Category Archives: Federal Reserve

Guest Contribution: “The European Central Bank’s Lack of Accountability Has Consequences”

Today, we are fortunate to present a guest contribution written by Ashoka Mody, Charles and Marie Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments.


The European Central Bank (ECB) was set up as the most independent of all central banks. Its independence also made it unaccountable. Freed from public accountability, the ECB’s decisions have been swayed by its management’s ideological preferences and by national interests. The consequence is that some eurozone countries are now subject to long-term deflation risk and are locked into a currency that is too strong for their economies.

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Another event to study

One of the ways economists have tried to estimate the effects of the Fed’s program of large-scale asset purchases (LSAP) is using event studies of how the market responds in the thirty minutes following Fed statements of changes in the program. Yesterday’s announcement from the Federal Reserve that it is starting a gradual process of reducing its balance sheet gives us one new data point for such efforts.
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The great unwind begins

The Federal Reserve announced today that it will begin reducing the size of its balance sheet next month in very modest and deliberate steps. One reason the Fed is moving so slowly is that they don’t want a repeat of the May 2013 taper tantrum, in which a surprise hint that the Fed might slow the rate at which it would be growing its balance sheet led to a spike up in long-term interest rates. But there may also be another reason why the Fed is contracting its balance sheet so cautiously.
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