Main Financial Regulators: Comparative Analysis of Federal Reserve and Euro System
This article contains a systematic comparison of the Eurosystem and the US Federal Reserve System as the major economic regulators. Comparative analysis of these two systems was performed. Monetary policy essence and its effects were described as well as monetary aggregates.
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irk-123456789-1233912017-09-04T03:02:56Z Main Financial Regulators: Comparative Analysis of Federal Reserve and Euro System Malyshko, O.V. German, K.A. Finance This article contains a systematic comparison of the Eurosystem and the US Federal Reserve System as the major economic regulators. Comparative analysis of these two systems was performed. Monetary policy essence and its effects were described as well as monetary aggregates. Ця стаття містить систематичне порівняння Євросистеми та Федеральної Резервної Системи США як основних економічних регуляторів. Було виконано порівняльний аналіз цих двох систем. Було описано сутність монетарної політики, її ефекти, а також грошові агрегати. Федеральной Резервной системы и Евросистемы Эта статья содержит систематическое сравнение Евросистемы и Федеральная Резервной Системы США как основных экономических регуляторов. Был выполнен сравнительный анализ этих двух систем. Были описаны сущность монетарной политики, её эффекты, а также денежные агрегаты. 2013 Article Main Financial Regulators: Comparative Analysis of Federal Reserve and Euro System / O.V. Malyshko, K.A. German // Економічний вісник Донбасу. — 2013. — № 4 (34). — С. 96–99. — Бібліогр.: 11 назв. — англ. 1817-3772 http://dspace.nbuv.gov.ua/handle/123456789/123391 [338.23:336.74] (4:73) en Економічний вісник Донбасу Інститут економіки промисловості НАН України |
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Finance Finance Malyshko, O.V. German, K.A. Main Financial Regulators: Comparative Analysis of Federal Reserve and Euro System Економічний вісник Донбасу |
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This article contains a systematic comparison of the Eurosystem and the US Federal Reserve System as the major economic regulators. Comparative analysis of these two systems was performed. Monetary policy essence and its effects were described as well as monetary aggregates. |
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Article |
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Malyshko, O.V. German, K.A. |
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Malyshko, O.V. German, K.A. |
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Malyshko, O.V. |
| title |
Main Financial Regulators: Comparative Analysis of Federal Reserve and Euro System |
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Main Financial Regulators: Comparative Analysis of Federal Reserve and Euro System |
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Main Financial Regulators: Comparative Analysis of Federal Reserve and Euro System |
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Main Financial Regulators: Comparative Analysis of Federal Reserve and Euro System |
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Main Financial Regulators: Comparative Analysis of Federal Reserve and Euro System |
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main financial regulators: comparative analysis of federal reserve and euro system |
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Інститут економіки промисловості НАН України |
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2013 |
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Finance |
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Main Financial Regulators: Comparative Analysis of Federal Reserve and Euro System / O.V. Malyshko, K.A. German // Економічний вісник Донбасу. — 2013. — № 4 (34). — С. 96–99. — Бібліогр.: 11 назв. — англ. |
| series |
Економічний вісник Донбасу |
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AT malyshkoov mainfinancialregulatorscomparativeanalysisoffederalreserveandeurosystem AT germanka mainfinancialregulatorscomparativeanalysisoffederalreserveandeurosystem |
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2025-07-08T23:34:27Z |
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2025-07-08T23:34:27Z |
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1837123690499670016 |
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96
Економічний вісник Донбасу № 4 (34), 2013
UDC [338.23:336.74] (4:73)
O. V. Malyshko,
PhD (Economics)
K. A. German,
Donetsk National Technical University
MAIN FINANCIAL REGULATORS: COMPARATIVE ANALYSIS
OF FEDERAL RESERVE AND EURO SYSTEM
Introduction. Two economical giants exist in the
world influencing monetary policy creation. They have
powers and established system on regulation of the
multiregional economic conditions. Comparing these two
systems we can find out and analyze the necessity,
benefits or drawbacks of their work. Sometimes we even
cannot imagine how global and stable they can be. With
the help of systematic comparison of Eurosystem and
the US Federal Reserve System we can explore the
importance of their existence as a major source of
financial resources. The legal status and several of their
tasks differ; there are fewer differences in their institutional
structures, monetary policy frameworks, as well as the
use of policy instruments.
