The European Central Bank will step up efforts to contain borrowing costs that have surged amid brighter
Question:
“The European Central Bank will step up efforts to contain borrowing costs that have surged amid brighter prospects for the U.S. economy and a relaxed stance from the Federal Reserve, aiming to shore up the flagging eurozone economy….
At a news conference Thursday, President Christine Lagarde said the ECB would seek to counter a recent increase in bond yields, part of which she said reflected higher growth expectations in the U.S. rather than a recovery in Europe. Very high debt levels in some European countries—particularly in the south, where debt is more than 150% of gross domestic product—leave the eurozone especially vulnerable to rising borrowing costs.
To contain yields, the ECB will significantly accelerate purchases under a €1.85 trillion bondbuying program, equivalent to $2.2 trillion, unveiled a year ago.
- Using a well-labelled diagram and assuming other things being equal, illustrate the effects of the bond-buying program (accelerated purchases) on the interbank interest rate and supply of reserve in the European interbank market.
- Explain briefly the expected effects of this bond-buying program on the interest rates of bank loans extended by European banks.
- Suggest TWO factors that may limit the effectiveness of this program in generating sufficient liquidity to prop up the sluggish economy.
- Explain briefly how the discount loans in Hong Kong are backed up by US dollar assets.
Money Banking and Financial Markets
ISBN: 978-0078021749
4th edition
Authors: Stephen Cecchetti, Kermit Schoenholtz