Easy Money through the Back Door: The Markets vs. the ECB

Jörg Bibow

Macroeconomics from University Library of Munich, Germany

Abstract: This paper assesses the performance of the European Central Bank (ECB) over the first two years of Europe's new policy regime. The verdict is that the ECB was not actually in charge, as the markets took over and imposed easy money on the euro zone. It is argued that the causes for the ECB's loss of effective control over the currency and monetary stance lie partly in the low-growth legacies of unsound macro policies inflicted upon Europe over the 1990s. The ECB made matters worse, though, first by failing to communicate effectively and coherently with financial market participants and, second, by playing against the markets' dominant theme: growth. This resulted in a time-inconsistency problem: attempts to prop up the euro through narrowing the current interest rate spread vis-à-vis the U.S. dollar were perceived as risking the euro zone's growth prospects and hence the sustainability of tighter money in the future. Under such conditions, interest rate hikes might then weaken rather than strengthen the currency. A more balanced and proactive attitude toward growth, and medium-term orientation as regards inflation, might have both reduced inflation in the short run and improved growth in the longer run. The recent short run of impressive GDP and employment growth spurred by easy money embarrasses the structural myth, and underlines that the ECB was not actually in charge.

JEL-codes: E (search for similar items in EconPapers)
Pages: 36 pages
Date: 2001-03-21
New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-mon
Note: Type of Document - Adobe Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 36; figures: included
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Easy Money through the Back Door: The Markets vs. the ECB (2001)
Working Paper: Easy Money Through The Back Door: The Markets Vs. The ECB
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0103004

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