Post n°104

The wedge between the return on capital and risk-free rates

Published on 02/21/2019

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By John Hutchinson and Arthur Saint-Guilhem

For several decades, the wedge between the return on capital and risk-free rates has been growing in the euro area and the United States. We examine the drivers of this wedge and find that while the risk premium is the main driver, mark-ups also play a role. More recently, the contribution from mark-ups has decreased in the euro area and increased in the United States.

Chart 1: Growing wedge between the return on capital and risk-free rates in the euro area and the United States
Chart 1: Growing wedge between the return on capital and risk-free rates in the euro area and the United States Source: AMECO, FRED, AWM, and authors’ calculations.
Updated on 02/13/2020 16:04
Post n°103

Is the European Union really in surplus vis-à-vis the United States?

Published on 02/14/2019

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By Rafael Cezar and Florian Le Gallo

The European Union’s exchanges with the United States generate a significant trade surplus but are also characterised by a substantial foreign direct investment deficit. This deficit reflects certain choices made by multinational firms with regard to their activities’ locations, particularly the placing of US subsidiaries in Europe. We propose an interpretation of these transatlantic exchanges using an aggregate that is broader than the balance of goods and services alone.

An expanded EU-US balance almost in equilibrium (2012 to 2017)
Chart 1: An expanded EU-US balance almost in equilibrium (2012 to 2017) Sources: Eurostat (customs data on exports of goods, non-financial services) and BEA (customs data on imports of goods, financial services, foreign direct investment flows). Authors' calculations.
Updated on 02/13/2020 11:28
Post n°102

Real estate: are high loan-to-value ratios the most risky?

Published on 02/07/2019

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By Thomas Ferrière and Laure Frey

Household mortgage debt can jeopardise financial stability, as the 2008 crisis showed. This risk is often assessed using the ratio of the loan amount to the value of the financed property, or loan-to-value ratio (LTV). Yet, very high LTVs cover in large part the property purchases, excluding primary residences, of households with the highest incomes, which are not necessarily the most risky. Therefore, this ratio by itself is insufficient to provide the full picture.

Chart 1: Lower LTVs for primary residences
Chart 1: Lower LTVs for primary residences (% of the 2014 value of the property) Sources: INSEE Household Wealth Survey 2014-2015 and authors’ calculations.
Updated on 02/13/2020 11:21
Post n°101

The G7, an engine for multilateralism

Published on 01/30/2019

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By Ludivine Berret, Bruno Cabrillac and Céline Rochon

G7 countries activated several economic policy levers to respond to the 2008 crisis, in particular monetary and fiscal policy. As a result, their ability to stimulate the economy or deal with future crises has been reduced. Consequently, the temptation to conduct beggar-thy-neighbour policies, despite their harmful effects, could be exacerbated. Even though its weight in global GDP has declined significantly since the late 1980s, the G7—whose presidency is held by France in 2019—remains the appropriate forum for curbing this temptation.

Chart 1: Reduction of the weight of the G20 and the G7 in global GDP
Chart 1: Reduction of the weight of the G7 in global nominal GDP Source: Datastream and IMF-World Economic Outlook (WEO).
Updated on 02/13/2020 11:02
Post n°100

An Alternative Financial Conditions Index for the Euro Area

Published on 01/16/2019

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By Anna Petronevich and Jean-Guillaume Sahuc

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
Updated on 02/13/2020 10:49
Post n°99

Will “autonomous” money demand affect monetary policy normalisation?

Published on 01/15/2019

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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
Updated on 02/13/2020 10:39
Post n°98

Making complexity easy: The ECB’s art of communication

Published on 01/11/2019

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By Gaetano Gaballo

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
Updated on 02/13/2020 10:04
Post n°97

Eco Notepad celebrates its second anniversary

Published on 01/09/2019

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By the Eco Notepad editorial team

Eco Notepad celebrated its second anniversary in December 2018. This is an opportunity to look back on this rich period in which we published almost 100 blog posts analysing economic and monetary developments. The posts on inflation, monetary policy and financial stability attracted a great deal of interest from our readers, as did those on growth and global trade, the deindustrialisation of the French economy and the increase in the number of monopolies in the United States. Let’s take a closer look.

Updated on 02/12/2020 12:45
Post n°96

The share of inheritance in aggregate wealth

Published on 12/21/2018

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By Bertrand Garbinti

The share of inheritance in aggregate wealth has varied significantly over time. Indeed, it depends on economic and demographic conditions that are not constant. The share was very high during the 19th century and until the First World War. After an abrupt decline, it is now rising in several countries.

Chart 1. Share of inherited wealth in Europe and the USA, 1900-2010
Chart 1. Share of inherited wealth in Europe and the USA, 1900-2010
Updated on 02/12/2020 12:24
Post n°95

The end of net asset purchases does not put a stop to quantitative easing

Published on 12/19/2018

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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.
Updated on 02/12/2020 12:17
Post n°94

Broadband internet changes the geography of international trade

Published on 12/12/2018

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By Clément Mazet-Sonilhac and Clément Malgouyres (with Juan Carluccio and Thierry Mayer)

The diffusion of information and communication technology (ICT) is considered to be a factor for economic growth, notably in developed countries. In particular, the diffusion of broadband internet could improve firms’ ability to find trading partners abroad as well as products suited to their needs. In France, the roll-out of broadband between 1998 and 2008 corresponds to a substantial improvement in firms’ imports.

Chart 1: A decade of gradual broadband roll-out
Chart 1: A decade of gradual broadband roll-out Source: Banque de France and authors’ calculations
Updated on 02/11/2020 16:55
Post n°93

Monetary policy and liquidity concentration in the euro area

Published on 11/20/2018

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By Vincent Grossmann-Wirth and Benoît Hallinger

The Eurosystem’s non-standard monetary policy has led to a significant build-up of excess liquidity in the euro area banking system, concentrated among a few countries. Since 2015, this concentration can mainly be explained by the Eurosystem’s asset purchase programme (APP) and the geographical location of the accounts and settlement circuits used in its implementation.

Chart 1: High concentration of excess liquidity among a few countries
Chart 1: High concentration of excess liquidity among a few countries Sources: ECB, Banque de France
Updated on 02/11/2020 16:41

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