The European Central Bank

Microeconomic Principles

The central bank under consideration is the European Central Bank. The European Central Bank is a monetary union of the 19 EU member states which uses the Euro. The Treaty of Amsterdam established the bank. It is one of the most central banks in the world enshrined in the Treaty on European Union. The capital stock of the bank is owned by all the 27 central banks of the EU member states. The paper identifies the tools that the central bank has to control the money supply in their country, how the tools can be used to control the money supply, and the regularly used tools.

The bank uses three major tools to increase or decrease the money supply. These tools are the open market operations, the reserve requirements, and the discount rate. Considering the open market operations, the bank buys and sells securities.

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These are typically sold to or bought from the private banks of the countries. When the central bank buys the securities, this is likely to add cash to the reserve of the bank. This puts them in a position to lend more money. When the securities are sold by the central bank, it places them on the balance sheet of the banks and cuts down on its cash holdings. By so doing, the bank will be having less to lend. The central bank buys securities when it wants expansionary monetary policies and sells them when it executes the contractionary monetary measures.

When it comes to the reserve requirement, this has to do with the money that the banks are expected to keep at hand at any given time. The banks can choose to keep the reserves at the central bank or in their vaults. A low reserve requirement will make it possible for the banks to lend more of their deposits. This creates credit and is deemed expansionary. On the other hand, a high reserve requirement is contractionary in nature. This is because it gives banks less money to lend. It becomes hard for banks because they do not have much money to lend. This is the reason why some banks may not be subject to the reserve requirement. The central bank does not change the reserve requirement because it is sometimes difficult for the member banks to be in a position to modify their procedures (Högenauer & Howarth, 2019).

Another tool used by the European Central Bank is the discount rate. This is the rate that the bank charges its members in order to borrow at its discount window. However, the discount window tends to have a stigma because the financial community assumes that any bank that utilizes the discount window is not financially stable. It is only for the desperate banks that have been rejected by others who would use the discount window.

Given the manner in which the tools control the supply of money, the European Central Bank may use the discount rate to increase or decrease the total liquidity. This is the amount of capital that is available to lend or invest. It is also credit and the money, which is availed to the commercial banks as the lenders of the last resort. When European Central Bank intends to increase the supply of money, it buys or sells securities in the open market from the member states. Specifically, it buys government bonds in order to increase the supply of money. If it intends to decrease the money supply, it sells bonds from its accounts, hence removing money from the economic system. As discussed above, the European Central Bank uses contractionary measures to reduce the supply of money from the economy, while expansionary measures are put in place to increase the supply of money in the economy.

The tools that are commonly used by the central bank have to do with the interest rates. It has the tools to push the interest rates towards the desired levels. For instance, the European Central Bank holds the key to the policy rate, i.e., the rate at which the commercial banks tend to borrow from the bank. This tends to determine the rate at which the banks can lend, hence controlling the supply of money.

Considering the European Central Bank's recent activities, the bank enhanced the internal whistleblowing framework to protect the institution's integrity. This entailed a new internal tool for secure and straightforward reporting of the potential breaches of professional duties. This new IT tool allows for anonymous reporting, among the other measures (Moschella & Diodati, 2020).

The action by the European Central Bank is likely to affect my career decisions more positively. The actions are tailored towards instilling more ethics in the workplace, which will motivate them to work harder while looking forward to growing through the ranks given that ethical standards are likely to upheld in activities such as whistleblowing and promotion procedures.

References

Högenauer, A.L., & Howarth, D. (2019). The democratic deficit and European Central Bankcrisis monetary policies. Maastricht Journal of European and Comparative Law, 26(1), 81-93.

Micossi, S. (2015). The monetary policy of the European Central Bank (2002-2015). CEPS Special Report, 109.

Moschella, M., & Diodati, N.M. (2020). Does politics drive conflict in central banks' committees? Lifting the veil on the European Central Bank consensus. European Union Politics, 21(2), 183-203.