advanced macroeconomics ii: monetary policy in...
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Advanced Macroeconomics II:Advanced Macroeconomics II:Monetary Policy in PracticeMonetary Policy in Practice
Jordi Galí and Lorenza Rossi
University of Pompeu Fabra
June 2014
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The European Central BankThe European Central Bank
� BCE, Eurosystem and the European System of Central Banks
� Members of the Euro area: 18◦ 11 initial members◦ 11 initial members
◦ Later accessions:Greece (2001), Slovenia (2007), Cipro and Malta (2008), Slovakia (2009), Estonia (2011) (Latvia (2014))
� UK and Denmark clause "opt-out"
� Sweden: de facto 'opt-out' (no ERM II)
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� "Convergence Criteria"◦ Inflation < 1.5% + average three members with lower inflation
◦ Deficit/GDP < 3%
◦ Debt/GDP < 60% (or approaching)
� Exchange rates: two years in ERM II without devaluation. ±15% from an unchanged central rate.
� Long-term interest rates <2% + average three members with lower inflationDecision-making� Decision-making◦ Executive Board (6 members: P + VP +4)
◦ http://www.ecb.europa.eu/ecb/orga/decisions/eb/html/index.en.html
◦ Board of Governors: EC + BCN Euro
◦ General Board: CE + BCN +UE
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ECB: ECB: ExecutiveExecutive BoardBoard� Mario DraghiPresident of the ECB
� Vítor ConstâncioVice-President of the ECB
Benoît Cœuré� Benoît Cœuré�
� Sabine Lautenschläger�
� Yves Mersch�
� Peter Praet
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� Mandate of the ECB (Treaty Art. 127):� Primary objective: price stability� support policies that contribute to EU objectives (Article 3): sustainable growth, price stability, highly competitive social market economy, full employment ...
� Initially: no direct powers of supervision and financial regulationfinancial regulation◦ "Tracking" euro area financial stability risks ensure liquidity in the event of financial shocks payment system
� Banking Union� Nov. 2014: BCE banking supervisor euro zone� Resolution banks, deposit insurance.
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� Strategy (October1998)� Quantitative definition of price stability: annual increase in HICP euro area <2%, to be achieved in the medium term. Review 2003: below, but close to, 2%
� Analysis of risks to price stability based on "two pillars":
� Monetary Analysis� until 2003, "prominent role of money," reflected in a reference value for M3 growth (4.5%).for M3 growth (4.5%).
� From 2001. M3 not stable� revision in 2003: becomes the second pillar, medium and long term perspective.
� Economic Analysis: factors affecting inflation in the short term� activity, demand, labor market, exchange rate, fiscal policy ...� projections SPF (survey of professional forecasters)� “Cross-checking”
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Source: Monthly bollettin ECB, 2014
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ImplementationImplementation� “Main Refinancing Operations”(MRO)◦ “repo” one week
◦ official rate = minimum rate auction: fixed rate, full allottment
� Longer-Term Refinancing Operations (LTRO)◦ From three months to three years (2)
� Others: fine-tuning, “outright transactions”
Marginal lending facility
fine-tuning
� Marginal lending facility: overnight liquidity from the ECB (now+ 0.75%)
� Marginal deposit facility (now 0) overnight deposit with the ECB
� Rates corridor: The interest rates on the marginal lending and deposit facilities normally provide a ceiling and a floor for the overnight market interest rate.
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Source: The Monetary Policy of the ECB, 2011
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Results (I): InflationResults (I): Inflation
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Results (II): Inflation ExpectationResults (II): Inflation Expectation
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Results (III): GrowthResults (III): Growth
Euro area: GDP growth (q-to-q)
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Federal ReserveFederal Reserve
� Federal Open Market Committee:◦ 7 Governs (Chairman+VC +5)
◦ 5/12 Presidents of Feds Regionals (NY fix)
� Mandate (Federal Reserve Act):◦ Max employment◦ Max employment
◦ Price stability (Inflation target: 2% from January 2012)
◦ in long-term moderate
� Implementation◦ Open market operations
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Monetary Policy in “Normal Times”Monetary Policy in “Normal Times”
OfficialInterest Rates
Objective: Price Stability
Market Interest Rate
Aggregatedemand
(consumption, investment…)
Production, Employment, Inflation
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Monetary policy during the crisisMonetary policy during the crisis
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Monetary Policy during the crisisMonetary Policy during the crisis
Official Interest Rates
Market Interest Rates
Aggregatedemand
(consumption, investment…)
Production, Employment, Inflation
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Interest rate differentials in the Monetary market: Euribos - OIS
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Interest rate differentials bank credit
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Interest Rates Differential - European debt
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Monetary policy during the crisisMonetary policy during the crisis
Official InterestRates
Market Interest Rates
Aggregatedemand
(consumption, investment…))
Production, Employment, Inflation
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Growth Rate of credit in Spain (2007-2010)
Font: Banco de España, Informe Mensual
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Monetary policy during the crisisMonetary policy during the crisis
Official InterestRates
Market Interest Rates
Aggregatedemand
(consumption, investment…))
Production, Employment, Inflation
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U.S. Monetary Policy with Greenspan and Bernanke
Source Galí (2011)
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U.S. Monetary Policy with Greenspan and Bernanke
Source: Galí (2011)
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Monetary Policy in the Euro Area
Source: Galí (2011)
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Responses Responses
� BCE:◦ Extraordinary liquidity injections to the banking sector
◦ Program to buy government bonds:� Securities Market Programme � Securities Market Programme
� Outright Monetary Transactions (OMT)
� Fed:◦ “Quantitative easing” (QE, QE2, QE3)
◦ “Operation Twist”
◦ Management of expectations (“forward guidance”)
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ECB Balance Sheet (Assets)
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ECB Balance Sheet (Liabilities)
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FED Balance Sheet (Assets)
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FED Balance Sheet (Liabilities)