Fundamentals of monetary policy in the euro area

Dieter Gerdesmeier Fundamentals of Monetary Policy in the Euro Area Concepts – Markets – Institutions Download free eBooks at bookboon.com Fundamentals of Monetary Policy in the Euro Area: Concepts – Markets – Institutions 3rd edition © 2015 Dieter Gerdesmeier & bookboon.com ISBN 978-87-403-1004-7 Download free eBooks at bookboon.com Fundamentals of Monetary Policy in the Euro Area Contents Contents Introduction and motivation 12 Basic concepts 13 2.1 Learning objectives 13 2.2 Some economic concepts 13 2.3 Some statistical concepts 14 A short history of EMU 17 3.1 Learning objectives 17 3.2 The roadmap to EMU 17 3.3 Convergence criteria 19 3.4 The concept of an optimal currency area 21 3.5 Advantages and disadvantages of a monetary union 22 3.6 Some controversies about the road 23 www.sylvania.com We not reinvent the wheel we reinvent light Fascinating lighting offers an infinite spectrum of possibilities: Innovative technologies and new markets provide both opportunities and challenges An environment in which your expertise is in high demand Enjoy the supportive working atmosphere within our global group and benefit from international career paths Implement sustainable ideas in close cooperation with other specialists and contribute to influencing our future Come and join us in reinventing light every day Light is OSRAM Download free eBooks at bookboon.com Click on the ad to read more Fundamentals of Monetary Policy in the Euro Area Contents 4 Institutions 24 4.1 Learning objectives 24 4.2 The European Union 24 4.3 The European Central Bank 25 4.4 Presidents of the European Central Bank 27 4.5 The Rise of the Euro 28 4.6 A closer look at the U.S Federal Reserve System 29 4.7 A closer look at the Bank of Japan 30 4.8 A closer look at the Bank of England 31 4.9 Decision-making modalities 31 4.10 Independence and accountability 34 5 Inflation 5.1 Learning objectives 5.2 Basic concepts 5.3 Effects of inflation 5.4 Measuring inflation 5.5 Core and non-core inflation 360° thinking 360° thinking 39 39 39 40 41 42 360° thinking Discover the truth at www.deloitte.ca/careers © Deloitte & Touche LLP and affiliated entities Discover the truth at www.deloitte.ca/careers Deloitte & Touche LLP and affiliated entities © Deloitte & Touche LLP and affiliated entities Discover the truth at www.deloitte.ca/careers Click on the ad to read more Download free eBooks at bookboon.com © Deloitte & Touche LLP and affiliated entities Dis Fundamentals of Monetary Policy in the Euro Area Contents 5.6 43 Measurement problems 5.7 Hyperinflation 43 5.8 Sacrifice ratios 45 Causes of inflation 46 6.1 Learning objectives 46 6.2 The Quantity Theory 46 6.3 The Phillips Curve 48 6.4 The P-Star Approach 51 6.5 The aggregate supply and demand model 52 6.6 Role and limitations of monetary policy 54 6.7 Empirical evidence 56 Monetary policy strategies 64 7.1 Learning objectives 64 7.2 Intermediate targets and indicators 64 7.3 Monetary policy strategies 65 7.4 The monetary policy strategy of the ECB 69 7.5 Functions of money 70 We will turn your CV into an opportunity of a lifetime Do you like cars? 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We will appreciate and reward both your enthusiasm and talent Send us your CV You will be surprised where it can take you Download free eBooks at bookboon.com Send us your CV on www.employerforlife.com Click on the ad to read more Fundamentals of Monetary Policy in the Euro Area Contents Financial markets 75 8.1 Learning objectives 75 8.2 Functions of the financial system 75 8.3 Direct and indirect finance 78 8.4 Financial institutions 79 8.5 Integration of financial markets 80 Interest rates 82 9.1 Learning objectives 82 9.2 Basic considerations 82 9.3 Present value and future value 83 9.4 Determinants of interest rates 84 9.5 Determinants of the term structure 85 10 Money markets 90 10.1 Learning objectives 90 10.2 Basic considerations 90 10.3 Some key interest rates worldwide 91 I joined MITAS because I wanted real responsibili� I joined MITAS because I wanted real responsibili� Real work International