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European Union Studies Center, CUNY, May 13 2014. Comparison of ECB and Fed Georges Pineau, ECB permanent representative in Washington DC. Outline. Remit – Purposes and Functions Monetary Policy – Objectives and Instruments Unconventional Monetary Policy (UMP)

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european union studies center cuny may 13 2014

European Union Studies Center, CUNY, May 13 2014

Comparison of ECB and Fed

Georges Pineau, ECB permanent representative in Washington DC

  • Remit – Purposes and Functions
  • MonetaryPolicy – Objectives and Instruments
  • UnconventionalMonetaryPolicy (UMP)
  • Governance – Independence, Accountability, Transparency
remit purposes and functions i
Remit – Purposes and Functions (i)
  • Contextdependent
  • Fed and ECB created in 1913 and 1998, respectively
  • SverigesRiksbank (1668) and Bank of England (1694)
  • Banque de France (1800) and Deutsche Bundesbank (1957)
  • Oldest CBs createdasgovernmentbankers (war financing)
  • Fedinitialremitfocused on banking/financialstability
  • Monetarypolicymandateenhanced in 1933 (FOMC)
  • ECB initialnarrowmandate (monetarypolicy) enlargedthisyear (Single SupervisoryMechanism - SSM)
remit purposes and functions ii
Remit – Purposes and Functions (ii)
  • Similarities: monetarypolicy; banknotes; FX operations; FX reserves (management); financialstability/systemicrisk; financialmarketinfrastructureoversight; provision of financialservices (paymentsystems); statistics; international monetarycooperation
  • Differences: governmentfiscalagent (NCBs); bankssupervision/regulation (NCBs); banksconsumerprotection (NCBs)
  • Shades: exchange rate regime/system (withoutprejudicetopricestability in EA); FX reserves (Eurosystem holds and managesassets, includinggold; splitbetween UST and Fed)
  • Post crisis: Fed: DFA (2010) strengthenedrole in financialstability/systemicrisk (stress tests, FSOC); consumerprotection (Consumer Financial ProtectionBureau)
  • ECB: financialstability/systemicrisk (ESRB, Dec 2010) and Banking Union (SSM in November 2014)
monetary policy objectives and instruments i
Monetary Policy – Objectives and Instruments (i)
  • Different objectives broadly unaffected by the crisis
  • Fed: maximum employment, stable prices and moderate long term interest rates; 2% inflation objective set in January 2012; no fixed goal set for maximum employment but estimates in FOMC Summary of Economic Projections; macroeconomic forecasts and financial risk analysis inform decisions
  • ECB: price stability (primary) and support the general economic policies of the EU (secondary); quantitative definition set below 2% in 1998, revised in 2003 to below but close to 2%; two pillar strategy including economic (quarterly staff macroeconomic projections) and monetary analysis (monetary aggregates/monthly; bank lending surveys/quarterly)
monetary policy objectives and instruments ii
Monetary Policy – Objectives and Instruments (ii)
  • Different conventional monetary policy (CMP) instruments before and during the crisis
  • Fed: Fed fund rates target (policy rate); overnight Fed funds rate (operating target); reserve requirement (low, non-remunerated until 2008); counterparties (primary dealers c. 20); collateral (UST and GSEs); open market operations (mainly outright); standing facilities (discount window); interest on excess reserves (2008), term deposit facility (2010), reverse repo (2013)
  • ECB: MRO (policy rate); EONIA - euro overnight index average (operating target); RR (higher, remunerated); counterparties (2500 banks); collateral (very broad private and sovereign); OMO (repo, reverse repo); standing facilities (MLR, deposit); debt certificates
unconventional monetary policy i
Unconventional Monetary Policy – (i)
  • Unconventional monetary policy (UMP) instruments used during the crisis
  • Fed: forward guidance (2003) initially qualitative, time contingent, state contingent, thresholds; liquidity provision with broader set of collateral and counterparties; 3 LSAP from 2008 to 2014, as part of balance sheet policy to address impairment of financial market segments and binding ZLB
  • ECB: enhanced credit support (Oct 2008) with fixed rate/full allotment and 1 year LTRO; SMP (May 2010) – impairment of financial market segments; 3 year LTRO (December 2011) - banks term funding; OMT (Sep 2012) - perceived redenomination risks; forward guidance (Jul 2013) – ZLB and short term rates volatility; other measures (CBPP, collateral framework, RR)
