European Central Bank Monetary Policy


Published on - European Central Bank Monetary Policy - As Mario Draghi takes charge, European Central Bank monetary policy seems about to change. During the last year of the European sovereign debt dilemma the bank president, Jean-Claude Trichet, kept interest rates high. This policy supported the value of the Euro but may have served as a damper on struggling European economic growth. Draghi seems to be following policies more like those of United States Federal Reserve chairman, Ben Bernanke. Interestingly both were doctoral students at the Massachusetts Institute of Technology.

If, indeed, Draghi is going to follow Bernanke’s lead in attempting to rescue the European economy, just what steps might he take? Here we look at the so called “Bernanke Doctrine.” Mr. Bernanke is considered an expert on the causes of the Great Depression and has written and spoken extensively about how to avoid deflation. His recipe for doing so is commonly referred to as the Bernanke Doctrine. Here is a synopsis of the Bernanke doctrine, what could just be the roadmap for coming European Central Bank monetary policy.
Increase money supply. Do this via printing money if necessary

Maintain liquidity of the financial system
Lower interest rates down to zero if necessary
Control the yields on corporate bonds and other private securities
Lend money to banks a zero percent and take back corporate bonds as collateral
Depreciate the US dollar
Buy foreign currencies in large quantities
Buy industries with printed money. That is, acquire equity stakes in banks and other financial institutions

Will this be the shape of European Central Bank monetary policy in the months to come? The European Central Bank has already issued loans over $600 Billion USD to ailing European banks at a 1% interest rate. Now there is talk of lowering the base interest rate of the bank even more. Expected measures include lowering the interest rate to half a percent, directly purchasing government bonds, and printing money to inflate the bank balance sheet. The bank will be doing this in response to a generally faltering European economy. Individual European nations are taking on austerity measures in order to reduce their national debts. One effect of devaluating the Euro will be to reduce these debts which are denominated in Euros. A European Central Bank monetary policy that mimics the Bernanke doctrine will in all likelihood drive the Euro lower versus other major currencies. How far it drives the Euro down versus the US dollar may depend upon the degree and vigor to which the US Federal Reserve pursues the Bernanke Doctrine itself.

Published in: News & Politics
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