Conventional monetary policy easing works by lowering market expectations for the future path of short-term interest rates, which, in turn, reduces the current level of longer-term interest rates and contributes to an easing in broader financial conditions. These changes, by reducing borrowing costs and raising asset prices, bolster household and business spending and thus increase economic activity.
The role of such rules was, and remains, to provide credible incentives for sound fiscal and macroeconomic policies in a monetary union. In this sense, it is encouraging to see that important steps have recently been taken. One step was the governance reform package (the so-called “six pack”), which came into force in December 2011.