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Unconventional Monetary Policies of the Economic and Monetary Union - Essay Example

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An essay "Unconventional Monetary Policies of the Economic and Monetary Union" reports that the main body presiding over the decisions of the Union is the Eurosystem which consists of the governors of the European Central Bank and National Central Banks of the seventeen member countries…
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Unconventional Monetary Policies of the Economic and Monetary Union
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Unconventional Monetary Policies of the Economic and Monetary Union

Download file to see previous pages... The main body presiding over the decisions of the Union is the Eurosystem which consists of the governors of the European Central Bank (ECB) and National Central Banks (NCBs) of the seventeen member countries (European Central Bank, 2004). While the ECB has only a major share in deciding the policies of the EMU, it bears the whole of the responsibility of implementation of the EMU’s policies. The Governing Council of the EMU comprises the people voting over the prospective policies of the EMU. Each person has one vote of the common weight. Members of the council include the President, Vice-President and the four directors of the ECB, and the governors of the NCBs of each of the seventeen member countries thereby rendering the total number of Governing Council members twenty-three. Primary Objective The main objective of the EMU as described in article 105 of the Maastricht Treaty (Jenkins & Economist Intelligence Unit, 1992, p. 466) is the maintenance of price stability. The article goes on to state that “Without prejudice to the objective of price stability, the ECB shall support the general economic policies in the Community with a view to contributing to the achievement of the Community”. The reasoning for the selection of this objective can be traced to the incentive for the formation of the ECB, which was the fear of rising in inflation due to the dominance of the Germans over the European economic landscape. Hence the EMU has a stated primary objective of keeping the average growth, over the Union countries, of the Harmonised Index of Consumer Prices below two percent (Buti & Sapir, 2002). Monetary Policy In order to pursue this objective the EMU has to choose between the two main macroeconomic approaches. It can either concentrate on an Inflation Targeting approach where a clearly defined objective of numerical indicators of levels of inflation is to be pursued or it can adopt a monetary targeting framework where it expands its resources on influencing the monetary aggregate. So far the strategies adopted by the EMU have been described by economists as inclusive of certain aspects of both types of approach; a two-pillar approach. The first pillar in this approach is the money stock manipulation while the second pillar comprises the inflation control strategies. It has been evident for at least a decade that the monetary aggregate indicators do not correspond to the inflation rates which the monetary control purportedly affects (Bofinger, Reischle, & Scha?chter, 2001). The basis for this approach is the economic relation of the money stock to price stability represented by the Quantity Theory Equation (Mayer, 1990, p. 132): ?m = ?p + ?y – ?v Where ?: Change from one year to the next m: Money stock p : Price level y : Real GDP v : Velocity of stock However the equation and the corresponding monetary theory assume that the monetary base represents the M3 aggregate. This assumption has turned out to be incorrect from the experience of the Euro area economies in the past decade.  ...Download file to see next pagesRead More
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