European Central Bank – Definition

Cite this article as:"European Central Bank – Definition," in The Business Professor, updated November 19, 2018, last accessed May 26, 2020, https://thebusinessprofessor.com/lesson/european-central-bank-defined/.

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European Central Bank (ECB) Definition

The European Central Bank (ECB) is the bank of European Union (EU) which sets and oversees monetary policy of the states which have adopted euro as national currency. The European Central Bank (ECB) has 19 members and all states are geographically located in Eurozone. The main purpose of European Central Bank (ECB) is to maintain economic stability and purchasing power of the region.

A Little More on What is the European Central Bank

The headquarters of European Central Bank is located in Frankfurt, Germany. TEuro currency was adopted by some European countries in Jan, 1999. Since then, the ECB has been responsible for formulating and regulating the monetary policy of its member states. The ECB has a governing council that makes monetary decisions for its member states. The council has six executive members and each member country is allowed to send a governor to the Central Bank.

The Governors’ Council has enlarged due to the expansion of the European Union (EU). With explanation it has become difficult for all incumbent members to vote in a meeting. So, the ECB introduced rotating voting criteria; though, the executive board members retain permanent voting rights.

The key responsibility of ECB is to maintain price stability when formulating monetary policy. The ECB takes monetary objectives, reserves, interest rates into consideration when making monetary policy decision. It also issues guidelines on how to implement these decisions. The ECB meets every six weeks.

The European Financial Crisis started in 2008. The negligence of banking supervision was one of its causes. It was in November, 2008 that ECB introduced Single Supervisory Mechanism (SSM) and now all member states are in SSM. The purpose of this function is to ensure the safety and integrity of European Banking System. The SSM aims to supervise member state’s banking systems to ensure they are functioning smoothly.

References for European Central Bank

https://www.ecb.europa.eu/
https://en.wikipedia.org/wiki/European_Central_Bank
https://www.investopedia.com/terms/e/europeancentralbank.asp

Academic Research on the European Central Bank

The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European Central Bank, Taylor, J. B. (1999). Journal of Monetary Economics43(3), 655-679. This paper examines the implications of recent research on monetary policy rules for practical monetary policy making, with special emphasis on strategies for setting interest rates by the European Central Bank (ECB). The paper draws on recent research and new simulations of a large open economy model to assess the efficiency of a simple benchmark rule in comparison with other proposed rules.  It also goes on to test the robustness of different models.

The European central bank: Reshaping monetary politics in Europe, Alesina, A., & Grilli, V. (1991).  National Bureau of Economic Research. This paper studies how the creation of a European Central Bank (ECB) will change the political economy of monetary policy in Europe. This paper discuss the likely consequences of the statute proposed by the twelve CBN governors on the conduct of monetary policy at the European level, particularly from the point of view of the trade-off between inflation and stabilization.

Using Taylor rules to understand European Central Bank monetary policy, Sauer, S., & Sturm, J. E. (2007). German Economic Review8(3), 375-398. This study analyses the value of the Taylor’s rule in evaluating the monetary policy of the ECB. The paper goes on to use this model to estimate several instrument policy reaction functions for the ECB, under the leadership of Wim Duisenberg, and aims to use this estimate in answering the stability status (stabilized/unstabilized rule) of the ECB.

Immediate challenges for the European central bank, Dornbusch, R., Favero, C., & Giavazzi, F. (1998). Policy13(26), 16-64. This paper focuses on a number of issues which the newly constituted Board of ECB will face early on. It highlights the difficulties in constructing an European monetary policy. This paper further explores voting on the ECB Board, questions on the introduction of a single monetary policy and its impact on member countries, and the differences of the monetary policy inside the EMU.

The European Central Bank: Institutional Aspects, Smits, R. (1996). International & Comparative Law Quarterly45(2), 319-342. In this article the legal and institutional issues surrounding the transition to a European Central Bank (ECB) will be discussed. The transition to a single currency entails many legal and institutional issues, both at the European level and at member State level. The author focuses on a few main themes.

The democratic accountability of the European Central Bank: A comment on two fairytales, De Haan, J., & Eijffinger, S. C. (2000). JCMS: Journal of Common Market Studies38(3), 393-407. This paper examines the concept of democratic accountability on central banks, with emphasis placed on the ECB. The reason for this study is to analyse the different arguments put forth by Buiter (1999) on the absence of democratic accountability on the part of the ECB, and that of Issing (1999), which contradicts the conclusions by Buiter, providing points which proves the accountability and transparency of the ECB.

The European Central Bank as lender of last resort in the government bond markets, De Grauwe, P. (2013). CESifo Economic Studies59(3), 520-535. This study examines the other functions of central banks apart from keeping inflation low. The author places emphasis on Central Banks’ responsibility for financial stability. This paper proposes the need for the ECB to act as a lender of last resort in government bond markets of monetary union. The author discusses the different arguments formulated people in opposition to the assumption of this role (lender of last resort) by the ECB in 2012.

The politics of the European Central Bank: principal-agent theory and the democratic deficit, Elgie, R. (2002). Journal of European Public Policy9(2), 186-200. This paper examines the institutional design of the ECB. A major political debate about this Bank, is that the ECB is suffering from democratic deficit. This paper applies the principal-agent approach to this debate in order to identify the logic behind the democratic legitimacy of the ECB.

The European Central Bank: A bank or a monetary policy rule, Folkerts-Landau, D., & Garber, P. M. (1992).  (No. w4016). National bureau of economic research. This paper explores the primary reason for the introduction of the European Central bank by the European Economic and Monetary union. The ECB’s primary objective was the maintenance of price stability in the draft statute proposed by the EC Committee. From this, it is clearly seen that the EC’s draft statute is subscribed to a narrow concept of the System of Central Banks, rather than a broad concept. This paper analyses the effect of a “narrow” central banking system for Community financial markets.

Should the European Central Bank and the Federal Reserve be concerned about fiscal policy?, Canzoneri, M., Cumby, R., & Diba, B. (2002). Rethinking stabilization policy, 29-31. This article investigates the role of the Federal Reserve and the European Central Bank (ECB) in price stability despite the presence of fiscal policy. It answers many questions raised on this concept by different individuals.

The European Central Bank and the euro: The first year, Feldstein, M. (2000).  (No. w7517). National Bureau of Economic Research. This paper takes into account the creation of the euro and the ECB, and the effects it has on the eleven countries using this currency. It shows the differences in inflation and standard of living in each country, and thus suggests that this single supranational currency, may not be the best decision. The paper explores reasons why cyclical unemployment, structural unemployment, and inflation may all be higher in the future as a result of the single currency. It goes on to examine the harm which this single currency could cause within Europe, and with the United States.

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