The Decision Of The European Central Bank

European Central Bank (ECB): Sustainable fiscal policies by all the EU members and the punishment for those members that do not comply with the

Another policy the government can use is the expansionary monetary policy, the expansionary monetary policy aim to shift aggregate demand to the right by lowering the interest rates, the lowering of the interest rates lowers the cost of borrowing for example using credit cards and decreases consumers marginal propensity to save which therefore encourages consumption. These lower interest rates also encourage firms to borrow and invest therefore further increasing aggregate demand in the economy. These lower interest rates will therefore increase aggregate demand shown in the graph below.

Through discretionary policy, the government can decrease interest rates and increase spending, which will encourage consumer spending. Because of the wealth effect, when consumers have more assets, they are likely to spend more. The increase in consumer spending will then result in higher demand and therefore an increase in jobs.

This gathering of governor was joined by leading academics, thought leaders, and commentators on monetary policy. The world of modern central banking and global finance had now entered a new phase of even more obvious artificiality and distortions. According to the author, Mohamed. El-Erian, “Ones whose skillful management of the price and quantity of money in an economy was key to containing inflation, promoting economic growth, and avoiding financial crises.” Since the global financial crisis of 2008, central bank has ventured, by necessity but not by the choice. They set the interest rates higher. For an unusually prolonged period, the central bank was bold policy experimentation. During that time, many of the economists thought that central banks had been forced to operate, and many of them wondered about it consequences. From the beginning of the financial crisis, there was the hope that courageous and responsive central banks would succeed in handing off the baton to high growth, robust job creation, price stability, and financial system. The world was in the process of grow out of its debts problems avoiding the debt defaults because the policy making entities were finally in the economic governance responsibilities and with the job returning and economic prosperity. The world changed in two important ways: one had to do with the analytics of central banking,

On the contrary, the government can increase spending if a recession is close or already happening and can lead to increased employment nationally. The central bank’s monetary policy can help by varying interest rates. They can lower interest rates to increase spending and raise them to decrease spending. To decrease inflation, the banks can reduce the supply of money, therefore giving citizens the incentive to spend less money and in turn, reducing the inflation.

At the last FOMC meeting, the Committee found the economy has continued to expand at a moderate pace and it reaffirmed its commitment to “maintain a stable price level, economic growth, and full employment” (Focus, 2012, p. 1). However, the FOMC also knows that “without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions” and that “strains in global financial markets continue to pose significant downside risks to the economic outlook” (p. 1). To promote continued economic recovery and to keep a check on inflation, the

On November 1, 1993 the fate of our economy was decided. After one half of a century of waiting, the Eurozone came to a solemn existence. The once great powers of the world, the European nations, had completed a risky, and perhaps foolish, task. The world’s first regional economic system was successfully created. Now, almost two decades later, the world’s economies are on the verge of collapse, and it seems that no economy, other than the Eurozone, is at fault, due to its recent and quite careless economic endeavors. As the rest of the world continues to force the blame upon the Eurozone and its twenty-five member states-including the United Kingdom of Great Britain and Northern Ireland, France, Spain, Portugal, Italy, and Germany, we

In my opinion, how effective low interests rates are to encourage consumers to borrow and spend depends on the elasticity of the demand for loans. If the demand for loans is inelastic, a sharp reduction in interest rates will only increase the loans by a small amount. Please refer to Appendix G. In this case, lowering the interest rates to 0.5% is not enough to stimulate demand. As a result, quantitative easing, another monetary policy is being utilized, as bank rates could not go any lower. Although there are other underlying factors that contribute to the high unemployment rate in the UK, it is shown that reducing bank rates is not the key to solving this problem.

The euro was introduced on the 1st of January, 1999 to foster economic integration and growth. The current member countries of the Euro are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The Euro involves a single, fixed currency within the Eurozone area. The member states are required to adopt a common monetary policy set by the European Central Bank (the same interest rate and policy on quantitative easing). The Growth and Stability Pact was incorporated to set strict limits on government’s budget deficit, gross debt and price stability.

