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7/31/2019 ECB vs FED Monetary Policy (2011)
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The ECB vs. The FedThe ECB vs. The Fed
By:Petru-Catalin David
FH des BFI Wien
May 2011
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http://upload.wikimedia.org/wikipedia/commons/f/f4/Federal_Reserve.jpghttp://upload.wikimedia.org/wikipedia/commons/3/36/Eurotower_in_Frankfurt.jpg7/31/2019 ECB vs FED Monetary Policy (2011)
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Presentation Plan
1.The ECB and the FED structure and history
2. Monetary policy
objectives of the ECB vsthe FED
3. Strategies for achieving
monetary policy goals
4. How did the central
banks respond to the
economic crisis 2
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Structure of The ECB
Modeled after the GermanBundesbank.
Governed by a six member
Executive Board ofDirectors.
Headed by a President anda Board of Governors.
Comprised of The ECB and
the Local Central Banks ofthe 27 European UnionMember States.
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Structure of The Fed
Modeled after some of the oldestEuropean central banks in history;such as, Swedens Riksbank(1668), the Bank of England
(1694), and the Banque France(1800). Also, served as a loosemodel for the reestablishment ofGermanys Bundesbank afterWWII.
Governed by The Federal ReserveBoard of Governors, which includesthe chairman, and The FederalOpen Market Committee (FOMC).
Comprised of the 12 FederalReserve Banks and the member
banks (mostly commercial banks). 4
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Presentation Plan
1.The ECB and the FED structure and history
2. Monetary policy
objectives of the ECB vsthe FED
3. Strategies for achieving
monetary policy goals
4. How did the central
banks respond to the
economic crisis 5
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ECB
Maintain Price
Stability
Support GeneralEconomic Policies ofthe European UnionStates
Ensure an OpenMarket Economy
Administer the U.S.
Monetary Policy Supervise and regulate
banking institutions
Maintain the stability ofthe financial system
Provide financialservices to depositoryinstitutions, the U.S.government, and
foreign officialinstitutions
FED
Official objectives
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Primary Goals
Achievingmaximumsustainable GDPgrowth with price
stability
Maintaining pricestability, definedas inflation ratesbelow, but close
to, 2 percentover the mediumterm
ECB FED
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Presentation Plan
1.The ECB and the FED structure and history
2. Monetary policy
objectives of the ECB vsthe FED
3. Strategies for achieving
monetary policy goals
4. How did the central
banks respond to the
economic crisis 8
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Strategies for achieving monetary policy goals
Carefully monitoring the money
supply M3 Quarterly MonetaryAssesment(QMA)
Analyzing the cyclical dynamics
of economic activity
Forecasting inflation using
velocity models
Influencing the overnight interest
rates by performing open market
operations
Analyzing the cyclical dynamics
of economic activity
Analyzing economic indicators
such as consumer
spending,manufacturing or
building indexes
ECB FED
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Why these differences ?
Empirical evidence of the correlation of
money supply and inflation
Instability in the money demand in the US
due to financial innovations
A predictable velocity of money in the EU
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...money should never be ignored-neither in monetary policy nor inresearch.
Otmar Issing,former member
of the ECB executive board
Money supply How the ECB sees
it
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...money plays no role in todaysconsensus macro model...and virtuallyno role in the conduct of monetary
policy, at least in the US
FED Governor Lawrence Meyer
Money supply How the FED sees
it
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Money aggregates
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U.S. M2 and Inflation
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EU M3C and Inflation
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Presentation Plan
1.The ECB and the FED structure and history
2. Monetary policy
objectives of the ECB vsthe FED
3. Strategies for achieving
monetary policy goals
4. How did the central
banks respond to the
economic crisis 16
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How the central banks reacted
Interest rates to all time lows FED 0,25%
ECB 1%
The FED started QE
The ECB bought Greek bonds andissued the SMP programm
Both the FED and the ECB provided
massive liquidity to banks 17
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The main reaction of the FED -
boosting its balance sheet
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ECB and its SMP
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FED vs ECB Balance sheets
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How did the markets react in response to
the FEDs strategies?
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US succeded in avoiding
deflation
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S&P 500 gained over 100%
since 2009
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Unemployment is still a big problem
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Conclusion
Price Stability is a priority for both central banksbut the FED could shift this objective for astronger GDP growth on short term.
ECB avoids to intervene directly on the market,while FED is often a player on the financialmarkets.
Focus is placed on signaling their decisionsregarding changes in short-term interest rates in
advance in order to let the markets adapt to newinterest rates.
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