The Federal Reserve System and ECB. These
systems are unusual mixture of both public and private
elements. It can influence on how fast or how slow the
economy will grow or contract. Let’s consider the
structure of the ECB and The Federal Reserve.
On June 1, 1998, the Executive Board of the ECB
held its first meeting at its headquarters in Frankfurt,
Germany [4]. Six months later the ECB assumed
responsibility for monetary policy in the euro area,
bringing to fruition a plan for monetary union first outlined
nearly two decades earlier. The euro area is unique among
common currency areas. 12 sovereign nations have not
only adopted a common currency, the euro, but have
also created a supranational organization, the ECB; this
institution, along with input from the head of each member
country's national central bank, sets monetary policy for
the euro area. 90 years ago, the Federal Reserve Act
created a central bank for the United States consisting of
12 regional (District) Federal Reserve Banks and a seven-
member Federal Reserve Board in Washington, D. C. In
1935 the Federal Reserve Board was renamed the Board
of Governors of the Federal Reserve System. The
European System of Central Banks consists of 15 national
central banks and a six-member Executive Board in
Frankfurt, Germany. The 15 central banks correspond
to the 15 member countries of the European Union. The
three central banks whose countries are not members of
the euro area participate in few of the activities of the
European System of Central Banks. The Eurosystem is
the term used to refer to the ECB and the 12 national
central banks of the member countries [5]. The 12
Districts of the Federal Reserve System, in contrast to
the national central banks of the Eurosystem, do not
correspond to political entities. These 12 Districts are
divided along county lines, encompassing not only
multiple states, but portions of states. Indeed, in the early
years of the Federal Reserve System, some border
counties petitioned and were allowed to switch Districts.
In the table below we can see the main differences
between Federal Reserve and ECB systems.
Based on this table we’ll consider strategy of both
systems in more detail because it is one of the fundamental
differences.
Monetary Policy. The main function of both the
Federal Reserve and the ECB is to conduct monetary policy
to achieve the goals assigned by their respective charters
[11]. In the short run, monetary policy influences inflation
and the economy-wide demand for goods and services
and, therefore, the demand for the employees who produce
those goods and services. It occurs primarily through its
influence on the financial conditions facing households and
firms. The inflationary consequences of rising commodity
prices represent an important challenge for monetary policy.
Rising commodity prices result in an increase in inflation,
but at the same time have negative consequences on
economic activity. Their implications for monetary policy
are less straightforward than those of demand shocks.
For example, a positive demand shock, that increases
inflation and output, calls for monetary tightening in order
to stabilize both. However, the implications of commodity
price shocks are less clear cut. During normal times, the
Federal Reserve has primarily influenced overall financial
conditions by adjusting the federal funds rate – the rate
that banks charge each other for short-term loans [11].
Movements in the federal funds rate are passed on to other
short-term interest rates that influence borrowing costs
for firms and households. Movements in short-term interest
rates also influence long-term interest rates (such as
corporate bond rates and residential mortgage rates)
because those rates reflect, among other factors, the current
and expected future values of short-term rates. In addition,
shifts in long-term interest rates affect other asset prices,
most notably equity prices and the dollar’s exchange rate.
Monetary policy also has an important influence on
inflation. When the federal funds rate is reduced, the
resulting stronger demand for goods and services tends to
push wages and other costs higher, reflecting the greater
demand for workers and materials that are necessary for
O. V. Malyshko, K. A. German
97
Економічний вісник Донбасу № 4 (34), 2013
production [2], [8]. In addition, policy actions can influence
expectations about how the economy will perform in the
future (Figure 1), including expectations for prices and
wages, and those expectations can themselves directly
influence current inflation. Monetary policy has an
important additional effect on inflation through
expectations – the self-fulfilling component of inflation [3].
