Session 3 Flashcards
What are the Maastricht Convergence Criteria?
- Inflation
- Long term interest rate
- Exchange rate mechanism membership
- Budget deficit
- Public debt
Define the inflation convergence criteria
Inflation should not to exceed by more than 1.5 per cent the average of the three lowest inflation rates among EU countries
Define the long-term interest rate convergence criteria
It helps guarantee an uniform environment, and that’s how they embed future inflation expectation
not to exceed by more than 2 per cent the average interest rate in the three lowest inflation countries.
Define the exchange rate mechanism membership
Convinces the exchange markets and to anchor exchange rates before firing the parity.
At least two years in ERM without being forced to devalue
Define the budget deficit convergence criteria
Deficit less than 3 per cent of GDP
Define the public debt convergence criteria
Debt less than 60 per cent of GDP, or decreasing at a sufficiently fast pace
What is the characteristic of these convergence criteria?
They are nominal, that means the intermediate target of stable inflation and public finances allow to focus on structural reforms and on the supply side
What is the European system of central banks made of?
The European Central Banks and all the National Central Banks of the EU.
What is the Eurosystem?
The ECB and the National Central Banks of euro area member countries.
What is the primary objective of the ESCB?
Maintain price stability, and then support general economic policies in the Community
What are the economic objectives of the EU
High level of employment and sustainable and non-inflationary growth.
Does the Eurosystem have a target (before 2021)?
Their target is to maintain inflation rates below but close to 2% over the medium term. It left room for interpretation.
What are the channels of monetary policy?
- Long run interest rates
- Credit
- Asset prices/ exchange rate
What channel of monetary policy does te central bank control?
The different channels are all beyond the central bank control. It can only affect the very short term interest rate (European Over Nigt Index Average) through REPO and Lending Facility. This means that the central bank only indirectly affects interbank rates, and even more so credit conditions to households and firms.
What are arguments in favour for central bank independence?
Government do not really resist to the printing press temptation, so central banks don’t have to handle such pressure.
What are arguments against central bank independence?
- Not held accountable, so maybe issue of democratic deficit
Define fiscal policy
It’s a set of macroeconomic policies aimed at impacting the macroeconomic outcome of the economy through:
- revenues of the government
- expenditures of the government
What is the role of fiscal policy?
- Provision of public goods
- Collective insurance
- Macroeconomic stabilisation
- Redistribution
Define government deficit
Difference between government expenditures and revenues
Define public debt
Stock of cumulated deficits
Define primary deficit or surplus
Government deficit or surplus net of interest payments
Define the output gap
Difference between actual and potential output
Define structural or cyclically adjusted deficit
What the balance would be if the output gap were zero
What are automatic stabilisers?
Things that happen with no decision, no lag, as a countercyclical phenomenon.
- Tax receipt decline when the economy slows down
- Welfare spending rises when the economy slows down.
