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As well as implementing the common monetary policy, the national central banks (NCBs) which, together with the European Central Bank (ECB) form the Eurosystem, are also responsible for performing a range of national tasks. Among other things, these include the management of their financial assets portfolios. To ensure that this function does not interfere with the implementation of the single monetary policy, the Agreement on Net Financial Assets (ANFA) limits the total net amount of financial assets (NFA) the NCBs are permitted to hold. National central bank purchases of government bonds under ANFA have led to public accusations that this was tantamount to covert monetary financing of fiscal deficits through the "printing press" by the national central banks. The present report first explains the Agreement on Net Financial Assets and shows the volume of securities purchased by the different NCBs under ANFA. Based on this, it examines the extent to which the accusation of monetary financing may be justified. Although there have been indications of certain national banks increasing the government bond holdings on their balance sheets in recent years, this does not provide sufficient evidence of monetary financing. However, the public debate on ANFA clearly highlights the Eurosystem's lack of transparency, particularly that of the NCBs. To ensure that confidence in European monetary policy is not undermined and both transparency and communication are improved, more detailed information on the development of NCBs' balance sheets must be published more regularly. [ABSTRACT FROM AUTHOR]

The European Central Bank (ECB) decided at its Council meeting in January to implement a comprehensive program to purchase bonds, including euro area government bonds. The purchases are intended to anchor the rate of infation and infation expectations at below but close to two percent again. Given the lack of experience with this unconventional monetary policy instrument, the ECB is venturing into uncharted territory. Market expectations that the ECB would implement an additional round of monetary easing to fulfill its mandate have, in recent months, contributed to a further fall in interest rates and a depreciation of the euro. Since interest rates in the euro area are already very low and the current weak price development is also affected by factors that are difficult to influence through monetary policy, the further effectiveness of the bond purchase program is uncertain. In particular, its success depends largely on its impact on consumption and investment. At the same time, this kind of unconventional monetary policy measure also involves certain risks. The present report describes the current development of infation in the euro area and outlines the main reasons for the recent decline in prices. It also discusses the transmission channels of a bond purchasing program, their possible relevance for the euro area, and potential risks associated with the program. [ABSTRACT FROM AUTHOR]

This paper develops a new methodology for estimating both the automatic and discretionary components of fiscal policy in one reaction function using the differences between real-time and ex post data. Discretionary policy should respond to information available to the policy maker at the time (real-time data), whereas automatic fiscal policy should respond to the true state of the economy at the time (proxied by the final data). We find that the intended discretionary response of fiscal policy to the cycle is counter-cyclical. Our estimates suggest that the automatic stabilizers are at the lower end of the range found in the related literature. This new methodology reduces the risk present in the conventional CAB approach that part of the discretionary actions may be wrongly attributed to automatic stabilizers. In that sense, automatic stabilizers are typically not as strong as usually claimed. This could be of particular use in countries where insufficient data exist to estimate structural budget sensitivities directly. [ABSTRACT FROM PUBLISHER]

With the crisis in the euro area, the issue of the institutional structure of the monetary union has gained in significance. One problem with regard to the longer-term stability of the euro area is the absence of mechanisms to adequately absorb asymmetric cyclical shocks in the individual member states. Such an instrument is essential in order to be able to implement a single monetary policy suitable for all countries. Consequently, the European Monetary Union should be equipped with an economic transfer mechanism--for instance, in the form of common unemployment insurance. This is not an instrument to solve the current crisis but rather to provide more stability to the European Monetary Union in the medium and long term. [ABSTRACT FROM AUTHOR]

The financial crisis of 2007/2008 and the current "Euro crisis" challenge the current global monetary system. They drastically reveal the actual system's weaknesses und show the eminent importance of the international monetary system for the stability of markets and national economies. DIW Berlin was commissioned by the Federal Ministry of Finance to research possible alternatives to the existing exchange rate regime. In principle, neither of the two extremes -- completely free or fixed exchange rates -- is suitable. A mixed system is preferable -- with improvements to the status quo, though. An exchange rate regime with few big currency areas, which are linked to each other with flexible exchange rates, should be the aim of reforms. This should correspond to a multi-polar key currency system with the currently dominating US Dollar and the Euro as well as the Chinese Renmimbi as most important actors. These developments should be accompanied by substantial improvements in the regulatory framework of the financial markets. Necessary elements are a reinforced global and especially European economic coordination and an internationally agreed-on, assertive financial market authority. [ABSTRACT FROM AUTHOR]