Brexit e la zona euro: focus sul tasso di cambio (tesi in inglese)

Effects on Base Currency

Appreciation

Depreciation

GDP increase

GDP decrease

Inflation reduction

Inflation growth

Employment increase

Employment decrease

Unemployment reduction

Unemployment increase

PMI increase

PMI decrease

Increase retail sales

Decrease retail sales

Table 8: Schematization of the general effects on the currency given by the positivity or negativity of the same with respect to expectations.

These are data that are cyclically released for each economy and destined to have effect mainly on the currency of the country of reference but not only. The economic data that impact the market most is those concerning the US economy, followed by data on the Eurozone, Japan and the United Kingdom.

Source: Borsa Italiana. 493.5.2. Monetary policy

As seen in the previous paragraph, monetary policy announcements have a level of volatility 3 and are among the most important data in determining movements in exchange rates.

Governments and the corresponding central banks formulate monetary policies to

achieve certain economic objectives and influence some macroeconomic variables. Normally most central banks operate under a legislative mandate which focuses on the basic objectives of price stability and promoting sustainable economic growth. To achieve these objectives, they try to control some variables including interest rates and the cost of money, the supply of currency and the level of price growth.

Monetary policy can be expansionary or contractionary. In the first case economic policy expands the supply of money available to the public. In the case of contractionary monetary policy, it reduces the supply of money in the economic system, in order to achieve its goals.

To change the supply of money in the economic system, central banks use appropriate monetary policy instruments which include:

• Open market operations: They consist in the purchase or sale of government bonds by the central bank. Buying securities from the private sector the central bank injects liquidity into the

The central bank plays a crucial role in regulating the economy by implementing monetary policy. There are several tools that the central bank can use to control the money supply and influence economic activity:

• Open market operations: The central bank can buy or sell government securities in the open market. When the central bank buys securities, it increases the monetary base, injecting liquidity into the economy. Conversely, when it sells securities, it reduces liquidity in the system.
• Refinancing operations: The central bank can provide overnight liquidity to banks in exchange for collateral. This helps banks meet their short-term funding needs.
• Deposit operations: Banks can deposit excess liquidity with the central bank, which helps absorb liquidity from the system.
• Mandatory reserve requirement: Banks are required to hold a certain percentage of their liabilities as reserves with the central bank. By adjusting this reserve ratio, the central bank can increase or decrease the amount of money in the system.

By using these tools, the central bank can effectively regulate the money supply and influence economic activity.

conditions of the money market and through it the trend of short-term interest rates and to influence the behaviour of economic operators.

Exchange rate and interest rates

Also called the official reference rate, the interest rate set by the central bank represents the central rate at which the banking and financial system relates to financing and refinancing operations.

Interest rates are one of the main determinants of the perceived value of one currency compared to the other, and it is also important to know the nature and direction of monetary policy decided by the central bank of a country.

One of the most important data influencing the monetary policy of a central bank and the level of interest rates is inflation. Inflation is defined as the generalized and prolonged increase in prices leading to a decrease in the purchasing power of the currency and therefore of the real value of all monetary quantities. An economy then experiences an inflation situation when there is a process of

price growth in a given period and a deflationary situation when there is a process of decrease .3838 Krugman, Obstfeld, Melitz (2014) 51

Inflation situations are generally experienced in times of economic growth when the well-being of the economy stimulates demand for goods, services, work and commodities, causing further inflationary expectations of successive rises in prices. In spite of this, a too high level of inflation could damage the economy and that is why central banks are usual to set an objective inflation rate in pursuing the so-called inflation targeting strategies. These are strategies that provide for the announcement of a target for the inflation rate and subsequent decisions to be made through adjustments in the level of interest rates according to present and future expectations. This is an important practice because it increases the level of transparency, predictability and therefore stability of monetary policy.

A central bank can avoid too high or too low levels of inflation

Interest rates act on the level of the exchange rate by determining a differential between two currencies in terms of the yield of deposits. The widening of this differential generally leads to an appreciation of the currency characterized by the higher interest rate, because the deposits denominated in that currency will make more to those holding them. On the contrary, the narrowing of the differential tends to favor the currency with the lowest yield.

In Table 9, we can see how there is a direct relationship between the difference between interest rates and the exchange rate trend. In contrast to the narrowing of the differential, the euro was appreciated on sterling. In fact, each widening of the differential achieves an appreciation of the higher-yielding currency (GBP) and a depreciation of the lower-yielding currency (EUR).

1.2654Sept-16 0.2 1.1898Nov-17 0.5 1.144Aug-18 0.75 1.1231Table 9: Differential between BOE and ECB interest rates and effects on exchange rate EUR/GBP.

Source: BOE and ECB data.

3.6. Bank of England and monetary policy

The Bank of England (BOE) was founded in 1694, initially as a private bank whose role was to lend money to the state and manage its public debt. In 1946-53, the Bank of England Act nationalized the bank and assigned its ownership to the Treasury.

To this day, the Bank of England has the role of promoting and maintaining the monetary and financial stability of the United Kingdom, of conducting exchange and lending policy to commercial banks. The main tasks of the Bank of England's monetary policy are to ensure price stability, control inflation, and support the economic objectives of employment and economic growth set by Governments that go through the leadership of the country.

The Bank of England Act of 1998 made the BOE totally independent in the definition of interest rates.

The task of fixing them was entrusted exclusively to the internal authority called Monetary Policy Committee (MPC), consisting of nine members including the Governor of the central bank. However, a derogation is envisaged for this exclusivity, which provides that in the event of extremely unfavourable economic conjunctions, the government may prevaricate the MPC and give direct instructions on the definition of monetary policy.

3.6.1. The inflation target

Like other central banks in other countries around the world, the Bank of England is committed to pursuing an objective level of annual growth of prices, the so-called Inflation Target. This target is set at 2% in terms of annual inflation growth based on the Consumer Price Index (CPI). This is a symmetrical target and for this reason an inflation lower than the desired level of 2% is considered as deleterious as much as a higher level. The bank aims to reach the desired level through the change in interest rates that is decided in the eight