Internationa al opportunities �ree wo work or placements �e Graduate Programme for Engineers and Geoscientists Maersk.com/Mitas www.discovermitas.com �e G for Engine Ma Month 16 I was a construction Mo supervisor ina const I was the North Sea super advising and the No he helping foremen advis ssolve problems Real work he helping fo International Internationa al opportunities �ree wo work or placements ssolve pr Download free eBooks at bookboon.com Click on the ad to read more Fundamentals of Monetary Policy in the Euro Area Contents 11 Bond markets 92 11.1 Learning objectives 92 11.2 Basic considerations 92 11.3 Types of bonds 93 11.4 Calculating the value of a bond 94 11.5 Bond ratings 94 12 Stock markets 97 12.1 Learning objectives 97 12.2 Basic considerations 97 12.3 Calculating the value of a stock 98 12.4 Technical and fundamental analysis 100 12.5 The Graham approach 101 12.6 Stock market indices 102 12.7 Equity risk premium 103 12.8 The concept of Beta 103 13 Foreign exchange markets 105 13.1 Learning objectives 105 13.2 Basic considerations 105 13.3 Purchasing power parity 107 13.4 Interest rate parity 111 13.5 Exchange market interventions 117 13.6 Exchange rate regimes 118 13.7 ERM II 120 14 Derivative markets 122 14.1 Learning objectives 122 14.2 Basic considerations 122 14.3 Forward and futures contracts 122 14.4 Swaps 123 14.5 Options 124 14.6 Credit default swaps 126 15 Market efficiency 127 15.1 Learning objectives 127 15.2 Forms of efficiency 127 15.3 Behavioural finance 129 Download free eBooks at bookboon.com Fundamentals of Monetary Policy in the Euro Area Contents 16 Banks and other financial institutions 130 16.1 Learning objectives 130 16.2 Commercial banks 130 16.3 Other financial intermediaries 132 16.4 Leveraging and deleveraging 134 16.5 Banks runs and banking crises 135 16.6 Key features of the banking system in the euro area 136 17 Money supply and money demand 139 17.1 Learning objectives 139 17.2 Monetary aggregates 139 17.3 The money supply process 146 17.4 Money demand 150 17.5 On the control of money supply 159 17.6 The monetary policy transmission process 160 17.7 Time lags of monetary policy 164 17.8 Interest rate decisions of the ECB 165 17.9 Monetary policy instruments in the euro area 169 17.10 Monetary policy in times of financial crisis 171 17.11 Enhanced credit support 174 17.12 The Securities Market Programme 174 17.13 Three-year longer-term refinancing operations 175 17.14 Outright Monetary Transactions 176 17.15 Forward guidance 176 17.16 Negative deposit rates 177 17.17 ABS and covered bond purchase programme 178 17.18 Expanded asset purchase programme 179 17.19 TARGET2 issues 179 17.20 The way forward 181 Download free eBooks at bookboon.com Fundamentals of Monetary Policy in the Euro Area Contents 18 Monetary policy in practice 182 18.1 Learning objectives 182 18.2 Real interest rates 182 18.3 Monetary Condition Indices 182 18.4 The McCallum rule 184 18.5 The Taylor rule 186 18.6 Monetary indicators 190 19 Asset price bubbles and monetary policy 198 19.1 Learning objectives 198 19.2 Asset price imbalances 198 19.3 Some historical examples 201 19.4 Debt-deflation and the Minsky moment 204 19.5 Detecting asset price booms and busts 205 19.6 Early warning indicator models 207 19.7 Monetary policy, asset and consumer prices 209 19.8 Monetary policy responses 211 20 Multiple Choice test 213 21 List of symbols and abbreviations 220 22 222 List of country codes 23 Glossary 223 24 References 230 Endnotes 265 10 Download free eBooks at bookboon.com ... Malta join the euro area, thereby increasing the number of Member States to 15 Jan 2009 Slovakia joins the euro area Jan 2011 Estonia joins the euro area Jan 2014 Latvia joins the euro area Jan... banks in the performance of their tasks” 4.5 The Rise of the Euro The name of the new currency of the euro area was decided at the meeting of the European Council in Madrid in December 1995 It was... system The highest-ranking decision-making body of the ECB is the Governing Council.25 It consists of the six members of the Executive Board and the Governors of the NCBs of the euro area. 26 The