Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Would a more active European Central Bank (ECB) have been able to solve the Euro crisis?
Introduction
Since the Euro crisis, the central claim of Svensson's (1995) theory of flexible inflation targeting - that by stabilising the
price level, the central bank also stabilises the output level - has been proven unfaithful
...

The disregard for financial stability, growth and employment stems from the ECB's narrow mandate
...
This is despite, as Paul De Grauwe (2012) argued, being the only institution that [could] prevent
countries falling into a "bad equilibrium” on account of panicked sovereign bond markets
...
The Fed cut interest rates quickly and implemented QE programs, unlike the ECB, meaning it was able
to promote total money spending in the economy and put it back on a stable growth path (Figure 1)
...
In reality, interest rates were raised in the aftermath, and
Eurozone GDP growth faltered
...
In theory, monetary easing should cause inflation to rise relatively more in those
parts of the Eurozone that were at, or closer to, full employment
...
If
the ECB had been more active in providing liquidity earlier, price levels would have increased more in Germany than in
the troubled periphery of the Eurozone, making goods and services from the periphery relatively more competitive
...

Martin and Philippon (2014) run counter-factual simulations of the effects on the PIGS had the ECB’s OMT program
and Draghi’s declaration to do “whatever it takes” been instigated in 2008 and not late 2012
...
Figures 2 and 3 reveal that spreads would
have been significantly lower if the ECB had been more active, and that employment would also be higher for all
countries
...

Figure 2 & 3:

Source: Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone - Philippe Martin and Thomas
Philippon (2014)
Simon-Wren Lewis (2014) agrees, positing that if the ECB’s OMT programme was implemented in 2010, rather than
2012, the degree of austerity required would have been far lower
...
Eurozone countries would have had fiscal space to counter the crisis, and
unemployment would have been reabsorbed, bestowing a "better recovery from the Great Recession” as a result
...

A comparison of central bank emergency measures reveal the ECB’s non-standard monetary action to have been tame
...

Examining the financial size of these monetary policy programs shows this to be true: ECB bond purchases up to the
end of 2012 amounted to only 3
...
In the same period, Fed spending for asset purchasing
programs came to 22
...
3% GDP, and the Bank of Japan to 37
...

Figure 4:

Source: WSJ
Figure 4 reveals ECB policy to be significantly more cautious compared with other central banks
...
Given the Euro Crisis was arguably a time when principle
actors should have been more proactive and taken larger risks to counteract such negative consequences, Rodríguez
and Carrasco (2014) deem the ECB’s strategy to have been "backward looking”
...
Wren-Lewis (2013) suggests that the fiscal positions
of some Eurozone economies became critical because of the ECB’s hesitancy, however, taking responsibility four years
after the crisis’ outbreak
...
Rodríguez and
Carrasco (2014) go further, suggesting that the ECB’s caution had perverse effects, mutating the sovereign crisis into a
bank solvency crisis
...

Countering the Counterfactual
Richter and Wahl (2011) propose that despite its initial prudence, ECB action has been quite pragmatic in the crisis
...
Giannone, Lenza, Pill and
Reichlin (2011) found evidence suggesting that the ECB's non-standard measures supported "financial intermediation,
credit expansion and economic activity" during the crisis
...
Pronobis (2014) argues the ECB has managed to avoid the worst-case
scenario in Europe, as all European countries remains solvent and their economic conditions are gradually improving
...
It was perhaps unrealistic to expect more, given it was acting in a very difficult legal and structural
environment during the crisis, and therefore encountered obstacles in implementing more unconventional measures
...
Holding the ECB accountable to Fed standards
may also be unfair, as Lenza, Pill & Reichlin (2010) attest to the different model of financial markets in Europe (bankoriented) and the US (market-based)
...
Perhaps this is a little too harsh, however - Pronobis (2014) points to the ECB's
“straitjacket" and narrow mandate - price stability
...
The ECB delayed acting as a sovereign lender of last resort for two years, creating a Eurozone
crisis out of what should have been just a Greek problem
...
Borio, English and Filardo (2003) recognise that the ECB’s pre-emptive monetary policy strategy leaves price
stability open to risks that stem from financial imbalance
...
The apparent price/ financial stability trade-off has been reconciled by De Grauwe (2009), who
proposes a ‘two-pillar strategy’
...
,
2014)
...
If we believe what Draghi says, then surely a more active ECB could have
solved the crisis sooner? Regardless of how easy monetary policy is, however, the ECB is unable to resolve all structural
problems that the Euro Crisis excavated
...
Final recovery also depends on policymaker
decisions and the future shape of European integration
...
citethisforme
...
(2012) 'The Eurozone's design failures: can they be corrected?,' LSE European Institute inaugural lecture,
November 2012
Pronobis (2014) - (ECB Policy Response 2007-14)
Richter and Wahl (2011) - (WEED)
Giannone, Lenza, Pill and Reichlin (2011) - (Is MP of ECB the right response to the Eurozone crisis?)



---