ABSTRACT
This chapter examines the structure and policy making of the central banks in Europe and especially the European Central Bank. If the ECB feels that inflation is picking up because the economy might be in danger of overheating, it increases the interest rates. In contrast, if the ECB feels that inflation is too low because the economy is not growing strongly enough and corporations cannot increase prices, it cuts interest rates. The chapter discusses the technical question of how the ECB or another economy's central bank can change the interest rate in the overnight money market and how it provides reserves to the commercial banks in its territory. As lower interest rates make loans cheaper, usually an expansionary monetary policy leads to faster credit growth throughout the economy. As mentioned, the most important instrument of the ECB's monetary policy is the main refinancing rate.
