Comparison of the monetary policies of the American Federal fund (EDF) and the European Central bank (BCE)

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Comparison of the monetary policies of the American Federal fund (EDF) and the European Central bank (BCE)

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Abstract

Interest rates of the Fed are currently at an all-time low. The rates of the European Central Bank are at their lowest levels in history and on April 2, 2009, there was a further decline with a reduction to 1%.Indeed, monetary policy is an important instrument of control, and along with fiscal policy, it is put forward in the current financial crisis.

Monetary policy acts on the mechanisms of financing the economy. Today, the monetary policy of a central bank maintains the purchasing power of money, while paying attention to stabilizing the economy by controlling interest rates in the short term. It is implemented by the U.S. Fed and the ECB in the Euro area.

The Fed was created by Congress in 1913 to regulate the supply of credit. Later, during the times of Franklin Roosevelt, it got more power. The ECB was created in 1999 by the Treaty of the European Union.

The functions of these two central banks are similar, with regard to their work, their position or their tools. However, they differ greatly in the choice of objectives, which translates in practice by differences in behavior. In the words of an economic analyst (see the source in the bibliography), one can wonder if there is not "an ocean between the Fed and the ECB, Atlantic wall policy money ".

To answer this question, we proceed in three stages. First, we observe the similarities of organizations that do not prevent the differences in the design of monetary policy. Then we will study the similarities and differences in monetary policy strategies. Finally, we analyze the impact of the crisis on these profound differences.

Tags: Interest rates, European Central Bank, fiscal policy, monetary policy, U.S. Fed and the ECB

Introduction
The similarities in the organizations
1. Affirmation of the self and focus on communication and credibility
2. Using similar tools
3. The intrinsic and original differences
Monetary strategies: similarities and differences
1. ECB: the fight against inflation
2. Fed: Growth and inflation
3. Flexibility and a more pragmatic Fed
Current crisis: common objectives erasing entrenched differences?
1. Unprecedented rate cuts for ECB
2. Fed adopts 'unconventional measures'
3. Persistence of the 'Atlantic Wall'

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[...] It is now necessary to ask whether the economic and financial crisis currently affecting the two continents results in a change or not (in the sense of convergence as a distance) of their monetary policies. III. Current crisis: common objectives erasing entrenched differences? With the crisis, the objectives are more common than ever. The levers are the same on both sides of the Atlantic. The Fed and the ECB have to inject liquidity into the banking system. Unprecedented rate cuts for ECB The Institute of Frankfurt cut its key rate five times since October, when it was Later in February-early March 2009, the Governing Council of the ECB decided to lower it to as the main policy rate.This passage below was unthinkable a few months ago which showed that the severity of the crisis forced the ECB to change the monetary policy strategies. [...]

[...] The central bank's credibility is critical to the effective conduct of monetary policy and in order to carry out their work over the long term, they must determine both their policies and how they implement it for happen. The ECB is engaged in a conference held by the president and vice president at the end of the first meeting of the Board of Governors of each month and publishes a Monthly Bulletin. The Fed is not subject to that requirement, but under the chairmanship of Alan Greenspan, transparency has increased. [...]

[...] The Central Bank acts on the amount of cash in circulation by the percentage of reserves required. The intrinsic and original differences First, it should be noted that the ECB is younger by a hundred years. It is therefore more difficult to refer to past experiences. Although they reflect and inspire the precedence of the Bundesbank and the Fed, it does not enjoy the credibility of a BC which, had to face many crises like the Fed. Also, it should be noted that the constraints are not the same. [...]

[...] Fed: Growth and inflation Congress supports the Fed's mission to "ensure long-term growth of domestic production to achieve the objectives of full employment, stable prices and moderate interest rates long term." Price stability is not the only goal of the Fed and it is not part of its original mandate.Growth still occupies a central place in the monetary policy strategy of the Fed. Fed announces neither inflation target nor quantitative definition of price stability. However, with regard to the crisis of the 1970s, it controlled the prices. [...]

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