Europe Money Supply

3 Key excerpts on "Europe Money Supply"

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  eBook - PDF

  Modern Monetary Theory and European Macroeconomics

  • Dirk H. Ehnts(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  M3 M2 + repurchase agreements, money market fund shares and debt securities with a maturity of up to and including two years Source: www.bundesbank.de/Navigation/EN/Service/Glossary/Functions/glossary.html?lv2=129536 &lv3=162818#162818. prediction of exchange rates. It’s important to know the limits of one’s discipline – in this case, monetary economics. Since we know that banks cannot lend out reserves to firms and households, the monetary base has lost much of the significance that has often been attributed to it in the past. Its recent huge increase has triggered warnings of sustained high 84 Money and credit inflation lately, but these are fading as the ECB’s massive bond-buying pro- gramme (‘extended asset purchase programme’, often called ‘quantitative easing’ or QE in the financial press) of more than €60 billion per month, in pro- gress since March 2015, continues apace (inflating the quantity of reserves held by financial institutions as a result) and CPI remains stuck in a narrow band of ±0.3 per cent. Slowly, those who had warned stridently of the hyperinflationary consequences of QE have gone rather quiet, and a few of them may even have taken the trouble to inform themselves sufficiently about the workings of the banking system to realise why their concerns were misplaced. Open market operations of the central bank In the example above, we had increased the amount of reserves because a bank with sufficient collateral asked for a loan from the central bank. The initiative for this transaction came from the commercial bank, while the central bank played a passive role. According to European law, the ECB has to provide reserves at its base interest rate, up to the value of collateral pledged by the bank requesting reserves. There is no leeway in decision-making on the part of the central bank. This is intended to provide a level playing field. The central bank cannot deny credit when a bank provides eligible collateral.

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  eBook - ePub

  Economics and Business Environment

  • Wim Hulleman, Ad Marijs(Authors)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  The first pillar of the ECB’s monetary policy presupposes that M3 is a reliable leading indicator for medium-term price development. The quantity theory easily demonstrates this. An increase in the money supply will of necessity lead to price increases if the velocity of circulation and the production remain the same. If the public has increasing amounts of money at its disposal, there is a good chance that they will be used for purchasing goods and services. This causes expenditure to increase – assuming that the production remains constant – and this will cause a price increase. Put simply, inflation is the result of too much money chasing too few goods.

  Headquarters of the ECB in Frankfurt

  Source: website ECB (new premises media centre)

  Reference value for M3

  The ECB publishes an annual reference value for M3. This represents the growth ratio of money that is compatible with medium-term price stability. The ECB uses the quantity theory to determine the reference value for M3 (see figure 7.9 ).

  FIGURE 7.9

  Determining the reference value of M3

  The European Central Bank looks first at the increase in the amount of money that is necessary to finance trend-related growth in production. The ECB assumes that production (Q) in the eurozone grows yearly by 2% in line with the trend. At an admissible inflation of 2% yearly, the demand for money (PxQ) will increase by 4% per year (see Fig. 7.8 ). The amount of money (M) would also have to increase by 4% if it were not for the fact that the velocity of circulation changes too. Let us assume that the velocity of circulation in the eurozone (V) decreases by about 0.5% per year. When money does not go from hand to hand that fast anymore more money is needed to pay the same quantity products. The decrease in the velocity of circulation is compensated by the ECB, which determines the reference value for monetary growth not at 4% but at 4.5% per year.

  Actual growth of M3

  If the actual growth of M3 exceeds the reference value the ECB will scrutinise the causes carefully. If the ECB is of the opinion that exceeding the reference value is the result of an incidental increase in demand for idle cash it will not take any measures. After all, idle balances are not used for expenditure but are kept for investment purposes. If, however, the ECB is of the opinion that the public is using the increased amount of money for expenditure, it will take measures to prevent demand-pull inflation.

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  What Global Economic Crisis?

  • P. Arestis, M. Baddeley, J. McCombie, P. Arestis, M. Baddeley, J. McCombie(Authors)
  • 2001(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The expansion of the form of money (say M1) which is largely used to finance transactions is of particular significance. It is necessary for government to run a budget deficit which was partially monetized in order that base money (MO) increased. A growing economy required an expansion of the stock of money (say M1), and such an expansion requires the underpinning of a growth in MO to prevent a continuous decline in the reserve ratio (between MO and M1 in this instance). In the context of EMU, there is a complete separation between the fiscal authorities and the monetary authorities, and Will the Euro Bring Economic Crisis to Europe? 83 moreover the appropriate fiscal authorities are barred from running any deficit. As the EU budget must be balanced each year, there can be no (base) money creation from that direction. It may well be that over the cycle there would be no net budget deficit (for the reasons indicated above). But in any case deficits run by member states must be covered by borrowing as they cannot be monetized because that would require credit to be granted to the national government by the ECB. This is clearly prohibited: 'Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as 'national central banks') in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments' (Article 104 of the Treaty of Rome). There would seem to be three possible responses by the ECB to this apparent inability of the ECB to create high-powered euros. The first is that in effect the ECB does actually monetize national government debt through open market operations.

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