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on Central Banking |
| By: | Julien Pinter (University of Minho, NIPE, Braga); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & Institute of Information Theory and Automation, Prague & CESifo, Munich & IOS, Regensburg) |
| Abstract: | We empirically investigate whether monetary policy announcements affect firms' and consumers' expectations by taking into account media treatments of monetary policy announcements. To identify exogenous changes in monetary policy stances, we use the standard financial monetary policy surprise measures in the euro area. We then analyze how a general newspaper and a financial newspaper (Le Monde and The Financial Times) report on announcements. We find that 87 % of monetary policy surprises are either not associated with the general newspaper reporting a change in the monetary policy stance to their readers or have a sign that is inconsistent with the media report of the announcement. When we use the raw monetary policy surprises variable as an independent variable in the link between monetary policy announcements and firms'/consumers' expectations, we mostly do not find, in line with several previous studies, any statistically significant association. When we take only monetary policy surprises that are consistent with the general newspaper report, in almost all cases we find that monetary policy surprises on the immediate monetary policy stance do affect expectations. Surprises related to future policy inclination and information shocks usually do not appear to matter. The results appear to be in line with rational inattention theories and highlight the need for caution in the use of monetary policy surprise measures for macroeconomic investigations. |
| Keywords: | firm expectations; consumer expectations; monetary policy surprises; European Central Bank; information effect |
| JEL: | D84 E02 E52 E31 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2021_30&r= |
| By: | Luca Fanelli; Antonio Marsi |
| Abstract: | High-frequency (HF) surprises of relevant asset prices around central bank meetings are extensively employed in the literature to identify the effects of conventional/unconventional monetary policy. This identification strategy assumes that these surprises reflect either a single unconventional ‘monetary shock’ or, as recently suggested, jointly an unconventional monetary shock and a central bank ‘information shock’. In this paper we show that monetary policy in the euro area after 2008 is best characterized by three shocks, not two. Besides the unconventional monetary shock and the information shock, we consider a third shock resulting from the ECB directly managing fragmentation risk in the sovereign bond market. We call this additional shock ‘spread shock’, and show that it permits to solve a puzzle we observe in HF comovement of long term risk free rates and sovereign spreads around press conferences. We identify the dynamic causal effects produced by the three shocks through a proxy-SVAR methodology which, using HF surprises of the euro area risk-free yield curve, stock prices and sovereign spreads, combines sign-restrictions with narrative restrictions and then extracts external variables (instruments) from an admissible identification set. Empirical results, obtained through a daily proxy-SVAR and Local Projections based on monthly data, reveal that the spread shock represents an important ingredient of the transmission mechanism of the monetary policy after the Global Financial Crisis. It reflects ECB’s attempt to offset self-fulling expectations of default in the euro area sovereign debt markets and behaves as a complement, not a substitute of the information shock. |
| JEL: | E43 E44 E52 E58 G10 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp1164&r= |
| By: | Aeimit Lakdawala (Wake Forest University); Rajeswari Sengupta (Indira Gandhi Institute of Development Research) |
| Abstract: | We create new measures of monetary policy shocks for India using high-frequency derivatives data and study their transmission. These shocks capture two distinct dimensions of the Reserve Bank of India's (RBI) monetary policy announcements. In addition to reacting to surprise changes (or non-changes) in the RBI's policy rate, financial markets also infer substantial information about the future path of the policy rate from RBI's communication. We analyze official statements and the corresponding media narrative on prominent RBI announcement dates to help understand how markets use RBI communication to update their expectations. Overall, bond and stock markets react strongly to these monetary shocks, but exhibit notable heterogeneity across governor regimes. Finally, we use the monetary shocks as external instruments to identify the impact on macroeconomic variables in a structural vector autoregression. We find some evidence of the conventional transmission of monetary policy to prices but not to output. |
| Keywords: | monetary policy, Reserve Bank of India, event study, monetary transmission |
| JEL: | E44 E52 E58 G10 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2021-021&r= |
| By: | Aberg, Pontus; Corsi, Marco; Grossmann-Wirth, Vincent; Hudepohl, Tom; Mudde, Yvo; Rosolin, Tiziana; Schobert, Franziska |
| Abstract: | This paper discusses commercial banks’ demand for central bank reserves under two alternative monetary policy framework configurations, namely: (i) an interest rate corridor system with scarce liquidity, and (ii) a floor system with ample liquidity. It outlines the interaction between the monetary implementation framework used to steer short-term market interest rates and banks’ demand for reserves. We find that by implementing a floor system, the Eurosystem has eliminated the opportunity costs of holding reserves and enabled banks to hold relatively large buffers of reserves compared with the corridor system. Additionally, the demand for reserves may have increased endogenously, as the environment of ample liquidity conditions has incentivised many banks to adapt their business models. In parallel, the demand for reserves has also increased for more exogenous reasons such as post-global financial crisis liquidity regulation and increased liquidity concentration. Our estimates indicate an increase, over recent years, in the level of excess liquidity required in the euro area to avoid a rise in short-term market rates. Moreover, the dependency on the adopted monetary policy instruments and the external environment highlights the increased uncertainty in estimating future levels of required reserves JEL Classification: E41, E44, E50, E51, E58 |
| Keywords: | central bank reserves, ECB, Eurosystem, liquidity management, monetary policy implementation |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021282&r= |
| By: | Narayana R. Kocherlakota |
| Abstract: | I reconsider the long-standing consensus view that macroeconomic stabilization should rely on monetary policy, not fiscal policy. I use an analytically tractable heterogeneous agent New Keynesian (HANK) model that is parameterized so as to admit a bubble in public debt. In this context, I show that it is possible to stabilize either inflation or output in response to aggregate shocks by varying only fiscal policy (that is, lump-sum uniform transfers). In contrast, when the public debt bubble is large, it is impossible to stabilize either inflation or output by varying only interest rates (monetary policy). The theoretical analysis implies that, in the presence of a large public debt bubble, fiscal policy is a more reliable stabilization tool than monetary policy. |
| JEL: | E58 E62 E63 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29226&r= |
| By: | Stijn Claessens; Ricardo Correa; Juan M. Londono |
| Abstract: | We investigate how central banks' governance frameworks influence their financial stability communication strategies and assess the effectiveness of these strategies in preventing a worsening of financial cycle conditions. We develop a simple conceptual framework of how central banks communicate about financial stability and how communication shapes the evolution of the financial cycle. We apply our framework using data on the governance characteristics of 24 central banks and the sentiment conveyed in their financial stability reports. We find robust evidence that communications by central banks participating in interagency financial stability committees more effectively mitigate a deterioration in financial conditions and advert a potential financial crisis. After observing a deterioration in conditions, such central banks also transmit a calmer message, suggesting that the ability to use policy tools other than communications strengthens incentives not to just "cry wolf". |
