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Monetary policy

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

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).

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

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

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).

Given their inflation objectives, the ECB and the Federal Reserve System closely monitor measures of inflation expectations. But what are the available sources of inflation expectations and how is their anchoring measured? This post addresses these questions and focuses on a novel approach to gauging the anchoring of inflation expectations, namely by computing the probability of future inflation being in a range that is consistent with inflation targets.

Figure 1 : Euro area and US measures of the anchoring of inflation expectations (1999-2016)
Figure 1: Euro area and US measures of the anchoring of inflation expectations (1999-2016) Source: Grishchenko, Mouabbi and Renne (2017).

By Christoph Grosse Steffen (with Marcel Fratzscher and Malte Rieth)

Countries that adopt a strict inflation target experience stronger growth and lower inflation after large natural disaster shocks. Inflation targeting can hence serve as an important shock absorber thanks mainly to a different policy mix. The results indicate that relaxing the inflation targeting regime might generate potential costs, since the stabilisation of future recessions might become more difficult.

Benefits of inflation targeting (=dark green) in the presence of large disasters
Figure 1. Benefits of inflation targeting (=dark green) in the presence of large disasters Note. Effects of a natural disaster that leads to reported insurance claims of 1% of GDP at quarter t=0. Inflation targeting countries=dark grey, non –inflation targeting countries= light green. Source: Fratzscher, Grosse Steffen and Rieth (2017)

By Klodiana Istrefi

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.

Figure 1. Hawks and Doves at the FOMC (1960-2015) Notes: The Hawk – Dove Balance is the share of Hawks minus the share of Doves in a given meeting of the FOMC (excluding the chair). The shade of the chart indicates the type of the Fed chair, red for Hawk and blue for Dove. Source: Istrefi (2018)

Central banks have adopted new unprecedented strategies to fight recent financial crises. In the euro area in 2012, one such tool allowed banks to use a wider set of corporate loans as guarantees when they borrow from the Eurosystem. Two recent studies show that this policy has been critical in fostering banks’ lending to firms during the crisis.

Chart 1: Comparative trends in credit for newly eligible firms Source: Cahn, Duquerroy and Mullins (2017).

Certain critics feel that the Eurosystem took excessive risks to fight the crisis by accepting poor quality collateral for its refinancing operations. Exhaustive analysis of the collateral pledged with the central bank disproves these claims. Their quality followed that of assets available on the market and improved significantly after Quantitative Easing was announced.

Chart 1. Average quality of assets pledged as collateral with the Eurosystem and assets available on the market (eligible for the central bank). Sources: Eurosystem, authors' calculations. Note: GIIPS refers to Greece, Ireland, Italy, Portugal and Spain. For the purpose of this article, only marketable securities are considered.

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