of the economy (including relative prices and lower inflation risk premia) and helps the economy to reach its full potential. Furthermore, surprise inflation causes arbitrary wealth redistribution, even with devastating social consequences. 17 In the 2021 review, the ECB barely discussed the negative effects of inflation apart from pointing out their non-linear nature. In contrast to earlier 15 ECB press release (13 October 1998), ‘A stability-oriented monetary policy strategy for the ESCB’, www.ecb.europa.eu/press/pr/date/1998/html/pr981013_1.en.html. 16 www.ecb.europa.eu/home/search/review/html/ecb.strategyreview_monpol_strategy_ statement.en.html. 17 The Monetary Policy of the ECB (2004), 41–43. 96 4 organisation, strategy & framework strategies, the ECB stressed that it takes the price stability objective as given, which could signal a reduced conviction. 18 The ECB has actively communicated its monetary policy strategy but also the uncertainties surrounding it.
No longer available |Learn more- Janice Eberly, James H. Stock, Janice Eberly, James H. Stock(Authors)
- 2019(Publication Date)
- Brookings Institution Press(Publisher)
13 On this occasion, the introductory statement is presented by the president on behalf of the Governing Council. It provides a summary of the policy-relevant assessment of economic and monetary developments, as well as the mon-etary policy stance, and it is structured along the lines of the ECB’s mon-etary policy strategy. The press conference includes a question-and-answer session, which is attended by key media representatives from across the euro area and beyond. The press conference was seen as an effective means of presenting and explaining in a very timely manner the discussions in the Governing Council, and thus the monetary policy decisionmaking process. In the context of a global trend toward more detailed and transparent com-munications by central banks, this feature of the ECB’s communication strategy has increasingly been adopted by other central banks (such as the Federal Reserve). 14 Other important communication channels used by the ECB are the Monthly Bulletin (since January 2015, this has been called the Economic Bulletin , and it is published less frequently than monthly), which gives a detailed and comprehensive analysis of the economic envi-ronment and monetary developments, the quarterly appearances of the ECB president before the European Parliament’s Committee on Economic and Monetary Affairs (Fraccaroli, Giovannini, and Jamet 2018), and a large number of public speeches (see figures 1 and 2) and interviews with media by members of the Executive Board. The operational framework. The monetary policy stance decided on by the Governing Council is implemented through ECB market opera-tions. As a matter of fact, the statute of the ECB delegated the conduct of these operations to the Executive Board from the start of the euro (see Article 12.1, second paragraph, in EU 2012c), creating some separation of the operational decisions from the general monetary policy debate.
eBook - PDF- H. Tomann(Author)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
Lecture 4 The Monetary Policy Strategy of EMU In this lecture, we analyse how the European monetary policy works. First, we briefly look at theory to understand how monetary im- pulses are transmitted and how they affect the economy. Second, we discuss different monetary policy concepts that are derived from theory and that provide indicators for orientation. Finally, against this background, we try to evaluate the monetary policy strategy of the Eurosystem. 4.1 How monetary policy affects expenditures and prices (transmission process) • Money creation by contracts • The simple quantity theory of money: Quantity of money, ex- penditures and the price level • The portfolio theory of money: Liquidity preference and the demand for money • The reputation theory: Direct effects on inflationary expecta- tions A central bank can only fulfil its task of preserving the value of money if it has control over the money stock. Money is created by private contracts, however. There are two channels of creating 49 50 How monetary policy affects expenditures and prices money. First, commercial banks buy bonds, which are issued by the government or by private firms. Second, commercial banks make credit contracts either with private business, private households or the government. So, the central bank can only indirectly affect the stock of money. The leverage for the central bank becomes effective whenever non-banks withdraw money from their bank accounts 80 that a bank has to pay in legal tender or, plainly, in cash (bank notes). In this case the commercial bank needs central bank money (base money). The individual bank can lend this liquidity from another bank in the so called money market. But the financial sec- tor as a whole can only increase its liquidity by contracting with the central bank. The central bank regulates the liquidity of the financial sector by short-term contracts.