| Keywords: | Financial Stability Governance; Natural Language Processing; Central Bank Communications; Financial Cycle |
| JEL: | G15 G28 |
| Date: | 2021–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1328&r= |
| By: | Eskelinen, Maria |
| Abstract: | In this paper I develop a New Keynesian dynamic stochastic general equilibrium model which features three different types of representative agents (THRANK): the poor hand-to-mouth, the wealthy hand-to-mouth and the non-hand-to mouth households. Compared to a full-scale HANK model, this model is easier to compute while reproducing many of the same monetary policy shock transmission channels. I show that monetary policy transmission takes place through a redistribution channel, as emphasised by Auclert (2019). In particular, the effects of a monetary policy shock are amplified as resources are redistributed from high-MPC households to low-MPC households. Monetary policy therefore becomes more effective compared to models with homogeneous MPC rates. Consumption inequality is countercyclical in this setting and a high degree of leverage amplifies the redistribution channel. These findings have important implications for understanding the effects of both monetary and macroprudential policy. JEL Classification: D31, E12, E21, E43, E52 |
| Keywords: | household heterogeneity, housing market, inequality, monetary policy |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212590&r= |
| By: | Ioannidis, Michael; Murphy, Sarah Jane Hlásková; Zilioli, Chiara |
| Abstract: | This paper offers an overview of the mandate of the European Central Bank (ECB), as defined by its objectives, the instruments available to achieve them and the constitutional framework that the ECB shall observe in pursuing them. The objectives include the primary objective of maintaining price stability and the secondary objective of supporting the general economic policies in the Union. The price stability objective enjoys primacy amongst the ECB objectives. The Treaties do not provide for a hierarchy of the “general economic policies” that the ECB shall support, although a number of criteria derived from primary law can help in guiding the ECB’s priorities in this respect. The ECB is also tasked with contributing to the “smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system”. As for the instruments available, these include both measures that directly pursue the objectives and measures that are instrumental in achieving them. Finally, the other constitutional rules that set out the framework within which the ECB pursues its objectives include the principles of conferral, institutional balance, proportionality, equal treatment and non-discrimination, as well as the principle of an open market economy and the prohibition of monetary financing. JEL Classification: K23, G21, G28 |
| Keywords: | ECB mandate, ESCB objectives, price stability, principle of conferral, principle of proportionality |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021276&r= |
| By: | Koester, Gerrit; Lis, Eliza; Nickel, Christiane; Osbat, Chiara; Smets, Frank |
| Abstract: | From 2013 up to the launch of the ECB’s strategy review in January 2020, inflation in the euro area was low and over-predicted. This low inflation during the years 2013-19 can be attributed to a combination of interconnected factors. Cyclical developments account for a substantial share of the fall in underlying inflation, mainly in the first part of the low inflation period. Additionally, there is evidence that an underestimation of the amount of economic slack and less well-anchored longer-term inflation expectations, in combination with monetary policy in the euro area being constrained by the effective lower bound, have played an important role in the long period of subdued inflation. Ongoing disinflationary structural trends (such as globalisation, digitalisation and demographic factors) are likely to have had a dampening effect on inflation over the last few decades, but were in themselves not the main drivers of low inflation in the euro area from 2013 to 2019. However, as they could not have been easily offset by interest rate policy in an effective lower bound environment, they might also have contributed to the more subdued inflation dynamics in the euro area from 2013 to 2019. JEL Classification: C51, E31, E32, E37, E52, F62, J11, J30 |
| Keywords: | effective lower bound, HICP inflation, low inflation, Monetary policy review, underlying inflation |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021280&r= |
| By: | Barnett, William; Bella, Giovanni; Ghosh, Taniya; Mattana, Paolo; Venturi, Beatrice |
| Abstract: | We study the stability properties and conditions for the onset of Shilnikov chaos in the UK New Keynesian macroeconomy, as well as the shifts in the equilibrium dynamics under various policy regimes. We find that Shilnikov chaos emerges for a restricted part of the free parameters space in the baseline rational expectations UK model with no regime switching. When the UK's central bank showed a weak response to inflation in the high inflation regime, the chaos did not occur at all. But Shilnikov chaos appears easily in the case of the low-inflation regime, which is associated with the Bank of England's use of aggressive monetary policy in recent years. Tightening the monetary policy interest-rate-feedback rule via the Taylor coefficient is one of the policy alternatives proposed by the local analysis for restoring uniqueness. We find that doing so accelerates the emergence of unanticipated phenomena such as Shilnikov's chaotic dynamics. Our results with UK data are thereby consistent with the results with US data by Barnett et al. (2021), who found that the adoption of an active interest rate feedback rule in recent years by the Federal Reserve produces Shilnikov chaos and unintentional downward drift in interest rates towards the lower bound. The source of the chaos and downward drift in interest rates is adoption of a myopic short-run interest-rate feedback rule without a terminal condition as long run anchor. A critical assumption of the results with US and UK data are existence of new Keynesian sticky prices. While the model’s parameters were calibrated with pre-Brexit data, we expect that our results will be highly relevant post-Brexit, as the needed data become available. Changes in the geometry of the Shilnikov fractal attractor set can be expected to be revealing about changes in the level and nature of UK economic risk following Brexit. |
| Keywords: | Shilnikov chaos criterion, long-term un-predictability, liquidity trap |
| JEL: | C61 C62 E12 E52 E63 |
| Date: | 2021–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109820&r= |
| By: | Grégory Levieuge; Jean-Guillaume Sahuc |
| Abstract: | Empirical evidence suggests that bank lending rates are downward rigid: banks tend to adjust their rates more slowly and less completely to short-term market rates decreases than to increases. We investigate the macroeconomic consequences of this downward interest rate rigidity by introducing asymmetric bank lending rate adjustment costs in a macrofinance dynamic stochastic general equilibrium model. Calibrating the model to the euro area economy, we find that the difference in the initial response of GDP to positive and negative economic shocks of similar amplitude can reach up to 25%. This means that a central bank would have to cut its policy rate much more to obtain a symmetric medium-run impact on GDP. We also show that downward interest rate rigidity is stronger when policy rates are stuck at their effective lower bound, further disrupting monetary policy transmission. These findings imply that neglecting asymmetry in retail interest rate adjustments may yield misguided monetary policy decisions. |
| Keywords: | Downward Interest Rate Rigidity, Asymmetric Adjustment Costs, Banking Sector, DSGE Model, Euro Area |
| JEL: | E32 E44 E5 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:828&r= |
| By: | Raphael Auer (Swiss National Bank; Bank for International Settlements (BIS)); Alexandra Matyunina (University of Zurich; Swiss Finance Institute); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)) |
| Abstract: | Do targeted macroprudential measures impact non-targeted sectors too? We answer this question by investigating the compositional changes in the supply of credit by Swiss banks, exploiting their differential exposure to the activation in 2013 of the countercyclical capital buffer (CCyB) which targeted banks’ exposure to residential mortgages. We find that the additional capital requirements stemming from the activation of the CCyB causes higher growth in banks’ commercial lending. While banks lend more to all categories of firms, including larger corporate borrowers in the syndicated loan market, smaller and riskier firms are the primary beneficiaries of the new macroprudential measure. However, the interest rates and other costs of obtaining credit for these firms increase as well. |
