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European Union Studies Center, CUNY, May 13 2014

European Union Studies Center, CUNY, May 13 2014. Comparison of ECB and Fed Georges Pineau, ECB permanent representative in Washington DC. Outline. Remit – Purposes and Functions Monetary Policy – Objectives and Instruments Unconventional Monetary Policy (UMP)

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European Union Studies Center, CUNY, May 13 2014

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  1. European Union Studies Center, CUNY, May 13 2014 Comparison of ECB and Fed Georges Pineau, ECB permanent representative in Washington DC

  2. Outline • Remit – Purposes and Functions • MonetaryPolicy – Objectives and Instruments • UnconventionalMonetaryPolicy (UMP) • Governance – Independence, Accountability, Transparency

  3. Remit – Purposes and Functions (i) • Contextdependent • Fed and ECB created in 1913 and 1998, respectively • SverigesRiksbank (1668) and Bank of England (1694) • Banque de France (1800) and Deutsche Bundesbank (1957) • Oldest CBs createdasgovernmentbankers (war financing) • Fedinitialremitfocused on banking/financialstability • Monetarypolicymandateenhanced in 1933 (FOMC) • ECB initialnarrowmandate (monetarypolicy) enlargedthisyear (Single SupervisoryMechanism - SSM)

  4. Remit – Purposes and Functions (ii) • Similarities: monetarypolicy; banknotes; FX operations; FX reserves (management); financialstability/systemicrisk; financialmarketinfrastructureoversight; provision of financialservices (paymentsystems); statistics; international monetarycooperation • Differences: governmentfiscalagent (NCBs); bankssupervision/regulation (NCBs); banksconsumerprotection (NCBs) • Shades: exchange rate regime/system (withoutprejudicetopricestability in EA); FX reserves (Eurosystem holds and managesassets, includinggold; splitbetween UST and Fed) • Post crisis: Fed: DFA (2010) strengthenedrole in financialstability/systemicrisk (stress tests, FSOC); consumerprotection (Consumer Financial ProtectionBureau) • ECB: financialstability/systemicrisk (ESRB, Dec 2010) and Banking Union (SSM in November 2014)

  5. Monetary Policy – Objectives and Instruments (i) • Different objectives broadly unaffected by the crisis • Fed: maximum employment, stable prices and moderate long term interest rates; 2% inflation objective set in January 2012; no fixed goal set for maximum employment but estimates in FOMC Summary of Economic Projections; macroeconomic forecasts and financial risk analysis inform decisions • ECB: price stability (primary) and support the general economic policies of the EU (secondary); quantitative definition set below 2% in 1998, revised in 2003 to below but close to 2%; two pillar strategy including economic (quarterly staff macroeconomic projections) and monetary analysis (monetary aggregates/monthly; bank lending surveys/quarterly)

  6. Monetary Policy – Objectives and Instruments (ii) • Different conventional monetary policy (CMP) instruments before and during the crisis • Fed: Fed fund rates target (policy rate); overnight Fed funds rate (operating target); reserve requirement (low, non-remunerated until 2008); counterparties (primary dealers c. 20); collateral (UST and GSEs); open market operations (mainly outright); standing facilities (discount window); interest on excess reserves (2008), term deposit facility (2010), reverse repo (2013) • ECB: MRO (policy rate); EONIA - euro overnight index average (operating target); RR (higher, remunerated); counterparties (2500 banks); collateral (very broad private and sovereign); OMO (repo, reverse repo); standing facilities (MLR, deposit); debt certificates

  7. Unconventional Monetary Policy – (i) • Unconventional monetary policy (UMP) instruments used during the crisis • Fed: forward guidance (2003) initially qualitative, time contingent, state contingent, thresholds; liquidity provision with broader set of collateral and counterparties; 3 LSAP from 2008 to 2014, as part of balance sheet policy to address impairment of financial market segments and binding ZLB • ECB: enhanced credit support (Oct 2008) with fixed rate/full allotment and 1 year LTRO; SMP (May 2010) – impairment of financial market segments; 3 year LTRO (December 2011) - banks term funding; OMT (Sep 2012) - perceived redenomination risks; forward guidance (Jul 2013) – ZLB and short term rates volatility; other measures (CBPP, collateral framework, RR)

