We’ll see what the European treaties say about monetary policy and the problems it could cause. In a second step, we’ll see how it works.

Since the Maastricht Treaty of 1992, monetary policy is the same for countries in the euro area. Monetary policy is given by the European System of Central Bank, national central banks and the ECB(European Central Bank).Major decisions are taken by the ECB in Frankfurt and the national central banks apply these decisions.The decision of ECB is made by a Council, known as governors. There is a president. Today, this is Jean Claude Trichet. The Executive Board is appointed by the European states, ie the Council of Ministers.

The Executive Board of the ECB is independent:

  1. The Executive Board of the ECB can not receive instructions from any member state or even the council of EU ministers
  2. She is financially independent, an independent budget with own resources.
  3. The members of this body are appointed for a certain period and are irrevocable. Members are appointed for 8 years.

What are the problems posed by the status of the ECB?
The mandate entrusted by the treaties to the ECB. There is a problem of coordination between monetary and fiscal policy. The problem of coordination between monetary and exchange policy. The objective of the ECB is price stability. There were also other objectives. The ECB shall contribute to other objectives such as employment, growth, provided that its goal is assured.EDF has set price stability on the same plane as employment. This choice of the ECB debate. It is rather inherited the status of the Bundesbank, which was independent and had the same objective and principal.

Maybe it is true in the long term. In the short term, this is certainly not true. There is a link between monetary policy and growth, which involves the influence of tau interest on the investment credit.

If there is a link between monetary policy and the real economy, then there is a problem of coordination between monetary and fiscal policy.The goals can conflict. Monetary policy is the ECB and fiscal policy is represented by states, each of their sides. Monetary policy has imposed rules on fiscal policy, 3% deficit, 60% of the debt. There is no real coordination between different policies. It is then possible inconsistency problems. For that fiscal policy is effective, it must be the monetary policy in coordination with fiscal policy.

Example: the ECB believes that inflation is too high, then they increase the rate of interest. While fiscal policy was expansionary fiscal policy because they want an increase in growth. The two effects cancel, the total deficit is rising and interest rates as well. There is no advantage to that.

Of course, there may be discussions between the two policies, but the ECB is fully independent, this can cause problems. This coordination problem, some economists have tried to solve it, saying that monetary policy and fiscal policy must intervene when the activity decrease, with supply shocks and demand shocks. This calls for macroeconomic policies are demand shocks. We must revive either monetary or by fiscal policy. There are demand shocks asymmetric and symmetric shocks. If the shocks are symmetric, then monetary policy operates for all countries affected fool. In contrast, if shocks are asymmetric, then this reference to a reaction of fiscal policy. Here there is a certain form of rationality between the ECB and fiscal policies since the two have the same goal.
In general, it is almost hit at the same time but not in the same way. Therefore, it is both the symmetric and asymmetric shock. This would explain the use of these two instruments.
So far, there have been no problems of coordination but it is possible. This is less sensitive than the United States.
The third problem is the problem of coordination between monetary policy and exchange policy.The exchange policy is the responsibility of the Council of Ministers. Exchange targets are set by the Council of Ministers. Foreign exchange reserves of the EU are in the ECB. If we intervene in the foreign exchange market is the ECB. The best way to have an exchange policy is to play on foreign exchange reserves (ECB), but also interest rates (ECB). There is a coordination problem, because the ministers set the policy of trade but the ECB is independent.
There is no policy currently trading within the EU.

Can we have both a policy of dynamic exchange with an independent monetary policy and free movement of capital between Europe and the rest of the world?
It is the inconsistency triangle Mundell, he says it is not possible. You can not have an independent monetary policy, a policy of independent trade and free capital movement. It was a freedom of capital movement and an independent ECB, so there is no exchange policy. Within the EU there is more politics of trade. Before the euro, each country had its own monetary policy. However, France wedged its monetary policy and exchange policy on Germany. The euro has merely completing a progressive construction.

Must specify the primary goal, then to achieve the ECB uses a number of milestones, and has the instruments to address them.
The ECB is an inflation of 0 to 2%. At first it was the 0 of the fork. Now, it is rather 1 to 2%. This objective concerns the general level of consumer prices, harmonized across the eurozone. This is a year on year, ie the price increase on the previous 12 months should not exceed 2%.

Empirically, the overall level of consumer prices has often exceeded 2%, primarily due to commodity prices. There was a re-correct index on the volatility of commodity prices.

To achieve this end, the ECB uses the intermediate objectives, including the rate of growth of money supply. The origin of the separation of the monetary sphere and the real economy, the ECB has set a target growth of money supply (M3). Based on what she considered a stable growth, it has set a growth target of M3.

This is a legacy of the Bundesbank.
All this has not worked very well, in that it failed to control growth in money supply (about 4.5% but M3 has risen faster than 4.5%) and M3 has Nor had the desired effect on price growth. M3 is somewhat artificial and the problem of the ECB thought there was a stable relationship between the M3 and prices in the euro area. But this relationship has never been demonstrated for the euro area did not exist. In itself, this target of M3 growth of 4.5% has been set up totally blind. The ECB has finally admitted that goal of the money was not obvious. The ECB has increased by another intermediate target interest rate in the short term. The ECB targets interest rates that can achieve price stability. It sets the interest rate based on price changes observed in activity.

To many economists, this approach to a normative value. Hence the fact that in determining whether the monetary policy of the ECB is restrictive and expansionary, will be seen from the Taylor formula. Example: If the actual nominal rate is below the Taylor formula, then we will say that the ECB gives slightly more importance to the growth …

How the ECB is she on interest rates in the short term?
It is important to understand how the money market. Every French bank has a current account at the Bank of France. If ever there is a transfer of the BNP in the SG, then there will be a transfer that goes through the Bank of France. Every evening, the accounts are adopted at the Bank of France. The current account balance of each bank must be balanced or even positive every night. It is even necessary that it is positive. If not, the current account balance is not due to a last check, then the bank borrows the amount provided for one day to another bank. Every day, banks borrow and lend money overnight. This is the interbank market so as to have permanently minimal money in the bank of France.
Structurally, the banks need to borrow in this market.
The ECB intervenes in setting two rates. It sets a rate that is a rate which it agrees to lend money to any bank. If it sets its rate to 4% when no bank will lend money beyond that rate. It sets a minimum rate of 3% for example, ie it is ready to pay accounts to 3%. In fact, no bank should lend money at less than 3%. The ECB sets two rates which oversees the monetary market, which ranges from overnight to one week.
Structurally, the banks need money and the rate tends to stall on the high side. To ensure that the rate is around the middle (ie the rate), the ECB will offer to lend money at interest rates around the middle. Then she manages to keep the rate within the range.
BC lends money to commercial banks against securities. BC will require the bank to take deposits, which are expressed in Treasury bills. The next day, the bank repays the loan and gives the Treasury.
This is the traditional operation.

European Central Bank

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