| Keywords: | macroprudential policy, spillovers, credit, bank capital, systemic risk, syndicated loan market |
| JEL: | E51 E58 E60 G01 G21 G28 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2166&r= |
| By: | Francesco D’Acunto; Andreas Fuster; Michael Weber |
| Abstract: | Increasing the diversity of policy committees has taken center stage worldwide, but whether and why diverse committees are more effective is still unclear. In a randomized control trial that varies the salience of female and minority representation on the Federal Reserve’s monetary policy committee, the FOMC, we test whether diversity affects how Fed information influences consumers’ subjective beliefs. Women and Black respondents form unemployment expectations more in line with FOMC forecasts and trust the Fed more after this intervention. Women are also more likely to acquire Fed-related information when associated with a female official. White men, who are overrepresented on the FOMC, do not react negatively. Heterogeneous taste for diversity can explain these patterns better than homophily. Our results suggest more diverse policy committees are better able to reach underrepresented groups without inducing negative reactions by others, thereby enhancing the effectiveness of policy communication and public trust in the institution. |
| JEL: | D84 E52 E58 E70 G53 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29275&r= |
| By: | Joshua Bernstein (Indiana University); Rupal Kamdar (Indiana University) |
| Abstract: | This paper studies optimal monetary policy under rational inattention: the policy maker optimally chooses her information subject to a processing constraint. Our analytical results emphasize how the policy maker’s information choices shape her expectations and the dynamics of the macroeconomy. Paying attention to demand shocks lowers output volatility and causes untracked supply shocks to drive inflation. Because persistent supply shocks have a minor impact on interest rates under full information in the New Keynesian model, the policy maker should focus her limited attention on demand shocks. Improvements in information can explain a declining slope of the empirical Phillips curve. |
| Keywords: | optimal monetary policy, rational inattention, expectations |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2021003&r= |
| By: | Maria Sole Pagliari |
| Abstract: | This paper aims at assessing the macroeconomic impact of unconventional monetary policies (UMPs) that the ECB has put in place in the euro area after the 2007 financial crisis. With this purpose, we first document how the relative importance of the main transmission channels of such measures has changed over time, with the portfolio rebalancing being generally more impactful than the signaling channel after the “Whatever it takes” speech in July 2012. However, we also provide evidence of a great degree of heterogeneity across core and peripheral economies, as well as over time. We then adopt a time-varying SVAR with stochastic volatility to account for such heterogeneity, by identifying UMP shocks via “dynamic” sign restrictions. By means of counterfactual experiments, we provide evidence of how a different stance on the part of the ECB would have led to a significantly different economic performance of euro area economies. For instance, if the ECB had not put in place the measures adopted between 2014 and 2017, annual output growth would have been, on average, 0.67 percentage points lower in peripheral countries. |
| Keywords: | : Time-varying Bayesian SVAR, Dynamic Restrictions, Unconventional Monetary policy, Eurozone |
| JEL: | C11 C32 E43 E52 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:829&r= |
| By: | Cyril Couaillier; Valerio Scalone |
| Abstract: | In this work we present the Risk-to-Buffer: a new framework to jointly calibrate cyclical and structural capital buffers, based on the integration of a non-linear macroeconomic model with a Stress test model. The macroeconomic model generates scenarios whose severity depends on the level of cyclical risk. Risk-related scenarios feed into a banks' Stress test model. Banks' capital losses deriving from the reference-risk scenario are used to calibrate the structural buffer. Additional losses associated to the current-risk scenario are used to calibrate the cyclical buffer. |
| Keywords: | Financial Vulnerability, Macroprudential Policy, Non-linear Models, Macroprudential Space, Deb |
| JEL: | C32 E51 E58 G51 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:830&r= |
| By: | Magnus Hansson |
| Abstract: | This paper studies the content of central bank speech communication from 1997 through 2020 and asks the following questions: (i) What global topics do central banks talk about? (ii) How do these topics evolve over time? I turn to natural language processing, and more specifically Dynamic Topic Models, to answer these questions. The analysis consists of an aggregate study of nine major central banks and a case study of the Federal Reserve, which allows for region specific control variables. I show that: (i) Central banks address a broad range of topics. (ii) The topics are well captured by Dynamic Topic Models. (iii) The global topics exhibit strong and significant autoregressive properties not easily explained by financial control variables. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2109.10058&r= |
| By: | Altavilla, Carlo; Lemke, Wolfgang; Linzert, Tobias; Tapking, Jens; von Landesberger, Julian |
| Abstract: | This paper summarises the work done by Eurosystem staff in the context of the Strategy Review Seminar on Monetary Policy Instruments. More specifically, it focuses on the efficacy, efficiency and potential side effects of the key monetary policy instruments employed by the European Central Bank since 2014. The following main findings emerge from the analysis. First, instruments have been effective in easing financing conditions and supporting economic growth, employment and inflation. Second, considering the effective lower bound on policy rates, a combination of instruments is generally more efficient than relying on a single tool. Third, side effects have been generally contained so far, but they are found to vary over time and need to be closely monitored on an ongoing basis. Fourth, the monetary policy toolkit needs to remain innovative, diversified, and flexible, i.e. reviewed regularly to ensure that it remains fit for purpose against the backdrop of evolving financial and macroeconomic conditions. JEL Classification: E52, E58, E43, E44, E47 |
| Keywords: | monetary policy instruments, standard and non-standard measures |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021278&r= |
| By: | Huang, Chien-Yu; Wu, Youchang; Yang, Yibai; Zheng, Zhijie |
| Abstract: | We explore the growth and welfare effects of monetary policy in a two-sector Schumpeterian economy with cash-in-advance (CIA) constrained R&D investment in both sectors. We show that a nominal interest rate increase generates two effects on equilibrium labor allocation: a manufacturing-R&D-reallocation effect and a cross-R&D-sector effect. The former reduces economic growth by shifting labor from R&D to production, whereas the latter can enhance it by shifting labor from the less productive R&D sector to the more productive one. Unless the high productivity R&D sector is severely more CIA-constrained than the low productivity one, aggregate R&D overinvestment is sufficient but not necessary for the Friedman rule of monetary policy to be suboptimal. Our benchmark parameterization suggests that a positive nominal interest rate is optimal despite that it exacerbates the aggregate R&D underinvestment problem. |
| Keywords: | CIA constraint, Endogenous growth; Monetary policy; R&D; Creative destruction. |
| JEL: | E41 O30 O40 |
| Date: | 2021–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109780&r= |
| By: | Marcus Hagedorn |
