Monetary policy

04/26/2019

Credibility and effectiveness of monetary policy in emerging countries

By Grégory Levieuge (Banque de France)

A credible central bank can more easily anchor agents’ expectations, and therefore long-term interest rates. Thus credibility would reduce the need to make an intensive use of key rates. There is indeed an inverse relationship between credibility and interest rate volatility.

Inverse relationship between credibility and interest rate volatility
Chart 1: Inverse relationship between credibility and interest rate volatility Note: "Credibility" is the indicator proposed by Levieuge & Al. (2018), ranging from 0 (minimum credibility) to 1 (maximum credibility). The conditional variance of the interest rate reflects the volatility of the main monetary policy instrument.
Updated on 04/26/2019 13:49.
01/16/2019

An Alternative Financial Conditions Index for the Euro Area

By Anna Petronevich and Jean-Guillaume Sahuc

Financial conditions are not fully captured by the short-term interest rate, especially when it is stuck at its lower bound. As a result, financial institutions and central banks turn to other indicators richer in information such as financial condition indices (FCI). We provide a new FCI with time-varying component weights which pinpoints the sources of changes in financial conditions.

Dynamics of the Banque de France FCI for the euro area
Chart 1: Dynamics of the Banque de France FCI for the euro area Sources: Bloomberg and the authors’ calculations
Updated on 01/16/2019 14:24.
01/15/2019

Will “autonomous” money demand affect monetary policy normalisation?

By Pierre Guerin, Adrian Penalver and Pierre-Francois Weber

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.

Chart 1: Excess liquidity at extraordinary high levels due to unconventional monetary policy Source: ECB Statistical Data Warehouse. Broken lines correspond to the period in which the Eurosystem switched to 8 from 12 maintenance periods per year. EAPP: Expanded Asset Purchase Programme
Updated on 01/15/2019 18:35.
01/11/2019

Making complexity easy: The ECB’s art of communication

By Gaetano Gaballo

After the ECB’s Governing Council Monetary policy meetings, market uncertainty has systematically fallen. It has done so even more in the past years. In particular, announcements related to asset purchases had a strong dampening impact on market uncertainty. This suggests that, despite the increasing complexity of unconventional policies, the ECB has been successful in communication.

Market uncertainty drops on ECB’s Governing Council Days
Figure 1: Market uncertainty drops on ECB’s Governing Council Days
Updated on 03/19/2019 14:56.
12/19/2018

The end of net asset purchases does not put a stop to quantitative easing

By Jean Dalbard, Hervé Le Bihan and Raphaël Vives

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.

Chart 1: Eurosystem asset purchases and reinvestments since March 2015
Chart 1: Eurosystem asset purchases and reinvestments since March 2015 Source: BDF, ECB. Note: Flow of purchases under all the APP programmes, in EUR billions. The dotted line shows the notional purchase target set by the Governing Council. March 2015: start of the public sector purchase programme.
Updated on 12/19/2018 17:04.
11/20/2018

Monetary policy and liquidity concentration in the euro area

By Vincent Grossmann-Wirth and Benoît Hallinger

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.

Chart 1: High concentration of excess liquidity among a few countries
Chart 1: High concentration of excess liquidity among a few countries Sources: ECB, Banque de France
Updated on 11/20/2018 14:58.
10/04/2018

Central banking at the top: it’s a man’s world

By Klodiana Istrefi and Giulia Sestieri

Women are underrepresented in central bank governance. In 2018, only 11 out of 173 central banks are headed by a woman. The ethical case for gender rebalancing in central bank governance is a sufficient reason alone, but we could go further and provokingly ask whether women have a different leaning to monetary policy objectives than men? An investigation of former and present US Fed policymakers suggests that this is not necessarily the case.

Women are poorly represented in monetary policy decision committees
Figure 1. Women are poorly represented in monetary policy decision committees Note: GC, the Governing Council of the ECB (1998-2018), FOMC, the Federal Open Market Committee of the Fed (1960-2015), MPC, the Monetary Policy Committee of the BoE (1997-2018).
Updated on 10/05/2018 11:32.
10/02/2018

Price-level targeting: the future conventional policy of the Fed?

By Stéphane Dupraz

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.

Price levels in the United States and the euro area since 1998
Chart 1. Price levels in the United States and the euro area since 1998. The blue and orange lines give the realised evolution of consumer prices in the US and euro area, normalising the 1998 level at 100. The black line gives the counterfactual evolution if inflation had been exactly 2% every year since 1998
Updated on 10/05/2018 09:23.
09/25/2018

International environment and US monetary policy: a textual analysis

By Laurent Ferrara and Charles-Emmanuel Teuf

What role does the international environment play in shaping US monetary policy decisions? To measure its influence, we construct an international indicator extracted from minutes of Fed monetary policy committee meetings. In a Taylor rule model, we show that the indicator has a significant and negative impact on the fed funds rate. Discussions centred more on the international environment may thus be associated with greater monetary policy easing.

Chart: International environment indicator and major events affecting the global economy
Chart: International environment indicator and major events affecting the global economy Note: The grey areas correspond to major international economic events. Indicator constructed from a textual analysis of FOMC minutes (1993-2017), authors’ calculations
Updated on 10/01/2018 17:04.
08/28/2018

QE in practice: what does market neutrality mean?

By Jean Dalbard and Benoit Nguyen

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.

Chart 1: Structure of French sovereign debt and APP purchases by maturity (March 2018)
Chart 1: Structure of French sovereign debt and APP purchases by maturity (March 2018) Sources: Bloomberg, Arrata and Nguyen (2017).
Updated on 08/29/2018 09:09.

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