Eco Notepad

To mark International Women’s Day, the Banque de France organised a roundtable on 7 March on the economic impact of gender inequalities, with the participation of Sylvie Goulard, Deputy Governor of the Banque de France, Isabelle Hudon, Ambassador of Canada in France, and Peter Praet, member of the Executive Board of the European Central Bank. This post echoes these discussions, and concludes that there is urgency to act at all levels.

A federal unemployment insurance scheme has been in place in the United States for more than 80 years. It has helped to cushion the effects of successive crises without the need for large fiscal transfers between American states. It provides an example of an unemployment insurance model based on temporary transfers and subsidiarity between federal and state governments.

The European Union’s exchanges with the United States generate a significant trade surplus but are also characterised by a substantial foreign direct investment deficit. This deficit reflects certain choices made by multinational firms with regard to their activities’ locations, particularly the placing of US subsidiaries in Europe. We propose an interpretation of these transatlantic exchanges using an aggregate that is broader than the balance of goods and services alone.

G7 countries activated several economic policy levers to respond to the 2008 crisis, in particular monetary and fiscal policy. As a result, their ability to stimulate the economy or deal with future crises has been reduced. Consequently, the temptation to conduct beggar-thy-neighbour policies, despite their harmful effects, could be exacerbated. Even though its weight in global GDP has declined significantly since the late 1980s, the G7—whose presidency is held by France in 2019—remains the appropriate forum for curbing this temptation.

Excess liquidity in the euro area has risen by less than the liquidity created by unconventional monetary policy measures. This is because much liquidity has been absorbed by non-monetary deposit accounts held by national central banks. As monetary policy normalises, liquidity will become scarcer. At what point this scarcity will cause interbank rates to drift above the deposit facility rate will depend on whether this “autonomous” demand remains high.

Eco Notepad celebrated its second anniversary in December 2018. This is an opportunity to look back on this rich period in which we published almost 100 blog posts analysing economic and monetary developments. The posts on inflation, monetary policy and financial stability attracted a great deal of interest from our readers, as did those on growth and global trade, the deindustrialisation of the French economy and the increase in the number of monopolies in the United States. Let’s take a closer look.

At its meeting of 13 December 2018, the ECB Governing Council confirmed that it would stop the net asset purchase programme begun in late 2014 at the end of this year. Quantitative easing nonetheless remains in place: it depends primarily on the stock of assets held by the Eurosystem rather than on the flow of purchases. This stock will remain unchanged for as long as the Eurosystem continues to reinvest the proceeds from maturing securities.

The Eurosystem’s non-standard monetary policy has led to a significant build-up of excess liquidity in the euro area banking system, concentrated among a few countries. Since 2015, this concentration can mainly be explained by the Eurosystem’s asset purchase programme (APP) and the geographical location of the accounts and settlement circuits used in its implementation.

The diffusion of information and communication technology (ICT) and the associated benefits in terms of growth appear to have petered out at the start of the 2000s in advanced countries. This suggests we are experiencing a pause in the third industrial revolution, ahead of the incipient shock linked to the digital economy.

Despite full employment, Japan is struggling with wage stagnation. Although this "enigma" can in part be explained by cyclical factors - subdued productivity and inflation expectations - it is also being exacerbated by structural factors linked to the country’s social model, notably the duality of its labour market. As a result, the prospects for a rise in wages and hence inflation remain limited.

Several prominent experts in US central banking have recently advocated a new policy framework: price-level targeting. What is it and what advantages and disadvantages does it offer over the current inflation targeting framework? Its main benefit would be to bring the policy of keeping interest rates low for some time after a recession – an unconventional policy tool used in fighting the last recession – into a conventional policy framework.

According to the May 2018 revised national accounts, the net borrowing of non-financial corporations improved slightly over the previous 10 years to 0.4 pp of GDP in 2017. This mainly reflects the sharp reduction in net financial expenses, while the share of compensation of employees and gross investment in value added increased.

By Stéphane Lhuissier
The 2008 financial crisis and the sovereign debt crisis in the euro area led to major recessions. By contrast, the macroeconomic impact of the bursting of the technology bubble in 2000 was mild. The reason behind these all-or-nothing effects is amplification: a fragile financial system makes economic agents more sensitive to changes in financial conditions.