eBook - PDFMonetary Economics
Policy and its Theoretical Basis
- Keith Bain, Peter Howells(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
It argued, too, that a reserve ratio system would safeguard the role of national central banks as providers of liquidity to the banking system. However, the Council acknowledged the burden that such a system places on banks if reserves at the central bank do not earn interest. It thus decided to pay interest on the required minimum reserves hold-ings at the main refinancing interest rate. 11.6 ECB Monetary Policy since 1999 and the value of the euro It is difficult to judge the effectiveness of ECB Monetary Policy. Firstly, we must allow for the time lags in monetary policy and accept that the performance of the euro area economy in 1999 and perhaps a good proportion of 2000 had more to do with the monetary policies of the central banks of the member countries before 1999 and with the attempt by various governments to meet the Maastricht con-vergence criteria. Secondly, despite the setting of an inflation target and a mone-tary growth reference value, it has not been easy to know precisely what the ECB has been attempting to do. In practice, the interest rate decisions appear to suggest that a medium-term average rate of inflation of 2 per cent would be perfectly acceptable and that monthly figures between 2 and 3 per cent per annum do not, in themselves, sug-gest a failure of policy. Thus, the Governing Council appears to become con-cerned when the monthly rate moves above 2 per cent per annum only if there is evidence of growing inflationary pressure that would continue in the medium-term, pushing the rate higher. However, it is difficult to know how long the medi-um term is in the minds of the members of the Governing Council. It has also Monetary policy in the European Union 364 been difficult to determine the attitude of ECB members towards the desired value of the euro. We have mentioned the doubts that surrounded the likely policy of the ECB and hence the likely strength of the euro following its launch in January 1999.
eBook - PDFThe European Central Bank
The New European Leviathan?
- D. Howarth, Kenneth A. Loparo, Peter Loedel(Authors)
- 2004(Publication Date)
- Palgrave Macmillan(Publisher)
6 A Question of Credibility: a Short History of ECB Monetary Policy Any monetary policy that lacks credibility must be paid for with higher interest rates. The expectations of a well-informed and fundamentally critical general public must not be disappointed. Central banks have to take this into account in pursuing their policy; above all, they should take care not to exacerbate any prevailing uncertainty through their own policy. Otmar Issing, ECB Governing Council 98 Monetary policy is a matter of confidence. You don’t get confidence for nothing; you have to work and earn it. It’s a great effort for us at the Central Bank to explain why we are doing it. I believe we are more open, more transparent than any central bank in the world. Wim Duisenberg, ECB President 99 Introduction As noted in the previous chapter, credibility centres on whether and how central bankers can make credible commitments about their future conduct. Importantly, central bank independence and the cred- ibility that flows from it needs to be understood in terms of actual policy and behaviour. It is one thing to proclaim a central bank inde- pendent – and, as we have demonstrated, the ECB maintains high levels of independence. It is another thing to proclaim the central bank’s policies credible. Monetary policy credibility must be measured over time and must be evaluated in terms of the monetary policies and behaviour of the bank. Moreover, the structure of the economy and 143 D. Howarth et al., The European Central Bank © David Howarth and Peter Loedel 2005 internal politics may present the ECB with difficult tradeoffs between short-run policy benefits and long-run policy costs that may have an impact upon credibility. Such tradeoffs present the central bank with difficult policy choices that will be analysed in minute detail by politi- cians and markets alike. Such choices are the basis of evaluating central bank credibility.
