Bank of Spain: Monetary Policy and Economic Cycles

The Bank of Spain: Core Functions

From 1 January 1999, the functions of the Bank of Spain as the national central bank for the Eurozone were redefined. The law recognizes the protocols of the European Central Bank (ECB) and their execution by the Bank of Spain (BE).

The BE participates in and develops several basic functions conferred on the European System of Central Banks (ESCB):

• Define and implement monetary policy (to achieve price stability).
• Implement foreign exchange policy.
• Issue legal tender banknotes.
• Hold and manage reserves.
• Monitor the credit system.
• Promote the smooth operation and financial stability.
• Put coins into circulation.
• Advise the government.

Economic Cycles

The economy follows a path of expansion and growth, often not uniformly, but as a series of ups and downs. One can observe that levels of economic growth are affected approximately every 8 or 10 years by a crisis of greater or lesser degree.

Causes of Economic Cycles:

Causes include natural disasters, conflict or war, technological advances, and production excesses.

Every cycle marks the start of an industry, but then it can infect other players and the entire economy of a country. The phases are:

1. Expansionary phase
2. Boom
3. Recession
4. Depression

There is no fixed period for each phase or cycle, but three types of economic cycles are known:

• Short: approximately 3 to 4 years, which may not end in a crisis.
• Average: 8 to 9 years.
• Long: over 50 years.

The Economic Crisis

A crisis occurs when economic variables do not behave normally and some markets do not function well. The economic crisis begins with the acceptance stage and ends when the expansive phase starts.

Characteristics of an Economic Crisis:

a) Unemployment

Abundant unemployment causes a fall in production, a diminution of investment, and increased deficiencies. It also has social consequences, such as adverse psychological effects or discriminatory outcomes. Solutions often involve governments promoting employment.

b) Low Level of Production

c) High Inflation

As we know, inflation is a comprehensive and sustained increase in prices.