The ECB vs.

The Fed

By: Petru-Catalin David FH des BFI Wien May 2011

Presentation Plan

1.The ECB and the FED structure and history 2. Monetary policy objectives of the ECB vs the FED 3. Strategies for achieving monetary policy goals 4. How did the central banks respond to the economic crisis

Structure of The ECB

Modeled after the German Bundesbank. Governed by a six member Executive Board of Directors. Headed by a President and a Board of Governors. Comprised of The ECB and the Local Central Banks of the 27 European Union Member States.

Structure of The Fed

Modeled after some of the oldest European central banks in history; such as, Swedens Riksbank (1668), the Bank of England (1694), and the Banque France (1800). Also, served as a loose model for the reestablishment of Germanys Bundesbank after WWII. Governed by The Federal Reserve Board of Governors, which includes the chairman, and The Federal Open Market Committee (FOMC). Comprised of the 12 Federal Reserve Banks and the member banks (mostly commercial banks).

Presentation Plan

1.The ECB and the FED structure and history 2. Monetary policy objectives of the ECB vs the FED 3. Strategies for achieving monetary policy goals 4. How did the central banks respond to the economic crisis

Official objectives
ECB

FED
Administer the U.S. Monetary Policy Supervise and regulate banking institutions Maintain the stability of the financial system Provide financial services to depository institutions, the U.S. government, and foreign official 6 institutions

Maintain Price Stability Support General Economic Policies of the European Union States Ensure an Open Market Economy

Primary Goals
ECB
Maintaining

FED
Achieving

price stability, defined as inflation rates below, but close to, 2 percent over the medium term

maximum sustainable GDP growth with price stability

Presentation Plan

1.The ECB and the FED structure and history 2. Monetary policy objectives of the ECB vs the FED
3. Strategies for achieving monetary policy goals

4. How did the central banks respond to the economic crisis

Strategies for achieving monetary policy goals

ECB
Carefully

FED

monitoring the money Influencing the overnight interest supply M3 Quarterly Monetary rates by performing open market operations Assesment(QMA) the cyclical dynamics Analyzing the cyclical dynamics of economic activity of economic activity
Analyzing Forecasting

inflation using velocity models

Analyzing

economic indicators such as consumer spending,manufacturing or building indexes

Why these differences ?

Empirical evidence of the correlation of money supply and inflation Instability in the money demand in the US due to financial innovations A predictable velocity of money in the EU
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Money supply How the ECB sees it

...money should never be ignoredneither in monetary policy nor in research.

Otmar Issing,former member of the ECB executive board
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Money supply How the FED sees it ...money plays no role in todays consensus macro model...and virtually no role in the conduct of monetary policy, at least in the US
FED Governor Lawrence Meyer

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Money aggregates

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U.S. M2 and Inflation

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EU M3C and Inflation

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Presentation Plan

1.The ECB and the FED structure and history 2. Monetary policy objectives of the ECB vs the FED
3. Strategies for achieving monetary policy goals

4. How did the central banks respond to the economic crisis

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How the central banks reacted

Interest rates to all time lows

FED 0,25% ECB 1%

The FED started QE The ECB bought Greek bonds and issued the SMP programm Both the FED and the ECB provided massive liquidity to banks

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The main reaction of the FED boosting its balance sheet

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ECB and its SMP

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FED vs ECB Balance sheets

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How did the markets react in response to the FEDs strategies?

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US succeded in avoiding deflation

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S&P 500 gained over 100% since 2009

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Unemployment is still a big problem

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Conclusion

Price Stability is a priority for both central banks but the FED could shift this objective for a stronger GDP growth on short term. ECB avoids to intervene directly on the market, while FED is often a player on the financial markets. Focus is placed on signaling their decisions regarding changes in short-term interest rates in advance in order to let the markets adapt to new interest rates.

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