| Abstract: | This paper proposes an equilibrium theory of nominal exchange rates, which offers a new perspective on various issues in open economy macroeconomics. The nominal exchange rate and portfolio choices are jointly determined in equilibrium, thus providing a new approach to overcoming the indeterminacy results in Kareken and Wallace (1981). The distinctive features of this theory are that the nominal exchange rate is determined in international financial markets, that the risk premium and UIP deviations are fully endogenous equilibrium objects and that the real exchange rate inherits its properties from the nominal exchange rate. In terms of policy, this novel theory implies that a country with an exchange rate peg and free asset mobility faces a tetralemma and not a trilemma, because it loses not only monetary policy independence but also fiscal policy independence. |
| Keywords: | exchange rate, determinacy, incomplete markets, monetary and fiscal policy, international asset flows |
| JEL: | D52 E31 E43 E52 E62 E63 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9290&r= |
| By: | Simon Mongey |
| Abstract: | I study a general equilibrium menu cost model with a continuum of sectors, idiosyncratic and aggregate shocks, and the novel feature that each sector consists of strategically engaged firms. Compared to an economy with monopolistically competitive sectors—separately parameterized to match the same microdata on price flexibility—the oligopoly economy features a smaller response of inflation to monetary shocks and output responses that are more than twice as large. Under the same parameters, output responses are five times larger. An oligopoly economy also (i) requires smaller menu costs and idiosyncratic shocks to match the microdata, addressing a significant challenge for mechanisms that generate non-neutrality via strategic complementarities, (ii) implies four times larger welfare losses from same sized nominal rigidities, and (iii) provides a novel rationale for positive menu costs: in an oligopoly firms prefer a degree of rigidity to complete flexibility. Quantitatively, the estimated degree of nominal rigidity is found to be close to optimal, from firms’ perspective. |
| JEL: | E0 E31 E32 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29233&r= |
| By: | Holm-Hadulla, Fédéric; Musso, Alberto; Rodriguez, Diego; Vlassopoulos, Thomas |
| Abstract: | This paper discusses the role of economic and monetary analysis in the monetary policy strategy of the European Central Bank (ECB). Both areas of analysis have evolved since the 2003 strategy review. Economic analysis has assigned an increasingly relevant role to the Eurosystem and ECB staff macroeconomic projections in forming a view on the medium-term outlook for economic activity and inflation. Furthermore, its focus has strengthened with regard to structural trends in shaping key economic relationships. Similarly, monetary analysis has shifted in focus: while the 2003 review emphasised the information value of monetary dynamics for detecting risks to price stability over medium-term to longer-term horizons, the focus of monetary analysis has increasingly been redirected to the assessment of monetary policy transmission. This evolution has opened a gap between the formal description of the strategy following the 2003 review and the practice of economic and monetary analysis in informing the ECB’s policy deliberations. This paper concludes by presenting options for closing this gap and aligning the strategy formulation with the evolved role of economic and monetary analysis. JEL Classification: E32, E37, E44, E47, E51, E52, E58 |
| Keywords: | ECB two-pillar framework, Economic analysis, monetary analysis |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021277&r= |
| By: | Robert Calvert Jump (University of Greenwich); Paul Levine (University of Surrey) |
| Abstract: | This paper introduces unemployment hysteresis into a tractable New Keynesian three equation model using an insider-outsider labour market. We demonstrate that strict inflation targeting can lead to a unit root in the unemployment rate, but dual mandate monetary policy can stabilise the economy around its efficient employment rate. |
| JEL: | E24 E31 E32 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0821&r= |
| By: | Consolo, Agostino; Koester, Gerrit; Nickel, Christiane; Porqueddu, Mario; Smets, Frank |
| Abstract: | The existence of nominal rigidities and inflation differentials between countries offers two of the main rationales for an inflation buffer in a monetary union where monetary policy is oriented towards an area-wide inflation objective. Evidence accumulated since 2003 suggests that nominal rigidities remain a prevalent feature of the euro area, with some differences as regards prices and wages. Price setting may have become more flexible and there is no evidence for any especially strong downward rigidities in price setting. At the same time, persistent downward nominal wage rigidity (DWR) provides a strong argument for a positive inflation buffer to “grease the wheels” of the euro area economy – also in order to avoid the risk of macroeconomic adjustments being managed in terms of quantities (unemployment) rather than prices when DWR is binding and particularly when productivity growth is low. Inflation differentials across euro area countries have tended to be small but persistent. For inflation dispersion in the euro area, the across countries has been more important than across regions, confirming that an inflation buffer might be especially important in a monetary union of different countries. Overall, inflation differentials were due to the rise of economic and financial imbalances in the first decade of the euro and the subsequent need for adjustment. Balassa-Samuelson effects which were highlighted in the 2003 strategy review were only a minor factor. By and large, the ECB’s inflation objective seems to have provided a sufficient margin to prevent countries from having to live with prolonged periods of excessively low inflation rates in the period 1999-2019. There were some exceptions in the second decade of the euro (from 2009-2019), when inflation in the euro area was, overall, substantially lower than during the first decade. JEL Classification: E31, E52, E24 |
| Keywords: | HICP inflation, inflation differentials, Monetary policy strategy review, nominal rigidities |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021279&r= |
| By: | Jeremy I. Bulow; Paul D. Klemperer |
| Abstract: | Banks’ reluctance to repair their balance sheets, combined with deposit insurance and regulatory forbearance in recognizing greater risks and losses, can lead to solvency problems that look like liquidity (bank-run) crises. Regulatory forbearance incentivizes banks to both retain risky loans and reject new good opportunities. With sufficient regulatory forbearance, partially-insured banks act exactly as if they are fully insured. Stress tests certify that uninsured creditors will be paid, not that banks are solvent, and have ambiguous effects on the efficiency of investment. |
| JEL: | G10 G21 G28 G32 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29223&r= |
| By: | Patnaik, Ila (National Institute of Public Finance and Policy); Sengupta, Rajeswari (Indira Gandhi Institute of Development and Research (IGIDR) Mumbai) |
| Abstract: | We analyse India's exchange rate regime through the prism of exchange market pressure. We estimate the various regimes that India's de-facto exchange rate has been through during the period from 2000 to 2020. We find four specific regimes of the Indian rupee differentiated by the degree of flexibility of the exchange rate. We document the manner in which EMP in India has either been resisted through foreign exchange market intervention, or relieved through exchange rate change, across these four de-facto exchange rate regimes. In particular, we find that after the 2008 global financial crisis the rupee-dollar exchange rate was relatively more flexible and the share of exchange rate in EMP absorption was the highest. After 2013 there was a change in the way the EMP was absorbed. The exchange rate was actively managed using spot as well as forward market intervention. We also find that the response of the RBI to EMP has been asymmetric. When there is pressure to appreciate, the RBI has typically responded by purchasing reserves. On the other hand, in the periods in which there has been pressure to depreciate, only a tiny fraction of reserves are used for resisting the pressure. Such pressure is absorbed by rupee depreciation. |
| Keywords: | Exchange rate regime ; Forex intervention ; Reserves ; Exchangen market pressure ; Structural change |
| JEL: | E58 F31 F41 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:21/353&r= |
| By: | George Hondroyiannis (Bank of Greece and Harokopio University); Dimitrios Papaoikonomou (Bank of Greece) |
