Countercyclical Monetary Policy

Countercyclical monetary policy is a monetary policy strategy that uses interest rate or monetary policy impulses to smooth the business cycle in order to prevent recessions or overheating of the economy.

In an economic downturn, it must have a stimulating (expansive) effect on the economy and in a boom it must act as a brake (restrictive). To do this, the central bank has to lower interest rates when the economy is weak and increase them when the economy is strong. The changed interest rates affect the economy through the various channels of monetary policy.

However, their effects are very delayed. An anti-cyclical monetary policy must therefore act with foresight. It must not cut interest rates until the economy has deteriorated and it should raise them before the boom begins. Therefore, it must not only refer to current data and events, but also to forecasts of economic development. Otherwise there is a risk that the measures will work too late and fail to achieve their goal.

A countercyclical monetary policy must also take into account that the effects of interest rate policy are highly likely to be asymmetrical - an increase in interest rates slows the economy down more than a rate cut by exactly the same percentage would stimulate it:

Durch Zinserhöhungen entstehen für die Unternehmen höhere Opportunitätskosten bei der financing ihrer Investitionsprojekte. Darauf wird sofort reagiert. Bei einer schlechten Wirtschaftslage haben niedrige Zinsen hingegen einen schwächeren Effekt, denn obwohl die Finanzierungsbedingungen nun günstiger sind, fallen die Erwartungen der Unternehmen aufgrund der allgemeinen Situation negativer aus, dies stellt ein massives Aufschwunghindernis dar.

In contrast to the early 1970s, stabilizing the economy through an anti-cyclical monetary policy is no longer one of the central banks' express goals. Only the Federal Reserve System (Fed) in the USA still has this task. For most other central banks, including the European Central Bank (ECB), the monetary policy objective is to achieve price stability by setting a maximum inflation rate.

According to the Maastricht Treaty, this is even the primary goal of the ECB, while stabilizing the economy as the task of an anti-cyclical economic policy in the euro zone is currently only a low priority. This only changed under the influence of the dramatic financial crisis in 2008, when the ECB also explicitly supported the economy.

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