Monetary policy

Post n°150
Published on 01/28/2020

The Taylor rule provides a natural paragon of short-term nominal interest rates, albeit one that is subject to considerable uncertainty. This post quantifies this uncertainty and shows how this quantification contributes to monetary policy assessment. It shows that, in 2019, short-term interest rates in the euro area were close to the middle of the benchmark interval thus obtained.

Chart 1: Distribution of Taylor rates, 2015-2019 Sources: Eurostat and author’s calculations. Note: The pink areas, from the darkest to the lightest, indicate the 50%, 70%, 80%, 90% and 95% confidence intervals of Taylor rates.
Post n°144
Published on 12/13/2019

By Jean Barthélemy and Eric Mengus

The anchoring of inflation expectations results from an equilibrium between the private sector’s expectations of future central bank actions and the latter's actual actions. This equilibrium is often reduced to the question of a monetary policy rule. While the adoption of a rule helps in the formation of inflation expectations, it is not sufficient to anchor them permanently.

Post n°128
Published on 08/20/2019

The recent inflation dynamics in advanced countries are difficult to understand and forecast. This post looks at the contribution of Consensus Economics Inc. projections in forecasting total one-year inflation in France over the period 2009-2019.

Chart 1: Capturing the inflation trend using Consensus Economics Inc. projections
Chart 1: Capturing the inflation trend using Consensus Economics Inc. projections Sources: INSEE, Consensus Economics Inc., author’s calculations. Chart 1: Total inflation (year-on-year HICP), average of one-year inflation projections for year (N+1) of Consensus Economics Inc., and inflation trend for France
Post n°127
Published on 08/02/2019

The ECB balance of risks for price stability and growth provides useful information on the Governing Council’s assessment of risks to the euro area outlook. Abstracting from unconventional monetary policy measures, an analysis since mid-2003 shows that: i) upside risks to inflation are associated with rate hikes, ii) downward risks to growth with rate cuts, and iii) in the case of conflicting signals, inflation takes priority.

Figure 1. ECB balance of risks and key ECB policy rates
Figure 1. ECB balance of risks and key ECB policy rates Sources: ECB and authors’ calculations. Since Sept. 2014 (vertical dashed line), no comment on inflation risks, except for downside risks from Sept. 2015 to March 2016. The DFR cut of 8 Oct. 2008, reversed the day after, is not shown.
Post n°122
Published on 07/15/2019

By Eric Monnet and Marie-Hélène Ferrer

On the occasion of the celebration of the 75th anniversary of the Bretton Woods Conference, this post reflects on the history of the international monetary system of the same name (1944 - 1971). The Bretton Woods system did not work as expected. Rather than cultivating the myth of a golden age, it is preferable to recognise the adaptability of monetary and financial multilateralism over time.

Figure 1: The hotel where the Bretton Woods Conference was held (New Hampshire, USA)
Figure 1: The hotel where the Bretton Woods Conference was held (New Hampshire, USA) Source : https://commons.wikimedia.org/wiki/File:The_Mount_Washington_Hotel,_Bretton_Woods,_NH.jpg
Post n°113
Published on 04/26/2019

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.
Post n°100
Published on 01/16/2019

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
Post n°99
Published on 01/15/2019

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
Post n°98
Published on 01/11/2019

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
Post n°95
Published on 12/19/2018

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.

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