Question

In: Economics

what are the similarities and differences in the making of monetary policy between the Federal reserve...

what are the similarities and differences in the making of monetary policy between the Federal reserve system in USA and the european central bank during covid-19

Solutions

Expert Solution

Similarities of making monetary policy between Federal Reserve System in USA and the European Central Bank during covid 19

Both ECB and Fed implemented an expansionary monetray policy to combat covid 19 crisis. ECB maintains main refinancing operations at 0.00%.Fed kept federal funds rate at 0.0% and 0.25% respectively. ECB kept marginal lending facility at 0.00% and 0.25%. Both Fed and ECB reduced discount rate at 0.25%. Both ECB and Fed pledged lending freely and started purchasing of government instruments

Differences

Federal Reserve System

The Fed has cut its target federal fund rate by a total of 1.5 % to 0.25%. Fed has resumed purchasing large amount of securities to increase money supply. Through Primary Dealer Credit Facility, the Fed will offer low interest rate loans up to 90 days to 24 large financial institutions known as primary dealers. Fed has relaunched the crisis era Money Market Mutual Fund Liquidity Facility which lends to banks against collateral they purchase from money market funds. Fed has offered $100 billion in overnight repo and $20 billion in two week repo. It has started direct lending to banks by charging discount rates with 0.25%

European Central Bank

ECB introduced negative interest rate policy in response to covid 19 crisis

ECB has offered forward guidence on the overnight rate to make a downward pressure on long term interest rates. ECB launched Asset purchasing program. It has launched 750 billion euro to Pandemic Emergency Purchase Program


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