ECB and Monetary integration (L11, L12)

Question 1

ECB: pre-crisis | The ECB Monetary policy performed well

Answer 1

ARGUMENTS FOR:

1. Single monetary policy is ‘premier’ success.
2. Inflation remained subdued
3. ECB developed a reputation for competence but also caution – no reason to criticise and the ECB’s main goal is to keep interest rates low and that’s what they did.

Question 2

ECB: pre-crisis | The ECB Monetary policy performed badly

Answer 2

ARGUMENTS AGAINST:
1. Us federal reserve acted quicker + more decisively than the ECB, but the Fed’s low interest rate policy may have contributed to a genesis of crisis.

2. ECB failed to control growth bank credit and price bubble in houses (prices in housing much higher than real value due to over-expansion of bank credit) once the FC started, housing market crashed.
3. ‘One size does not fit all’
   Think about the different countries in the Eurozone, each country has their own economic condition – industry structure is different, and efficiency is different. However, despite those vast countries, they all adopted the same interest rate. Does one size fit all? NO

Question 3

What is one size does not fit all?

Answer 3

Without MU, each country would set their own interest rate according to their local situation. If economy is going well, set a high interest rate etc.
If interest rate is lower, more money is around so they find somewhere to put it and put it in housing market.

Question 4

what is the taylor rule?

Answer 4

For any country, the TAYLOR RULE provides a formula to find the best interest rate based on key macroeconomic data.
e.g., 2002 taylor rule suggest best rate for Germany was 2.75% but Ireland 7.5%.