Monetary policy of ECB and FED during COVID outbreak

The two central banks faced the pandemic with a completely different approach. The European Central Bank (ECB) has increased funding and set up emergency financial assistance with the ultimate goal of boosting market liquidity, as opposed to the US Federal Reserve, which has taken a different approach by lowering interest rates. cash flow in the market but with rising inflation. As far as the banking sector is concerned, both central banks have taken measures to stimulate programs and financing, as well as to supervise them, with the auditing authorities playing a key role in monitoring liquidity and market equilibrium. In terms of the big picture, the Fed decided to follow a more innovative course with facilities and support for the flow of credit, in contrast to the ECB, which followed a more ordinary course, usually increasing the asset purchase program.

As a measure of comparison, we will take the inflation rate as it is an indicator that reflects the stability of the economy, being a tool of the central banks based on the policy and the support measures they have taken. The smooth course of EU inflation without much fluctuation in contrast to that of the US, indicates a stable economic situation without the outcome of abrupt changes. The Fed's primary goal was to increase inflation through interest rate cuts. It seems that the rapidly desired increase has led to an undesirable result compared to the relatively smooth increase achieved by the European Central Bank through the support packages it received.

USA inflation rate

EU inflation rate

Why the Central Banks should be independent?

The central bank's crucial role is to ensure the stability of the currency through complete independence while keeping inflation levels low and stable. But it is not often where its role will lead to preventive oversight of functions that are inextricably linked to action. For example, the functions of a central bank tax representative. In addition, the financial sector of the central bank with regulatory functions and advisory powers, as well as its own participation in the financial system allow to encourage the development of the sector, which will require close coordination with the government, for example in legal reform.

Economists argue that banning monetary financing of governments is a key element in ensuring the operational independence of a central bank. By protecting its independence, it helps ensure that monetary policy decisions are geared towards monetary objectives while maintaining the health of the economy, rather than having to accept pressure from public authorities to help finance government deficits. But it is very common for a central bank to declare independence of an institution without independence of purpose. In this case, the government sets its own monetary policy goals and leaves the choice of instruments to the central bank, depriving it of long-term economic stability.