Monetary policy

Post n°178

Is fiscal policy more effective at the zero lower bound ?

Published on 08/20/2020

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By Giulia Sestieri

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).
Updated on 08/20/2020 16:48
Post n°172

Demand for banknotes : linkages with the crisis

Published on 07/22/2020

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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
Updated on 07/22/2020 14:02
Post n°171

Inflation and households’ inflation expectations during the Covid -19 pandemic

Published on 07/17/2020

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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.
Updated on 07/17/2020 14:11
Post n°170

When the ECB lends in US dollars: Central Bank swaps during COVID 19

Published on 07/07/2020

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By Julia Schmidt

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.
Updated on 07/07/2020 16:49
Post n°168

The liquidity trap, monetary policy and the health crisis

Published on 06/30/2020

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By Stéphane Lhuissier

With nominal interest rates close to zero, the scope for using conventional monetary policy becomes very limited. However, this liquidity trap does not undermine central banks’ capacity for action. A recent study shows that they can stimulate the economy even in periods of low interest rates, and that they are therefore equipped to act effectively in response to the Covid-19 crisis.

Chart 1 – The effect of monetary easing remains positive in the euro area in ELB times
Chart 1 – The effect of monetary easing remains positive in the euro area in ELB times Source: Lhuissier, Mojon and Jubio-Ramirez (2020). NB: The accommodative monetary policy decision (“monetary policy shock”) corresponds to a fall in two-year sovereign interest rates of the order of 10 basis points.
Updated on 06/30/2020 17:11
Post n°166

Monetary policy measures taken by the Eurosystem in response to COVID-19

Published on 06/12/2020

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By Vincent Grossmann-Wirth

The Eurosystem responded quickly to the COVID-19 crisis, deploying significant measures to support the provision of financing to the economy through the bank lending and market financing channels. The measures take three forms: credit operations have been adjusted and extended, collateral easing measures have been introduced, and securities purchase programmes have been strengthened.

Table: main monetary policy decisions taken in March-June 2020
Table: main monetary policy decisions taken in March-June 2020 Source: Banque de France
Updated on 06/17/2020 09:49
Post n°164

Why should central banks react strongly in the event of a crisis?

Published on 06/05/2020

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By Grégory Levieuge and Jean-Guillaume Sahuc

The Covid-19 pandemic has prompted lender-of-last-resort interventions and massive asset purchases by central banks. Such responses are all the more necessary since the transmission of monetary policy to the real economy is asymmetric. Evidence suggests that the effects of an expansionary monetary policy are more limited than those of a contractionary policy. One reason lies in the existence of downward bank lending rate rigidity.

Chart 1 - Year-on-year changes in Eonia and bank lending rates in the euro area (per cent)
Chart 1 - Year-on-year changes in Eonia and bank lending rates in the euro area (per cent) Source: Levieuge and Sahuc (2020)
Updated on 06/05/2020 16:02
Post n°162

There is nothing magic in central bank money

Published on 05/20/2020

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By Jean Barthelemy and Adrian Penalver

Is central bank money “magic money” that could avoid issuing government debt or extinguish existing debt? This blog explains what is central bank money, how it is created, and the relationship between central bank and government finances. There are no easy options to avoid paying for fiscal deficits.

Figure 1: Sovereign debt held by the Eurosystem as % of GDP
Figure 1: Sovereign debt held by the Eurosystem as % of GDP Source : ECB ; Note : last data point 2019 Q4.
Updated on 05/20/2020 17:17
Post n°157

What central banks have done to help the economy survive Covid-19

Published on 04/15/2020

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By Florens Odendahl, Adrian Penalver, Urszula Szczerbowicz

Covid-19 is a public health emergency. Economic activity has been suspended due to the necessary confinement measures taken almost everywhere in the world. The targeted policies of major central banks to address this economic crisis share many common features but differ in details and labels.

Chart 1: Timeline of central banks’ main responses to the Covid-19 crisis.
Chart 1: Timeline of central banks’ main responses to the Covid-19 crisis. Source: Banque de France.
Updated on 04/21/2020 11:16
Post n°151

Monetary policy and inequality: where do we stand?

Published on 02/04/2020

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By Erwan Gautier, Adrian Penalver, Frédérique Savignac

Over the cycle, monetary policy can be redistributional. Lower interest rates boost asset prices and lower borrowing costs but also increase employment and wages. But in the long run, monetary policy does not have systematic distributional effects; intergenerational transfers, globalisation, taxes and technological changes are the key fundamental drivers of inequality.

Chart 1: Wealth and income concentration at the top of the distribution in France and in the United States
Chart 1: Wealth and income concentration at the top of the distribution in France and in the United States Sources: Garbinti, Goupille and Piketty (2016), Piketty, Saez, and Zucman, (2016), wid.word. Note: Pre-tax national income share held by the Top 1%; net personal wealth share held by the Top 1%.
Updated on 02/04/2020 15:08

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