The monetary authorities aim at guarding the stability of prices, the financial system, and, more broadly, the economy. This section presents several tools of monetary and banking policy, such as the money supply, and the policy rate.
The money supply is a key indicator of the level of liquidity in the economy. Money supply can be measured at different levels:
M0: Currency-in-circulation
M1: currency-in-circulation plus overnight deposits
M2: M1 plus term deposits up to 2 years and deposits redeemable at notice up to 3 months
M3: M2 plus repos, money market funds, and debt securities with maturity up to 2 years
The following graph shows the evolution of these 4 measures of the money supply.
The European Central Bank sets the interest rate at which it lends to commercial banks, which affects banks' ability and willingness to lend to firms and households thereby affecting the level of economic activity.
The Governing Council of the ECB sets three key interest rates (policy rates) for the euro area.
The interest rate on the main refinancing operations, which is the rate banks pay when they borrow money from the ECB for one week.
The rate on the deposit facility, which banks can use to make overnight deposits with the Eurosystem.
The rate on the marginal lending facility, which offers overnight credit to banks from the Eurosystem.
The graph shows the evolution of these three key policy rates of the ECB.
The European Central Bank has set up several funding facilities in order to provide funding and guard the stability of the financial system. Long-Term Refinancing Operations (LTROs) are Eurosystem operations that provide financing to credit institutions. By offering banks long-term funding at attractive conditions they preserve favourable borrowing conditions for banks and stimulate bank lending to the real economy. The ECB’s Pandemic Emergency Purchase Programme (PEPP) is “a non-standard monetary policy measure initiated in March 2020 to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the coronavirus (COVID-19) outbreak. The PEPP is a temporary asset purchase programme covering private and public sector securities.”
The next graph presents the amount of LTROs used by Greek banks and the bimonthly and cumulative net purchases of Greek public sector securities in the context of PEPP.