Easy Money through the Back Door: The Markets vs. the ECB
This paper assesses the performance of the European Central Bank (ECB) over the first two years of Europe's new policy regime. The verdict is that the ECB was not actually in charge, as the markets took over and imposed easy money on the euro zone. It is argued that the causes for the ECB's loss of effective control over the currency and monetary stance lie partly in the low-growth legacies of unsound macro policies inflicted upon Europe over the 1990s. The ECB made matters worse, though, first by failing to communicate effectively and coherently with financial market participants and, second, by playing against the markets' dominant theme: growth. This resulted in a time-inconsistency problem: attempts to prop up the euro through narrowing the current interest rate spread vis-à-vis the U.S. dollar were perceived as risking the euro zone's growth prospects and hence the sustainability of tighter money in the future. Under such conditions, interest rate hikes might then weaken rather than strengthen the currency. A more balanced and proactive attitude toward growth, and medium-term orientation as regards inflation, might have both reduced inflation in the short run and improved growth in the longer run. The recent short run of impressive GDP and employment growth spurred by easy money embarrasses the structural myth, and underlines that the ECB was not actually in charge.
|Date of creation:||21 Mar 2001|
|Note:||Type of Document - Adobe Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 36; figures: included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:sae:niesru:v:152:y::i:1:p:76-96 is not listed on IDEAS
- Wynne Godley & L. Randall Wray, "undated". "Can Goldilocks Survive?," Economics Policy Note Archive 99-4, Levy Economics Institute.
- Kenen,Peter B., 1995. "Economic and Monetary Union in Europe," Cambridge Books, Cambridge University Press, number 9780521558839.
- Alison Cottrell, 2000. "Softer Euro, Stronger Europe," Journal of Common Market Studies, Wiley Blackwell, vol. 38(s1), pages 77-80, September.
- Silke Tober, 2000. "Geldpolitik in besonderer Verantwortung für den Aufschwung," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 67(47), pages 801-806.
- Giancarlo Corsetti & Paolo Pesenti, 1999. "Stability, Asymmetry, and Discontinuity: The Launch of European Monetary Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 295-372.
- Charles Freedman, 1995. "The role of monetary conditions and the monetary conditions index in the conduct of policy [speech]," Bank of Canada Review, Bank of Canada, vol. 1995(Autumn), pages 53-59.
- Jorg Bibow, 2000. "On exogenous money and bank behaviour: the Pandora's box kept shut in Keynes' theory of liquidity preference?," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 7(4), pages 532-568.
- Jesus Ferreiro & Felipe Serrano, 2001. "The Spanish Labour Market: Reforms and consequences," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(1), pages 31-53.