Monetary policy: Prehistory, Monetary Union
Prehistory of monetary policy
From an initial period that we could call prehistory of monetary policy, during which the authorities passively covered the demand for money, monetary policy has become an irreplaceable piece of macroeconomic management of aggregate demand. Monetary control has been articulated in terms of objectives and instruments, although the selection of one and others has not been exempt from problems. On different occasions, monetary authorities have found difficulty in establishing a clear priority of objectives over the other possible, have tried to achieve several objectives at the same time with a single monetary instrument or have alternated the priority between the objectives too often to have obtained a consolidated successIn any of them (García, 1993). We can link the first attempt for active use of monetary policy to the 1959 stabilization plan, since until then the Central Bank had limited to passively proportional the liquidity demanded by banking entities. The stabilization plan was an adjustment plan, which sought, among other objectives, a slowdown in aggregate demand, it was added that monetary policy played its restrictive role through the direct limitation of credit. The measure was completed with the elevation of interest rates and with the creation of a deposit prior to importation, however, these actions barely lasted a year and mid 1960 the objective of economic policy had changed towards the stimulus of theProductive investment, monetary policy continued to consider with a basic restrictive purpose during the 1970-73 period, and was discontinuous and not very effective. In the same way, an important change was perceived: monetary control becomes more indirect, it is intended to influence bank liquidity, which in turn will influence credit growth. The monetary measures taken were the establishment of a deposit prior to importation (which due to the restriction on the liquidity of the banks, forces these to restrict the credit granted), the elevation of the basic type of the Bank of Spain and the application of aCommission to the new credit policies at the Bank of Spain, making the appeal to it (García, 1993, p.22).
In 1959 to 1969 the stabilization plan was established, which supposed the opening to the rest of the world of the Spanish economy and was followed during the 60s with the implementation of successive development plans. The monetary policy of this period was used to maintain interest rates and credit levels compatible with the objective indicated in these plans: the increase in GDP. In general we can say that in this period the necessary instruments were lacked to practice an adequate monetary policy, a small advance was the establishment of the Coefficient Box of Industrial Banks and the process of release of the interest rates initiated in 1969 (Martínez, 2008, p.376).
Martínez (2008) states: In the monetary policy of the seventies, a series of measures are launched that allow establishing a monetary policy with a modern structure, including:
- The creation of cash coefficients for commercial banking in 1970 and for savings banks in 1971 that allowed, together with the existing for industrial banking, covering the entire banking field.
- A series of mechanisms were launched that, when required the daily calculation of certain banking magnitudes, cash coefficient, allowed an advance in the statistical knowledge of the assets of the entities.
- Special rediscount lines were eliminated by disappearing, therefore, the endogenization of autonomous liquidity creation factors.
- With the intention of draining liquidity and financing the budget deficit, public debt was issued, surplus investment bonds and treasure bonds were placed. (p.376-377)
It can be said that this 70’s policy was already something modern and could meet objectives, but it is not until 1974 that a policy arrives that fits the levels implemented.
Quantitative monetary control
In 1973 the inflationary situation and the monetary bonfire and credit again forced the authorities to rethink monetary policy, but more articulatedly. From that year the Bank of Spain formulates objectives of growth rates of a monetary magnitude representative of the demand for money by the agents, whose evolution is linked to the evolution of nominal production through an easily determinable equationand stable. Spain was one of the first countries to adopt a bietapic monetary control model, which has been in force during the 1970s and the first half of the eighties (García, 1994, P.24).
Monetary policy at a stage of change (1984-1989)
This era is mainly made up of two facts that ended the implementation of monetary policy.
Martínez (2008) states:
- First the high public deficit that injected large doses of liquidity into the system
- The strong financial innovation that prevented the objective M3 being as effective as it was intended. (p. 378)
To solve the second problem, the one related to the lack of effectiveness of M3 as an intermediate objective of monetary policy, it was replaced by liquid assets in the hands of the public (ALP) that were better related to real variables in nominal terms. ALP included in addition to M3 assets, substitute bank liabilities. However, the relationship between ALP and AC would be configured as an inherently unstable relationship, of very difficult control. The Spanish authorities implemented a more austere fiscal and monetary policy that increases the interest rates and incentive the entry of short -term capitals, which determined an appreciation of the peseta, the necessary interventions to prevent the appreciation of the currency, injected liquidity into thesystem whose sterilization led to new increases from interest rates. The need to maintain low exchange rates to favor export determined the acceptance of farming rates of the ALP higher than those that, in other circumstances, would have been recommended (Martínez, 2008, p.379).
Instability (1987-1988)
During the first three years of stocks, the ALP had shown stable growth, and their use as a monetary control variable produced a very positive result in inflation control, which became 4.6% in 1987. However, in that same year, important problems in monetary instrumentation were manifested, part of them were due to the variability of the circulation speed of the Dupil the objective, part of the deviation was due to a real growth ofThe economy superior to the estimated, but much was due to restructuring of the active portfolios of individuals due to the increase in the preference for liquidity. The resistance of the Treasury to be financed in market conditions and the attraction of the issuance of the Treasury letters explain the speed of circulation of the ALP decreases, instead of increasing, however, the major difficulties were born by interrelations between politicsmonetary with the public deficit and with the exchange rate policy (García, 1994, p.31).
In summary we can say that in 1986 and 1987 they chose to make new decisions about Spanish investments abroad on their possibilities in financial loans, long -term operations in convertible pesetas, coverage of short -term positions in foreign currency and maintenance of short positions.
