Principles of Flight

Monetary Policy:The process by which monetary policy decisions affect the Economy in general and the price level in particular is called the transmission Mechanism of the monetary policy and consists of a long chain of causes and Effects that relates monetary policy decisions to the level of price.

The impact mechanism of the last chains of effects is as follows: • The Lower interest rates favor, on the one hand, consumption as they will be Compatible with lower returns of savings, and on the other hand, investments Since then the cost of borrowing is lower and thus the expected returns on Investments could easily exceed the realized investment costs. • In addition, Consumption and investment are also affected by movements in asset prices via Wealth effects and effects on the value of collateral. -Changes in interest Rates can affect the exchange rates through international flows of capital such That the value of domestic currency can appreciate or depreciate.In addition to The traditional bank lending channel, which focuses on the quantity of loans Supplied, a risk-taking channel may exist when banks’ incentive to bear risk Related to the provision of loans is affected

In summary, the goal of the monetary policy is to achieve price stability In the euro area. In order to achieve this, decisions on the so-called operative Variable are taken.“Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. Price Stability is to be maintained over the medium term.

The main strategy of the ECB in achieving its objective revolves around the Thorough analysis of the risks to price stability. This analysis is organized Around two analytical (but complementary) perspectives, referred to as the "two Pillars": economic analysis and monetary analysis. 

Economic analysis (first pillar) consists of the following three elements: 1. Real activity and financial conditions: The economic analysis assesses the Short to medium-term determinants of price developments. The focus is on real Activity and financial conditions in the economy.2. Asset prices and financial Yields: These variables are also analysed to derive information about the Expectations of the financial market.3. Macroeconomic projections are produced under the responsibility of ECB/Eurosystem staff using a number of analytical and empirical Models.

Monetary analysis takes a longer-term perspective and focuses on a longer-term horizon than the economic analysis. It exploits the long-run link between money and prices.

2.2. MONETARY POLICY OPERATIONS OF THE ECB The EMU implies a single Monetary policy for all its member countries, which means that there is an Entity – the European Central Bank (ECB) and the European System of Central Banks (ESCB) – that has the exclusive power/capacity to decide on the regulation Of the amount money and its other aspects within the whole euro area

 the operational framework follows several guiding principles:-

Operational efficiency: The most important principle is operational Efficiency. It can be defined as the capacity of the operational framework to Enable monetary policy decisions.-. Equal treatment and Harmonization-Decentralised implementation-. Simplicity, transparency, Continuity, safety and cost efficiency.

OPEN MARKET OPERATION:Open market operations play an important role in Steering interest rates, managing the liquidity situation in the market and Signalling the monetary policy stance. They constitute the fundamental element Of the actions of the ESCB and the interest rates defined therein are the key Benchmark/reference for monetary policy.. Main refinancing operations (MROs) are Regular liquidity-providing reverse transactions conducted by the Eurosystem With a frequency and maturity of normally one week.. Longer-term refinancing Operations (LTROs) are liquidity-providing reverse transactions with a longer Maturity than the MROs-.Fine-tuning operations can be executed on an ad hoc Basis tomanage the liquidity situation in the Market and to steer interest rates.- . Structural operations can be carried out by the Eurosystem through reverse Transactions, outright transactions, and the issuance of debt Certificates

B. Standing facilities Granted by the Bank of Spain to authorized entities Operating in the market, standing facilities aim to provide and absorb overnight Liquidity, signal the general monetary policy stance and bound overnight market Interest rates.Marginal lending facility: Counterparties can use the marginal Lending facility to obtain overnight liquidity from the NCBs against the Presentation of sufficient eligible assets.-Deposit facility: Counterparties can Use the deposit facility to make overnight deposits with the NCBs.
C. Minimum reserves It applies to credit Institutions in the Euro area. It is intended that the entities Maintain a certain amount of liquidity reserves in the form of one or more Accounts with the central bank of the country where they are Operating.