| Abstract: | We investigate the effect of Eurosystem Asset Purchase Programmes (APP) on the monthly yields of 10-year sovereign bonds for 11 euro area sovereigns during January-December 2020. The analysis is based on time-varying coefficient methods applied to monthly panel data covering the period 2004m09 to 2020m12. During 2020 APP contributed to an average decline in yields estimated in the range of 58-76 bps. In December 2020 the effect per EUR trillion ranged between 34 bps in Germany and 159 bps in Greece. Stronger effects generally display diminishing returns. Our findings suggest that a sharp decline in the size of the APP in the aftermath of the COVID-19 crisis could lead to very sharp increases in bond yields, particularly in peripheral countries. The analysis additionally reveals a differential response to global risks between core and peripheral countries, with the former enjoying safe-haven benefits. Markets’ perceptions of risk are found to be significantly affected by credit ratings, which is in line with recent evidence based on constant parameter methods. |
| Keywords: | Euro area;asset purchase programmes; sovereign bond yields; time-varying parameters. |
| JEL: | C33 E44 E52 E58 F34 G15 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:291&r= |
| By: | Rohan Kekre; Moritz Lenel |
| Abstract: | We study a business cycle model of the international monetary system featuring a time-varying demand for safe dollar bonds, greater risk-bearing capacity in the U.S. than the rest of the world, and nominal rigidities. A flight to safety generates a dollar appreciation and decline in global output. Dollar bonds thus command a negative risk premium and the U.S. holds a levered portfolio of capital financed in dollars. We quantify the effects of safety shocks and heterogeneity in risk-bearing capacity for global macroeconomic volatility; U.S. external adjustment; and the international transmission of monetary and fiscal policies, including dollar swap lines. |
| JEL: | E44 F44 G15 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29238&r= |
| By: | Hyunduk Suh (Inha University) |
| Abstract: | Housing cycles can vary significantly across regions. This study investigates the macroeconomic implications of regionally heterogeneous housing cycles and stabilization policies. The general equilibrium model includes two separate regions, idiosyncratic shocks in regional housing markets, and inter-regional housing investments by households. Counterfactual simulations suggest that regional housing cycles can be a source of economic inequality between regions and the level of financial status by affecting consumption, housing service, debt and welfare asymmetrically across agents. Region-specific stabilization policies such as property tax, countercyclical loan-to-value, and housing supply policies can mitigate regional housing cycles, but it takes large policy responses if the cycle is caused by housing exuberance (demand) shocks. Those policies also have asymmetric welfare effects, while housing supply policy is the most beneficial to agents in the region that experiences the cycle. Leaning against the wind monetary policy is relatively ineffective in stabilizing regional housing prices and higher interest rates during housing price appreciations lower the welfare of borrowers in all regions. |
| Keywords: | Regionally heterogeneous housing cycles, monetary policy, macroprudential policy, housing |
| JEL: | E32 R31 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:inh:wpaper:2021-4&r= |
| By: | Cole, Stephen J. (Department of Economics Marquette University); Huh, Sungjun (Department of Economics Marquette University) |
| Abstract: | Housing markets are closely related to monetary policy. This paper studies the link between housing frictions and the effectiveness of forward guidance. A housing collateral constraint and forward guidance shocks are incorporated into a standard medium-scale New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. Our main results produce a number of important implications. First, financial frictions emanating from the housing market dampen the effectiveness of forward guidance on the economy. Second, forward guidance has asymmetric effects on the welfare of lenders and borrowers when housing frictions increase. Housing frictions also attenuate the effect of forward guidance at the zero lower bound. Finally, this article provides a solution to "forward guidance puzzle" of Del Negro et al. (2012). Thus, policymakers should consider housing frictions when examining the effects of forward guidance on the economy. |
| Keywords: | forward guidance, financial frictions, housing collateral, zero lower ground |
| JEL: | E32 E44 E52 R21 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:mrq:wpaper:2021-07&r= |
| By: | Matheus R. Grasselli; Alexander Lipton |
| Abstract: | We review different classes of cryptocurrencies with emphasis on their economic properties. Pure-asset coins such as Bitcoin, Ethereum and Ripple are characterized by not being a liability of any economic agent and most resemble commodities such as gold. Central bank digital currencies, at the other end of the economic spectrum, are liabilities of a Central Bank and most resemble cash. In between, there exist a range of so-called stable coins, with varying degrees of economic complexity. We use balance sheet operations to highlight the properties of each class of cryptocurrency and their potential uses. In addition, we propose the basic structure for a macroeconomic model incorporating all the different types of cryptocurrencies under consideration. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2109.10177&r= |
| By: | Cappiello, Lorenzo; Holm-Hadulla, Fédéric; Maddaloni, Angela; Mayordomo, Sergio; Unger, Robert; Arts, Laura; Meme, Nicolas; Asimakopoulos, Ioannis; Migiakis, Petros; Behrens, Caterina; Moura, Alban; Corradin, Stefano; Nicoletti, Giulio; Ferrando, Annalisa; Niemelä, Juha; Giuzio, Margherita; Petersen, Annelie; Golden, Brian; Pierrard, Olivier; Guazzarotti, Giovanni; Ratnovski, Lev; Gulan, Adam; Schober-Rhomberg, Alexandra; Hertkorn, Andreas; Sigmund, Michael; Kaufmann, Christoph; Soares, Carla; Avakian, Lucía Kazarian; Stupariu, Patricia; Koskinen, Kimmo; Taboga, Marco; Sédillot, Franck; Tavares, Luis Miguel; Matilainen, Jani; Boom, Emme Van den; Mazelis, Falk; Zaghini, Andrea; McCarthy, Barra |
| Abstract: | The financing structure of the euro area economy has evolved since the global financial crisis with non-bank financial intermediation taking a more prominent role. This shift affects the transmission of monetary policy. Compared with banks, non-bank financial intermediaries are more responsive to monetary policy measures that influence longer-term interest rates, such as asset purchases. The increasing role of debt securities in the financing structure of firms also leads to a stronger transmission of long-rate shocks. At the same time, short-term policy rates remain an effective tool to steer economic outcomes in the euro area, which is still highly reliant on bank loans. Amid a low interest rate environment, the growth of market-based finance has been accompanied by increased credit, liquidity and duration risk in the non-bank sector. Interconnections in the financial system can amplify contagion and impair the smooth transmission of monetary policy in periods of market distress. The growing importance of non-bank financial intermediaries has implications for the functioning of financial market segments relevant for monetary policy transmission, in particular the money markets and the bond markets. JEL Classification: E4, E5, G2, G38 |
| Keywords: | Asset purchases, Financial markets stress, Low interest rates, Monetary policy transmission, Non-bank intermediation, Risk-taking |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021270&r= |
| By: | Assenmacher, Katrin; Glöckler, Gabriel; Holton, Sarah; Trautmann, Peter; Ioannou, Demosthenes; Mee, Simon; Alonso, Conception; Argiri, Eleni; Arigoni, Filippo; Bakk-Simon, Klára; Bergbauer, Stephanie; Bitterlich, Marie Therese; Byron, Jennifer; Carvalho, Alexandre; Catenaro, Marco; Charalampakis, Evangelos; Deroose, Marjolein; Ehrmann, Michael; Fernandez, Ricardo; Ferreira, Clodomiro; Ferrero, Giuseppe; Gardt, Marius; Georgarakos, Dimitris; Gertler, Pavel; Giovannini, Alessandro; Goldfayn-Frank, Olga; Goodhead, Robert; Grandia, Roel; Hellström, Jenni; Hernborg, Nils; Herrala, Niko; Hoffmann, Mathias; Huertgen, Patrick; Ioannidis, Michael; Istrefi, Klodiana; Kalnberzina, Krista; Kedan, Danielle; Kenny, Geoff; Kocharkov, Georgi; Linzert, Tobias; Manrique, Marta; Márquez, Víctor; Mestre, Ricardo; Meyer, Justus; Mönch, Emanuel; Nardelli, Stefano; Newby, Elisa; Nomm, Nele; Pavlova, Lora; Penalver, Adrian; Reedik, Reet; Rieder, Kilian; Ruhe, Corina; Samarina, Anna; Šanta, Martin; Schupp, Fabian; Schultefrankenfeld, Guido; Sciot, Geert; Silgoner, Maria; Skotida, Ifigeneia; Stylianou, Aliki; Taylor, Eva; Tischer, Johannes; Tiseno, Andrea; Weber, Michael; Winkler, Bernhard |
