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This article examines the new role of central banking in the world. The Federal Reserve System
(FED), European Central Bank (ECB), The Bank of England (BOE) Bank Of Japan (BOJ) have embarked on and unprecedented expansionary monetary policy to solve their high unemployment, stagflation and recession. The policies “quantitative easing,” program of the FED have unprecedented but successful.
Unemployment in the US has declined from 10.7% in 2008 to about 5.8 in February 2015 where more than 6 million jobs have been created. European Central Bank (ECB) has just started to change its monetary policy with extended quantitative easing program. The Bank of England (BOE) Monetary Policy
Committee at its meeting on March 5, voted to maintain Bank Rate at 0.5%. The Committee also voted to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375.
Despite massive quantitative easing program, the Bank Of Japan (BOJ) has been struggling to revive the
Japanese economy.
The FED has three policy goals: “maximum employment, stable prices and moderate long-term interest rates” Unlike the European Central Bank mandate, price stability is not given a higher priority than the other goals. Clearly, the policymakers of the FED must assign at least an implicit ranking to these goals; in the long-run all three goals are compatible.
Confronting the high unemployment and recession in 2008-2009, the FED announced a fourth round of “quantitative easing,” or QE4, to stimulate the economy. The FED has been purchasing $85 billion of mortgage back securities each month for entire 2013 and part of 2014. The FED has announced lately that will be trimming and declining “quantitative easing,” program. Starting in 2015 the FED has been declining its assets purchase. However the FED will continue those pur chases for as long “ the labor market does not improve substantially” and „will maintain “a highly accommodative stance of monetary policy…for a considerable time after the economic recovery strengthens” It specifically noted that its highly accommodative stance would continue at least until the end 2014, implying nearly $1.5 trillion of increased bank liquidity. The policy is clearly working. Unemployment in the US has declined.
The FEDs QE4 may see similarities with the open-ended strategy of the ECB European central bank but unemployment in EU is not declining but has been increasing. On July 26, 2012, Mario Draghi,
President of the ECB, pledged “The ECB is ready to do whatever it takes to preserve the euro," The ECB will purchase short-term Italian, Spanish and other countries bonds without any limit. Thus the ECB can substantially reduce the interest rate on the sovereign debt of those countries, helping them to grow but remove the discipline that the bond market has had on their fiscal actions. But unemployment in these two countries has remained high. Spain has reached more than 25% and Italy in particularly has increased their unemployment from about 8% to about 10.8 %.
In the paper, I will argue that US, ECB, BOE, and BOJ central banks have embarked on a strategy unprecedented in history with some risks.
Pellegrino Manfra Ph.D., City University New York. Email: pmanfra@qcc.cuny.edu