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News Analysis Assignment

News Analysis Assignment. Follow news on topics related to EU, EMU ( or economic integration elsewhere ) Read newspapers , magazines Search the internet Articles do not have to be about the same topic ; this time no logic required …

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News Analysis Assignment

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  1. News Analysis Assignment • Follow news on topicsrelated to EU, EMU (oreconomicintegrationelsewhere) • Readnewspapers, magazines • Search the internet • Articlesdonothave to beabout the sametopic; thistime no logicrequired… • Based on theories/conceptslearnedduring the course, explain the economicsbehind the stories • Show me thatyouhavelearnedsomeeconomicsduring the course! • See for examplegroupworktoday on news on ECB’sinterestrates • Include the news as an appendix in yourreport • Report (excludingappendices, coverpage and table of content) shouldbemaximum 10 pages • DL MonNov 4th, send to henrik.nisen@aalto.fi and riikka-leena.leskela@nhg.fi • INDIVIDUAL assignment – DO NOT copy textdirectly (notfrom Internet oranyothersource)

  2. Is EMU an OCA? • In groups, collect your findings • Openness • Intra-industry trade or specialization? • Business cycle correlation • GDP changes • Inflation • Financial markets & institutions • Labor markets • … • In your opinion, is EMU above the ”OCA line”?

  3. Change in real GDP

  4. HICP (Inflation) Source:Eurostat

  5. Intra EU trade Share of exports (%) going to EU countries Source:Eurostat

  6. Today’s Agenda • Monetary Policy • Goals and tools • Transmission mechanism of monetary policy • The European Central Bank • Goals of ECB • Challenges

  7. Monetary Policy = Actions of a central bank to control the supply of money • Goals • Stabilize economy (low inflation) • Support economic growth • Tools • Interest rate • Open market operations • Standing facilities • Minimum reserve requirements

  8. Transmission Mechanism • The mechanism through which the central bank’s actions affect the economy and ultimately the price level • Complex • Time lags

  9. Transmission Mechanism Illustrated OFFICIAL INTEREST RATES Shocks from outside the control of the central bank Expectations Bank and Market Interest Rates Money, Credit Asset Prices Exchange Rate Changes in global economy Wage & Price Setting Supply & Demand in Goods & Labor Markets Changes in fiscal policy Import Prices Domestic Prices Changes in commodity prices PRICE DEVELOPMENTS

  10. European Central Bank • ECB, ”Eurosystem”, and ESCB • Decision-making in ECB • Governingcouncil and executiveboard • General council • Independencefrompolitics • Established in the MaastrictTreaty: • Primaryobjective to ”maintainpricestability” • Secondaryobjective to ”support general economicpolicies in EU” • Highlevel of employment, sustainablegrowth, highdegree of competitiveness • Comparison to the anglo-saxonmodel

  11. Specifying ECB’s Goals • What is meant by ”price stability”? • ECB’s definition: Inflation close but not above 2% • If inflation is bad, why not aim at 0%? • Inflation keeps economy going when wages are sticky • Bias in HICP -> true inflation less • Regional differences within EMU • Risk of deflation

  12. How Are Policy Decisions Made? • Two pillars strategy • Economic analysis • Monetary analysis • ECB takes actions to ensure price stability in the medium to long term • Due to lags, monetary policy cannot react to shocks in the short term • Accountability?! • Transparency and communication of policy

  13. Challenges for ECB • ”One policy fits all” • How to maintain price stability in all regions? • ECB follows euroarea aggregates -> large countries weigh more • Pressures from politicians and other lobbyists • Credibility and reputation • How to establish when no track record?

  14. Financial Crisis 2008 • Startedfrom the U.S. • Housingmarket and subprimeloansturned into investmentinstruments • Defaults and decliningpricescausedhugelosses for banks and investors • Problem: trustbetweenbanksdisappeared • Interbank money marketfroze • Banks couldn’tget money sotheycouldnotlendit to firmsorconsumers • No invesments, lowconfidence => recession

  15. ECB in the Financial Crisis • ECB tookemergencymeasures • Acting as an intermediary in the interbank money market • Longertermfinancingguaranteed for banks • Decrease in the interestrate • New duties for the ECB: regulation of financialinstitutions, e.g. ”stresstests” for banks • Discussion on moreregulation of the financialmarkets

  16. Debt Crisis of 2011: Implications for ECB • Although a problem of national governments, the debtcrisisaffects ECB • Insolvency of onemembercanaffect the credibility of othermembers • Also the credibility of the ECB is at risk: canitmaintainpricestability? • Problems for commercialbanks • Banks usetheir ”lowrisk” investments as collateralwhenborrowingfrom ECB • Whenbanksincurlosses, theirability to gainfinanancing is compromised • Potentialliquidityproblemsimilar to the financialcrisis • ECB hashad to purchasegovernmentbonds to calm the markets • The ECB is notsupposed to purchasegovernmentbonds to maintainitsindependencefrom national governments

  17. Group Work • Read the news itemfromSeptember 2013 fromwww.bloomberg.comreporting on the outlook on ECB’smonetarypolicy in the followingmonths • What is the economicsbehind the story? • Whydid ECB lower the interestrates in the spring? • Whydidtheynotmakechangesnow? • Whatare the currentchallenges for the ECB? • Whatwill the effects of the decisionbe?

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