Transcript Lecture 4
News Analysis Assignment
Follow news on topics related to EU, EMU (or economic
elsewhere)
• Read newspapers, magazines
• Search the internet
• Articles do not have to be about the same topic; this
time no logic required…
Based on theories/concepts learned during the course, explain
the economics behind the stories
- Show me that you have learned some economics during
the course!
- See for example group work today on news on ECB’s
interest rates
Include the news as an appendix in your report
Report (excluding appendices, cover page and table of
content) should be maximum 10 pages
- DL Mon Nov 2nd, send to [email protected] and [email protected]
- INDIVIDUAL assignment – DO NOT copy text directly (not
from Internet or any other source)
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Is EMU an OCA?
In groups, collect your findings
- Openness
• Intra-industry trade or specialization?
- Business cycle correlation
• GDP changes
• Inflation
- Financial markets & institutions
- Labor markets
- …
In your opinion, is EMU above the ”OCA line”?
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Today’s Agenda
Monetary Policy
- Goals and tools
- Transmission mechanism of monetary policy
The European Central Bank
- Goals of ECB
- Challenges
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Monetary Policy
= Actions of a central bank to control the supply of
money
Goals
- Stabilize economy (low inflation)
- Support economic growth
Tools
- Interest rate
• Open market operations
• Standing facilities
- Minimum reserve requirements
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Transmission Mechanism
The mechanism through which the central bank’s
actions affect the economy and ultimately the price
level
- Complex
- Time lags
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Transmission Mechanism Illustrated
OFFICIAL INTEREST RATES
Expectations
Money, Credit
Wage &
Price Setting
Bank and Market
Interest Rates
Asset Prices
Exchange
Rate
Supply & Demand in
Goods & Labor Markets
Domestic
Prices
Import
Prices
Shocks from outside
the control of
the central bank
Changes in
global economy
Changes in
fiscal policy
Changes in
commodity prices
PRICE DEVELOPMENTS
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European Central Bank
ECB, ”Eurosystem”, and ESCB
Decision-making in ECB
- Governing council and executive board
- General council
- Independence from politics
Established in the Maastrict Treaty:
- Primary objective to ”maintain price stability”
- Secondary objective to ”support general
economic policies in EU”
• High level of employment, sustainable growth,
high degree of competitiveness
Comparison to the anglo-saxon model
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Specifying ECB’s Goals
What is meant by ”price stability”?
- ECB’s definition: Inflation close but not above 2%
If inflation is bad, why not aim at 0%?
-
Inflation keeps economy going when wages are sticky
Bias in HICP -> true inflation less
Regional differences within EMU
Risk of deflation
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How Are Policy Decisions Made?
Two pillars strategy
- Economic analysis
- Monetary analysis
ECB takes actions to ensure price stability in the
medium to long term
- Due to lags, monetary policy cannot react to shocks in the
short term
Accountability?!
Transparency and communication of policy
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Challenges for ECB
”One policy fits all”
- How to maintain price stability in all regions?
- ECB follows euroarea aggregates -> large countries weigh
more
Pressures from politicians and other lobbyists
Credibility and reputation
- How to establish when no track record?
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Financial Crisis 2008
Started from the U.S.
- Housing market and subprime loans turned into investment
instruments
- Defaults and declining prices caused huge losses for banks
and investors
Problem: trust between banks disappeared
- Interbank money market froze
- Banks couldn’t get money so they could not lend it to firms
or consumers
• No invesments, low confidence => recession
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ECB in the Financial Crisis
ECB took emergency measures
- Acting as an intermediary in the interbank money market
- Longer term financing guaranteed for banks
- Decrease in the interest rate
New duties for the ECB: regulation of financial
institutions, e.g. ”stress tests” for banks
- Discussion on more regulation of the financial markets
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Debt Crisis since 2011: Implications for
ECB
Although a problem of national governments, the debt
crisis affects ECB
Insolvency of one member can affect the credibility of
other members
- Also the credibility of the ECB is at risk: can it maintain price
stability?
Problems for commercial banks
- Banks use their ”low risk” investments as collateral when
borrowing from ECB
- When banks incur losses, their ability to gain finanancing is
compromised
• Potential liquidity problem similar to the financial crisis
ECB has had to purchase government bonds to calm the
markets
- The ECB is not supposed to purchase government bonds to
maintain its independence from national governments
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Group Work
Read the news item from September 2015 from the
Wall Street Journal reporting on the outlook on FED’s
monetary policy
- What is the economics behind the story?
• Why did ECB lower the interest rates?
• What are the current challenges for the ECB?
• What are the effects of the decision?
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Pre-Lecture Assignment
1. How successful has ECB’s policy been?
Evaluate the success of ECB from several view
points.
- Find data on the development of ECB interest
rates, EMU inflation and GDP growth of EMU
countries
- You can read selected parts from ECB’s 10 year
anniversary publication "Special edition of the
Monthly Bulletin". May 2008.
http://www.ecb.int/pub/pdf/other/10thanniver
saryoftheecbmb200806en.pdf
2. What do you think the ECB’s challenges will be
in the near future?
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