Monetary Policy of the European Central Bank

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The monetary policy of the European Central Bank encompasses those measures that the European Central Bank (ECB) takes to achieve its goals set out in statutes and European treaties. The monetary policy of the ECB is characterized in particular by the monetary policy autonomy of the ECB, the focus on the ultimate goal of price level stability and the monetary policy strategy two-pillar strategy .

European Central Bank autonomy

An autonomous (Greek = autonomous, independent) monetary policy is operated independently of other areas of economic and financial policy. The European Central Bank is independent from the governments of the eurozone. Since the central bank is responsible for the stability of the value of money , it must not have any financial relations with institutions of the European monetary union or with public national institutions. If monetary policy is not independent, it is always threatened with being used for other economic policy goals. Its primary goal is to ensure price stability. Without prejudice to this aim, it supports the general economic policies of the Union in order to help achieve its objectives. Art. 282  ff. FEU Treaty

The autonomy of the European Central Bank is characterized by:

• Institutional (operational) autonomy - "The ECB has all the instruments and competencies that are required for the implementation of an efficient monetary policy and is empowered to decide independently how to use them."
• Personal autonomy - "The statutes provide for the following terms of office for the members of the Governing Council:

1. A term of at least five years for the governors of the national central banks.
2. An eight-year term for the members of the Executive Board ; reappointment is not permitted. "

These terms of office are longer than the terms of office in politics. This ensures that the Governing Council is independent of political groups.

• financial autonomy - “The ECB has its own budget. Your capital is subscribed and paid in by the national central banks of the euro area. "

Strategies in Monetary Policy

The intermediate and final monetary policy objectives

The main task of the European Central Bank is to ensure price stability. However, the central bank cannot control prices directly, but tries to achieve price stability through an appropriate monetary policy strategy . The monetary policy strategy forms the framework for ongoing monetary policy. It thus covers the entire path from the use of instruments to the ultimate goals of monetary policy (Fig. 1).

A distinction is made between two strategies in monetary policy strategies, namely the two-stage and one-stage strategy. The two-stage strategy sets an intermediate goal, which serves as a means to an end to achieve the ultimate goal. The one-step strategy pursues the ultimate goal directly.

Two-step monetary policy strategy

If monetary policy operates with an intermediate goal, it is a two-stage strategy. In order to achieve the end goal, the focus is on another variable - the intermediate goal - which can be more easily controlled. In the monetary policy process, the intermediate goals are located between the directly controllable operational goals and the macroeconomic end goals (Fig. 1). An intermediate goal should be observable in the short term and controllable by the central banks with their available instruments.

The nominal gross domestic product as an intermediate target in theory

In the following, a control of nominal GDP will be examined as an intermediate target variable . The way in which nominal GDP control works can be illustrated using the quantity equation expressed in rates of change (^) .

${\displaystyle {\hat {M}}+{\hat {V}}\equiv \pi +{\hat {Y}}\equiv {\hat {Y}}^{n}}$

• ${\displaystyle {\hat {M}}}$ = Money supply growth
• ${\displaystyle {\hat {V}}}$ = Change in speed of rotation
• ${\displaystyle {\hat {Y}}^{n}}$ = Growth rate of nominal GDP
• ${\displaystyle \pi }$ = Price development
• ${\displaystyle {\hat {Y}}}$ = real economic growth

This intermediate goal strategy combines two end goals, namely price development and real economic growth . Both goals are equally weighted. The GDP target is controlled by adjusting interest rates. The interest rate adjustment can take place if the current GDP development deviates from the target or if the growth in nominal GDP deviates from the target value. If GDP growth is intended, interest rates must be lowered. This stimulates real GDP growth and prices tend to rise. When controlling nominal GDP growth, the central bank orients itself on deviations from this growth and a target growth rate. The nominal GDP growth target consists of the inflation target and a real growth component. ${\displaystyle \pi }$ ${\displaystyle {\hat {Y}}}$

• ${\displaystyle \pi ^{Ziel}}$ = Inflation target
• ${\displaystyle {\hat {Y}}^{*}}$ = real growth component

The following applies to the total target deviation ( ): ${\displaystyle {\hat {Y}}^{n}-{\hat {Y}}^{*n}}$

${\displaystyle {\hat {Y}}^{n}-{\hat {Y}}^{*n}=(\pi -\pi ^{Ziel})+({\hat {Y}}-{\hat {Y}}^{*})}$