By December 2018, the Eurosystem will have bought more than EUR 2,500 billion of securities as part of its Asset Purchase Programmes (APP). These purchases are governed by a number of principles, one of which is "market neutrality". This is intended to minimise the potentially distortive effects of purchases on the functioning of the financial markets, while enabling the transmission of monetary policy stimulus to the economy. We demonstrate this in this blog by comparing the Eurosystem's purchasing techniques with those of other central banks.

The public debt ratios of France and Germany (as a % of GDP) were similar in the early 2000s. Since 2010, the ratio has fallen sharply in Germany, but has continued to rise in France. Using a simple model, we show that the economic and financial context is now favourable to triggering a lasting reduction in France's public debt, provided that efforts to curb public spending are stepped up.

No one wins a trade war. Based on a multi-region dynamic general equilibrium model (GIMF), we show that a global and generalised 10 percentage point increase in import tariffs could reduce global GDP by 1% after two years. This effect could be amplified by a fall in productivity, a rise in the financing cost of capital and a decline in investment demand. Taking all these factors into account could result in lowering global real GDP by up to 3% after two years.

Financial cycles can be broken down into four phases in which the intensity of financial risks changes. The crisis that follows the downturn is all the more pronounced as risks have accumulated during the upturn. Macroprudential policy aims to limit the impact of financial crises on the real economy: the decision to activate the countercyclical capital buffer in France meets this imperative.

The intensification of competition in Sub-Saharan African (SSA) countries has had an ambivalent impact on credit risk. The resulting improvement in management and bank intermediation may, beyond a certain threshold, be offset by greater risk-taking. Strengthening prudential frameworks would make it possible to harness the opportunities offered by bank competition.

Within a monetary area, the quantity of banknotes circulating in a given Member State is unknown as banknotes move back and forth across borders and cannot be tracked. There are various estimates but these have the drawback of varying by up to a factor of three. But the issuance of the new series of euro banknotes, combined with surveys, enable these figures to be more specific. Only 10% of the banknotes issued in France are apparently used for transaction purposes in the country.

Reducing current account imbalances is often equated with curbing excessive exports or imports. However, legacies of the past can develop their own dynamics due to accruing income flows. Indeed, in some countries that have accumulated large foreign liabilities, current account adjustment has been impeded by large negative income flows despite substantial improvements in the trade balance.

Monetary policy nowadays is usually decided by a committee. A narrative approach of the history of the U.S Federal Open Market Committee suggests that the Fed Chair’s economic beliefs and the Committee’s center of gravity of policy preferences matter for decision making.

Changes in the value added sharing are the focus of considerable debate. In France, the assessment depends largely on the scope of analysis chosen and the degree to which it is aggregated, and it differs depending on the sector: since the crisis, the labour share has increased in market services but has declined in industry.

Short-time work schemes have been implemented in many OECD countries with a view to protecting jobs in companies experiencing temporary difficulties. While such schemes made it possible to save jobs during the Great Recession of 2008-2009, they may also have adverse effects on the economy. However, these effects would be minimised by sensible reforms.

The share of imports from low-wage countries in French households’ consumption increased threefold from 1994 to 2014. These less expensive imports lowered inflation in France by 0.17 pp per year on average. This direct effect of imports since 1994 represented a gain of about EUR 1,000 in terms of average household consumption in 2014. However, the indirect effects of opening up to international trade on households’ purchasing power, via wages and employment, were not taken into account.

In France in 2016, the gross margin rate of non-financial corporations (NFCs) returned to its early 2000s level, at 32%, while the net margin rate was 15%, compared with 18% in the 2000s. Thus, using aggregates "net" of capital depreciation gives a different picture of the NFCs account. Furthermore, the NFCs' net saving rate would be close to zero, and their stock of fixed capital could only increase through external financing.

Less than two months after the adoption of the Tax Cuts and Jobs Act, which cut individual income tax and corporate tax, US Congress passed a budget agreement that increases public spending for 2018 and 2019. The effects on the US economy represent a two-edged sword: an additional 1.4 percentage point of GDP over two years, but a widening of the trade and budget deficits to 4% and 6% of GDP respectively. The recent dollar depreciation may reflect the growing concerns of international investors

The weakness of wage inflation may result in part from the increasing participation of older workers in the labour market. Over the last two decades, the participation rate of workers aged 55 to 64 has increased from 33% to 55% on average across OECD countries. We observe that, since 2013, the countries where this increase in labour supply has been the largest have also experienced slower wage inflation.

