Central banks are among the most powerful actors in today’s financial markets. This notwithstanding, for the public, there remains a certain mysterious aura around these institutions and the way they work in practice. This book aims at shedding more light at central banks and monetary policy, with a particular focus at the euro area.

About the author

Dieter Gerdesmeier holds a diploma in business and economics from the University of Basel (CH) and was awarded a doctorate in economics. Having worked for the Deutsche Bundesbank in the past, Dieter Gerdesmeier is now working for the European Central Bank and for the Frankfurt School of Finance and Management. His lectures comprise monetary theory and policy, macroeconomics and the empirics of financial markets.

Central banks are among the most powerful actors in today’s financial markets. At the same time, and despite a recent trend towards more transparency, little is known about their structures, the way they work in practice and the way they arrive at concrete decisions – there is still a mysterious aura around these institutions. This book aims at shedding more light at central banks and monetary policy, with a particular focus at the euro area.

1. Introduction and motivation
2. Basic concepts
   1. Learning objectives
   2. Some economic concepts
   3. Some statistical concepts
3. A short history of EMU
   1. Learning objectives
   2. The roadmap to EMU
   3. Convergence criteria
   4. The concept of an optimal currency area
   5. Advantages and disadvantages of a monetary union
   6. Some controversies about the road
4. Institutions
   1. Learning objectives
   2. The European Union
   3. The European Central Bank
   4. Presidents of the European Central Bank
   5. The Rise of the Euro
   6. A closer look at the U.S. Federal Reserve System
   7. A closer look at the Bank of Japan
   8. A closer look at the Bank of England
   9. Decision-making modalities
   10. Independence and accountability
5. Inflation
   1. Learning objectives
   2. Basic concepts
   3. Effects of inflation
   4. Measuring inflation
   5. Core and non-core inflation
   6. Measurement problems
   7. Hyperinflation
   8. Sacrifice ratios
6. Causes of inflation
   1. Learning objectives
   2. The Quantity Theory
   3. The Phillips Curve
   4. The P-Star Approach
   5. The aggregate supply and demand model
   6. Role and limitations of monetary policy
   7. Empirical evidence
7. Monetary policy strategies
   1. Learning objectives
   2. Intermediate targets and indicators
   3. Monetary policy strategies
   4. The monetary policy strategy of the ECB
   5. Functions of money
8. Financial markets
   1. Learning objectives
   2. Functions of the financial system
   3. Direct and indirect finance
   4. Financial institutions
   5. Integration of financial markets
9. Interest rates
   1. Learning objectives
   2. Basic considerations
   3. Present value and future value
   4. Determinants of interest rates
   5. Determinants of the term structure
10. Money markets
    1. Learning objectives
    2. Basic considerations
    3. Some key interest rates worldwide
11. Bond markets
    1. Learning objectives
    2. Basic considerations
    3. Types of bonds
    4. Calculating the value of a bond
    5. Bond ratings
12. Stock markets
    1. Learning objectives
    2. Basic considerations
    3. Calculating the value of a stock
    4. Technical and fundamental analysis
    5. The Graham approach
    6. Stock market indices
    7. Equity risk premium
    8. The concept of Beta
13. Foreign exchange markets
    1. Learning objectives
    2. Basic considerations
    3. Purchasing power parity
    4. Interest rate parity
    5. Exchange market interventions
    6. Exchange rate regimes
    7. ERM II
14. Derivative markets
    1. Learning objectives
    2. Basic considerations
    3. Forward and futures contracts
    4. Swaps
    5. Options
    6. Credit default swaps
15. Market efficiency
    1. Learning objectives
    2. Forms of efficiency
    3. Behavioural finance
16. Banks and other financial institutions
    1. Learning objectives
    2. Commercial banks
    3. Other financial intermediaries
    4. Leveraging and deleveraging
    5. Banks runs and banking crises
    6. Key features of the banking system in the euro area
17. Money supply and money demand
    1. Learning objectives
    2. Monetary aggregates
    3. The money supply process
    4. Money demand
    5. On the control of money supply
    6. The monetary policy transmission process
    7. Time lags of monetary policy
    8. Interest rate decisions of the ECB
    9. Monetary policy instruments in the euro area
    10. Monetary policy in times of financial crisis
    11. Enhanced credit support
    12. The Securities Market Programme
    13. Three-year longer-term refinancing operations
    14. Outright Monetary Transactions
    15. Forward guidance
    16. Negative deposit rates
    17. ABS and covered bond purchase programme
    18. Expanded asset purchase programme
    19. TARGET2 issues
    20. The way forward
18. Monetary policy in practice
    1. Learning objectives
    2. Real interest rates
    3. Monetary Condition Indices
    4. The McCallum rule
    5. The Taylor rule
    6. Monetary indicators
19. Asset price bubbles and monetary policy
    1. Learning objectives
    2. Asset price imbalances
    3. Some historical examples
    4. Debt-deflation and the Minsky moment
    5. Detecting asset price booms and busts
    6. Early warning indicator models
    7. Monetary policy, asset and consumer prices
    8. Monetary policy responses
20. Multiple Choice test
21. List of symbols and abbreviations
22. List of country codes
23. Glossary
24. References