Fiscal and Monetary Policy- the Response of Global Economic Crisis Especially in Eu

Topics: Monetary policy, Macroeconomics, Economics Pages: 12 (4057 words) Published: September 12, 2013
Fiscal and Monetary policy-
The response of global economic crisis especially in EU

Monetary and fiscal authorities across the globe have responded quickly and decisively to these extraordinary developments. In particular, against the background of rapidly receding inflationary pressures and risks, the Euro system has taken monetary policy and liquidity management measures that were unprecedented in nature, scope and timing. Since October last year they reduced the interest rate on the main refinancing operations. They also provided unlimited liquidity support to the banking system in the euro area to maintain the flow of credit. Governments in the euro area have reacted swiftly to stabilize the financial system and to counteract the adverse impact of the financial crisis on the real economy.

Both monetary and fiscal authorities will need to remain credible and effective, and to fulfill their respective responsibilities. In so doing, they will lay solid foundations for future economic recovery and long-term economic growth and job creation. The crisis has shown how important it is to have an independent central bank firmly committed to the objective of price stability. At the same time, governments must make a strong and credible commitment to a path of fiscal consolidation and thus comply with the Stability and Growth Pact. But they must also resist the temptation to further increase the size of the stimulus measures, as this could erode trust in the sustainability of public finances and undermine the effectiveness of the measures already adopted. Global economic situation

The financial markets, which was triggered by a systematic under-pricing of risk, particularly in the US sub-prime mortgage market, has now developed into a fully-fledged financial and economic crisis at global level. While the world economy continues to face a severe and synchronized downturn, recent international business confidence indicators suggest that the pace of the decline in economic activity is slowing down somewhat. Most forecasters expect that the global economy is likely to recover in 2010.

The economic prospects remain fraught with uncertainty. Compared with a few months ago, overall risks to global economic growth have become more balanced. A stronger positive confidence effect than expected triggered by the monetary and fiscal policy measures could lead to a more sustained recovery in global demand and in global trade, and a quicker normalization of financial market and credit conditions. If global policy actions fail to strike an appropriate balance between economic stimulus and longer-term sustainability, financial market conditions could turn unfavorable again. Global inflation rates have continued to diminish rapidly. This is mainly due to lower commodity prices, weaker labour market conditions and greater global economic slack. Risks to global inflation seem to be broadly balanced in the short to medium term. Inflation risks depend on how efficiently the authorities withdraw the policy stimulus. Euro activity

In global developments, economic activity in the euro area has also contracted sharply since the second half of 2008. The euro area economy has shrunk by about 4% over the past two quarters, the worst decline since the start of Economic and Monetary Union. For the current quarter, there is evidence that the economy has shrunk further, though at a slower pace. The economy is no longer in free fall; we are seeing the first signs of stabilization. Indicators of consumer confidence and business sentiment have continued to improve somewhat. We are also seeing some encouraging signs of normalization in financial markets.

The euro area economy is likely to be very weak for the remainder of past year. The real GDP growth are broadly in line with the most recent forecasts from the IMF and the European Commission. Both institutions expect the euro area economy...

References:   Rüdiger Bachmann and Eric Sims, 2012, Confidence and the transmission of government spending shocks,” Journal of Monetary Economics 
Blanchard, O
Nicoletta Batini, Giovanni Callegari and Giovanni Melina, 2012. “Successful Austerity in the United States, Europe and Japan,” IMF Working Papers 12/190, International Monetary Fund.
International Monetary Fund, World Economic Outlook (2008)."Fiscal Policy as a countercyclical tool." October
Ethan Ilzetzki, Enrique Mendoza & Carlos Vegh, 2011
Daniel Shoag, 2012, “The Impact of Government Spending Shocks: Evidence on the Multiplier from State Pension Plan Returns,” Harvard Kennedy School.
   Antonio Spilimbergo, Steven Symansky, and Martin Schindler, “Fiscal Multipliers,” Staff Position NoteNo. 2009/11, International Monetary Fund.
Perotti, R. (2002). "Estimating the effects of fiscal policy in OECD countries." ECB Working Paper.
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