Abstract
The global financial crisis broke out at on August 9, 2007. Although the U.S. was origin of the crisis, it became the global one. The entire global economy entered a severe recession. Both the U.S. government and the Federal Reserve began to react aggressively and it didn’t take so long time to stabilize the U.S. economic growth. On the other hand, the European economy has suffered from both the sovereign debt and banking system crises for years. Comparing the U.S., it takes too long time to cope with the sovereign debt and banking system crisis. It has been wondered broadly why the European authorities and people can’t solve the problems with affluent resource, sophisticated knowledge and painful historical experiences of the economic and financial crises.
It is noticeable to see that the Federal Reserve’s responses to the crisis have been aggressive, theoretical and accountable. Including the unconventional monetary policy such as LSAP, Large Scale Asset Purchase Program, their easing policies have followed systematically a response function, which is a derivative of the Taylor rule, Year 99 version of the monetary policy rule. After years, we have got an accumulation of the historical data and it is possible now to estimate how effective their quantitative easing is and they are following the Year 99 rule. This denotes that the Federal Reserve’s monetary policies during the crisis era have been theoretical and very accountable. This means that the monetary authority can cope with a similar crisis in the future.
The European authorities have responded the crisis substantially. Comparing the U.S., it was not successful for the European authorities to stabilize the economic fluctuations and the recession has come. This poor outcome may be coming from the nature of European integration. The EMU doesn’t have the united power to handle all of economic policies simultaneously and the biggest concern has been how to finance the unintended debt of fiscal failure. Stabilizing the economic fluctuations has not been the first priority. It is the era of flat Phillips curve and stabilizing inflation doesn’t mean stabilizing the economic fluctuation directly. In the past it was possible to say that stabilizing inflation rate will be followed by the economic stability and sustainable economic growth. It may not be true under the current flat Phillips curve era.
The ECB began to act aggressively to promote economic stability in 2011. They introduced LTRO, Long-term Refinance Operation and OMT, Outright Monetary Transaction. It is remarkable to find that they have apparent strategies. The worst of the financial crisis in the U.S. has gone due to many measures by the Fed to inject liquidity. They were successful to revive the paralyzed money markets in the U.S. Some academic authors explained how they worked very well. The LTRO by the ECB was very successful to gain trust in the Euro money markets. Seeing the difficulties in the sovereign bond markets, the ECB decided to react decisively to protect the EMU and they introduce the OMT. This measure may be a historical revolution of the monetary policy. It requires implementation of economic reform and fiscal consolidation, if the country needs an intervention by the ECB to their sovereign bond markets. Some of major economies are walking on the edge of the liquidity trap. This OMT programs is considering the incentives explicitly. If the OMT is successful, the monetary policy can be more effective than people have believed because the monetary policy may alter behaviors of the economic agents.
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