Many wage and price contracts are agreed to in advance,
based on projections of inflation. If policymakers hike
interest rates and communicate that further hikes are
coming, this may convince the public that policymakers
are serious about keeping inflation under control [6]. Long-
term contracts will then build in more modest wage and
price increases over time, which in turn will keep actual
inflation low.
Monetary policymakers and central banks universally
recognize that, in the long run, inflation is strictly
determined by monetary policy [7]. However, they
disagree sharply about the role of monetary aggregates
in the conduct of monetary policy.
Monetary aggregates. Given that many different
financial assets are close substitutes, and that the nature
and characteristics of financial assets, transactions and
means of payment are changing over time, it is not always
clear how money should be defined and which financial
assets belong to which definition of money. Central banks
usually define and monitor several monetary aggregates.
The ECB’s definitions of euro area monetary aggregates
are based on harmonized definitions of the money-issuing
sector and the money-holding sector as well as of
categories of monetary financial institution (MFI)
liabilities. The money-issuing sector comprises MFIs
resident in the euro area. The money-holding sector
includes all non-MFIs resident in the euro area excluding
the central government sector [9]. Based on conceptual
considerations and empirical studies, and in line with
international practice, the Eurosystem has defined a
narrow (M1), an “intermediate” (M2) and a broad
monetary aggregate (M3). These aggregates differ with
regard to the degree of liquidity of the assets and include:
– M1 includes currency, i. e. banknotes and coins,
as well as balances that can immediately be converted
into currency or used for cashless payments, such as
overnight deposits.
– M2 comprises M1 and, in addition, deposits with
an agreed maturity of up to two years or redeemable at a
period of notice of up to three months. These deposits
can be converted into components of narrow money,
but some restrictions may apply, such as the need for
advance notification, penalties and fees.
– M3 comprises M2 and certain marketable
instruments issued by the resident MFI sector [5]. These
marketable instruments are repurchase agreements,
money market fund shares/units and debt securities with
a maturity of up to two years (including money market
paper). A high degree of liquidity and price certainty make
these instruments close substitutes for deposits. As a
result of their inclusion, broad money is less affected by
substitution between various liquid asset categories
than narrower definitions of money, and is more stable.
O. V. Malyshko, K. A. German
ECB Fed
structure Majority of the NCB Majority of the Board
objectives Price stability Full employment, stable prices, moderate
interest rates
strategy Two-pillar approach
Rule-based monetary policy
Case-by-case
Discretionary monetary policy
doctrine Long-run neutrality of money Affect economic variables
indepen-
dence of
each
High level of independence
European institutions have no authority
over ECB
Lack of transparency
Independent government agency
Reports four times a year to Congress
President can remove a member
Rule based
= one response to every economic
situation
Discretionary
= come to a decision case-by-case
+consistency
+plausibility
+predictable
+quick decisions
+flexible
+best reaction
ECB & €
- a new central bank and currency
- a heterogeneous area
Fed & $
- an established central bank and currency
- a homogeneous area
Table 1
Comparative analysis
98
Економічний вісник Донбасу № 4 (34), 2013
Holdings by euro area residents of liquid assets denominated
in foreign currencies can be close substitutes for euro-
denominated assets.
Effect of Monetary Policy. Unanticipated changes
in monetary policy will produce both price (substitution)
and income effects [8].The sequence of events to occur
with regard to the price effect is as follows:
– Real interest rates will be reduced.
– As real interest rates are reduced, domestic
financial and capital assets become less attractive as a
result of their lower real rates of return. Foreigners will
reduce their positions in domestic bonds, real estate,
stocks and other assets. The financial account (or balance
on capital account) will deteriorate as a result of foreigners
holding fewer domestic assets. Domestic investors will
be more likely to invest overseas in the pursuit of higher
rates of return [3].