The US term premium (TP) has been very low by historical standards. Would its sudden rise affect the euro area (EA)? Lower US demand and tighter financial conditions would slow down EA activity. A surprise 1pp increase in US TP could reduce US and EA GDP growth by 0.4pp and 0.25pp respectively. Such effects would be smaller if the monetary authorities were to counteract the fall in inflation.

In 2017, several studies revived the debate in the United States on the place of female economists in the profession and on the barriers to progress that had to be lifted. In most countries, women are poorly represented in all fields of economics (19% on average worldwide) and the situation is stagnating over time. However, significant differences exist between countries. In France, for example, women are a little more present, particularly among assistant professors.

Since 2008, growth in nominal industry-level wage floors in France has slowed progressively. In a near-zero inflation environment, wage floors have risen by less than 1% per year since 2014. Increases in negotiated wages are largely determined by past inflation and by changes in the national minimum wage (NMW). As a result, the upturn in inflation observed in 2017 could lead to slightly stronger growth in nominal negotiated wages in 2018.

Google, Apple, Facebook and Amazon are giant companies that reflect the more general phenomenon of concentration which is intensifying in most sectors in the United States. This trend is contributing to an increase in the share of profits and to a decrease in the share of labour in domestic income, as well as to a deepening of inequalities. It is also associated with a decline in the creation rate of new firms and jobs, which could in the longer term weigh on US growth.

The risk of currency wars is a recurrent theme, given an extra twist with unconventional monetary policy. The US Fed has begun normalising its balance sheet, raising concerns about cross-border spillovers. But the effects of conventional and unconventional policies are too similar for the spillovers to be very different. Greater international coordination is therefore no more or less appropriate with two instruments than one.

A large proportion of economic growth remains unexplained by labour and capital factors. When the quality of these factors and the diffusion of innovation are taken into account, the unexplained share is reduced by roughly half. We thus remain ignorant as to the sources of a significant share of growth.

In France, flexibility in the labour market relies mainly on fixed-term and temporary workers. These workers are less well paid, receive less training and find it difficult to obtain permanent employment. This two-tier labour market creates social and economic problems. Public policies can be envisaged to favour transition to permanent contracts.

New cross-country evidence shows that VAT compliance is pro-cyclical, and its response to tax-rate hikes is sizeable and negative. Countries with highly sensitive tax compliance have a low ability to reimburse their debt, thus facing higher default risk. Issuing GDP linked bonds may protect such countries from the combined, cyclical risk of growing debt-to-GDP ratios and declining tax revenues.

The share of the manufacturing industry in French GDP has fallen by 9 percentage points over the past forty years. This decline is mainly due to technical progress and consumer preferences. Foreign trade has only played a minor role.

The Fed attributes the current disconnect between a tight labour market and low inflation to transitory factors, while also acknowledging an unusual level of uncertainty. It is not the first time such disconnect appears. In the late 1990s already such configuration had triggered a debate on a structural downward shift in inflation. It later transpired that this assessment was based on erroneous data.

In France, at the beginning of 2015, interest rates on new bank loans to businesses fell sharply; this lasting decline, which was more pronounced for high-rate loans, followed the ECB's announcement of quantitative easing. Without any significant change in the characteristics of borrowing companies, it attests to an improvement in financing conditions.

Uncertainty about the future path of interest rates is harmful to the economy. A new measure of interest rate uncertainty is constructed for G7 countries, Spain and Sweden, during 1993-2015. Interest rate uncertainty, of the size observed during the recent crisis, decreases industrial production by up to 3.8% and CPI inflation by up to 1 percentage point (pp) while increasing unemployment by up to 1.2 pp.

In France, there has been a marked deterioration since the 1970s in the ability of young low-income households to get on to the property ladder. Aside from the problem of house prices and borrowing conditions, this can in part be attributed to demographic changes, notably an increase in single-parent families and in urban migration. Financial assistance, such as cash gifts or inheritance, is widening the gap between the poorest and wealthiest young households.