The monetary policy responds to deviations from the inflation target and to changes in aggregate output target . If the intended goal is met, d. H. if is, then results as the inflation rate ${\displaystyle (\pi -\pi ^{Ziel})}$ ${\displaystyle ({Y}-{\hat {Y}}^{*})}$ ${\displaystyle {\hat {(}}{Y}^{n}-{\hat {Y}}^{*n})=0}$

${\displaystyle \pi _{t}=\pi ^{Ziel}+E_{t-1}({\hat {Y}}^{*}-{\hat {Y}})_{t}}$

advantages

“In addition to the benefit of being closely tied to macroeconomic objectives that are publicly recognized, proponents of nominal GDP governance attribute shock absorption capabilities. Let us imagine an exogenous decline in demand that slows real and consequently also nominal economic growth. A nominal GDP rule would then require monetary policy easing to get back on track. The interest rate cut would increase aggregate demand and real growth. But even with an aggregated disruption of supply, the positive properties of the nominal GDP orientation are evident. The prerequisite for these positive properties is that the growth of nominal GDP can be perfectly controlled by the central bank. If, moreover, only one end goal is striven for, even if nominal GDP growth is fully controllable, the advantages of the nominal GDP rule no longer apply without restriction. In the case of supply-side disruptions, you can only compensate for the price effect or the output effect. "

disadvantage

“A serious disadvantage of the nominal GDP orientation is the availability of data. The data source for real GDP is the national accounts, which are only available with a time lag of several months and only quarterly. It should also be asked whether the pursuit of economic and growth targets in addition to the aim of fighting inflation does not overwhelm a central bank. Rather, it can be argued that maintaining price stability is the best contribution monetary policy can make to real development. This makes the transparency of monetary policy and communication with the markets and the general public more difficult. Furthermore, the advantages of nominal GDP as an intermediate goal can only be exploited if, in principle, the entire process from taking a monetary policy measure to influencing aggregate demand and nominal income is known. Furthermore, the EU countries are characterized by different financial structures. "

Further intermediate goals of autonomous monetary policy

• Exchange rate targets - only the flexible exchange rates are compatible with the autonomous monetary policy, since with fixed exchange rates the domestic monetary policy depends on the foreign monetary policy.
• interest
• Monetary targets

Single-stage monetary policy strategy

“With the single-stage strategy, price stability is achieved through direct inflation control. The inflation target is compared with the central bank's inflation forecast. Variables such as import prices, unit labor costs and the output gap are included in the forecast. The inflation targets are usually formulated as an upper limit for price increases. Compliance with the inflation target is measured against the officially expected development. If the forecast inflation is above the target value, monetary policy has to adopt a restrictive course, ie raise central bank rates. On the other hand, more favorable inflation prospects than those specified by the inflation target signal a more expansive monetary policy orientation in the future. "

Taking into account the autonomy of monetary policy in direct inflation control, it is important that the national central banks formulate the specific inflation target themselves. Otherwise conflicts with autonomy can arise.

Instruments

→ Main article : “Instruments” in the European Central Bank article

The European Central Bank has the following instruments at its disposal to implement its monetary policy objectives:

• Open market operations
• Standing facilities
• Forex market intervention
• Reserve

Individual evidence

1. ↑ ^{a b c} http://www.ecb.int/ecb/orga/independence/html/index.de.html European Central Bank
2. ↑ Egon Görgens / K. Ruckriegel / F. Seitz; European Monetary Policy, 3rd edition, ISBN 3-8282-0250-0 , page 119.
3. ↑ Egon Görgens / K. Ruckriegel / F. Seitz; European Monetary Policy, 3rd edition, ISBN 3-8282-0250-0 , pp. 119–120.
4. ↑ Egon Görgens / K. Ruckriegel / F. Seitz; European Monetary Policy, 3rd edition, ISBN 3-8282-0250-0 , pp. 135-136.

literature

• Egon Görgens / K. Ruckriegel / F. Seitz; European Monetary Policy , 3rd edition, ISBN 3-8282-0250-0 .
• M. Borchert; Foreign trade , 7th edition.
• Dr. Peter Schaal: Monetary Theory and Monetary Policy , 3rd Edition, ISBN 3-486-22442-5 , Oldenbourg Verlag.
• D. Duwendag / K.-H. Ketterer / W. Kösters / R. Pohl / DB Simmert: Monetary Theory and Monetary Policy, A Problem-Oriented Introduction , 4th, revised and expanded edition, ISBN 3-7663-2342-3 , Bund-Verlag.

Web links

• German Bundesbank
• European Central Bank