Ligjërata master 2012-2013 syllabusi 2012-2013

Financial intermediaries

There are two categories:

• 
  monetary financial institutions (MFIs), and
  
• 
  other financial intermediaries (OFIs).
  

MFIs (Monetary financial institutions)

MFIs include the Eurosystem (ECB and the NCBs of those countries that have adopted the euro), credit institutions (the most important financial intermediaries in the euro area) and non-credit institutions (mainly money market funds) whose business is to receive deposits from entities other than MFIs and to grant credit and/or invest in securities. back to top

Consolidated balance sheet of MFI sector

MFIs regularly report data on their assets and liabilities to the ECB and the NCBs. These data are used to compute the consolidated balance sheet of the MFI sector.

The chart below shows the composition of the consolidated balance sheet of the euro area MFI sector at the end of 2009. Deposits are the most important liability item, while loans represent the largest share of total MFI assets.

The consolidated MFI balance sheet is very useful. It represents the basis for the computation of some of the key monetary and credit variables regularly monitored at the ECB. In particular, this balance sheet is used to calculate the euro area monetary aggregates.

Schematic consolidated balance sheet of the MFI sector for the euro area^(^1^)
( 1 ) A detailed description of the instrument categories is provided in Annex 4 of the ECB publication: "The single monetary policy in Stage Three: General documentation on ESCB monetary policy instruments and procedures".
Assets	Liabilities
1. Loans	1. Currency in circulation
2. Securities other than shares	2. Deposits of central government
3. Shares and other equities	3. Deposits of other general government and other euro area residents
4. External assets	4. Money market fund shares/units
5. Fixed assets	5. Debt securities issued
6. Remaining assets	6. Capital and reserves
	7. External liabilities
	8. Remaining liabilities

Trends in monetary aggregates are important sources of information about future inflation and economic activity.
The chart below shows the composition of the monetary aggregate M3 at the end of 2009.

As the definition of monetary aggregates adopted by the ECB only includes liabilities of MFIs located in the euro area vis-à-vis euro area residents, the monetary aggregate M3 comprises:

1. 
   short-term deposits with euro area MFIs,
   
2. 
   shares/units issued by money market funds located in the euro area, and
   
3. 
   debt securities issued with a maturity of up to and including two years by MFIs located in the euro area.
   

Holdings of these instruments by non-residents are not included in M3. Currency in circulation is entirely included in the monetary aggregates, irrespective of whether it is held by euro area residents or non-residents, given the difficulty of deriving accurate and timely measures of the amounts of banknotes and coins held by non-residents. back to top

OFIs (Other financial intermediaries)

OFIs form a broad category comprising insurance corporations, pension funds, financial auxiliaries, mutual funds, securities and derivatives dealers and financial corporations engaged in lending (see definition and sub-categories of OFIs).

2. MONETARY POLICY IN THE EUROPEAN AREA

2. 1. Monetary policy

Inflation

Inflation refers to a general increase in consumer prices and is measured by an index which has been harmonised across all EU Member States: Harmonised Index of Consumer Prices (HICP). The HICP is the measure of inflation which the Governing Council uses to define and assess price stability in the euro area as a whole in quantitative terms.

Inflation in the euro area (annual percentage changes, non-seasonally adjusted)

HICP

Average inflation since 1999

Source: Eurostat. Data prior to 1996 are estimated on the basis of non-harmonised national Consumer Price Indices (CPIs).  

2.1. 1. Objective of monetary policy

The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term.

 

To maintain price stability is the primary objective of the Eurosystem and of the single monetary policy for which it is responsible. This is laid down in the Treaty on the Functioning of the European Union, Article 127 (1).

"Without prejudice to the objective of price stability", the Eurosystem will also "support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community". These include a "high level of employment" and "sustainable and non-inflationary growth".

The Treaty establishes a clear hierarchy of objectives for the Eurosystem. It assigns overriding importance to price stability. The Treaty makes clear that ensuring price stability is the most important contribution that monetary policy can make to achieve a favourable economic environment and a high level of employment.

These Treaty provisions reflect the broad consensus that

• 
  the benefits of price stability are substantial (see benefits of price stability). Maintaining stable prices on a sustained basis is a crucial pre-condition for increasing economic welfare and the growth potential of an economy .
  
• 
  the natural role of monetary policy in the economy is to maintain price stability (see scope of monetary policy). Monetary policy can affect real activity only in the shorter term (see the transmission mechanism). But ultimately it can only influence the price level in the economy.
  

The Treaty provisions also imply that, in the actual implementation of monetary policy decisions aimed at maintaining price stability, the Eurosystem should also take into account the broader economic goals of the Community. In particular, given that monetary policy can affect real activity in the shorter term, the ECB typically should avoid generating excessive fluctuations in output and employment if this is in line with the pursuit of its primary objective.

2.1.2. Benefits of price stability

The objective of price stability refers to the general level of prices in the economy. It implies avoiding both prolonged inflation and deflation. Price stability contributes to achieving high levels of economic activity and employment by

• 
  improving the transparency of the price mechanism. Under price stability people can recognise changes in relative prices (i.e. prices between different goods), without being confused by changes in the overall price level. This allows them to make well-informed consumption and investment decisions and to allocate resources more efficiently;
  
• 
  reducing inflation risk premia in interest rates (i.e. compensation creditors ask for the risks associated with holding nominal assets). This reduces real interest rates and increases incentives to invest;
  
• 
  avoiding unproductive activities to hedge against the negative impact of inflation or deflation;
  
• 
  reducing distortions of inflation or deflation, which can exacerbate the distortionary impact on economic behaviour of tax and social security systems;
  
• 
  preventing an arbitrary redistribution of wealth and income as a result of unexpected inflation or deflation.
  

While the Treaty clearly establishes the maintenance of price stability as the primary objective of the ECB, it does not give a precise definition of what is meant by price stability.

Quantitative definition of price stability

The ECB’s Governing Council has defined price stability as "a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. Price stability is to be maintained over the medium term".

The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.