Question

Name one function of the ECB (or structure of the ECB) that is better than the Federal Reserve System and one that is worse. While this is your opinion, please support your opinion with information from the lecture or outside sources.

Answer 1

The function of ECB that is better that FED is:

The ECB is using the approach of Product-Money-and-Lend (PML). This generates cash and lends it for a week or three months to the banking system. Government bonds are the preferred collateral for these loans to banks. Banks are receiving new base money as a result of PMP and PML. We keep more reserves on their central bank account. The additional reserves mean that credit can now be expanded and more money created. The mechanism works quite well for governments. Typically they spend more on taxes than they earn, i.e. they run a deficit. Nobody likes to pay taxes. Yet most citizens want their governments to receive gifts. The policymakers ' solution is simple.

The function of ECB that is notIn a more subtle way, the ECB funds deficits. It only began to buy government bonds directly in the sovereign debt crisis. The ECB normally lends against collateral to banks. Banks buy government bonds because they know that the ECB's collateral is preferred. Banks receive new funds by pledging the bonds as collateral at the ECB and are able to expand credit. Given that banks still own government bonds, governments should pay interest to banks. Banks, in effect, are paying interest on the ECB's loans which refund their income to governments. better that FED is: