NOTE: Free essay sample provided on this page should be used for references or sample purposes only. The sample essay is available to anyone, so any direct quoting without mentioning the source will be considered plagiarism by schools, colleges and universities that use plagiarism detection software. To get a completely brand-new, plagiarism-free essay, please use our essay writing service.
One click instant price quote
... that decision, Chief Economist Issuing commented that its policy was not ordinarily to surprise the markets: .".. the evidence from the financial markets indicates that ECB monetary policy has always been credible and also -- for the most part -- has been well anticipated by the markets. There is also some evidence that volatility in financial markets at the time of interest rate decisions has been declining over time. The ECB has, on occasions, been forced to surprise markets with policy decisions.
However 'surprise' is never the goal or deliberate intention of monetary policy. " It should be noted that this is a different attitude from that often thought to have been held by the Bundesbank, which almost seemed to delight in surprising the markets. Indeed, the outcome of meetings since May 2001 -- with the exception of the emergency meeting on September 17 of 2001 -- have been a little more discernible from previous comments by ECB officials. Moreover, an analysis of the change in the Euribor three-month futures contract on the days of rate changes suggests that the ECB suggests that the ECB has surprised the market on a three-month horizon with only three of its twelve rate changes (see Figure 2). But surprises do occasionally happen, such as the 50 bp rate cut on September 17 th, a decision that resulted from exceptional economic and financial circumstances and so need not be considered inconsistent with the doctrine of not ordinarily surprising the markets. In contrast to the monthly bulletin of the Fed, the ECB's Monthly Bulletin is the single most important statement of the ECB's thoughts. It strives, particularly in its Editorial, to truly represent the collective thoughts of the ECB.
The Opening Statements at the ECB's press conferences also merit close attention, but the Bulletin is more extensive and sometimes gives a framework for evaluating the future directional risks for monetary policy. Since the ECB does not believe in expressing biases on monetary policy, one needs to read between the lines. For example, in its August 2001 Bulletin, the ECB stopped talking about expected growth being in line with potential. This was a material omission that signaled that the ECB had altered its growth assessment, which in turn helps to account for its 25 bp rate cut on August 30.
The ECB does not publish minutes of its Governing Council meetings primarily because it does not wish to personalize the internal debates it conducts. This seems fair enough -- a public airing of the inevitable disagreements that will arise internally would undermine collective responsibility and lead to a less productive discussion, in at least two respects. First, a public reporting of their discussion might make central bank officials -- who anyhow are a watchword for caution -- excessively conservative in expressing ideas at Council sessions, thereby potentially limiting free ranging and creative debate. Second, ECB officials are proud to observe that the ECB's decisions are based on what policy is believed to be appropriate for the euro area as a whole -- to the extent that discussion of specific regional developments is discouraged at Governing Council meetings. In mm, this means that the twelve national central bank governors who sit on the Council meetings act as representatives of the euro area, not as national delegates. ECB officials observe that if minutes were published then Council members would risk coming under heavy pressure from local politicians and media to vote in accordance with national interests, which would run counter to the European spirit of decision making.
The ECB's "twin pillar" monetary strategy has perhaps aroused the most criticism from external observers. Basically, the first pillar is "analysis according a prominent role to money" while the second is "analysis focusing on a wide range of other economic and financial indicators. " The ECB believes that "monetary developments contain information about future price developments and can therefore help in the overall assessment of risks to price stability. " Increasingly it points to a focus on monetary and credit aggregates as a way to avoid asset price instability. Nonetheless, the ECB is always careful to observe that, "Monetary policy does not respond in a mechanical way to deviations of M 3 growth from the reference value, " since M 3 velocity may not be stable in the short run. In practice, the ECB use the information contained in the monetary and credit aggregates for ex post rationalization of interest rate decisions. M 3 growth is routinely the first aggregate mentioned in the Bulletin's Editorial and so the ECB has deliberately put itself in a position where interest rate decisions need to be justified first with reference to M 3 as well as other variables.
On account of various distortions that have prevailed in the monetary aggregates since EMU's inception, the ECB has persistently sought to account for policy actions that might be inconsistent with M 3 growth. Hence, for example, it lowered rates in April 1999 despite M 3 growth being above the 4. 5 percent reference rate, by commenting that there were "special factors at the start" of EMU. It lowered rates in August (by 25 bp) and in September and November last year (each by 50 bp) despite reported M 3 growth being above the reference rate, by citing a distortion in M 3 measurement that was boosting the aggregate by 0. 75 pp, as well as, increasingly, shifts from equity funds into money markets. Overall, the ECB has shown itself willing to adopt a very pragmatic attitude towards the M 3 reference rate, provided that it can show there are special factors accounting for distortion in M 3 growth, and when other economic and financial variables under its "second pillar" argue in favor of easing.
