The Federal Reserve and the European Central Bank: a theoretical comparison of their legislative mandates (original) (raw)

The European Central Bank and the Federal Reserve

Oxford Review of Economic Policy, 2003

In the 4 years of its existence, the European Central Bank (ECB) has made significant contributions to the macroeconomic stability of the euro area. This paper takes a critical look at the ECB and compares its institutional structure, policy framework, and operational procedures with those of the longer-established US central bank. We discuss the implications of various differences between the ECB and the Federal Reserve with a view toward identifying successful elements of the practices of both these institutions. The paper recommends that the ECB abandon the first pillar of its monetary policy strategy that affords a special role to monetary aggregates in the evaluation of financial market conditions. It also suggests that the Federal Reserve should follow the ECB's lead and provide an explicit definition of price stability.

The Mandate of the ECB: Legal Considerations in the Ecb's Monetary Policy Strategy Review

Social Science Research Network, 2021

This paper offers an overview of the mandate of the European Central Bank (ECB), as defined by its objectives, the instruments available to achieve them and the constitutional framework that the ECB shall observe in pursuing them. The objectives include the primary objective of maintaining price stability and the secondary objective of supporting the general economic policies in the Union. The price stability objective enjoys primacy amongst the ECB objectives. The Treaties do not provide for a hierarchy of the "general economic policies" that the ECB shall support, although a number of criteria derived from primary law can help in guiding the ECB's priorities in this respect. The ECB is also tasked with contributing to the "smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system". As for the instruments available, these include both measures that directly pursue the objectives and measures that are instrumental in achieving them. Finally, the other constitutional rules that set out the framework within which the ECB pursues its objectives include the principles of conferral, institutional balance, proportionality, equal treatment and non-discrimination, as well as the principle of an open market economy and the prohibition of monetary financing.

The New Governance in Monetary Policy: A Critical Appraisal of the Fed and the ECB

Aspects of Modern Monetary and Macroeconomic Policies, 2007

The term 'governance' refers to the decision-making processes in the central bank and to the relations between the central bank and the government and/or the elected representatives. Governance comprises the traditions, institutional design, mandate, accountability, communication strategies and processes that determine how power is exercised, how citizens are given a voice, and how decisions are made on issues of public concern. For the last fifty years, four monetary policy regimes succeeded each other. A special kind of governance corresponds to each monetary policy regime. First, until 1974, for the Keynesian regime founded on the Keynesian synthesis, the government managed directly the economic policy. The monetary policy was only one element of the global policy and under the discretion of the government. Second, from 1974 to 1982, the Monetarist regime developed the monetary policy rule. Svensson (1999, p.636) calls this monetarist policy rule monetary targeting. The monetary policy became self-governing. The rule versus discretion debate shed light these both outdated monetary policy regimes. But if the rule (quantity theory of money) must be respected, Friedman said nothing about a specific organisation of the central bank. The theoretical framework changed; not the institutional design. Third, during the 1980s, the basic Friedmanian policy has evolved with the rational expectations revolution. Kydland and Prescott (1977), Barro and Gordon (1983) or Rogoff (1985) provide new decisive arguments in favour of rule, and against discretion. These are the famous dynamic inconsistency, inflation bias, reputational equilibrium, strategic delegation to a conservative banker, contract, incentive compatible mechanism. The New classical Economics (NCE) has developed the Credibility literature to propound alternatives to the rule issuing from the quantity theory of money. The simplified chain of this new regime, called credibility strategy is: Rule-Commitment-Enforcement-Independence-Transparency-Credibility. The great novelty was the institutional design: the independence of the central bank has become a necessity for the credibility. The credibility strategy is minimalist governance, since the central bank is fully independent. Respect of the rule and transparency are enough.

The ECB: towards a monetary authority of a federal Europe

Perspectives on Federalism, 2014

The article explores the present role of the ECB in European economic governance and point at the required steps to make such governance effective in tackling the challenges of the Eurozone and of the European Union in the global economic order.

The effectiveness of the european central bank in pursuing its prime mandate

Economic Analysis Letters, 2023

The objectives and tasks of the European Central Bank (ECB) are defined in Articles 2 and 3 of Protocol (No 4) on the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB). While in Article 3,1° of this Protocol other tasks are mentioned, the prime objective of the ESCB and therefore of the ECB, is price stability. This concept was originally specified by the Executive Board of the ECB as an annual increase of less than 2% in the inflation rate over the medium term, measured by the Harmonized Index of Consumer Prices (HICP) for the euro area. This paper examines to what extent the ECB has been effective in realizing price stability over the period from January 1, 2000 to December 31, 2022. Price stability is important for economic agents. It allows them to plan their savings, spending and investment eventually resulting in sustained economic growth. Notwithstanding the commitment of large human and other resources and the use of unconventional monetary policies, the ECB did not realize its prime objective during a large part of this period. We conclude that putting too much confidence in DSGE-modeling as one of the methodologies to determine monetary policy, may have played an important role in the ECB not achieving its main statutory objective.

Making a virtue of necessity? The economics and politics of the ECB’s monetary policy, 1999-2019

Region & Periphery, 2020

The ECB could hardly afford political neutrality, even in the monetary union’s “honeymoon phase”. Being a stateless central bank entailed striking compromises between confl icting (national) monetary policy preferences. However, such compromises would often be reached at the expense of theoretical consistency and to the detriment of coherence in the ECB’s monetary policy strategy. And, perhaps inevitably, they would also bear the mark of the dominant partner in the European Monetary System, that is prior to the establishment of the monetary union, now also being the biggest subscriber to the ECB’s capital. Political neutrality and, for that matter, monetary activism on the part of the ECB -as well as liquidity in the euro-area- were largely inadequate during the euro area crisis, especially in its early phase. They were subsequently increased, but at a slow pace and in a preferential fashion, that is, largely to the benefi t of the banking industry. Eventually, the ECB did try to ma...

Voting on monetary policy in the Council of the European Central Bank

Economic Modelling, 2003

This paper challenges the received view that, from the monetary policy standpoint, EMU is a sure loss since participating countries relinquish a useful stabilisation instrument with no credibility benefit if they are equally averse to inflation. The single European monetary policy is decided by majority voting within the Council of the European Central Bank-a collegiate body consisting of the members of the Executive Board and the governors of the participating countries who are assumed to entertain Union-wide and national stabilisation objectives, respectively. The incentive structure originating from repeated voting and conflicting national interests provides an effective commitment device that reduces the inflationary bias and can offset the welfare loss due to the poorer stabilisation performance of the single monetary policy. However, this common advantage may well be accompanied by a very unequal distribution across countries of the stabilisation benefits from the single monetary policy, despite the presence of the members of the Executive Board.