Steps towards the Monetary European Union
The entrance of the peseta into the European Monetary System (SME) in 1989, forced the Bank of Spain to give a new orientation to its monetary policy. Once within the exchange stability mechanism, the priority objective of the monetary authority could not be other than maintaining the exchange rate of the peseta within the margin of fluctuation that was initially established in 6% against ECU, accepting forthis the precise movements of the types of interests. The implementation of a fiscal policy of expansive sign and a monetary policy of restrictive sign, allowed the peseta to remain at the top of the fluctuation band. However, the SME soon showed contradictions inherent in its operation. On the one hand, the price of the coins of all countries was set in relation to the German framework, when in reality the economic situation of those was very different from that of the German country and required different economic policies. Thus, Germany was facing a reunification process and needed to apply expansive fiscal policies, demanding from this of restrictive monetary political countries, when the situation of the latter was in some cases, recession (Martínez, 2008, p.380).
Spain was added difficulties since, on the one hand, the existence of strong increases in costs and salaries and sectors very little open to competition was certainly incompatible with exchange commitments, but also, and to a large extent, because it was madenecessary the use of variables such as the interest rate to temper the pressure of the expense. During the 1992 and 1993 the SME mechanism made a crisis, there was a wave of devaluations and the SME was abandoned by the sterling and Italian lyre. Finally, on August 2, 1993, fluctuation bands were expanded by setting them at 15%, which made the system practically types of flexible changes. These devaluations together with those carried out until 1995, clearly indicated that monetary political management could not rest only on exchange stability. (Martínez, 2008, P.380)
The Monetary Union
The project of a European Union (UME) was scheduled more than three decades and collected in the Werner report, however, until June 1989 and at the Madrid Summit, when the heads of state accept the report of Delors and set the dayJuly 1, 1990 as an entry date of the first phase of the Monetary Union. The UME is developed in three stages that we summarize explain below:
- On July 1, 1990, capital movements of the countries of the European Union are fully liberalized, on January 1, 1993, the single market is established, on November 1, 1993, the composition of the Basket of ECU is determined and entersIn force, the European Union Treaty signed in Maastricht, in this phase the coordination of economic policies is carried out as a prior step to the establishment of a monetary policy and single currency.
- The second stage begins on January 1, 1994 with the creation of the European Monetary Institute (IME) in Fran. The necessary policies are established for Member States to reach the convergence criteria that were estimated essential to be part of the UME. These criteria referred to the inflation rate, public deficit, interest rates and exchange rate. After all this, the Member States that met the conditions to be part of the UME were: Germany, Austria, Belgium, Spain, Finland, France, Holland, Ireland, Italy, Luxembourg and Portugal. The rabbit I consider that Greece and Sweden did not meet at that time the required conditions. On the other hand, they did not want to be part of the Ume Denmark and the United Kingdom.
- In January 1999, it is the beginning of the third stage in which the ‘’ euro ’’ is established as a single currency for the entire area, although physically it will not be implemented until 1-1-2002. The Council sets the exchange rates of each currency in an irrevocable way with respect to the euro and monetary policy becomes formulated by supranational authority: the European Central Banks System (SEBC), the introduction of the single currency toAs of January 1, 1999, it required the change in the accounting of the European System of Central Banks and initiated the instrumentation of unified monetary policy, also reominated by a set of accounts, values and annotations (Martínez, 2008, P.381-382).
conclusion
As we already know the monetary authorities deal with the monetary mass to influence monetary markets and also with the real economy. With what they can perform open market operations, they can also make variations in their own active rates and make reservations or modify their reserve coefficients. And also happens with fiscal policy, once the economic gap is identified or known, an expansive monetary policy for recessive gaps, and a restrictive monetary policy in an inflationary gap should be used. Monetary policy is better than fiscal policy in many ways, but its greatest weakness is that it is much less effective in recessive gaps than in inflationary gaps.
Monetary policy is the most powerful and efficient tool to control inflation. Issue above what demand grows is always and everywhere, attempting against the growth and generation of long -term jobs. In this sense, the economic policy recommendation was conclusive: fiscal and monetary policy must be counter-closing. Monetary policy must be responsible when inflation overflows. On the contrary, it can be expansive if inflation is controlled and there is high unemployment. The fiscal policy must be austere (save) when it grows, and then spent when the activity level cools (Giacomi
BIBLIOGRAPHY AND INFOGRAPHY
- Gárcia, n. Saints. (1993). Economic policy of Spain coordinated by Luis Gámir. In l. G. Luis Gámir Caseres (ed.), Monetary Policy (2nd ed., pp. twenty-one). Madrid, Spain: Editorial Alliance.
- Álvarez, J. A. M., Batanero, a., & González, J. L. C. (2008). Economic policy in democratic Spain (2nd ed.). Valencia, Spain: Tirant lo Blanch.
- Business School Ceipa. (2018). Deployment of monetary policy content. Retrieved June 2, 2019, from http: // icontent.Ceipa.Edu.CO/ICONTE/FACES/JSP/DEFERGEN/CONTENT/DEFRECIGUECONTENIDOITEM.JSP?Itemestructured = 1839Diego, D. G. Giacomomini. (2013, June 14).
- Monetary politics. Retrieved May 29, 2019, from https: // www.the Economist.com.AR/2013-06-LA-POLYTIC-MONETARY/IE BUSINESS SCHOOL. (2019, June 13).
- Conclusion: Module 4 – Monetary Policy |Coursera. Retrieved June 1, 2019, from https: // is.Coursera.Org/Lecture/Analyzing-Policicas-Economics/Conclusion-Modulo-4-Cardot
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