Financial Markets - Relations Economic growth and Financial markets - Current issue: Corona virus and economic growth
18 important questions on Financial Markets - Relations Economic growth and Financial markets - Current issue: Corona virus and economic growth
Responsibility for Monetary Policy: US
Central Bank: Federal Reserve (FED)
- Board of governors, Chairman: Jerome Powell
- FOMC ( Federal Open Market Committee)
Government:
- Congress
- President of USA
Responsibility for Monetary Policy: Eurozone
Central Bank: ECB
President: Christine Lagarde
(until end of October 2019 is/was Mario Draghi)
Monetary policy in the US : Objectives
Goals:
- Price stability ( key goal)
- Maximum employment
- Moderate longterm interest rates
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Central Bank operationalization price stability ( U.S.)
Definition price stability: officially not defined
Core inflation rate: average 2% a year ( was until August 2020, 2% a year)
Economic decisions are not disturbed by expected inflation
Central Bank operationalization price stability (EU)
Definition price stability:
A harmonised consumer price index of between 1 and 2%
Monetary policy - decision making strategy (U.S.)
Policy based on:
- Business cycle, output gap
- and a variety of other economic indicators.
Monetary policy decision making strategy (Euro zone)
Policy based on:
- 2 'pilars' :
- Other inflation indicators (e.g. Business cycle, prices of raw materials, wages, yield curve)
Central bank (CB) in the Euro zone: Dependency
Main official interest rate EU:
Monetary policy : Choosing policy tools
- Quantity measures: (target on monetary aggregate)
- Pricing instruments ( target on short interest rates)
Monetary policy ECB
The primary objective of the ECB's monetary policy is to maintain price stability.
This is the best contribution monetary policy can make to economic growth and job creation
What does Monetary policy do?
The ECB's monetary policy strategy
The ECB has adopted a specific strategy to ensure the successful conduct of monetary policy.
Defines price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%
In the pursuit of price stability, the ECB aims at maintaining inflation rates below, but close to, 2% over the medium term.
The strategy also includes an analytical framework for the assessment of all relevant information and analysis needed to take monetary policy decisions.
Minimum reserve requirements
Open market operations
Buying or selling short-term financial assets from commercial banks (e.g. Government bonds) to keep interbank interest rates at a specified target value
a.) main refinancing operation ( or minimum bid rate)
b.) fine tuning operations
Monetary policy Federal Reserve Bank (FED)
Sets U.S. Monetary policy in accordance with its mandate from Congress to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. Economy
FED achieves these goals by managing the level of short-term rates- specifically, by setting a target (or target range) for the federal funds rate, which is an overnight, unsecured, interbank borrowing rate.
The level of short-term interest rates then influences the availability and cost of credit in the economy, and, ultimately, the economic decisions made by businesses and households.
The Federal Reserve has a variety of tools for implementing monetary policy
The Board of Governors of the Federal Reserve System ( Board of Governors) is responsible for tools such as:
- the discount rate
- reserve requirements
- interest on reserves
- Federal Open Market Committee (FOMC) is responsible for open market operation
Quantitave Easing (QE) unconventional form of Monetary Policy
- Expansion of Central banks balance sheet or large-scale asset purchases _ liquidity is injected directly into the economy
CB purchases at a large-scale financial assets like government bonds from commercial banks _ prices↑ and yield (interest rates) ↓
- Aim: to spur inflation when standard expansionary policy has become ineffective
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