While there is a relationship between economic growth and inflation, monetary policy conducts inflation targeting of 2-3% over the medium term in attempt to reduce inflation. For instance, the RBA can use contractionary monetary policy by increasing the official cash rate, with interest rates adjusting upwards. This increase in interest rates will lead to a reduced incentive for businesses to borrow and invest and for consumers to borrow and spend. Also, by tightening the monetary policy, households will be encouraged to increase their savings, and retire debt. Although the tightening of monetary policy can reduce inflation, the opposing relationship of growth and inflation will in turn reduce aggregate demand since there is a decrease in spending and

Conversely, on behalf of a member of the ECB board of governors, applying quantitative easing within the Eurozone is seen as a very unbalanced approach, unbalanced approach in terms of effecting financial activities and may be beneficial for some countries in the Eurozone. Nevertheless, the Germans may see Quantitative Easing as an ineffective monetary policy regarding that, if the European Central Bank (ECB) purchase governments or corporate bonds from high debt countries then the “German taxpayers will face a risk of having to foot the bill. This occurs if one or more of these countries default on their debt. Also, it will create a loss on the balance sheet of the ECB. The other member countries in the euro zone, especially Germany, will then have to step in to cover the loss” (De Grauwe, 2015). Mario Draghi believes that the programme of bond buying is an important financial approach to circumvent the Eurozone from a deflationary situation. Whereas, the Germans fear

During the financial crisis in 2008, the Central Banks (CB) tried to repair the economy by setting in action an open market operation (OMO). An OMO is where the CB buys short-term bonds to increase the money supply. The CB’s across the globe had to use a monetary policy instead of a fiscal policy, partly due to countries sovereign debt problems . The CB’s were buying short-term bonds until the real interest rate fell to zero. When the real interest rate fell to zero it created liquidity trap. And CBs had to look to unconventional monetary policies to create a higher output. This paper will seek to answer if unconventional monetary policies, specifically quantitative easing (QE), were effective on the economy or not. First, this paper will explain what liquidity trap and how it is relevant. Second, it will explain how QE work. Third, it will conclude if QE were effective or not. To question whether QE were effective or not it will use the American economy. This paper will illustrate liquidity trap and QE by using the models: MS-MD, IS-LM and AS-AD.

On the other hand, the ZLB is a global phenomenon, “The main policy rate of the central bank is currently at zero (or close to zero) in 22 out of 34 OECD countries” displays the worldwide struggle of central banks since the global financial crisis (Wiederholt, 2015, 1). At the ZLB central banks must look at unconventional policies, however Japan shows us it remains extremely difficult to stimulate growth and inflation. In 1999 the BOJ introduce Zero Interest Rate policy (ZIRP) when it lowered in the interest rate to virtually zero. The BOJ also incorporated future policy statements indicating the rate would remain lower for longer this “is to lower future expected interest rates and thereby boost spending immediately” and cause reflation (Williams, 2014, 6). However, expected inflation will only increase if the bank credibly commits to its policy and it is merely not transitional. The BOJ stated ZIRP would remain until “until deflationary concerns disappeared” which is too vague and does not give private agents enough information, therefore casting doubt on competence of the BOJ (www.boj.or.jp, 1999). Setting an inflation target would help quantify the BOJ objectives. Krugman (1998) argued for the BOJ to “credibly promise to be irresponsible” and not reverse ZIRP once inflation increases plus set an inflation target higher than desirable. Bernanke (1999) agrees by setting an inflation target of 3-4% would highlight the movement of BOJ away from a deflationary regime.

The European Central Bank (ECB) was the last to embrace quantitative easing, partly due to political constraints. By contrast, the Fed, under former Chairman Bernanke, did not face the same headwind and was prepared invoke three tranches of asset purchases due to elevated economic uncertainty. How times have changed! ECB President Draghi last week announced that an expanded round of quantitative easing could be invoked beyond September 2016 if financial markets sold off further and threatened to undermine the respective outlooks for economic growth and inflation. Forecasts for real GDP growth and consumer prices have already been reduced by the ECB and downside risks have been attached to these estimates. It appears, therefore, that the ECB under President Draghi is more prepared to behave like the Fed under former Chairman Bernanke. The reaction of Eurozone equity markets and the single currency to the ECB President’s announcement was textbook in nature. It appears that the strengthening of the euro versus the dollar in late-August did not please the ECB: President Draghi warned that negative consumer price inflation was likely in the latter months of 2015. Continued appreciation of the euro would only have intensified deflationary pressure. It appears, therefore, that the currency is once again being used as a safety valve. By contrast, the undershooting of US inflation and dollar strength does not appear to have deterred at

The Bank of Japan (BoJ) significantly downgraded its economic outlook last Friday, citing elevated external risks to growth. Meanwhile, important economic data for December, notably industrial production and household spending, pointed to a significant slowing in activity. The combination of a more negative forecast and indications the economy had meaningfully slowed last month prompted the BoJ’s Board of Directors to unexpectedly incept negative interest rates of -0.1% on banks’ new current account balances at the central bank, effective 16 February. The ultimate aim is to spur bank lending into the real economy, as well as to weaken the yen. The BoJ’s current bond buying programme remains intact.