– The reduction in domestic investment by
foreigners and the country's citizens will decrease the
demand for the nation's currency and increase the demand
for the currency of foreign countries. The exchange rate
of the nation's currency will tend to decline.
– With no government intervention, the financial
account and the current account must sum to zero. As
the financial account declines, the current account will
be expected to improve by an equal amount. In other
words, the balance of trade should improve. The
country's export will have become relatively cheaper and
imports will be relatively more expensive.
The effect of an expansionary monetary policy is
to lower the exchange rate, weaken the financial account
and strengthen the current account. A restrictive monetary
policy would be expected to result in the opposite: a higher
exchange rate, a stronger financial account and a weaker
current account (a more negative, or a less positive balance
of trade) [1]. With a program of expansionary (easy)
monetary policy, the following sequence of events would
be expected to occur with regard to the income effect:
– The domestic GDP will rise.
– The rise in domestic GDP will tend to increase
the demand for imports. The increase in imports will
cause the current account to deteriorate.
– The increase in imports purchased will increase
the need to convert domestic to foreign currency. As a result,
the exchange rate of the domestic currency will decrease.
– With no government intervention, the financial
account must now move toward a surplus as the financial
and current account must sum to zero. Due to the increase
in imports, foreigners will now have a surplus of the
nation’s currency. If foreigners do not use that currency
to purchase the country’s exports (which would improve
the current account balance), they will ultimately need to
invest that currency in the assets of the domestic country.
This explains why countries such as China and Japan invest
large sums in assets such as U.S. Treasuries. The holders
of the U.S. $ must put it to work somewhere! Foreign
investors are often getting better rates of return than what
might be readily apparent because the value of the domestic
currency is falling relative to their own currency. In
summary, the income effect of expansionary monetary
policy tends to lower the domestic currency exchange
rate, weaken the current account and work to improve
the financial account. A restrictive monetary policy tends
to cause the opposite due to the income effect. The
domestic currency exchange rate increases, the current
account improves and the financial account weakens.
Conclusion. The Federal Reserve and the ECB view
the role of monetary aggregates in the conduct of policy
very differently. For the Fed, the aggregates are just one
set of many economic indicators that are monitored for
insight into the outlook for economic activity and inflation
[10]. For the ECB, the aggregates – M3 in particular –
O. V. Malyshko, K. A. German
Fig. 1. Inflationary Expectations and Monetary Policy
99
Економічний вісник Донбасу № 4 (34), 2013
represent one of two pillars of monetary policy [5]. As
such, developments with the money supply carry more
weight in policy decisions at the ECB than developments
with other indicators of the outlook for economic activity
or inflation. This difference in the role assigned to money
in monetary policy stems from two related sources. First,
as a new central bank, the ECB needed a monetary strategy
in place that would give it the inflation fighting credibility
of the national central banks it was replacing. In particular,
the ECB wanted to inherit the credibility of the German
Bundesbank [4]. Although the ECB chose not to target
money growth in the way the Bundesbank did, the ECB
strategy preserved a special role for money. Second, as an
empirical matter, money growth is more highly correlated
with inflation in the medium to long run and a better
predictor of inflation in the Euro area than in the United
States. Going forward, the role of money in monetary
policy is likely to be continually examined within both the
Federal Reserve and the ECB. At the Fed, Chairman
Bernanke has said, “…the Federal Reserve will continue
to monitor and analyze the behavior of money. Although a
heavy reliance on monetary aggregates as a guide to policy
would seem to be unwise in the U. S. context, money
growth may still contain important information about future
economic developments”. Attention to money growth is
thus sensible as part of the eclectic modeling and forecasting
framework used by the U. S. central bank [10].
