ECON Assignment Example | Topics and Well Written Essays - 750 words

ECON - Assignment Example Among other things, the report admits the influence of high interest rates on other economic determinants such as inflation and foreign direct investment. It therefore sees the ambition of the European Central Bank to keep its interest rate at record low values as an attempt to redeeming the European region from further financial crisis, admitting that as it stands now, â€Å"the eurozone lurches out of recession amid high unemployment and low growth† (Steen, 2013). In this analysis paper, the economic implications of the decision taken by the European Central Bank are further analyzed in relation to key arguments made in the report. Influence of reduced interest rate on inflation rate There are some key indicators within the article to suggest that the lowered interest rates within the eurozone over the years have not necessarily sent inflation levels to the target of the European Central Bank. The writer however generally, opines that using inflation rates in August and Sept ember, which were 1.3 per cent and 1.1 per cent respectively, the intended intervention by the European Central Bank could become a one-stop strategy to achieve low inflation. Clearly, there is an enthusiasm with inflation coming down because once they do it would mean that prices can be expected to be relatively stable, ensuring that consumers have sufficient reserves in their purchasing power. However, the analogy presented in the report cannot be wholly true that reduced interest rates will forever stabilize or reduce inflation. This is because from the theory of rational expectations, the current hypothesis may only be short lived as investors are likely to start switching to the use of real interest rates in the determination of prices as begin to project inflation in the future (Bernanke, 2006). External determinants of growth In the article, there is the admission that the eurozone is not independent of itself in the determination of factors that will bring general economic r elief to its populace and for that matter, investors. This is because reference is made to the US budget shutdown with the assertion that â€Å"US budget shutdown would represent a risk to the world economy if it were protracted† (Steen, 2013). The implication of this admission is that no single trade and economic region is independent of its self in the regulation of its monetary policies. As much as possible, it is always important to have an eye for what is happening in other sectors and regions of trade and economic activities. This is because the world is now put in a position where the global economic market is more vibrant in the determination of growth for individual markets than individual markets can determine for the global economic market (Bernanke, 2006). Even within the eurozone alone, the graph below shows that even though different member states have different interest rates, it is the collection of the differences that constitute a holistic rate determinant f or the larger region. Steen (2013) Impact of excess liquidity on financial fragmentation The issue of real interest rates that was raised earlier is trumpeted in latter parts of the report as the president of the European Central Bank admits that bank liquidity is a challenge for the use of lowered interest rate to being about economic revamping. This is because in his opinion, bank liquidity cannot be predicted perfectly on its impact on â€Å"