| Abstract: | This paper examines the importance of central bank communication in ensuring the effectiveness of monetary policy and in underpinning the credibility, accountability and legitimacy of independent central banks. It documents how communication has become a monetary policy tool in itself; one example of this being forward guidance, given its impact on inflation expectations, economic behaviour and inflation. The paper explains why and how consistent, clear and effective communication to expert and non-expert audiences is essential in an environment of an ever-increasing need by central banks to reach these audiences. Central banks must also meet the demand for more understandable information about policies and tools, while at the same time overcoming the challenge posed by the wider public’s rational inattention. Since the European Central Bank was established, the communications landscape has changed dramatically and continues to evolve. This paper outlines how better communication, including greater engagement with the wider public, could help boost people’s understanding of and trust in the Eurosystem. JEL Classification: E43, E52, E58 |
| Keywords: | accountability, central bank, forward guidance, transparency, trust |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021274&r= |
| By: | Albertazzi, Ugo; Martin, Alberto; Assouan, Emmanuelle; Tristani, Oreste; Galati, Gabriele; Vlassopoulos, Thomas; Adolf, Petra; Kok, Christoffer; Altavilla, Carlo; Lewis, Vivien; Andreeva, Desislava; Lima, Diana; Brand, Claus; Musso, Alberto; Bussière, Matthieu; Nikolov, Kalin; Fahr, Stephan; Patriček, Matic; Fourel, Valère; Prieto, Esteban; Heider, Florian; Rodriguez-Moreno, Maria; Idier, Julien; Signoretti, Federico; Aban, Jorge; Busch, Ulrike; Ambrocio, Gene; Cassar, Alan; Balfoussia, Hiona; Chalamandaris, Dimitrios; Bonatti, Guido; Cuciniello, Vincenzo; Bonfim, Diana; Eller, Markus; Bouchinha, Miguel; Falagiarda, Matteo; Fernandez, Luis; Maddaloni, Angela; Garabedian, Garo; Mazelis, Falk; Geiger, Felix; Miettinen, Pavo; Grassi, Alberto; Nakov, Anton; Hristov, Nikolay; Obradovic, Goran; Ibas, Pelin; Papageorghiou, Maria; Ioannidis, Michael; Pogulis, Armands; Jan, Jansen David; Redak, Vanessa; Jovanovic, Mario; Velez, Anatoli Segura; Kakes, Jan; Tapking, Jens; Kempf, Alina; Valderrama, Maria; Klein, Melanie; Weigert, Benjamin; Licak, Marek |
| Abstract: | Since the European Central Bank’s (ECB’s) 2003 strategy review, the importance of macro-financial amplification channels for monetary policy has increasingly gained recognition. This paper takes stock of this evolution and discusses the desirability of further incremental enhancements in the role of financial stability considerations in the ECB’s monetary policy strategy. The paper starts with the premise that macroprudential policy, along with microprudential supervision, is the first line of defence against the build-up of financial imbalances. It also recognises that the pursuit of price stability through monetary policy, and of financial stability through macroprudential policy, are to a large extent complementary. Nevertheless, macroprudential policy may not be able to ensure financial stability independently of monetary policy, because of spillovers originating from the common transmission channels through which the two policies produce their effects. For example, a low interest rate environment can create incentives to engage in more risk-taking, or can adversely impact the profitability of financial intermediaries and hence their capacity to absorb shocks. The paper argues that the existence of such spillovers creates a conceptual case for monetary policy to take financial stability considerations into account. It then goes on to discuss what this conclusion might imply in practice for the ECB. One option would be to exploit the flexible length of the medium-term horizon over which price stability is to be achieved. Longer deviations from price stability could occasionally be tolerated, if they resulted in materially lower risks for financial stability and, ultimately, for future price stability. ... JEL Classification: E3, E44, G01, G21 |
| Keywords: | financial frictions, Monetary policy, systemic risk |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021272&r= |
| By: | Brand, Claus; Obstbaum, Meri; Coenen, Günter; Sondermann, David; Lydon, Reamonn; Ajevskis, Viktors; Hammermann, Felix; Angino, Siria; Hernborg, Nils; Basso, Henrique; Hertweck, Matthias; Bijnens, Gert; Hutchinson, John; Bobeica, Elena; Jacquinot, Pascal; Bodnár, Katalin; Kanutin, Andrew; Botelho, Vasco; Karsay, Alex; Colciago, Andrea; Kienzler, Daniel; Consolo, Agostino; Kolndrekaj, Aleksandra; De Philippis, Marta; Lhuissier, Stéphane; Da Silva, António Dias; Le Roux, Julien; Dossche, Maarten; Lozej, Matija; Dupraz, Stéphane; Martins, Fernando; Falath, Juraj; Mazelis, Falk; Ferrari, Alessandro; Mongelli, Francesco; Gomes, Sandra; Montero, José; Salvador, Ramon Gomez; Motto, Roberto; Goy, Gavin; Nakov, Anton; Grasso, Adriana; Osterloh, Steffen; Guglielminetti, Elisa; Pidkuyko, Myroslav; Haavio, Markus; Piton, Celine; Ploj, Gasper; Slacalek, Jirka; Polemidiotis, Marios; Sokol, Andrej; Propst, Maximilian; Soudan, Michel; Neves, Pedro Luis Rebelo; Szörfi, Béla; Ristiniemi, Annukka; Thaler, Dominik; Pereira, Manuel Bernado Rodrigues; Vanhala, Juuso; Saint-Guilhem, Arthur; Warne, Anders; Justo, Ana Seco; Zhutova, Anastasia; Seward, Domingos |
| Abstract: | This report discusses the role of the European Union’s full employment objective in the conduct of the ECB’s monetary policy. It first reviews a range of indicators of full employment, highlights the heterogeneity of labour market outcomes within different groups in the population and across countries, and documents the flatness of the Phillips curve in the euro area. In this context, it is stressed that labour market structures and trend labour market outcomes are primarily determined by national economic policies. The report then recalls that, in many circumstances, inflation and employment move together and pursuing price stability is conducive to supporting employment. However, in response to economic shocks that give rise to a temporary trade-off between employment and inflation stabilisation, the ECB’s medium-term orientation in pursuing price stability is shown to provide flexibility to contribute to the achievement of the EU’s full employment objective. Regarding the conduct of monetary policy in a low interest rate environment, model-based simulations suggest that history-dependent policy approaches − which have been proposed to overcome lasting shortfalls of inflation due to the effective lower bound on nominal interest rates by a more persistent policy response to disinflationary shocks − can help to bring employment closer to full employment, even though their effectiveness depends on the strength of the postulated expectations channels. Finally, the importance of employment income and wealth inequality in the transmission of monetary policy strengthens the case for more persistent or forceful easing policies (in pursuit of price stability) when interest rates are constrained by their lower bound. JEL Classification: E52, E24 |
| Keywords: | Employment, inequality, monetary policy |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021275&r= |
| By: | Lodge, David; Pérez, Javier J.; Albrizio, Silvia; Everett, Mary; De Bandt, Olivier; Georgiadis, Georgios; Ca' Zorzi, Michele; Lastauskas, Povilas; Carluccio, Juan; Parrága, Susana; Carvalho, Daniel; Venditti, Fabrizio; Cova, Pietro; Attinasi, Maria Grazia; Fontagné, Lionel; Mozzanica, Mirco Balatti; Giron, Celestino; Banerjee, Biswajit; Gunnella, Vanessa; Baumann, Ursel; Hemmerlé, Yannick; Bricongne, Jean-Charles; Jochem, Axel; Chiacchio, Francesco; Karjanlahti, Kristiina; Coimbra, Nuno; Kataryniuk, Ivan; Del Giudice, Davide; Korhonen, Iikka; De Luigi, Clara; Kühnlenz, Markus; Dimitropoulou, Dimitra; Labhard, Vincent; Di Nino, Virginia; Le Mezo, Helena; Dorrucci, Ettore; Meinen, Philipp; Eichler, Eric; Mattias, Nilsson; Feldkircher, Martin; Osbat, Chiara; Felettigh, Alberto; Quaglietti, Lucia; Reininger, Thomas; Stumpner, Sebastian; Schmidt, Julia; Van Schaik, Ilona; Schmitz, Martin; Wacket, Helmut; Serafini, Roberta; Zumer, Tina; Siena, Daniele |
