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Comparison of the FED and the European Central Bank

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on 15 March 2017

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Transcript of Comparison of the FED and the European Central Bank

1. Structure
1. Objective

2. Independence
I. The FED and the ECB's similarities
II. Different objectives and tools
Central Bank is in charge to run monetary policy of a state (FED or BCN) or economic zone (the ECB). Concretely Central Bank has to:

• Make sure of price stability
• Insure the growth
• Contribute to decrease unemployment

Thursday, October 13, 2016
I. The FED and the ECB's Similarities
The FED has to insure the growth as long as inflation is not a problem
A Comparison of the FED and the European Central Bank
Thomas Gratiant
1. Structure
2. Independence
II. The FED and the ECB's Differences
1. Objectives
2. Tools
To what extent do the FED & the ECB have similarities and differences ?
Decision Center The Board of governors :
7 members
The Federal Open Market Committee (FOMC) :

7 members of the board
12 presidents of the Regional FED
6 governors
Executive Board:
19 governors of the National Central Banks (NCB)
The Governing council:
I. The FED and the ECB's similarities
Non-renewal of the member’s Board mandate
Twice a year, The fed reports back to the congress about the evolution and short terms perspectives of monetary policy
There are frequent hearing of the Board of governors by the 2 Houses of Congress.
Moreover, The FOMC publish their minutes six to eight weeks after the meeting
The Maastricht Treaty makes sure The ECB reports back to the European council and Parliament Once per year
However, despite an effort in 1999 by the president of the ECB to increase the transparency including giving press conference, The ECB refuses to communicate its minutes
Therefore we can see that the FED is more transparency than The ECB
II. Different objectives and tools
1. Objective

The ECB has for unique mandate to contain the inflation then insure the growth and contributes to decrease unemployment
In the Fed and ECB’s statute we find these objectives but the priority is different
II. Different objectives and tools
2. Tools

To achieve their objectives the central banks have different tools

The FED reckons that the rate of the inflation has to be “close to 2 percent”, so that there is price stability.

As for the ECB, she is more objective and she stipulates that the rate of inflation has to be “lower than 2 percent”
II. Different objectives and tools
2. Tools

The European economy is benefit financed by the banking system
The ECB’s principal tool to regulate inflation is to adjust the policy rate, which is equivalent to a minimum refinancing rate, which banks can finance at short term
If this rate is high, banks will limit their credit knowing that refinancing will be costly and vice versa.

In principle, banks pass that cost on to the consumer by way of loans it grants to its own customers.
The lower the rate of ECB, the cheaper credit will be. In theory this will boost growth.

II. Different objectives and tools
2. Tools

To fix the interest rate while the ECB is based on the monetary aggregate M3 which includes M1 and M2 aggregate, the FED relies only on the monetary aggregate M1 and M2.
- Deposits > 2 years
- Money market funds
- Savings Book
- Various Term deposits < 2 years

- Notes and coins
- Current accounts
II. Different objectives and tools
2. Tools
The USA is more based on a financial system. The FED repurchases government bonds and mortgages in order to lower rates.
Quantitative easing :
is to buy market sovereign debt with newly created money. The primary purpose of this policy is to inject liquidity into the economy to prevent deflation, then trying boost the economy. The goal is not to bring down sovereign rates.
Since the 2008 crisis, the Fed has increased its quantitative easing policy
Clarification :
The Fed was created in 1913 whereas the ECB started to decide on monetary policy in 1999. This fundamental difference brings about the differences in perspective between the two institutions.
Indeed, it takes time for a central bank to develop its internal organization and its monetary policy framework. Moreover, both have made many mistakes and sometimes badly managed economic crisis in the property market crisis of the 2000's to the FED and from 2008 to 2011 economic context for the ECB).
This is easily explained, because whatever the management system in place, the economic variables are not fixed. Central banks shall do their best to anticipate crises and to prevent them, but they can’t absolutely avoid the economy from all shocks. 
The ECB can not purchase debt of a member country of the euro zone that would be unable to pay its debts. Indeed, it could be accused of favoring a particular state and generating inflation which is contrary to its mandate. Moreover, the sovereign debt bought by the ECB is prohibited by the Article 123 of the Lisbon Treaty, but a little tip allowed to circumvent this prohibition, the ECB announcing that these transactions are legal as consisting of " a repurchase on the secondary market, accompanied by sterilization operations "
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