The Federal Reserve and the European Central Bank : a comparison of their unconventional monetary policy measures

Abstract

This dissertation provides an in-depth analysis of the main unconventional monetary policy measures implemented by the Federal Reserve and the European Central Bank in response to the global financial crisis. The dissertation starts by highlighting the main constraints faced by the Euro Area and the US at the onset of the financial crisis. Subsequently, the dissertation categorises the unconventional measures into three distinct phases to evaluate the responses of both central banks in specific time periods. The remaining part of the dissertation focuses solely on identifying the main reasons which prompted the ECB and FED to adopt different measures.

This dissertation has managed to idenify five main reasons. Firstly, the different treatment of non-standard measures and the distinct way in which both central banks view the role of unconventional measures as being either a subsitute or a complement to changes in interest rate was key in implementing certain unconventional measures. Secondally, the legal fundamentals of both central banks incorporating the legislative mandates and the regulatory restrictions were also found to have played a key role in shaping unconventional monetary policies. Furthermore, the reliance on a bank-based financial structure in the Euro Area as opposed to the market-based financial structure in the US also contributed in the design of the unconventional measures. Fourthly, the timing in which central banks had to act and their macroeconomic projections on real GDP growth, unemployment and inflation figures were also found to be a major contributor in the more aggressive stance of the FED at the intial phase of the financial crisis. Finally, the institutional features comprising the organisational framework and the independence and accountability cultures of both central banks was also crucial in the design of certain unconventional monetary policy features.