Monetary policy

Post 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.

Post 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.

Post 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’.

Post 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.

Post 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.

Post 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.

Post 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.

Post 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.

Post n°11
Published on 03/23/2017

The natural rate of interest is the theoretical real rate at which inflation neither rises nor falls. Determined independently of monetary policy, it is a benchmark to assess whether policy is accommodative or restrictive. It is unobservable but estimated to be negative in the euro area over recent years. With modest inflation expectations and the effective lower bound on nominal interest rates, conventional monetary policy struggled to raise inflation, explaining the ECB’s recourse to non-conventional instruments.

Post n°7
Published on 02/10/2017

Euro area inflation would have been negative in 2015 and 2016 absent the ECB action since 2014. The impact of this action on inflation, measured by the HICP (Harmonized Index of Consumer Prices), is around +0.3 percentage point (pp) as early as 2015 and +0.8 pp in 2016 according to staff’s estimates of the Eurosystem (the ECB and the 19 national central banks). The cumulated effect on 2015-18 of measures taken in 2014-16 reaches almost +1.6 pp.

Figure 1. Euro area inflation and the estimated effect of monetary policy Note: Inflation is year-on-year percentage change in HICP. The green line represents the realized annual average of inflation. The pink area represents the inflation gain brought by monetary policy.