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The ECB vs. The FedThe ECB vs. The Fed

By:Petru-Catalin David

FH des BFI Wien

May 2011

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http://upload.wikimedia.org/wikipedia/commons/f/f4/Federal_Reserve.jpghttp://upload.wikimedia.org/wikipedia/commons/3/36/Eurotower_in_Frankfurt.jpg

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Presentation Plan

1.The ECB and the FED structure and history

2. Monetary policy

objectives of the ECB vsthe FED

3. Strategies for achieving

monetary policy goals

4. How did the central

banks respond to the

economic crisis 2

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Structure of The ECB

Modeled after the GermanBundesbank.

Governed by a six member

Executive Board ofDirectors.

Headed by a President anda Board of Governors.

Comprised of The ECB and

the Local Central Banks ofthe 27 European UnionMember States.

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Structure of The Fed

Modeled after some of the oldestEuropean central banks in history;such as, Swedens Riksbank(1668), the Bank of England

(1694), and the Banque France(1800). Also, served as a loosemodel for the reestablishment ofGermanys Bundesbank afterWWII.

Governed by The Federal ReserveBoard of Governors, which includesthe chairman, and The FederalOpen Market Committee (FOMC).

Comprised of the 12 FederalReserve Banks and the member

banks (mostly commercial banks). 4

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Presentation Plan

1.The ECB and the FED structure and history

2. Monetary policy

objectives of the ECB vsthe FED

3. Strategies for achieving

monetary policy goals

4. How did the central

banks respond to the

economic crisis 5

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ECB

Maintain Price

Stability

Support GeneralEconomic Policies ofthe European UnionStates

Ensure an OpenMarket Economy

Administer the U.S.

Monetary Policy Supervise and regulate

banking institutions

Maintain the stability ofthe financial system

Provide financialservices to depositoryinstitutions, the U.S.government, and

foreign officialinstitutions

FED

Official objectives

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Primary Goals

Achievingmaximumsustainable GDPgrowth with price

stability

Maintaining pricestability, definedas inflation ratesbelow, but close

to, 2 percentover the mediumterm

ECB FED

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Presentation Plan

1.The ECB and the FED structure and history

2. Monetary policy

objectives of the ECB vsthe FED

3. Strategies for achieving

monetary policy goals

4. How did the central

banks respond to the

economic crisis 8

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Strategies for achieving monetary policy goals

Carefully monitoring the money

supply M3 Quarterly MonetaryAssesment(QMA)

Analyzing the cyclical dynamics

of economic activity

Forecasting inflation using

velocity models

Influencing the overnight interest

rates by performing open market

operations

Analyzing the cyclical dynamics

of economic activity

Analyzing economic indicators

such as consumer

spending,manufacturing or

building indexes

ECB FED

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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 should never be ignored-neither in monetary policy nor inresearch.

Otmar Issing,former member

of the ECB executive board

Money supply How the ECB sees

it

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...money plays no role in todaysconsensus macro model...and virtuallyno role in the conduct of monetary

policy, at least in the US

FED Governor Lawrence Meyer

Money supply How the FED sees

it

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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 vsthe FED

3. Strategies for achieving

monetary policy goals

4. How did the central

banks respond to the

economic crisis 16

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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 andissued the SMP programm

Both the FED and the ECB provided

massive liquidity to banks 17

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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 banksbut the FED could shift this objective for astronger GDP growth on short term.

ECB avoids to intervene directly on the market,while FED is often a player on the financialmarkets.

Focus is placed on signaling their decisionsregarding changes in short-term interest rates in

advance in order to let the markets adapt to newinterest rates.

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