Monetary policy

Billet n°54
Published on 03/21/2018.

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.
Billet n°53
Published on 03/15/2018.

The US term premium (TP) has been very low by historical standards. Would its sudden rise affect the euro area (EA)? Lower US demand and tighter financial conditions would slow down EA activity. A surprise 1pp increase in US TP could reduce US and EA GDP growth by 0.4pp and 0.25pp respectively. Such effects would be smaller if the monetary authorities were to counteract the fall in inflation.

Figure 1: 10-year Term Premia in the United States, Germany and the euro area Note: The term premia of 10-year government bonds are estimated by NIESR. The euro area term premium is here calculated as ECB capital key weighted average of the term premia of the member countries.
Billet n°45
Published on 01/18/2018.

By Christoph Grosse Steffen, Adriana Lojschova and Adrian Penalver

The risk of currency wars is a recurrent theme, given an extra twist with unconventional monetary policy. The US Fed has begun normalising its balance sheet, raising concerns about cross-border spillovers. But the effects of conventional and unconventional policies are too similar for the spillovers to be very different. Greater international coordination is therefore no more or less appropriate with two instruments than one.

Billet n°44
Published on 01/12/2018.

The Eurosystem provided long-term loans to banks to fight financial fragmentation during the sovereign debt crisis (2011/2012). Some critics have argued that such interventions had adverse side effects for fiscal sustainability by removing market discipline. This criticism misses a critical mitigating effect: the associated stabilisation of credit to the economy improves public debt sustainability by cushioning the drop in GDP. We show with a calibrated model that fiscal solvency is fostered through temporary access to non-standard central bank liquidity.

Billet n°42
Published on 12/19/2017.

According to the latest Eurosystem projections, inflation is expected to be substantially below 2 % by 2018. Some commentators contend that the Eurosystem should adjust to the “lowflation” environment and lower its inflation target. In this post, we argue that this would not be a good idea. A lower inflation target would increase the incidence of depressed output in the future, thereby dragging inflation further below this new ‘target’.

Billet n°33
Published on 10/11/2017.

By Sanvi Avouyi-Dovi, Françoise Drumetz and Guillaume Horny

In France, at the beginning of 2015, interest rates on new bank loans to businesses fell sharply; this lasting decline, which was more pronounced for high-rate loans, followed the ECB's announcement of quantitative easing. Without any significant change in the characteristics of borrowing companies, it attests to an improvement in financing conditions.

Billet n°31
Published on 09/27/2017.

Uncertainty about the future path of interest rates is harmful to the economy. A new measure of interest rate uncertainty is constructed for G7 countries, Spain and Sweden, during 1993-2015. Interest rate uncertainty, of the size observed during the recent crisis, decreases industrial production by up to 3.8% and CPI inflation by up to 1 percentage point (pp) while increasing unemployment by up to 1.2 pp.

Billet n°21
Published on 06/13/2017.

The Taylor rules provide guideline recommendations for policy interest rates based on the deviation between macroeconomic variables and their target or potential levels. They can be calculated for each of the euro area countries. Although significantly divergent at the height of the sovereign debt crisis, there has been a clear convergence since 2014, reflecting the resynchronisation of business cycles in the euro area.

Billet n°20
Published on 05/30/2017.

Economic history and wine may contribute to understanding contemporaneous economic issues. The wine crisis caused by phylloxera in the late 19th century helps identify the causal impact of refinancing operations of central banks (CBs) on firms’ defaults. The geographical distribution of the branches of the French CB meant that varying ease of access to discounting bills of exchanges varied when the crisis struck. Regions that benefitted from easier access to central bank refinancing exhibited a lower increase in default rates during the crisis.

Billet n°19
Published on 05/22/2017.

By M. Marx, B. Mojon and F. Velde

Risk-free rates have been falling since the 1980s while the return on capital has not (Figure 1). In the framework of an overlapping-generation model, Marx, Mojon, Velde (2017) show that these contrasted developments can be mainly explained by an increase in the (perceived) risk on productivity growth. This implies that real rates are likely to stay low for several years.

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