Table Of ContentMonetary Poliey Instruments
for European Monetary Union
Springer-Verlag Berlin Heidelberg GmbH
Lukas Menkhoff
Monetary Poliey
Instruments
for European
Monetary Union
With 8 Figures
and 16 rabIes
, Springer
Prof. Dr. Lukas Menkhoff
Aachen University of Technology
Department of Economics
D-52056 Aachen
Germany
We kindly thank Deutscher Sparkassenverlag GmbH, Stuttgart for granting permission to
publish the English version of Geldpolitische Instrumente der Europäischen Zentralbank.
Cataloging-in-Publication Data applied for
Die Deutsche Bibliothek - CIP-Einheitsaufnahme
Menkhorr, Lukas:
Monetary policy instruments for European monetary union:
mit 16 Tabellen / Lukas Menkhoff.
ISBN 978-3-642-08287-0 ISBN 978-3-662-03412-5 (eBook)
DOI 10.1007/978-3-662-03412-5
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Foreword
This book represents the revised and enlarged results of a research projeet
whieh recieved fmaneial support from the "Wissenschaftsförderung der
Sparkassenorganisation e.V." and was originally published in German
(Menkhoff 1996). As the issue of monetary poliey instruments for EMU is
one whieh is inherently international, the publieation of an English edition
is a logieal step. I whish to thank the Deutscher Sparkassenverlag, whieh
published the German edition, for eneouraging work on this subsequent
projeet.
The major innovation in the English edition is the inc1usion of several
new seetions, i.e. 3.2.4, 3.3.4, 3.3.5, 3.4.3 and 3.5. These new analyses,
together with changing institutional eireumstanees and the addition of new
literature have also resulted in a large number of minor ehanges through
outthetext.
The book is a contribution, from a German perspeetive, to the diseussion
about monetary poliey instruments of the future European Central Bank.
The main instruments are analyzed from the point of view of effieieney; in
addition, the need to harmonize often divergent sets of national poliey
instruments means that an emphasis on the additional goal of fair eompeti
tion is of partieular relevanee. Last but not least, the explieit linking of
EMU to the eoneept of subsidiarity has wide-ranging eonsequenees for
monetary poliey instruments.
I would like to express my gratitude to Axel Bertueh-Samuels, Bernd
Braaseh, Heinz Herrmann, Jürgen Jerger, Eberhart Ketzel, Klaus Krumm
rieh, Norbert Tolksdorf and Hans-Jürgen Treutler for their helpful adviee
and eomments during the course of writing and revising the book. I would
also like to thank the partieipants at the 1995 CEPR!Irving Fisher Soeiety
Conferenee on "What Monetary Poliey for the European Central Bank?"
VI Foreword
and the 1996 conference on "European Monetary Union: Transition, Inter
national Impacts and Policy Options" of the European Institution for
International Economic Relations for their constructive discussions.
Finally, my particular thanks go to Robin Bonthrone for his excellent
translation (additional material by the author), to Catherine Plitzko for her
invaluable lay-out assistance and again to the "Wissenschaftsförderung"
for its financial support.
Aachen, November 1996 Lukas Menkhoff
Contents
1 Introduetion .. ..................................... .............. .......................... 1
1.1 The problems............................................................................... 1
1.2 The background to the goals of the study ........ ........................... 3
1.3 The structure of the study.................. ................ .............. ............ 5
2 The monetary poliey instruments of the European Central
Bank ............................................................................................ 7
2.1 Restricting the subject................................. ....... ..... .................... 7
2.2 Monetary policy instruments ...................................................... 8
2.3 The European Central Bank and the status quo .......................... 12
2.4 Historical overview ofmonetary policy instruments .................. 15
2.5 The structure of national role-models ......................................... 21
2.6 Consensus and controversy in Europe ........................................ 34
3 Measuring the instruments against the goals......................... 41
3.1 An "optimum" environment ........................................................ 41
3.2 Monetary efficiency under constraints ........................................ 43
3.2.1 Can a minimum reserve policy be abandoned? .......................... 43
3.2.2 The advantages ofrediscount credits? ........................................ 56
3.2.3 Shielding the real economy ......................................................... 60
3.2.4 Stabilizing function of a steady central bank rate? ..................... 68
3.2.5 Conclusions ................................................................................. 74
3.3 Analysis offair competition ........................................................ 76
3.3.1 Neutral minimum reserve requirement? ..................................... 76
3.3.2 Equitable rediscount quotas? ...................................................... 79
3.3.3 Securities repurchase transactions: an Ordnungspolitik analysis 83
3.3.4 Securities repurchase transactions: participation data analysis.. 86
3.3.5 Securities repurchase transactions: questionnaire analysis ......... 94
VIII Contents
3.3.6 Conclusions ..................... ........................ ........ ........................... 98
3.4 Analysis of decentralization..................... ..... ... .......................... 99
3.4.1 Uniformity and subsidiarity ....................................................... 99
3.4.2 Which financial sector structures are worth preserving? ........... 101
3.4.3 Implications ofidiosyncratic financing structures ..................... 107
3.4.4 Adecentrally organized central bank ........................................ 112
3.4.5 Conclusions ................................................................................ 115
3.5 Policy options for lending facilities and reserve requirements .. 116
4 Discussion of alternative concepts .... ..... ................................. 121
4.1 Outline ........................................................................................ 121
4.2 Lean v. conservative concept ..................................................... 124
4.3 A decentralized concept ............................................................. 125
4.4 Implementation ofthe concepts in Europe ................................ 131
5 Result ofthe study .................................................................... 135
References .............................................................................................. 139
List ofFigures ........................................................................................ 153
List ofTables ......................................................................................... 155
1 Introduction
1.1 The problems
Tbe creation of a new European System of Central Banks (ESCB),
headed by a European Central Bank (ECB), raises the question of the in
struments of monetary policy which will be used by these institutions.