The boom of the 2000s in France stimulated investment by firms with significant real estate holdings (positive collateral channel). Conversely, it was unfavourable to investment by younger firms, with fewer holdings, because of the induced cost (negative profit channel), which justifies the current attention given to the financing of SMEs.

This blog post summarises a study covering the 1995-2007 period focusing on the local effects of Chinese import competition on the French labour market: the competition displaced jobs in the manufacturing sector; it also placed downward pressure on average hourly wages, and modified the wage distribution, with limited impacts on the lowest wages, probably as a result of the lower limit set by the statutory minimum wage.

Financial markets confirm that, since autumn 2016, deflationary risks in the euro area have dissipated. Market indicators – which are admittedly susceptible to a number of biases – nevertheless continue to reflect medium-term inflation expectations which are below the Eurosystem’s target (inflation rates of below, but close to, 2% over the medium run).

The Capital Markets Union project (CMU) recommends diversifying the financing of companies, in particular through debt securities in addition to bank loans. Is the choice of debt instrument important in economic recoveries? In fact, companies replace bank financing by bond financing in a recovery phase. In addition, recoveries are more robust when the share of bond financing is high.

Economic history and wine may contribute to understanding contemporaneous economic issues. The wine crisis caused by phylloxera in the late 19th century helps identify the causal impact of refinancing operations of central banks (CBs) on firms’ defaults. The geographical distribution of the branches of the French CB meant that varying ease of access to discounting bills of exchanges varied when the crisis struck. Regions that benefitted from easier access to central bank refinancing exhibited a lower increase in default rates during the crisis.

The G20 has called for greater investment in infrastructure projects in order to boost growth. One such project, the Train à Grande Vitesse (the TGV – France's high-speed train) allows for corporate productivity gains through reorganisations and increased site specialisation in their areas of expertise. For companies in operation in 2011, this could have represented a positive impact on profit margins of between 0.6 and 1.9 percentage points depending on the industry.

The relationship between the rather volatile capital flows and domestic credit has become a major challenge from a financial stability point of view. It is at the origin of the implementation, in some economies, of capital flow management measures. Domestic credit sensitivity to cross-border inflows is amplified by the fixed exchange rate arrangements and the strong presence of foreign banks. The implications for countercyclical policies are significant.

Game theory provides examples and a few valuable lessons for negotiators, whether hawks or doves, such as the risk of “falling off a cliff” in the “game of chicken”. Investment bank strategists and academics have already started toying with such tools to analyse the Brexit “game”. Surely the negotiators’ war rooms have been paying attention.

Services price inflation in France stood at 1.0% in 2016, well below its average from 1999 to 2015 (around 2%). This paper looks at the mechanisms through which the fall in oil prices and lower headline inflation have contributed to slowing services prices since mid-2014. An analysis of these interactions suggests that services price inflation will begin to recover as of 2017, to around 2%.

According to model simulations, the dollar appreciation in effective terms would have choked 0.2 percentage point (pp) off US growth since mid-2014. Meanwhile, the euro depreciation would have added 0.5pp to Euro Area (EA) growth. But since mid-2015 the euro has been appreciating, dampening growth by 0.2pp. Higher openness of the EA, as well as a larger exposure to emerging economies, could be an explanation.

According to the Banque de France nowcasting model, global economic growth is likely to increase moderately in 2017: it would expand by 3.3% after 3.0% in 2016. This is in line with the consensus of major international organizations. Since 2011, the International Monetary Fund (IMF) had to revise downwards its global growth projections, but the mid-January update of forecasts brings optimism for global growth this year.

The ECB unconventional monetary policy has largely succeeded in decoupling nominal interest rates in the euro area from those in the United States since 2014, as warranted by their respective macroeconomic conditions. This has been especially true since the rise in US interest rates after the election of Donald Trump, particularly for rates up to 5 years.

Over the past five years, global trade and global production have grown at similar rates, whereas before 2008, global trade grew at twice the rate. This slowdown in global trade is largely due to China’s rebalancing towards its domestic demand and its services sector. If we exclude the decline in trade related to increasing protectionism, near-parallel growth for global trade and production is the new “normal.”