It will be interesting to see if the prominence accorded to the money and credit aggregates remains so strong as the Governing Council's composition and size changes in coming years. Despite responsibility for foreign exchange policy in the Maastricht Treaty being a somewhat grey area, in practice this ECB has claimed for itself, in the absence of guidance from the Finance Ministers, the prerogative over the external value of the euro. Under the Treaty, the Finance Ministers have the authority to issue a "general orientation" to the ECB concerning the external value of the euro, but this must not prejudice the ECB's primary objective of price stability. As such, the ECB could legitimately oppose such an orientation if it considered that doing so would compromise its price stability objective. As the ECB is charged with interpreting as well as maintaining this price stability objective, and is granted formidable independence, in practice it would appear implicitly to support the ECB as the final arbiter of what constituted a risk to price stability, in the event of a dispute with the Ecofin concerning exchange rate policy. In practice, the Finance Ministers have so far refrained from giving the ECB a general orientation.
Doing so would probably entail a major wrangle -- the ministers would be required first to consult with the ECB, and if there were such a disagreement that required an orientation, then the ECB could dig in its heels and claim that to obeying it would prejudice its primary objective. By opening up this particular hornets' nest, the ministers might achieve a weaker euro, but they could also find a higher risk premium in the form of higher interest rates on euro assets, thereby negating any benefit from a weaker currency. Hence it would appear hard to dispute the claim by the ECB President that he is, de facto, "Mr. Euro. " That said, being "Mr. Euro" de facto is not the same as de jure. Some officials suggest that the finance ministers are not happy at the ECB President assuming this moniker, and that the euro group might at some stage try to reclaim some influence over the euro.
This issue, ambiguous in the Treaty, has not yet gone away. The establishment of a single currency is obviously a vital step if the goal of federation is to be achieved. There still remains dispute on what federation actually means. The goal for many is total economic and political union. As far back as 1970, the Council of Ministers began to prepare plans for full economic and monetary union. It appears to have given no consideration to the pros and cons of monetary unions.
The Council only looked at the routes to achieve monetary union. The routes chosen involved as John Mills writes an uneasy marriage of Keynesian and monetarist approaches. It is this which helps to explain some of the difficulties which have arisen with the implementation of the Euro. The Keynesian economists believed that there should be convergence of economic performance and policies among member states, with monetary union to follow when these conditions had been established. The monetarists believed that the best way forward was to establish monetary union immediately on the grounds that this would create the necessary economic convergence. In the event, the compromise was to achieve some convergence of economic performance and then to have the full rigour of monetary union.
Duisenburg really blamed financial factors and international money movement for the predicament of the euro, but to return to the point of underlying economic structures it might be argued that the opportunity for economic growth was greater outside the eurozone due to more flexible labour markets and lower levels of business taxation. Confidence does seem to have returned at international level but I dont think we can say that the euro is now totally well and not in need of care. There will need to be a need to ensure a sound economic infrastructure which will make eurozone industry internationally competitive at higher euro-exchange rates. Also the base interest rate of the ECB is 4. 75 %, below the 5. 5 % of the USA and 5. 75 % of Britain (9 / 3 / 03) which is still probably having some effect on inward investment. Confidence hasnt totally returned.
Bibliography: 1. Europe: Euros in-and-out club, The Economist, London; Oct 16, 1999 2. Money Rates, Wall Street Journal, New York; Oct 20, 1999 3. Monti, Mario. The Single Market and Tomorrows Europe. Bolton: Kogan, 1996. 4.
Roy, Jean Louis. 2002: A Guide to the European Economic Community Charter. Toronto: Collier, 2001. 5. Barrell, R. Economic Convergence and Monetary Union in Europe London: Sage 2002 6. Thornton, P. ECB urges eurozone member to cut back on spending.
The Independent. London: 22 September 2000 7. Color of Money, Jason Goodwin; Forbes, New York; Oct 11, 1999 8. Croft, Adrian. Preparations for Euro Enter Last Lap.
Sunday, December 30, 2001. 9. Fisher, Kenneth L. Why The Big Gets Bigger. Forbes March 99 10.
Kharouf, Jim. Start the Presses: Euro Set to Makes its Debut. Futures Sept. 1998
Free research essays on topics related to: interest rate, primary objective, monetary policy, monetary union, financial markets
Research essay sample on Monetary Union Primary Objective
