The European Central Bank (ECB) has engaged in a form of monetary policy in which it buys bonds from the Spanish and Italian Governments. Monetary policy is a central bank’s changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth. There are two types of monetary policy; expansionary and contractionary. This article focuses on expansionary monetary policy. Expansionary monetary policy is Federal Reserve System action to increase the money supply, lower interest rates, and expand real GDP. The goal of this policy would be to bring down the interest rates on the Italian and Spanish bonds which might be able to reassure private investors that Italy and Spain would be able to pay them back and therefore reduce the upward pressure on interest rates in the Euro Zone. The European Central Bank is currently buying bonds and effectively increasing the money supply in Europe with the hope that more government and private sector spending will move the Euro Zone economy closer to the level of full employme...
In this paper I will explain which of the monetary tools available to the Federal Reserve are most often used and the reasons for that. I will also describe how expansionary activated conducted by the Federal Reserve impact credit avilaiblilty, the money supply, interest rates and security prices, and to conclude I will show the result of the transactions in the form of a balance sheet supposing the Federal Reserve
Culturegrams 1995. Brigham Young University: David M. Kennedy Center for International Study, 1998. German Economy. http://www.cnnfn.com
European Commission. Economic and monetary union and the euro. Publications. Luxembourg: Publication Office of the European Union, 2012. Document.
In the past, the system of monetary policy is based on the Classical Gold Standard. In the article, “Review of: European monetary union: Lessons from the classical gold standard”, Stanley W stated how the gold standard lasted from the periods of 1880 to 1913. In the beginning, central banks used interest rates to drive short term capital inflows, which avoided gold movements and made sure that the prices adjust relatively. However, this adjustment process didn’t work. The author then argued that long term international capital flows, migration, and differences in tariff barriers, also known as the “Three Pillars of the Classical Gold Standard”, contributes to the reason why developing countries were able to maintain their current account deficits until they could face the competition with the modernized countries. However, in accordance to the article “Interest rate interactions in the classical gold standard, 1880-1914: Was there any monetary independence?” by Bordo and Macdonald, the Classical Gold Standard is not a sustainable monetary system because it required some countries to be independent when monetary policy operates. This is especially conflicting in the modern day structure in which central banks need to use a targeting zone to achieve their purpose. In the modern era, quantitative easing (QE) is an unconventional type of monetary policy used by the Federal Reserve to respond to the deep recession. According to the article “Quantitative easing and Proposals for Reform of Monetary Policy Operations: by authors Scott and L.Randall, the impact of conducting QE on interest rates is lower long term yields when compared to the short term ones. As noted by authors Bora, Omar and Georges in their article “Financial Crisis and...
Many people would agree that Europe is a continent in which regions identify with each other even if they are not part of the same country. For that reason, as well as others, in 1957 the Treaty of Rome "declared a common European market as a European objective with the aim of increasing economic prosperity and contributing to 'an ever closer union among the peoples of Europe'" (www.euro.ecb.int). Later, in 1986 and then in 1992, the Single European Act and the Treaty of European Union tried to build on the previous treaty to create a system in Europe in which one currency could eventually be used all over the land under the heading of the Economic and Monetary Union. (www.euro.ecb.int) However, the question remains, why would the leaders of various European nations want to create one currency when the rights of national sovereignty have always been an issue for countries all over the world. Why, in 1998 did they create the European Central Bank, and why in "The third stage of EMU... on 1 January 1999, when the exchange rates of the participating currencies were irrevocably set" (www.euro.ecb.int) did eleven, and later twelve, countries link themselves economically in a way that has never been done before?
Organizations that decide to issue bonds generally go through a series of steps. Discuss the six steps.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
The recent global financial crisis that affected not only America but also Europe and other parts of the world resulted in massive unemployment. This is due to the high costs of operation that many corporations faced forcing them to cut on labor costs. There is need for European government interventions to avert this social crisis and prevent the occurrence of such a crisis in future. Unemployment has hit the service sector harder than other sectors with the following being the most affected: automotive, construction, tourism, finance and real estate. The global financial crisis has also increased consumer prices thus pushing inflation. According to McCathie, “the increase in July consumer prices to 1.7 per cent pushed inflation in the currency bloc up towards the European Central Bank’s target of keeping inflation at below, but close to 2 per cent. Eurozone consumer prices had stood at 1.4 per cent in June” (McCathie, 2010).
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
Monetary policy is the central bank’s use of increasing or decreasing the money supply or the base rate of interest to influence the level AD. It can be expansionary - used to take the economy out of recession by increasing the money supply and the interest rates and therefore increasing the AD.
As a result of those huge economic and social issues resulting from Eurozone crisis, finding a solution to the currency problem become an urgent as well as a crucial task of the member countries. In order to fix this problem, there were many different proposals submitted by all parties concerned. Policy implementations taken by the European Central Bank have had some powerful impacts on the economy of the union, and therefore the idea concerning a separation within the union has almost disappeared. However, to be able to find an effective and permanent solution it is needed to focus on long term fiscal and monetary policies.[1]
Smaghi, L. (2009, Aprl 28). Conventional And Unconventional Monetary Policy. Speech at the International Centre for Monetary and Banking Studies (ICMB), Geneva. Retrieved from http://www.bis.org/review/r090429e.pdf
“If you owe your bank a hundred pounds, you have a problem; but if you owe it a million, it has.(1)”
(b) Provide an example of how a Central Bank could use monetary policy to achieve
Bonds have a number of characteristics that differentiate one issue from another. We are going to define and describe a number of characteristics in detail below.