Monetary policy of the euro zone
INTRODUCTION
Monetary policy refers to the decisions made by central banks to intervene in costs and the availability of money in an economy. These decisions directly affect consumer spending and business investment. The objective of monetary policy is, therefore, to maintain stable prices and inflation below or about 2%. All this contributes to support the general economic policies of the European Union to favor full employment and economic growth.
The main objective of the Eurosystem is the maintenance of price stability. According to Antonia Calvo (2014), “Experience shows that a monetary policy that contributes to maintaining price stability in a lasting and credible way constitutes one of the best ways to guarantee the rate of economic growth and quality of life (…). However, monetary policy cannot act directly to control the prices of the euro area, it has to operate through a complex process, which involves the financial system, financial markets and real economy ”.
Monetary policy is a strong point to determine inflation expectations that affect the increase or decrease in future prices. For this reason, central banks have the mission of specifying and communicating their objectives to be able to execute them to an effective and coherent method for the development of monetary policy. If a central bank is not faithful when marking these objectives, citizens can stop trusting it, so the credibility inspired by central banks is a necessary condition to influence the prospects of economic agents.
In times where inflation is maintained long.
Economy structure of the euro zone
The economy of the euro zone is formed by different economic and financial structures that achieve its correct operation:
- Economic policy.
- Fiscal policies.
- Foreign trade.
- Effective change rates.
- Financial structures.
- Financial markets.
- Financial intermediaries.
- Economic diversity.
- Working market.
Although the different countries that are part of the “small and open” economies can be considered, the whole of the countries that form it create a much larger and more closed economy. Therefore, the structure of the euro zone can be compared to countries such as the United States or Japan than with those of the countries that integrate it, since they are the world’s largest economies.
As for the population, the euro zone would be the second economy with the highest number of citizens, 341.7 million, behind China, which basically quadruples the population of the euro zone with 1.395.4 million inhabitants.
China leads as a country with greater participation in world GDP in purchasing power parity (18.7%), followed by the United States (15.2%) and the euro zone (11.4%), so the latter waspositions as the third largest economy in the world.
In 2018, the euro zone led the services sector, including non -commercials, with 73.4% of participation in total production, above China, with 51.7% of the total. We cannot compare the data with those of Japan and the United States, since its data is from 2017.
Followed by the services sector we find the industrial sector, sector in which the euro zone has 24.9% of total production, however, its percentage of participation in total production in agriculture, fishing and forestry is much lower, obtaining only1.7%.
Monetary policy decisions.
The European Central Bank uses interest rates and other measures to regulate financial conditions in the economy, provides funds to the banking system and charges interest, and thanks to the monopoly available to the issuance of money, you can establish the interest rate. When controlling financial conditions, the ECB has the ability to influence the development of economic activity and can ensure that the objective of marked inflation (not exceeding 2%) is met (not exceeding 2%). In this context, it is necessary to specify that the Governing Council of the ECB establishes, on its website, three different interest rates:
- The interest rate of the main refinancing operations. With this type of rate the banks can borrow liquidity of the eur eurosystem weekly, at a predetermined interest rate.
- The rate in the ease of deposit. Banks can use this rate to make deposits in view in the Eurosystem at a lower pre -established rate than the main rate of refinancing operations.
- The rate on marginal credit ease. This rate offers credit to the eurosystem banks at one day at a pre -established interest rate above the main refinancing operations rate.
The changes established by the ECB in official interest rates affect different aspects. Directly affects the interest rates of the money market, and indirectly to banks, since it affects the rates of loans and deposits they establish for their clientele. This last event also affects the savings and investment made by households and companies, since this rise in loan rates causes them to stop obtaining them for consumption and investment.
On the other hand, in terms of the decisions of monetary policy, at the time the financial crisis began, in 2007, the ECB carried out a series of unconventional measures to be able to respond to the three phases of the crisis.
In the first phase, the main objective of the measures established by the ECB was to provide liquidity to the banks and ensure that the financial markets were kept in operation. Before the crisis, the ECB facilitated, through auctions, a fixed amount of pre -established credit. In this period the banks also lent loans between them in the interbank market to settle their liquidity. However, when in 2008 the interbank market plummeted, the banks stopped trusting the loans they had between them, so the ECB took a measure called complete fixed rate allocation, the institution granted unlimited credit to the banks to the banksA fixed interest rate.
The second phase was transformed into an external debt crisis, so the measures did not standardthat are part of the euro zone. To do this, he carried out very long -term refinancing operations and announced conditional absolute monetary transactions.
Finally, in the third phase of the crisis, the measures adopted approached the beginning of a credit crisis and the risk of deflation. As short -term interest rates were already close to zero, the measures wanted to influence all interest rates that are important for the financial conditions of the euro zone.
According to the official website of the European Central Bank, the measures adopted included:
- Negative interest rate in the ease of deposit.
- Specific long -term refinancing operations (TLTRO), designed to support bank loans to companies and homes.
- Assets Purchase Program (APP), which involves public and private sector values, to downward the structure of interest rates.
- Advanced orientation, which means communicating how the ECB expects its political measures to evolve in the future and what conditions would justify a change in political position.
Economic and monetary developments
The economic bulletin is a complete analysis of the economic and monetary evolution that constitutes the basis of the political decisions of the Governing Council. Its publication is every 15 days after the BC Governing Council meeting on monetary policy, which replaced the previous monthly bulletin at the beginning of 2015.
With all these data, inflation has been analyzed over ten years, specifically from February 1999 to September 2019.
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