Eco Notepad features educational articles that present the research, studies and economic expertise of the Banque de France. The blog is aimed at students, professionals, journalists and academics. Some articles will be devoted to analyses carried out by the Bank's branch network, on specific topics. The opinions expressed are those of the authors and do not necessarily reflect the position of the Banque de France, the Eurosystem, or the institutions employing these authors.
Eco Notepad editors asks authors submitting a post to the blog to confirm that they have no conflicts of interest. If one of the authors of a blog benefits of an external financing, he should state the sources of financial support for the particular research it describes.
The results of the 2020 Eco Notebook contest will be announced this autumn. The date and terms of the award ceremony will be communicated later.
By Vivien Levy-Garboua, François Mouriaux, Tatiana Mosquera Yon and Mylène Sabatini
Since the 2008 financial crisis, captive financial institutions (special-purpose financial holding companies), subsidiaries of non-financial corporations (NFCs), have helped to drive growth in the financial sector, causing it to outstrip GDP growth. This trend reflects the increasingly complex and international organisational structures adopted by NFCs, but does not appear to have been accompanied by growth in risky financial transactions by these entities.
Chart 1a. Foreign direct investment by country, liabilities, % of GDP Source: ECB
While the Covid-19 shock to the world economy is, in many respects, unprecedented, the recovery that is expected could nevertheless be similar to past ones. Reconstruction and sectoral reallocation of activity and employment are processes that take time, and debt is likely to weigh on aggregate demand. The speed of the recovery will therefore depend less on the nature of the shock than on the measures taken to limit its impact.
Chart 1 Fall in Unemployment in France, Germany, Italy and the United States during recent recoveries. Source: OCDE.
Are the effects of a fiscal stimulus greater in situations in which central banks are stuck at the zero lower bound (ZLB)? The question is still debated in the economic literature but some empirical evidence suggests that the ZLB per se does not seem to increase the effects of a fiscal stimulus, while economic slack and loose monetary policy do: this bodes well for the fiscal response to the covi19 crisis.
Figure 1. UK fiscal multiplier of output Source: Glocker, Sestieri and Towbin (2019).
The health crisis has severely impacted global trade and revived debates about the location of production. The widespread onshoring of manufacturing activities would mean abandoning the gains from international specialisation, but without necessarily making value chains more resilient. Given that French companies mainly source their inputs from Europe, a coordinated, EU-wide industrial strategy seems more appropriate.
Chart 1: Percentage change in volumes of manufacturing output and external trade between January-April 2019 and January-April 2020 Source: CPB World Trade Monitor. Authors' calculations.
In the wake of the Covid-19 crisis, the US authorities adopted an unprecedented set of fiscal measures, targeting households in particular. These measures aim at preserving the purchasing power of US households, but less than half of this additional income should be spent.
The health crisis has left a significant number of businesses in urgent need of cash. In response, public authorities have put in place various support mechanisms, including a scheme to provide State-Guaranteed Loans (SGLs). The credit mediation system is currently helping businesses that have received an initial refusal from a bank in response to their SGL request.
Chart 1: Number of requests for credit mediation from businesses (monthly average) Source: Banque de France, Credit Mediation Scheme for Businesses
The COVID-19 crisis has required a real-time monitoring of economic activity, which has not been possible with the usual data. However, by using high-frequency data, such as electricity consumption and credit card transactions, it has been possible to estimate the magnitude of the shock and the timing of the rebound at an early stage, for both industrial production and for household consumption.
Chart 1: Impact of the health crisis on household consumption and firms' electricity consumption (%) Note: Deviation from a normal level (households) or from the historical average (firms). Household consumption is estimated by credit card transactions. Electricity consumption is adjusted for temperatures and working days.
Bank solvency and liquidity risks mutually interact. Using a model that simultaneously estimates the solvency and liquidity ratios of French banks, it is possible to incorporate them jointly into a stress scenario. It shows that the financial environment has a significant impact, but only in times of crisis, and that solvency has an impact on liquidity, not vice versa.
Chart 1: Solvency ratio and liquidity ratio of French banks since 1993 Sources: ACPR, authors’ calculations.
By Martial Delmas, Lucas Devigne, Emmanuelle Politronacci, Ghjuvanni Torre
The demand for banknotes in the euro area has grown faster than GDP since the creation of the euro. Yet, paradoxically, the use of cash as a means of payment is tending to decline. The increase in the demand for banknotes seems to be mainly due to an increase in precautionary demand from economic agents.
Chart 1: Continual rise in nominal net banknote issuance (% of GDP) Sources: Banque de France (BdF), Currency Information System (CIS) of the Eurosystem and OECD
During the lockdown, inflation in France fell sharply while households expected a sharp increase. The profound and sudden change in the structure of household consumption and the strong dispersion of price changes for commonly purchased goods (fresh food, fuel) could explain this unprecedented divergence, which is set to narrow.
Chart 1: Inflation and households’ inflation expectations in France Sources: European Commission and Eurostat. Note: y-axis: balance of opinion on price developments over the next 12 months; x-axis: year-on-year % change in the HICP in France. Each point represents a date.
US dollar funding costs in foreign exchange markets rose sharply in March 2020 when the supply of US dollars in FX swap markets dried up with the onset of the pandemic. Central banks reacted quickly by activating swap lines, which enabled them to provide US dollar liquidity to banks in their jurisdictions.
Climate policy has so far had limited results despite national commitments under the Paris agreement. Various scenarios establishing a cost-benefit balance of this policy bring to light the main obstacles it is facing. Its net gains are highly significant but remote in time and very unevenly distributed between countries.
Chart 1: Impact on world GDP of global warming and climate policies (as a % of GDP) Source : Alestra, Cette, Chouard and Lecat (2020)