| Abstract: | This paper assesses how globalisation has shaped the economic environment in which the ECB operates and discusses whether this warrants adjustments to the monetary policy strategy. The paper first looks at how trade and financial integration have evolved since the last strategy review in 2003. It then examines the effects of these developments on global productivity growth, the natural interest rate (r*), inflation trends and monetary transmission. While trade globalisation initially boosted productivity growth, this effect may be waning as trade integration slows and market contestability promotes a winner-takes-all environment. The impact of globalisation on r* has been ambiguous: downward pressures, fuelled by global demand for safe assets and an increase in the propensity to save against a background of rising inequality, are counteracted by upward pressures, from the boost to global productivity associated with greater trade integration. Headline inflation rates have become more synchronised globally, largely because commodity prices are increasingly determined by global factors. Meanwhile, core inflation rates show a lower degree of commonality. Globalisation has made a rather modest contribution to the synchronised fall in trend inflation across countries and contributed only moderately to the reduction in the responsiveness of inflation to changes in activity. Regarding monetary transmission, globalisation has made the role of the exchange rate more complex by introducing new mechanisms through which it affects financial conditions, real activity and price dynamics. Against the background of this discussion, the paper then examines the implications for the ECB’s monetary policy strategy. In doing so, it asks two questions. How is the ECB’s economic and monetary analysis affected by globalisation? And how does globalisation influence the choice of the ECB’s monetary policy objective and instruments? ... JEL Classification: E58, F42, F44, F62, F65 |
| Keywords: | Globalisation, inflation, monetary policy strategy, productivity, r* |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021263&r= |
| By: | Debrun, Xavier; Masuch, Klaus; Ferrero, Guiseppe; Vansteenkiste, Isabel; Ferdinandusse, Marien; von Thadden, Leopold; Hauptmeier, Sebastian; Alloza, Mario; Derouen, Chloé; Bańkowski, Krzysztof; Domingues Semeano, João; Barthélemy, Jean; Eisenschmidt, Jens; Bletzinger, Tilman; Faria, Thomas; Bonam, Dennis; Freier, Maximilian; Bouabdallah, Othman; Galati, Gabriele; Burriel, Pablo; Garcia, José; Campos, Maria; Gardó, Sándor; da Costa, José Cardoso; Gerke, Rafael; Checherita-Westphal, Cristina; Hammermann, Felix; Chmelar, Bernadette; Haroutunian, Stephan; Cimadomo, Jacopo; Hartung, Benjamin; Christoffe, Kai; Jacquinot, Pascal; Kamps, Christophe; Poelhekke, Steven; Kataryniuk, Ivan; Pool, Sebastiaan; Körding, Julia; Prammer, Doris; Kostka, Tommy; Romanelli, Marzia; Maćkowiak, Bartosz; Röttger, Joost; Mazelis, Falk; Sauer, Stephan; Marrazzo, Marco; Schmidt, Katja; Montes-Galdón, Carlos; Schmidt, Sebastian; Muggenthaler, Philip; Schupp, Fabian; Nerlich, Carolin; Setzer, Ralph; Nuño, Galo; Slawinska, Kamila; Ozden, Talga; Trzcinska, Agnieszka; Paulus, Alari; Valenta, Vilém; Penciu, Alexandru; Vladu, Andreea; Piloiu, Anamaria; Wolswijk, Guido; Pisani, Massimiliano |
| Abstract: | The last review of the ECB’s monetary policy strategy in 2003 followed a period of predominantly upside risks to price stability. Experience following the 2008 financial crisis has focused renewed attention on the question of how monetary and fiscal policy should best interact, in particular in an environment of structurally low interest rates and persistent downside risks to price stability. This debate has been further intensified by the economic impact of the coronavirus (COVID-19) pandemic. In the euro area, the unique architecture of a monetary union consisting of sovereign Member States, with cross-country heterogeneities and weaknesses in its overall construction, poses important challenges. Against this background, this report revisits monetary-fiscal policy interactions in the euro area from a monetary policy perspective and with a focus on the ramifications for price stability and maintaining central bank independence and credibility. The report consists of three parts. The first chapter presents a conceptual framework for thinking about monetary-fiscal policy interactions, thereby setting the stage for a discussion of specifically euro area aspects and challenges in subsequent parts of the report. In particular, it reviews the main ingredients of the pre-global financial crisis consensus on monetary-fiscal policy interactions and addresses significant new insights and refinements which have gained prominence since 2003. In doing so, the chapter distinguishes between general conceptual aspects – i.e. those aspects that pertain to an environment characterised by a single central bank and a single fiscal authority and those aspects that pertain to an environment characterised by a single central bank and many fiscal authorities (a multi-country monetary union). ... JEL Classification: E52, E58, E62, E63, F45 |
| Keywords: | Fiscal Policy, Monetary Policy, Monetary Union |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021273&r= |
| By: | Cecion, Martina; Coenen, Günter; Gerke, Rafael; Le Bihan, Hervé; Motto, Roberto; Aguilar, Pablo; Ajevskis, Viktors; Giesen, Sebastian; Albertazzi, Ugo; Gilbert, Niels; Al-Haschimi, Alexander; Gomes, Sandra; Bornemann, Friederike; Goy, Gavin; Brand, Claus; Grasso, Adriana; Carboni, Giacomo; Grosse-Steffen, Christoph; Cecioni, Martina; Haavio, Markus; Cleanthous, Lena; Hammermann, Felix; Hoffmann, Mathias; Consolo, Agostino; Hölz, Jonas; Corbisiero, Giuseppe; Hurtado, Samuel; Dedola, Luca; Hürtgen, Patrick; Andreeva, Desislava; Hutchinson, John; Dobrew, Michael; Ioannidis, Michael; Dupraz, Stéphane; Kenny, Geoff; Ehrmann, Michael; Kho, Stephen; Fahr, Stephan; Kienzler, Daniel; Gautier, Erwan; Knüppel, Malte; Georgarakos, Dimitris; Kok, Christoffer; Kontulainen, Jarmo; Rannenberg, Ansgar; Kortelainen, Mika; Ristiniem, Annukka; Röttger, Joost; Lima, Ana Isabel; Saint-Guilhem, Arthur; Locarno, Alberto; Santoro, Sergio; Lojschová, Adriana; Scheer, Alexander; Maletic, Matjaz; Schmidt, Sebastian; Martin, Alberto; Schneider, Jan David; Matheron, Julien; Schultefrankenfeld, Guido; Marx, Magali; Skotida, Ifigeneia; Mazelis, Falk; Soudan, Michel; Meyler, Aidan; Stevens, Arnoud; Mönch, Emanuel; Sturm, Michael; Montes-Galdón, Carlos; Thaler, Dominik; Tosato, Andrea Giorgio; Nikolov, Kalin; Tristani, Oreste; Nuño, Galo; Valderrama, Maria Teresa; Papageorgiou, Dimitris; Weber, Henning; Pavlova, Lora; Wouters, Raf; Penalver, Adrian; Zev, Giordano; Pisani, Massimiliano |
| Abstract: | The ECB’s price stability mandate has been defined by the Treaty. But the Treaty has not spelled out what price stability precisely means. To make the mandate operational, the Governing Council has provided a quantitative definition in 1998 and a clarification in 2003. The landscape has changed notably compared to the time the strategy review was originally designed. At the time, the main concern of the Governing Council was to anchor inflation at low levels in face of the inflationary history of the previous decades. Over the last decade economic conditions have changed dramatically: the persistent low-inflation environment has created the concrete risk of de-anchoring of longer-term inflation expectations. Addressing low inflation is different from addressing high inflation. The ability of the ECB (and central banks globally) to provide the necessary accommodation to maintain price stability has been tested by the lower bound on nominal interest rates in the context of the secular decline in the equilibrium real interest rate. Against this backdrop, this report analyses: the ECB’s performance as measured against its formulation of price stability; whether it is possible to identify a preferred level of steady-state inflation on the basis of optimality considerations; advantages and disadvantages of formulating the objective in terms of a focal point or a range, or having both; whether the medium-term orientation of the ECB’s policy can serve as a mechanism to cater for other considerations; how to strengthen, in the presence of the lower bound, the ECB’s leverage on private-sector expectations for inflation and the ECB’s future policy actions so that expectations can act as ‘automatic stabilisers’ and work alongside the central bank. JEL Classification: E31, E52, E58 |
| Keywords: | effective lower bound, euro area, European Central Bank, monetary policy strategy, price stability |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021269&r= |
