Monetary Policy Interaction Between Eurosystem and European Countries under Crisis Period

Abstract

Eurosystem has faced various bad situations since 2008 and taken easing policy-whatever it takes. Eurosystem cut down monetary policy rate quickly in 2008 to 2009, then supplied liquidity more than market’s demand to restore financial system stability. Eurosystem has kept easing stance since then. Periphery European countries could take independent monetary policy from Eurosystem on their own in orthodox economic theory, but it seems that periphery countries have been affected from Eurosystem’s easing stance. This paper shows interaction monetary policy implementation between Eurosystem and six European countries divided two groups; the first group included Switzerland, Denmark and Sweden and the second one included Poland, Czech Republic and Hungary. This paper adopt compering instruments by instruments approach.

First group faced capital inflow from euro area as a capital flight and suffered from currency appreciation against euro. Although their economic performance have been better than euro area, they were obliged to accommodate their monetary policy stance with Eurosystem. Especially, Switzerland and Denmark introduced negative interest rate policy against to currency appreciation.

Compared to the first group, second group, considered confidence was lower than euro area, had to defend certain exchange as a grwp where rate threshold because share of euro denominated loans held firms and household was too high. Notwithstanding tightening policy was needed, the second group also accommodated their monetary policy with Eurosystem.

Turning into policy instruments, some policy instruments introduced by periphery countries affected Eurosystem. Targeted longer term refinancing operation (TLTRO) introduced by Eurosystem is affected by Funding for Growth Scheme and long term operation introduced by Hungary National Bank which purpose is to increase bank lending to firms, not to restore financial system stability. We can also find easily a common characteristic: Lending Facility of Denmark and special LTRO of Eurosystem (Bazooka LTRO), which maturity is three years and liquidity supply amount is unlimited.

I wade the following finding; periphery countries cannot take independent monetary policy stance freely in Europe at least even if they choose any currency regime and if their economic performance is better or worse than euro area, although there is interaction at instruments level.