  8. Unconventional Monetary Policy (ii) • Long term interest rates decomposed into: • Expectations about future monetary policy rates (forward guidance) • Plus risk premia, including: • Term premium (LSAP) • Liquidity premium (LSAP, LTRO) • Credit premium: impairment of transmission of policy stance (SMP); perceived redenomination risk (OMT)

  9. Unconventional Monetary Policy (iii) • Impact on future short term rates (forward guidance)

  10. Unconventional Monetary Policy (iv) • Impact on risk premia (term and liquidity/credit)

  11. Unconventional Monetary Policy (v) • ECB and Fed have used their balance sheets to accommodate deleveraging by private sector - NFC/HH/FI – (leverager of last resort); sovereign also contributed to preventing contractionary deleveraging • Given differences in financial structures, ECB used collateralized lending to banks (bank-centric) and Fed used outright purchases of securities (market-centric) • No single risk-free yield curve in the EA and smaller wealth effects (equity, housing) than in the US • CMP and UMP used in parallel and sequentially by ECB and Fed, respectively • Balance sheet expansion/contraction: endogenous (ECB) and exogenous (Fed)

  12. Unconventional Monetary Policy (vi) • Different initial conditions and policy responses reflected in balance sheet size

  13. Unconventional Monetary Policy (vii) • Differences in financial structure and sectoral deleveraging

  14. Unconventional Monetary Policy (viii) • Sectoral leveraging and deleveraging in the EA

  15. Unconventional Monetary Policy (ix) • Bank liquidity provision/absorption through Eurosystem (T2 balances)

  16. Unconventional Monetary Policy (x) • Leverager of last resort together with sovereign

  17. Unconventional Monetary Policy (xi) • Changes in EA sovereign debt investor base during the crisis

  18. Governance • Independence: Fed “independent within the government”; number of legislative acts adapting the Fed’s tasks over last 100 years; 1951 Fed-Treasury Accord seen as major step; ECB’s independence defined in international treaty; recent significant change in mandate with SSM • Accountability: Fed accountable to Congress (testimony, report) and GAO (operational efficiency not policy effectiveness); ECB accountable to EP (testimony, report); greater accountability for SSM (inter-institutional agreement with EP, summary proceedings of SB meetings); ECB accountable to ECA (operational efficiency) • Transparency: press conferences (ECB: monthly; Fed: quarterly); economic projections (ECB: staff; Fed: FOMC members); minutes (ECB: detailed minutes released after 30 years; Fed: summary minutes after 3 weeks – since 2004; transcripts after 5 years); ECB accounts of GovC meetings under preparation

  19. Conclusions • Different historical and institutional contexts • Broader remit of the Fed but difference to be reduced with enlarged scope of activities (SSM) for the ECB by the end of this year • Dual monetary policy mandate of the Fed and focus on price stability for the ECB • Convergence on definition of price stability with lasting differences on use of CMP tools (e.g. broader set of collateral and counterparties) • Use of different UMP instruments reflecting specific financial market structures and institutional features • Convergence in the area of independence, accountability and transparency, with deviations accounted for by institutional differences

  20. References • FRS: Purposes and Functions • ECB Working Paper # 1528 (The ECB non-standard monetary policy measures; the role of institutional factors and financial structure; Philippine Cour-Thimann and Bernhard Winkler) • ECB Occasional Paper # 107 (The collateral frameworks of the Eurosystem, the Federal Reserve System and the Bank of England and the financial market turmoil) • ECB Occasional Paper # 135 (The use of the Eurosystem monetary policy instruments and operational framework since 2009) • ECB Monthly Bulletin Article July 2013: Eurosystem collateral framework throughout the crisis • ECB Occasional Paper # 117 (Extraordinary measures in extraordinary times: public measures in support of the financial sectors in the EU and the US)

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