With no homogeneity in the array of instruments employed across Europe
today, there can certainly be no automatic solution to this problem, as
various traditions are now competing head-on in this field.
These traditions are of much more than marginal significance, reflect
ing the fundamental concepts of how national institutions, and thus Euro
pean institutions - including the ECB - should function. In line with its
own federal structure, the German position in this competitive arena tends
to support decentralized decision-making structures, competition between
differing organizational forms and the principle of subsidiarity. Even
where other countries fundamentally approve of these principles, imple
mentation in concrete terms may weIl lead to divergent views on how this
should be achieved, as these will be based alm ost inevitably on the coun
tries' own established structures.
Although this interest in the future arrangements for the monetary pol
icy instruments of the ECB - and the ECB will also be taken as represen
tative of all the national central banks (ESCB) in this study - affects all
the countries involved to an equal extent, an additional concern is evident
for those countries tending towards decentralized organizational struc
tures. Contrary to the declared beliefs in institutional diversity, subsidiar
ity and decentralized structures, it is likely from the outset that the shift in
responsibility for monetary policy from the nation states to the European
level will be accompanied by more uniform policy instruments and
greater centralization in their employment.
2 1 Introduction
On the other hand, however, it should not be assumed automatically
that Germany's existing monetary policy instruments would necessarily
be the best for the ECB, just because they happen to have demonstrated
their usefulness in the past. This study will therefore examine in detail the
potential instruments of monetary policy open to the ECB. Emphasis will
be placed on fair competition and decentralization, firstly because these
aspectsare expected to result in substantial divisions between the coun
tries involved, and secondly because they are of particular interest to Ger
many, for the reasons outlined above. However, a strict requirement for
any discussion is, of course, that the monetary efficiency of the instru
ments is ensured.
The tasks involved in this study can therefore be summarized as an
analysis of the instruments of the ECB to establish
- how efficient they are in terms of monetary policy,
the extent to which they distort competition between various organ
izational forms and
in case of doubt, whether they tend to promote rather than discriminate
against decentralized organizations and decision-making structures, in
line with the principle of subsidiarity.
To allow concentration on the core problems, the monetary policy in
struments in this study have been restricted from the outset to minimum
reserve, open market and refinancing policies, as these represent the most
important instruments at national level. In particular, the balance of pay
ments issues which do not fall under the remit of the ECB - such as any
decision on the exchange rate system - have been essentially ignored, in
addition to those with effects similar to domestic instruments, above all
open market policy.
Wherever possible, the analysis will only focus on key aspects relating
to the market participants affected and the more detailed design of spe
cific instruments. The spotlight will be on the dominant commercial
banks, with non-banks, building societies and so on being disregarded.
Another topic which has been limited is the notion of decentralization.
In principle, monetary policy can also be viewed as an instrument of re
gional policy, for instance when the subsidy components of a low-interest
discount policy are selectively channelled into economically disadvan
taged regions. However, financial policy considerations in particular
mean that this interpretation of the tasks of monetary policy has no appre
ciable advocates: ifthe objective ofmonetary policy -monetary stability
were to be watered down by competing goals, its primary function could
be violated (see LehmentIScheide, 1992). Moreover, a range of other
