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Monetary policies are considered economic tools used by a country to regulate money in circulation through the use of different adjustments from the central bank point (Mishkin, 2011). According to Mishkin (2011), a combination of policies including adjusting the interest rates, change of the Federal Reserve requirement for deposits, and policy on maximum borrowing from the central banks are commonly applied. Before the emergence of the financial crisis in 2007, most of the nations that fall under the Organization for Economic Co-operation and Development (OECD), which originated from the OEEC, a European body, had considered themselves extremely successful in their monetary policy. However, the strike of the 2008 economic crisis changed the perception of the level of success expected from the traditional monetary policy.
The monetary policies have been considered important in regulating the different aspects of economic performance like employment levels within a nation, controlling the inflation rates, and to some extent, cushioning the interest rates in the long-term whenever there is a need to (Friedman, 2000). The bigger challenge to applying the monetary policy has been based on the economist’s perception of the fluctuations caused by these policies. In contrast, other economists support them (Mankiw, 2007). However, the study of Eusepi, Giannoni, and Preston (2018) points out that there are a lot of benefits that may accrue from the use of the monetary policies, although establishing the equilibrium point in the market was considered hard on account of the sensitivity of the bonds’ prices to the short-term interest rates. In this review, a focus of the different monetary policies that have been put in place by the European Central Bank (ECB) to assist in economic recovery shall be reviewed.
The market condition of the Eurozone’s during the 2008 financial crisis
The financial crises of 2008 were flagged as one of the long-felt financial distress in the entire globe, which resulted in an economic crash in most of the global markets, commonly referred as the great crash (Altman, 2009, p. 1). Although the great crash had been initially perceived as a US problem, the European market was not spared by the adverse influence of the crisis. Aristei and Gallo (2014, p. 273-295) pointed out that the financial institutions within the different markets found themselves stuck in the situation based on the high borrowing made to secure financial instruments that had lost value for any investor to recover their investment. Furthermore, Taylor (2009) indicated that the banking industry in the Eurozone and US were pushed to the end of almost collapsing. In most cases, the banking industry being the vehicle used by the central bank to implement the monetary policy justifies the current investigation on the measures taken by ECB for economic recovery after-the-math.
European Central Bank takes monetary policies for economic recovery
From the inception of the ECB, the main goals were established for the institution that included price stabilization, push for economic growth, and the realization of financial stability (Micossi, 2015). During the ever-felt great crash crisis of 2008 that destabilized both the financial markets and other markets, ECB had a call to stand in and support the recovery of the Eurozone’s economies from the crisis. Among the monetary policies employed by ECB included the following.
Regulation of interest rates: – Among the strategies put in place by ECB was a policy on rates that aimed at cushioning the medium-term market disturbances from the market conditions (Hartmann & Smets, 2018, p. 1-146). The policy ensured that the prevailing market rates were set by the central bank rather than the forces of demand and supply, as it would have been the case in a free economy, and the condition was clear that the free market had failed. The policy was considered a complement to the interest rates regulation rather than substituting the interest rates policy that may be a fiscal policy. In this case, ECB was found to even move towards the
Liquidity management strategy through open market operations: – The ECB attempted to address the financial crisis on the performance of financial markets and government bonds. ECB, through the monetary policy, wherein a position to the extent some of the government bonds beyond one year allowed stability of the markets even though this was a short-term solution as the obligation could still require repayment. Repurchase of some of the assets was the main way to control the liquidity of these instruments even though (Pronobis 2014, p. 398-403) pointed out this effort was lagging compared to other central banks in the globe.
Application of ECB bank lending survey for 2003 recommendations: – The policy was concerned with the supply of money in the economy. The policy considered the restriction of creating more credit by the lending firms that could be detrimental to the bleeding economy. The amount available for borrowing was limited, and hence the risk of more disturbance by higher debts levels was avoided.
Role of the lender of last resort: – After a severe struggle, the recovery period also needed the economy to be activated. The ECB was considered to employ their monetary policy to allow the release of money into the economy. Among such policies included reducing the reserve requirements and reviewing the standardized and unstandardized policies that slowly revived the economy. A continuous relaxation of the strict measures made initially during the crisis started to be evident in 2013 until the new pandemic posed a similar threat. The fact that Covid-19, as severe as it was, did not result in financial crises is an indicator that the nations were prepared with the monetary policies and other models of managing economic stability and growth.
As the financial crisis of 2008 was wide felt in both developing and developed alike, all nations required a response toward the financial distress. Monetary policies in most of these nations remained the only hope, even if not to revive economies, then minimize the adverse results. European Central Bank was found to have still operated with the monetary policies, including interest rates regulation, open market tools, and non-standardized procedures and instruments to meet the need for market stabilization. ECB seems to have been very cautious in applying monetary policies to avoid a scenario of the overreliance of this policy by the entire economy.
Altman, R.C., 2009. The great crash, 2008. Foreign Aff., 88, p.1.
Aristei, D. and Gallo, M., 2014. During the financial crisis, interest rate pass-through in the Euro area: A multivariate regime-switching approach. Journal of Policy Modeling, 36(2), pp.273-295.
Boeckx, J. and Cordemans, N., 2017. Monetary Policy in the Wake of the Great Recession. Reflets et perspectives de la vie economique, 56(1), pp.61-78.
Eusepi, S., Giannoni, M. and Preston, B., 2018, September. On the limits of monetary policy. In NBP Summer Workshop Conference paper.
Friedman, B.M., 2000. Monetary policy.
Hartmann, P. and Smets, F., 2018. The European Central Bank’s Monetary Policy during Its First 20 Years. Brookings Papers on Economic Activity, 2018(2), pp.1-146.
Hartmann, P. and Smets, F., 2018. The first twenty years of the European Central Bank: monetary policy.
Mankiw, N.G. ed., 2007. Monetary policy (Vol. 29). University of Chicago Press.
Micossi, S., 2015. The monetary policy of the European Central Bank (2002-2015). CEPS Special Report, 109.
Mishkin, F.S., 2011. Monetary policy strategy: lessons from the crisis (No. w16755). National Bureau of Economic Research.
Pronobis, M., 2014. Is monetary policy of ECB the right response to the Eurozone crisis?. Procedia-Social and Behavioral Sciences, 156, pp.398-403.
Taylor, J.B., 2009. The financial crisis and the policy responses: An empirical analysis of what went wrong (No. w14631). National Bureau of Economic Research.
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