What about monetary policy?! – Is it trendy enough for you?

Monetary policy is such a fancy word but what exactly does it mean…  Let’s first discuss the basic elements before you’ll make up your mind.

Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. The main objective of monetary policy is all about maintaining a price stability. The principal way to influence price stability is for the European Central Bank (ECB) to raise or lower interest rates. It is idealistic to keep inflation rates at levels below but close to 2 percent over the medium term. To control these interest rates, the ECB employs a two-pronged strategy; the money-supply growth and the economic indicators. Heavily rising prices (inflation) or falling prices (deflation) cause insecurity and harm the economy. So, price stability is a necessary precondition for a healthy economy. Monetary decisions are made by the ECB Governing Council, which consists of the central bank governors of the sixteen euro countries plus the ECB Executive Board. The Eurosystem uses three monetary policy instruments to influence the liquidity position of the banking sector. These instruments help maintain price stability by steering the short-term money market rate to the key policy rate determined by the ECB.

The three policy instruments are:                                               

• Minimum reserve requirements                                                                 
• Open market-operations
• Standing facilities

The Bank of England, the European Central Bank, and the Bank of Japan have all pursued similar policies. For example quantitative easing, a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.

This is all very interesting to know of course, but how exactly does it influence your own personal life? Everybody certainly can recall the euro crisis. Due to the 2008 financial crisis interest rates have been low and in many cases near zero. Do we as students or as European citizens contribute to this system of money control? We certainly felt the consequences, or at least I heard and still hear some people complain about the euro crisis and the suddenly increased prices. Although when I look around I constantly see people buying and spending money if it is no big of a deal.

Yesterday I attended a trade fair in Amsterdam. The annual household fair targets at especially housewives between the age of 30 to 45 years old. According to my own experience people tend to buy products with ease when they are in the sale. Their buying behaviour becomes more aggressively when there is a shortage, demand overrates supply. When analysing the spending behaviour of the ordinary European citizen it is recognizable to see that we tend to save money by spending less but on the other hand it is better to spend more because it will eventually stimulate the economy.

What about you!  Do you stop spending money on luxury products in a time of recession?

When clicking on this link you can watch a defined explanation of the ECB and Eurosystem which might be interesting for you! > https://www.youtube.com/watch?v=TAlcFwGIQBg

                                                                                                      Maxime Helgers

References

http://www.investopedia.com/terms/m/monetarypolicy.asp

http://www.investopedia.com/terms/q/quantitative-easing.asp

http://www.dnb.nl/en/interest-rates-and-inflation/monetary-policy/interest-rates/index.jsp

https://www.cer.org.uk/in-the-press/strategic-consequences-euro-crisis

http://www.economywatch.com/files/story/MonetaryPolicy.jpg