At the ECB, policymakers will need to evaluate
recent rapid money growth in the context of future
inflation developments. A key question is whether
the recent acceleration in the decline in M3 velocity
is permanent or temporary. If permanent, ECB
policymakers may need to reevaluate, and possibly raise,
the reference value they assign to M3. If temporary,
policymakers will need to determine whether velocity will
continue to be affected by temporary fluctuations in M3
that are unpredictable. The emergence of an unstable and
unpredictable velocity trend in the Euro area could mean
that the ECB would need to move closer to the Federal
Reserve in its approach to monetary analysis.
References
1. De Gregorio, J. and F. Labbe (2011): “Copper,
the Real Exchange Rate and Macroeconomic Fluctuations
in Chile”, in Arezki, R.,T. Gylfason y A. Sy (eds.), Beyond
the Curse: Policies to Harness the Power of Natural
Resources, Washington D. C.: International Monetary
Fund, 2011. 2. Ghezzi, P., L. Ricci and J. Zuniga (2011):
“Easy Money in Not for All EM: Rising focus on
Commodity Prices and EM Inflation”, Barclays Capital,
Emerging market Research. 3. Hammond, G. (2012):
State of the Art of Inflation targeting, Handbook No. 29,
Centre for central Banking Studies, Bank of England.
4. Dieter Gerdesmeier (2007): European Central Bank:
Germany: Price stability: why is it important for you?
5. European Central Bank: http://www.ecb.int.
6. Ghezzi, P., L. Ricci and J. Zuniga (2011): “Easy
Money in Not for All EM: Rising focus on Commodity
Prices and EM Inflation”, Barclays Capital, Emerging
market Research. 7. Hammond, G. (2012): State of the
Art of Inflation targeting, Handbook No. 29, Centre for
central Banking Studies, Bank of England. 8. Woodford, M.
(2003): Interest and Prices: Foundations of a Theory of
Monetary Policy, Princeton: Princeton university Press.
9. Aoki, K. (2001): “Optimal Monetary Policy Responses
to Relative-Price Changes”, Journal Of Monetary
Economics, Vol. 48, pp. 55 – 80. 10. Federal Reserve
System: www.federalreserve.gov. 11. Domestic Open
Market Operations during 2012: http://www.newyorkfed.org.
Малишко О. В., Герман К. А. Головні фінан-
сові регулятори: порівняльний аналіз Федераль-
ної Резервної системи та Євросистеми
Ця стаття містить систематичне порівняння Євро-
системи та Федеральної Резервної Системи США як
основних економічних регуляторів. Було виконано
порівняльний аналіз цих двох систем. Було описано
сутність монетарної політики, її ефекти, а також гро-
шові агрегати.
Ключові слова: структура монетарної політики,
євросистема, федеральна резервна система, інфляція,
центральні банки, грошові агрегати.
Малышко А. В., Герман Е. А. Главные фи-
нансовые регуляторы: сравнительный анализ
Федеральной Резервной системы и Евросистемы
Эта статья содержит систематическое сравнение
Евросистемы и Федеральная Резервной Системы США
как основных экономических регуляторов. Был вы-
полнен сравнительный анализ этих двух систем. Были
описаны сущность монетарной политики, её эффек-
ты, а также денежные агрегаты.
Ключевые слова: структура монетарной политики,
евросистема, федеральная резервная система, инфля-
ция, центральные банки, денежные агрегаты.
Malyshko O. V., German K. A. Main Financial
Regulators: Comparative Analysis of Federal
Reserve and Euro System
This article contains a systematic comparison of the
Eurosystem and the US Federal Reserve System as the major
economic regulators. Comparative analysis of these two
systems was performed. Monetary policy essence and its
effects were described as well as monetary aggregates.
Key words: monetary policy frameworks, eurosystem,
federal reserve system, inflation, central banks, monetary
aggregates.
Received by the editors: 08.11.2013
and final form 04.12.2013
O. V. Malyshko, K. A. German
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