eBook - PDF- Alberto Alesina, Francesco Giavazzi, Alberto Alesina, Francesco Giavazzi(Authors)
- 2010(Publication Date)
- University of Chicago Press(Publisher)
However, the complexity of the procedure—which involves the estimation of underlying trends in monetary aggregates adjusted for portfolio shifts— likely makes any policy response to monetary developments less predictable. Without adjustments to the aggregates, money-based forecasts typically overpredicted inflation, while the adjustments may be large and occur with some time lag. In turn, market uncertainty about the ECB’s response may reduce the e ff ectiveness of policy, because ECB behavior is less likely to be reinforced by market anticipations. For example, Andersson, Hansen, and Sebestyén (2006) found euro area bond markets to be insensitive to news about M3 announcements. To the extent that the ECB actually responded to monetary news, the response appears to have been received in the euro area bond market as an unanticipated policy disturbance, despite the prominent role of the monetary pillar. In this sense, the pillar has yet to be defined in an operational manner that elicits market understanding. 9.4.4 Currency Considerations The performance of the ECB cannot be divorced from the role of the new currency, which instantly became the world’s second-most important store of value and means of payment and has continued to rise in importance since inception. Fig. 9.6 Annual growth of M3 (three-month centered moving average), 1999–2007 Source: European Central Bank. The First Decade of European Central Bank Policy and Beyond 347 The fluctuations of the foreign exchange value of the euro during its first decade of life are surely relevant for future policy strategy. Prior to EMU, some observers expected that the reduced importance of the currency for euro area-wide activity would downgrade its impact on policy, hinting that currency volatility versus the dollar would rise compared to, say, the Deutsche Mark. In fact, there is little direct evidence of increased volatility (see figure 9.7).
eBook - PDFThe European Central Bank
The New European Leviathan?
- D. Howarth, Kenneth A. Loparo, Peter Loedel(Authors)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
6 A Question of Credibility: a Short History of ECB Monetary Policy Any monetary policy that lacks credibility must be paid for with higher interest rates. The expectations of a well-informed and fundamentally critical general public must not be disappointed. Central banks have to take this into account in pursuing their policy; above all, they should take care not to exacerbate any prevailing uncertainty through their own policy. Otmar Issing, ECB Governing Council 98 Monetary policy is a matter of confidence. You don’t get confidence for nothing; you have to work and earn it. It’s a great effort for us at the Central Bank to explain why we are doing it. I believe we are more open, more transparent than any central bank in the world. Wim Duisenberg, ECB President 99 Introduction As noted in the previous chapter, credibility centres on whether and how central bankers can make credible commitments about their future conduct. Importantly, central bank independence and the cred- ibility that flows from it needs to be understood in terms of actual policy and behaviour. It is one thing to proclaim a central bank inde- pendent – and, as we have demonstrated, the ECB maintains high levels of independence. It is another thing to proclaim the central bank’s policies credible. Monetary policy credibility must be measured over time and must be evaluated in terms of the monetary policies and behaviour of the bank. Moreover, the structure of the economy and 143 internal politics may present the ECB with difficult tradeoffs between short-run policy benefits and long-run policy costs that may have an impact upon credibility. Such tradeoffs present the central bank with difficult policy choices that will be analysed in minute detail by politi- cians and markets alike. Such choices are the basis of evaluating central bank credibility.
eBook - PDF- Athina Zervoyianni, George Argiros, George Agiomirgianakis(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
In certain aspects, such as reasoning behind decisions and monthly reports, the ECB exceeds the requirements of legal accountability (see Bini-Smaghi and Gros (2001) and Randzio-Plath (2000)). But even when this is allowed for, De Haan and Eijffinger (2000) conclude that the ECB is much less accountable than, the Bank of Canada, of Japan and of England, as well as the Federal Reserve. The ECB’s Monetary Framework: Is the ECB Transparent Enough? Choice of Intermediate Monetary Target and Means of Communication with the Public As mentioned earlier, because other macroeconomic variables often intervene between the tools of monetary policy and the final targets of monetary policy, a common practice of CBs is to have an interme-diate monetary target. The variable selected as intermediate monetary target must posses certain characteristics that makes it useful as such. In particular, it must intervene in the transmission mechanism of economic fluctuations between the final targets and the monetary instruments, it must be easily predictable, it must be directly measur-able, and so on. The idea then is that the CB selects a value for this intermediate variable which guarantees the achievement of the final target in the long run, and in the short run sets the instruments of monetary policy in such a way so as to reduce the divergence of the current value of the intermediate variable from its target value (see, for example, Bean (1998)). On the other hand, communication is the way in which the CB of a monetary union reveals itself to the markets, the media and the general public. Several authors, including Svensson (1999), Buiter (1999) and Bini-Smaghi and Gros (2001), stress that external commu-nication is a significant part of a CB’s overall framework, since, through its impact on expectations, it affects its policy effectiveness. 280 EUROPEAN INTEGRATION It also influences the degree of transparency of monetary policy and thus the ability of others to evaluate it.
