Inflation is small and negative in almost all European Monetary Union (EMU) countries despite the efforts of the ECB to expand monetary base and keep yearly inflation at around 2%. Economic growth rates in these countries are also low and have not returned to before financial crisis levels despite the fact that they have done so, for example, in the US. you need to discuss the possible reasons why inflation is low in the European Monetary Union countries from the perspective of the models we have covered during our classes. Discretion, Commitment, or Constrained Discretion? 1. What is the type of policy that ECB runs (Discretion, Commitment, or Constrained Discretion)? a. How would it react to the fall of Lehman Brothers if that happened in EMU? What is the difference between your answer and the Federal Reserve Bank's actions? Please explain any difference. 2. Would inflation and growth be different if ECB ran a different type of policy? a. Which of these policy types could have been better to achieve 2% inflation and high growth rates? b. Which of these policy types could have been better to combat below target since inflation levels since 2012 and increase of risk premiums in the South of EMU (e.g., Italy, Spain, Portugal, and Greece) Brief Historical Record, References, and Data The former governor of the ECB, Jean-Claude Trichet, raised interest rates until 2009, when the economy was already in recession. The ECB did not expand monetary base as the Federal Reserve Bank did. Instead, it was issuing warnings about the danger of inflation [Note: see the graphic with GDP growth and ECB interest rate]. The ECB began to lower rates in 2009. The program of "open bar" for banks was approved in December 2011. In 2012, Mario Draghi, the current governor of the ECB, quickly lowered rates to the minimum and instituted negative rates on bank reserves placed in the ECB since mid-2014. Moreover, the ECB extended the open bar indefinitely. In February 2015, the ECB has started a massive program of government and corporate bonds purchases (QE). The program is still ongoing.