The journal article by Abdre Fourcan and Radu Vranceanu

Introduction

The journal article by Abdre Fourcan and Radu Vranceanu talks about the monetary policies of European Central bank (ECB) for the period of 1999-2006. The paper clearly states the goals, decisions and procedures derived from the speeches of the president of ECB Jean-Claude Trichet. The requirement of a bank to disclose details when it is under scrutiny and the variables that can affect the behavior of the banker are mentioned discussed in the article. The performance of EB has been quite well but despite that there are several issues that are alarming like the inflation objective not being achieved. The monetary developments were also not in correspondence with the economic stability. The paper discusses the monetary policies, inflation expectations and the real activity in terms of output growth and the unemployment factor in detail. The science and art of central banking as the policymaker has to consider all the economic stats in order to make correct decisions for implementation..

Summary

The purpose of the article is to make an attempt to unveil the decision making process of the ECB. Analysis both the qualitative analysis and empirical analysis of the main monetary policy decisions. The authors intend to study to decision making policy and propose reforms and changes that would increase and sustain the credibility of the bank over the passage of time and also improve the Bank’s role as a money watcher. The decision making process of the ECB is of vital importance as it drives the other banks of the market so an effective decision making policy will be very useful in terms of its economic benefits. The article intends to find the entire process behind the decision making of the ECB.

The method used by the authors to conduct the research will be qualitative analysis of the statements and positions made in the public by the president of the ECB Mr. Jean-Claude Trichet. The qualitative analysis will try to extract valuable information from the responses of ECB to the main macroeconomic variables. The extraction of information will enable the authors to check the empirical results against the data from the qualitative analysis. The qualitative analysis will be conducted by the estimates of the rules of interest rates. The method will enable to draw a straight comparison between the decisions process and the policy making of the bank. This will enable the authors to get the most actual and real data to answer the questions.

The sources used for the qualitative analysis include the monetary and non-monetary expectations. These expectations are the core variables that are influencing the practical monetary policy for the free agents that are presiding in the euro zone. In the initial time of European Monetary Union (EMU) the growth of money was referred to as reference value. The reference value account for a yearly growth of 4.5% for M3. If the reference value is eliminated then still the growth of M3 monetary aggregate is a variable considered by the European policy makers. The real activity data which includes the output growth and rate of unemployment is also among the sources for the qualitative analysis.

The finding of of qualitative research shows that the policy makers must take into value all the economic facts and have a underlying economy model in order to make policy related decisions and to implement them effectively. But that not all the policy makers also have to face fuzzy variables like credibility and transparency. The reaction from the market and the short terms vs long terms visions are also needed to be considered. The ECB seems to more focus on two issues that are long term inflationary expectations and building a more credible reputation for the bank. They also plan to reduce the macroeconomic shocks as a response to the economic fluctuations (Micossi, 2015). In the views of the central banker the inflation expectation are achieved in the best manner when there is an explicate defined and credible price stability as the goal.

The policy implications are that communication and transparency go a long way in the entire policy making process. They are an integral part of the entire process as they contribute very effectively to its efficiency. Communication acts as a verbal reminder and an demonstrations of banks following a consistent rule of policy along the price stability. Further research indicates that short run macroeconomic shocks should not influence the opinions of the European Banker views on the matter. Consistency is the key here for the Banker and should not over react to sudden market fluctuations. The credibility of the bank must originate from the policy process rather than the interest rates.

Evaluation

The ideas like the process of decision making of the ECB is very appealing and interesting. The methods used by the authors of conducting a qualitative analysis bases on the speeches made by the president of the bank. The sources used by the researchers to conduct the analysis were also very interesting like the inflation expectations of the private agent played a part in the policy making (Editor, 2019). The decisions of the policy maker are largely dependent on private expectations. Therefore the impact on the market in terms of interest rates are effective for short terms (Blattner, et al., 2008). The findings of the paper are also very sensible as they portray the unseen factors that have an impact on the decision making for monetary policies. The ECB banker’s behavior is directly related to the credibility of the bank. The bank should make long term policies and not be bothered about the sudden market fluctuations.

There are a number of saps in the monetary policy of the European Central Bank the lack of attention to the across region experience in other countries. The consistent exchange rate behaviors is a unique feature available for some countries. It is often argued that exchange rate particularly important for banks as a high degree of inflation can ensure competitive in to the trade sector. The empirical is data is not clear about the impact of exchange rate on monetary policy making (Mohanty & Klau, 2004).

By analyzing this article we may also find transparency gap, by the passage of time, and with the formation of Banking Union, the ECB has gained the status of being main bank with supervisory activities. However, ECB performs tasks in line by observing numerical data and then set its objective, and in this case supervisory is nearly difficult to quantify and evaluate. Furthermore, the decisions of supervision requires discretion in its margin which open gateways for other to make interference politically. The supervision of ECB disregards the level of independence in monetary matters. Concerns arise regarding how secure the credibility of ECB is so there is a serious issue of the transparency gap (Beroš, 2019).

There is also an output gap present in the current policy making model. Inflation is very dependent on the forward looking expectations and the expectations rationally to the changes in the monetary and fiscal policies. This model has no space for sudden shocks and fluctuations (European Central Bank, 2018). These are called the output gaps and the ECB model has room for shocks and fluctuations. The model is very loose in terms of its monetary policy making. The monetary policy is facing new challenges when the global economic environment is changing very rapidly and becoming more uncertain with the passage of time (Smaghi, 2011). The uncertainties are both long term and short term so most of them are manmade (GALHAU, 2019).

The article in comparison to other articles is very detailed as it explains all the factors that impact the decision making process of ECB. It conducts a qualitative analysis to base its research on. This article is very velar and precise in its approach. The other articles that have been cited are information but not to the extent of this article. They highlights the gaps and problems but this articles also presents the solution for the bank to increase its credibility and sustainability in the euro market.

Conclusion

The article is very helpful in briefing the process of decision making of the ECB. The papers discusses both qualitative and quantitate analysis techniques to understand how the policy maker implements the monetary changes. There a number of challenges that the bank is facing and the gaps are also present in the current system. The qualities approach is based on the speeches of the president of the bank. Then the paper briefs the different areas that have an impact on the monetary policy making like the inflation expectations and the output gap. Overall the research paper has been very helpful and the comparison with other papers has led to the further discussion of improvement in the banking system. The article emphasize on the philosophy that there is an urgent need to establish credibility of bank to control inflation and anchor inflationary expectations to sustain the growth in the euro area. The article emphasizes on further research in the area to further help the market be more credible and stable.