- Jesús Ferreiro, Felipe Serrano, P. Arestis(Authors)
- 2005(Publication Date)
- Palgrave Macmillan(Publisher)
As I mentioned earlier, the most important task of a central bank is to get monetary policy right. At times, getting policy right will involve taking action unexpected by the market – for example, in its timing and magnitude’ (Ferguson, 2001, p. 5). Limited transparency points out the importance of independence towards financial markets, and not only on political author- ity, as in the case of ECB independence. The Fed considers uncertainty as a fundamental element of monetary policy: ‘Uncertainty is not just an important feature of the monetary policy landscape, it is the defining characteristic of that landscape’ (Greenspan, 2003, p. 1). Openness also concerns inflation targets. With the New Keynesians, the explanation of inflation moves from money to expectations. Money is no longer neutral. There is no natural rate of inflation. In accordance with Greenspan (2001, p. 2), the confidence paradigm considers inflation to be a phenomenon of expectation: price stability is ‘when economic agents no longer take account of the prospective change in the general level price level in their economic decision-making … By price stability, however, I do not refer to a single number as measured by a particular price index’. Greenspan prefers an implicit inflation target that gives flexibility to the policy mix. The implicit inflation target can be 2 per cent, 3 per cent or 4 per cent depending on circumstances. The explicit reference value of the ECB (2 per cent inflation) is rule-like and generates a restrictive bias. Fixed targets generate rigidity in expectations that reduces the working margin of the monetary policy under unpre- dictable shocks. If there is a deviation from the target, volatility of inflation expectations will be very high, and the expectations anchorage will be broken. With unpredictable shocks, monetary policy is required and cannot be rule-based. But the Fed can be forecast-based, or forward-looking.
eBook - PDF- Alain Alcouffe, Maurice Baslé, Monika Poettinger, Alain Alcouffe, Maurice Baslé, Monika Poettinger(Authors)
- 2018(Publication Date)
- Routledge(Publisher)
Other papers focused on the economic activity effects of the unconventional measures. For example, Boeckx et al. (2017) study the macroeconomic effect of the ECB balance sheet measures. They find that these expansionary measures stimulate credit growth, stabilize financial markets and support output and inflation. But they also contribute to depreciate the cur-rency and to lower sovereign bond spreads. Another recent paper finds similar results. Bernoth et al. (2016) study the effects of the ECB quantitative easing. On the one hand, they find that the announcement of the EAPP decreased bond yields and spreads in the euro area. On the other hand, they show that the EAPP increased economic activity up to 0.2% and the inflation of about 0.1%. 76 Antonio Forte Summing up, this section has highlighted that there is widespread agreement on the fact that the unconventional monetary policy measures are effective in stimulating both the output and inflation and in reducing bond yields. Some studies underline that the impact of unconventional measures is weak, but it is unquestionable that the non-standard measures have helped the economies in recovering from the crisis. Conclusion In this chapter, I depicted the evolution of the monetary policy in the euro area through a very long series of innovations: on the one hand, the traditional tools of the ECB have been transformed in order to sustain the banking system and to avoid liquidity risk; on the other hand, unconventional measures have been launched to reactivate the monetary policy transmission mechanism, to avoid the risks of a prolonged period of deflation and to weed out the idea of the Eurozone disintegration. Undoubtedly, all these measures have rubbed out the worst scenario, that is the end of the Eurozone, but the analysis of their effectiveness has revealed that they probably have not had the expected impact.
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