Question

compare and contrast the monetary policy issues faced by the european central bank and Federal reserves of USA.

compare and contrast the approaches to monetary policy of european central bank and the FED of USA

Answer 1

European Central Banks (ECB) and Federal reserves were severely affected by the great recession that hit the economies of the world, especially the American region and European countries. These countries were seriously affected by the defects in the monetary policy measures of the central banks of these countries. But from then the central banks especially ECB and Federal banks are taking extra concern in avoiding such crashes which had a huge impact over the concerned economies.ECB has taken adequate steps to improve the resilience of the euro area banking sector. But still, most of the banks in the euro area are underperforming even after post-reform measures.

The ECB nowadays faces slow growth in the eurozone, for example, Italy is facing recession and had a consecutive decline in economic growth in the fourth quarter of 2018. and Germany has a reduction in its growth projections from around 1.8 percent to 1.0 percent in the year 2018(cited). There also certain disruptions took place in England as well as in Europe as a result of England's decision on leaving the EU. Most of the banks in Europe are struggling to achieve sustainable profitability due to the existence of cyclical and structural challenges. many of the banks under the ECB faces various problems including cost inefficiencies, excess capacity, inappropriate business model modifications, high levels of NPLs, etc. The various banks in the European countries were not integrated financially by the ECB and thereby could not get the benefits of cross border banking activities which also is a major issue. There is a potential decline of neutral interest rates which will reduce the central bank's margin for maneuver.

The ECB has a prime objective of maintaining the price stability and bring the inflation rates below 2% over the medium term(cited). Learning from the experiences from the financial crisis ECB has taken adequate monetary policy measures.

Federal Reserves of the United States

The Fed reserves have taken adequate steps after the financial crisis that hit the American economy in 2008. The Fed reserves have reduced the federal fund rate to a range of 05 to 0.25% during the financial crisis in 2008. This type of lowering of the federal funds rate is called zero lower bound. the Fed began raising the fund rates once the recession ended and from then they keep on increasing the fund rates slowly to tighten monetary policy. The Fed holds the interest rate below neutral rate when the economy is below full employment, hold at the nuetral level when the economy is near full employment and above neutral level at level above full employment.

The Federal Open Market Committee(FOMC) has a strong objective to bring the inflation rate at 2 percent per year over the longer run. The FOMC has committed to support the employment and bring monetary policy an inevitable force for stabilizing the overall economy. The central bank aims at explaining their policy decisions and the reasons behind the decisions to the common public so as to ensure transparency .they have adopted a forward-looking approach where future expectations of the economy is given prime importance along with current situations. It have taken necessary steps to consult the prescriptions of policy rules relating to the monetary policy of Fed on routine manner.