The Impending Demise of the Euro. The Impact of Monetary Policy on the Sustainability of the Euro
(Sprache: Englisch)
The aim of this thesis is to study the impact of expansionary monetary policy on the European economies through the conceptual framework of the Austrian Business Cycle Theory. The European Central Bank has continually reduced interest rates as a policy...
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The aim of this thesis is to study the impact of expansionary monetary policy on the European economies through the conceptual framework of the Austrian Business Cycle Theory. The European Central Bank has continually reduced interest rates as a policy measure to counter the sovereign debt crisis and this thesis examines the implications of this venture. From Germany's perspective, the viability of reverting to the Deutschmark in times of monetary instability is also explored. The results, based on the deductive reasoning principle of the Austrian School, are also discussed.
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Text Sample:Chapter 3: Central Banks and Monetary Union:
Now, let us discuss in detail, the major roles of a central bank. The mission of a central bank is to provide the nation with a safe and stable financial system. Its main functions are: (i) being the bank of the government and commercial banks, (ii) being the lender of last resort, and (iii) regulating the banking system and managing monetary policies (Parkin et al., 1997).
Being the bank of the government means financing its spending which can be done in two ways. It can be done either by issuing a direct loan which is equivalent to money printing, or alternatively, by selling government bonds. The central bank changes the supply of money by buying or selling bonds in the bonds market in what is called open market operations. If it wants to decrease the amount of money in circulation it sells existing bonds in the market, thereby removing money from the existing supply. On the other hand, if the central bank wishes to increase the amount of money in the economy, it buys bonds by creating money (Blanchard, 2003). The price of these bonds and their interest rates has an inverse relationship. The lower the bond price, the higher the interest rate and vice versa. Thus, financing debt through open market operations can be used to control the interest rate in financial markets.
Being the bank of the commercial banks imply keeping their reserves, regulating the banking sector and acting as their lender of last resort. When central banks extend credit to commercial banks in times of a credit crunch, it means they are serving the purpose of being a lender of last resort. Restoring the cash levels of commercial banks helps to avoid a possible bank run. In theory, the central bank can also regulate the money supply by increasing the minimum reserve requirement.
A central bank can also directly set the interest rate at which commercial banks borrow funds. Increasing the interest rate makes it more costly to loan
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money from the central bank, encouraging commercial banks to cut down on their lending, while a fall in the interest rate naturally stimulates lending. The banks are required to keep a specific fraction of their deposits on reserve, to be made available for customer withdrawal. Banks can find themselves below the reserve requirement set by the central bank if they have made a lot of loans or if an unusually large number of people have withdrawn funds. Banks borrow from each other when the need arises for additional cash reserves to meet this reserve requirement. The interest rate increases when there is too much demand from banks looking to borrow and too little supply from banks willing to lend. A central bank, like the Federal Reserve of the United States, then intervenes by buying bonds from the banks. This gives the banks more money in the form of reserves to lend to banks that need it. In the process, funds available to be lent to other banks become more abundant, and a correspondingly lower interest rate reflects this. So, a question may now arise regarding from where exactly a central bank can get hold of this money to buy the bonds. Paul (2008) provided a simple answer to this query by stating that the central bank creates the money out of thin air by writing checks on itself and then giving them to the banks.
3.1 The European Central Bank (ECB):
The European Central Bank (ECB) is at the heart of European monetary union. The ECB was envisioned in the Maastricht Treaty (1992) and legally formed in 1998. It is responsible for issuing the euro, which is a single currency for nineteen out of the twenty eight nations that are European Union (EU) members. Moreover, the ECB conducts monetary policy with the mandate of maintaining price stability in the eurozone. It also manages the foreign exchange reserves of the nineteen national central banks in the eurozone (countries using the euro) and operates a payments platform among those banks called TARGET2.
The Europe
3.1 The European Central Bank (ECB):
The European Central Bank (ECB) is at the heart of European monetary union. The ECB was envisioned in the Maastricht Treaty (1992) and legally formed in 1998. It is responsible for issuing the euro, which is a single currency for nineteen out of the twenty eight nations that are European Union (EU) members. Moreover, the ECB conducts monetary policy with the mandate of maintaining price stability in the eurozone. It also manages the foreign exchange reserves of the nineteen national central banks in the eurozone (countries using the euro) and operates a payments platform among those banks called TARGET2.
The Europe
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Bibliographische Angaben
- Autor: Tahmeed Zaman
- 2017, 120 Seiten, 23 Abbildungen, Maße: 15,5 x 22 cm, Kartoniert (TB), Englisch
- Verlag: Anchor Academic Publishing
- ISBN-10: 3960671768
- ISBN-13: 9783960671763
Sprache:
Englisch
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