Monetary policy

Post n°212
Published on 04/23/2021

by Sylvérie Herbert, Maria Sole Pagliari and Adrian Penalver

For several decades, advanced economies have seen their borrowing costs decrease, including amid the coronavirus pandemic. This is especially true at the long end of the yield curve. Even long-term bonds issued by some private corporations in the euro area trade at negative interest rates. This decrease in borrowing costs primarily reflects a decline in the natural real rate of interest due to population ageing and slower productivity growth, as well as the more recent compression of the long end of the yield curve resulting from central banks’ bond purchases.

Chart 1: 10-year sovereign yields and asset purchases
Chart 1: 10-year sovereign yields and asset purchases Sources: Bloomberg, ECB
Post n°210
Published on 04/14/2021

By Oustry Antoine, Erkan Bünyamin, Svartzman Romain and Weber Pierre-François

The securities accepted as a guarantee under the Eurosystem collateral framework are not, in aggregate, “aligned” with the climate targets of the Paris Agreement. They can therefore be considered to be exposed to so-called “transition” risks related to climate change. Technically, it would be possible to ensure that the collateral pools pledged by each counterparty are more aligned, but this raises methodological questions.

Chart 1: Coverage rate and climate alignment of the pools of collateral pledged by Eurosystem counterparties, based on the methodology developed by Carbon4Finance
Chart 1: Coverage rate and climate alignment of the pools of collateral pledged by Eurosystem counterparties, based on the methodology developed by Carbon4Finance Sources: Carbon4Finance, Eurosystem and authors’ calculations.
Post n°209
Published on 03/25/2021

By Emmanuel Cerclé, Hervé Le Bihan and Michaël Monot

Central banks' balance sheets have grown significantly, as a result of the "non-standard" monetary policies conducted in response to the 2008 crisis and the Covid-19 crisis. Reflecting the net asset purchase programmes in place, they are still expanding. However, over the longer term, their size could stabilise and then gradually decline once inflation has consistently returned to close to its target. Adjusting the size of their balance sheets should nevertheless remain in central banks' toolbox.

Chart1: Balance sheets of the Eurosystem, the FED and the BoJ  (in amounts and as a % of GDP)
Chart1: Balance sheets of the Eurosystem, the FED and the BoJ (in amounts and as a % of GDP) Source: ECB, FED, BoJ, Eurostat Note: Top panel: amount in billions of euros (G€), dollars (G$), and yen (G¥). Bottom panel: as a % of GDP.
Post n°208
Published on 03/12/2021

By Samuel Bieber

The two-tier system, which has been in place for over a year in the euro area, exempts part of banks' excess reserve holdings with the central bank from negative remuneration. This system aims to support the bank-based transmission of monetary policy. It has not unduly influenced money market rates.

Chart 1: Excess reserves exempted and non-exempted from negative remuneration (EUR billion)
Chart 1: Excess reserves exempted and non-exempted from negative remuneration (EUR billion) Source: Banque de France, European Central Bank
Post n°200
Published on 01/22/2021

By Ivan Odonnat

Interest rate benchmarks, which are used to price money-market instruments as well as numerous financial contracts (bank overdrafts, real estate loans, bond debt, etc.), are only relevant if they are reliable and representative of the actual financing conditions experienced by economic agents. At the global level, they underpin some USD 350 trillion worth of financial instruments and contracts.

Chart 1: Evolution of interest rate benchmarks in the euro area
Chart 1: Evolution of interest rate benchmarks in the euro area Sources: EMMI and ECB.
Post n°193
Published on 12/15/2020

Even though the Fed does not have an explicit financial stability objective extending beyond its supervisory responsibilities, the public speeches of Fed officials reveal that there is a relationship between the higher proportion of speaking time on financial stability topics and more accommodative monetary policy. Financial stability became a topic of concern in Fed speeches especially around the global financial crisis.

Chart 1. Main topics covered in Fed speeches
Chart 1. Main topics covered in Fed speeches Source: Istrefi, Odendahl, Sestieri (2020). The chart shows the proportion of six topics extracted from the Fed speeches for the period 1997 to 2018. The topic proportions displayed are annual averages.
Post n°178
Published on 08/20/2020

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.

Source: Glocker, Sestieri and Towbin (2019).
Figure 1. UK fiscal multiplier of output Source: Glocker, Sestieri and Towbin (2019).
Post n°172
Published on 07/22/2020

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)
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
Post n°171
Published on 07/17/2020

By Erwan GAUTIER, Youssef ULGAZI, Paul VERTIER

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.

Inflation and households’ inflation expectations in France
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.
Post n°170
Published on 07/07/2020

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.

Covered Interest Parity deviations in 2020
Chart 1: Covered Interest Parity deviations in 2020 Source: Datastream, FRED. Author’s calculations.

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