Monetary Policy in the Euro System

Thèmes abordés

Monetary policy, European Union, EU, FED, ECB, economy

Résumé du document

From 1945 to 1970, the monetary policy was part of the Bretton Woods system. The adherent countries must maintain a fixed exchange rate between their currencies and the U.S. one. With the collapse of this system in 1970, some countries have adopted a floating exchange rate, which is a system where currencies have no official value; the price is formed on the foreign exchange market based on supply and demand.

Nevertheless, many countries have kept a system of a pegged exchange rate. This was particularly true for the European Monetary System (EMS). The monetary policy remained highly controlled by the government.
The upheavals that led to the current system occurred in 1980 with the deregulation of domestic financial markets and the liberalization of capital movements that happened in France in 1986‐1987 thanks to the Single European Act. During those years, central banks have become independent of government. However, before 1990, most central banks were under government supervision, while the U.S. Federal Reserve (FED) already enjoyed considerable autonomy.

The European Monetary System (EMS) has now given way to the definition of a common monetary policy within the euro area. The European Central Bank (ECB) aims to establish the monetary policy of countries in the euro area since 1st January 1999.

Currently, central banks (ECB & FED) are characterized in terms of their institutional
independence:
 Freedom to formulate and implement monetary policy (operational independence or instruments)
 Independence of leaders, appointed by the government
 Assessed financial independence through budgetary control exercised by public authorities, or by how much the state is free or not to finance its expenditure by a direct action or indirect appropriation of the Central Bank.

Therefore, there is no independence of targets. Monetary policy is the government.

Extraits

[...] Monetary policy requires a match of instruments to achieve its objectives by central banks II. A similar instruments and organization The European Central Bank (ECB) and the U.S. Federal Reserve (FED) have each, as we have seen, different objectives. However, we will see they have a similar organization and they use the same tools to implement monetary policy A similar organization The ECB and the Fed have many common features: firstly, both are decentralized systems in which a central entity makes the single monetary policy and integrates the decentralized operations of banks (twelve regional banks in the United States and sixteen in the Eurosystem). [...]

[...] The overnight rate is the amount paid to the bank lending the funds. http://en.wikipedia.org/wiki/Overnight_rate 11 Flouzat Osmont d'Aurilly Denise, Le Concept de Banque Centrale, Bulletin de la Banque de France, Octobre III I. Anal lysis of f behavior The ECB use mainly th es hree types o rates: the Bank Rate (or margina lending ra of e al ate), the refin nancing rate and the rate e of remuner ration of dep posits. The Fed, me eanwhile, relies more on n the rate an nd the Bank k Rate. [...]

[...] And finally, the Fed has assured its function of lender of last resort. All this has helped, thanks for the prompt recognition of the existence of a significant increase in productivity gains, the exceptional cycle of the 1990's and, after having ably conducted the excesses of financial markets, the economic rebound from 2002‐2003, and we hope, the economic rebound of 2010. However, we note that these successes are not so excellent, for at least three reasons. First, we note that, in theory, it is the most complete uncertainty that prevails. [...]

[...] It is indeed much more credible than the ECB through its level of seniority. Indeed, while the ECB has been established there nine years, the Fed enjoys 94 years of experience. To carry out its mission and to ensure the credibility and stability of the euro, the ECB plays on its degree of independence vis‐à‐vis the political power. It attempts to buy credibility, but never managed to acquire in many years. The Fed can influence the behavior of economic agents with a single speech by the President. [...]

[...] An expe ected inflatio on rate zero. In facts, the ECB aims to o anchor infla ation expect tations in the e short and m medium term m and to redu uce uncertainty about the long‐term price level. In general, t the Taylor cu urve represe ents the sho ort‐term expe ectations of inflation. Th he short‐ term evolution of economic activity is largely determined by monetary p m policy decisions; the Cent Bank must be concerned about its variability. [...]