Monetary policy

Post n°86
Published on 09/25/2018

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
Post n°81
Published on 08/28/2018

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).
Post n°80
Published on 08/21/2018

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).
Post n°72
Published on 06/19/2018

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)
Post n°67
Published on 05/16/2018

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)
Post n°66
Published on 05/14/2018

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).
Post 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.
Post 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.
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.