unconventional monetary policy ii
Unconventional Monetary Policy (ii)
  • Long term interest rates decomposed into:
  • Expectations about future monetary policy rates (forward guidance)
  • Plus risk premia, including:
  • Term premium (LSAP)
  • Liquidity premium (LSAP, LTRO)
  • Credit premium: impairment of transmission of policy stance (SMP); perceived redenomination risk (OMT)
unconventional monetary policy iii
Unconventional Monetary Policy (iii)
  • Impact on future short term rates (forward guidance)
unconventional monetary policy iv
Unconventional Monetary Policy (iv)
  • Impact on risk premia (term and liquidity/credit)
unconventional monetary policy v
Unconventional Monetary Policy (v)
  • ECB and Fed have used their balance sheets to accommodate deleveraging by private sector - NFC/HH/FI – (leverager of last resort); sovereign also contributed to preventing contractionary deleveraging
  • Given differences in financial structures, ECB used collateralized lending to banks (bank-centric) and Fed used outright purchases of securities (market-centric)
  • No single risk-free yield curve in the EA and smaller wealth effects (equity, housing) than in the US
  • CMP and UMP used in parallel and sequentially by ECB and Fed, respectively
  • Balance sheet expansion/contraction: endogenous (ECB) and exogenous (Fed)
unconventional monetary policy vi
Unconventional Monetary Policy (vi)
  • Different initial conditions and policy responses reflected in balance sheet size
unconventional monetary policy vii
Unconventional Monetary Policy (vii)
  • Differences in financial structure and sectoral deleveraging
unconventional monetary policy viii
Unconventional Monetary Policy (viii)
  • Sectoral leveraging and deleveraging in the EA
unconventional monetary policy ix
Unconventional Monetary Policy (ix)
  • Bank liquidity provision/absorption through Eurosystem (T2 balances)
unconventional monetary policy x
Unconventional Monetary Policy (x)
  • Leverager of last resort together with sovereign
unconventional monetary policy xi
Unconventional Monetary Policy (xi)
  • Changes in EA sovereign debt investor base during the crisis
  • Independence: Fed “independent within the government”; number of legislative acts adapting the Fed’s tasks over last 100 years; 1951 Fed-Treasury Accord seen as major step; ECB’s independence defined in international treaty; recent significant change in mandate with SSM
  • Accountability: Fed accountable to Congress (testimony, report) and GAO (operational efficiency not policy effectiveness); ECB accountable to EP (testimony, report); greater accountability for SSM (inter-institutional agreement with EP, summary proceedings of SB meetings); ECB accountable to ECA (operational efficiency)
  • Transparency: press conferences (ECB: monthly; Fed: quarterly); economic projections (ECB: staff; Fed: FOMC members); minutes (ECB: detailed minutes released after 30 years; Fed: summary minutes after 3 weeks – since 2004; transcripts after 5 years); ECB accounts of GovC meetings under preparation
  • Different historical and institutional contexts
  • Broader remit of the Fed but difference to be reduced with enlarged scope of activities (SSM) for the ECB by the end of this year
  • Dual monetary policy mandate of the Fed and focus on price stability for the ECB
  • Convergence on definition of price stability with lasting differences on use of CMP tools (e.g. broader set of collateral and counterparties)
  • Use of different UMP instruments reflecting specific financial market structures and institutional features
  • Convergence in the area of independence, accountability and transparency, with deviations accounted for by institutional differences
  • FRS: Purposes and Functions
  • ECB Working Paper # 1528 (The ECB non-standard monetary policy measures; the role of institutional factors and financial structure; Philippine Cour-Thimann and Bernhard Winkler)
  • ECB Occasional Paper # 107 (The collateral frameworks of the Eurosystem, the Federal Reserve System and the Bank of England and the financial market turmoil)
  • ECB Occasional Paper # 135 (The use of the Eurosystem monetary policy instruments and operational framework since 2009)
  • ECB Monthly Bulletin Article July 2013: Eurosystem collateral framework throughout the crisis
  • ECB Occasional Paper # 117 (Extraordinary measures in extraordinary times: public measures in support of the financial sectors in the EU and the US)