| By: | Drudi, Francesco; Moench, Emanuel; Holthausen, Cornelia; Weber, Pierre-François; Ferrucci, Gianluigi; Setzer, Ralph; Adao, Bernardino; Dées, Stéphane; Alogoskoufis, Spyros; Téllez, Mar Delgado; Andersson, Malin; Di Nino, Virginia; Aubrechtova, Jana; Diez-Caballero, Arturo; Avgousti, Aris; Duarte, Claudia; Barbiero, Francesca; Estrada, Ángel; Boneva, Lena; Faccia, Donata; Breitenfellner, Andreas; Faiella, Ivan; Bua, Giovanna; Farkas, Mátyás; Bun, Maurice; Ferrari, Alessandro; Caprioli, Francesco; Fornari, Fabio; Ciccarelli, Matteo; Mendoza, Alberto Fuertes; Darracq Pariès, Matthieu; Garcia-Sanchez, Pablo; Giovannini, Alessandro; Papadopoulou, Niki; Grüning, Patrick; Parker, Miles; Guarda, Paolo; Petroulakis, Filippos; Hebbink, Gerbert; Piloiu, Anamaria; Murphy, Sarah Jane Hlásková; Ploj, Gasper; Ioannidis, Michael; Pointner, Wolfgang; Isgro, Lorenzo; Popov, Alexander; Kapp, Daniel; Prammer, Doris; Kashama, Mélissa Kasongo; Queiroz, Ricardo; Lopez-Garcia, Paloma; Rachedi, Omar; Lozej, Matija; Rognone, Lavinia; Lydon, Reamonn; Röhe, Oke; Manninen, Otso; Roos, Madelaine; Manzanares, Andrés; Russo, Simone; McInerney, Niall; Santabárbara, Daniel; Meinerding, Christoph; Schotten, Guido; Mikkonen, Katri; Sotomayor, Beatriz; Mistretta, Alessandro; Stracca, Livio; Mongelli, Francesco Paolo; Tamburrini, Fabio; Montes-Galdón, Carlos; Theofilakou, Anastasia; Müller, Georg; Tsalaporta, Pinelopi; Nerlich, Carolin; van den End, Jan Willem; Osiewicz, Malgorzata; Cruz, Lia Vaz; Osorno-Torres, Boris; Weth, Mark Andreas; Ouvrard, Jean-François; Gomez, Gonzalo Yebes; Page, Adrian |
| Abstract: | This paper analyses the implications of climate change for the conduct of monetary policy in the euro area. It first investigates macroeconomic and financial risks stemming from climate change and from policies aimed at climate mitigation and adaptation, as well as the regulatory and fiscal effects of reducing carbon emissions. In this context, it assesses the need to adapt macroeconomic models and the Eurosystem/ECB staff economic projections underlying the monetary policy decisions. It further considers the implications of climate change for the conduct of monetary policy, in particular the implications for the transmission of monetary policy, the natural rate of interest and the correct identification of shocks. Model simulations using the ECB’s New Area-Wide Model (NAWM) illustrate how the interactions of climate change, financial and fiscal fragilities could significantly restrict the ability of monetary policy to respond to standard business cycle fluctuations. The paper concludes with an analysis of a set of potential monetary policy measures to address climate risks, insofar as they are in line with the ECB’s mandate. JEL Classification: E52, E58, Q54 |
| Keywords: | climate change, environmental economics, green finance, monetary policy, sustainable growth economics |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021271&r= |
| By: | Baumann, Ursel; Darracq Pariès, Matthieu; Westermann, Thomas; Riggi, Marianna; Bobeica, Elena; Meyler, Aidan; Böninghausen, Benjamin; Fritzer, Friedrich; Trezzi, Riccardo; Jonckheere, Jana; Kulikov, Dmitry; Popova, Dilyana; Pert, Sulev; Michail, Nektarios; Paloviita, Maritta; Brázdik, František; Pönkä, Harri; Bess, Mikkel; Vilmi, Lauri; Jørgensen, Casper; Robert, Pierre-Antoine; Al-Haschimi, Alexander; Gmehling, Philipp; Bańbura, Marta; Hartmann, Matthias; Charalampakis, Evangelos; Menz, Jan-Oliver; Hartwig, Benny; Schupp, Fabian; Hutchinson, John; Speck, Christian; Paredes, Joan; Volz, Ute; Reiche, Lovisa; Bragoudakis, Zacharias; Tirpák, Marcel; Kasimati, Evangelia; Tengely, Veronika; Łyziak, Tomasz; Tagliabracci, Alex; Stanisławska, Ewa; Bessonovs, Andrejs; Iskrev, Nikolay; Krasnopjorovs, Olegs; Gavura, Miroslav; Reichenbachas, Tomas; Damjanović, Milan; Colavecchio, Roberta; Maletic, Matjaz; Galati, Gabriele; Leiva, Danilo; Kearney, Ide; Stockhammar, Pär |
| Abstract: | This paper summarises the findings of the Eurosystem’s Expert Group on Inflation Expectations (EGIE), which was one of the 13 work streams conducting analysis that fed into the ECB’s monetary policy strategy review. The EGIE was tasked with (i) reviewing the nature and behaviour of inflation expectations, with a focus on the degree of anchoring, and (ii) exploring the role that measures of expectations can play in forecasting inflation. While it is households’ and firms’ inflation expectations that ultimately matter in the expectations channel, data limitations have meant that in practice the focus of analysis has been on surveys of professional forecasters and on market-based indicators. Regarding the anchoring of inflation expectations, this paper considers a number of metrics: the level of inflation expectations, the responsiveness of longer-term inflation expectations to shorter-term developments, and the degree of uncertainty. Different metrics can provide conflicting signals about the scale and timing of potential unanchoring, which underscores the importance of considering all of them. Overall, however, these metrics suggest that in the period since the global financial and European debt crises, longer-term inflation expectations in the euro area have become less well anchored. Regarding the role measures of inflation expectations can play in forecasting inflation, this paper finds that they are indicative for future inflationary developments. When it comes to their predictive power, both market-based and survey-based measures are found to be more accurate than statistical benchmarks, but do not systematically outperform each other. Beyond their role as standalone forecasts, inflation expectations bring forecast gains when included in forecasting models and can also inform scenario and risk analysis in projection exercises performed using structural models. ... JEL Classification: D84, E31, E37, E52 |
| Keywords: | anchoring, forecasting, Inflation expectations, macroeconomics, monetary policy |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021264&r= |
| By: | Darracq Pariès, Matthieu; Notarpietro, Alessandro; Kilponen, Juha; Papadopoulou, Niki; Zimic, Srečko; Aldama, Pierre; Langenus, Geert; Alvarez, Luis Julian; Lemoine, Matthieu; Angelini, Elena; Lozej, Matija; Berben, Robert-Paul; Marotta, Fulvia; Carroy, Alice; Matheron, Julien; Christoffel, Kai; Montes-Galdón, Carlos; Ciccarelli, Matteo; Paredes, Joan; Consolo, Agostino; Pisani, Massimiliano; Cova, Pietro; Schmöller, Michaela; Damjanović, Milan; Smadu, Andra; de Walque, Gregory; Szörfi, Béla; Dupraz, Stéphane; Turunen, Harri; Gumiel, José Emilio; Verona, Fabio; Haertel, Thomas; Vetlov, Igor; Hurtado, Samuel; Warne, Anders; Júlio, Paulo; Zhutova, Anastasia; Kühl, Michael |
| Abstract: | This paper provides an assessment of the macroeconomic models regularly used for forecasting and policy analysis in the Eurosystem. These include semi-structural, structural and time-series models covering specific jurisdictions and the euro area within a closed economy, small open economy, multi-country or global setting. Models are used as analytical frameworks for building baseline projections and for supporting the preparation of monetary policy decisions. The paper delivers four main contributions. First, it provides a survey of the macroeconomic modelling portfolios currently used or under development within the Eurosystem. Second, it explores the analytical gaps in the Eurosystem models and investigates the scope for further enhancement of the main projection and policy models, and the creation of new models. Third, it reviews current practices in model-based analysis for monetary policy preparation and forecasting and provides recommendations and suggestions for improvement. Finally, it reviews existing cooperation modalities on model development and proposes alternative sourcing and organisational strategies to remedy any knowledge or analytical gaps identified. JEL Classification: C5, E47, E52, E58, F4 |
| Keywords: | central banking., econometric modelling, forecasting and simulation, monetary policy |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021267&r= |
| By: | Nickel, Christiane; Fröhling, Annette; Álvarez, Luis J.; Willeke, Caroline; Zevi, Giordano; Osbat, Chiara; Ganoulis, Ioannis; Koester, Gerrit; Lis, Eliza; Peronaci, Romana; Hahn, Elke; Henkel, Lukas; Costain, James; Hoeberichts, Marco; Eiglsperger, Martin; Jonckheere, Jana; Kapatais, Demetris; Gautier, Erwan; Goldhammer, Bernhard; Rumler, Fabio; Kouvavas, Omiros; Krasnopjorovs, Olegs; Strasser, Georg; Lünnemann, Patrick; Trezzi, Riccardo; Martins, Fernando; Vilmi, Lauri; Vlad, Aurelian; O'Brien, Derry; Westermann, Thomas; Popova, Dilyana; Wintr, Ladislav; Porqueddu, Mario; Zekaite, Zivile; Roma, Moreno; Kondelis, Evripides; Knetsch, Thomas; Conflitti, Cristina; Kalantzis, Yannick; Herzberg, Julika; Beka, Jan; van Overbeek, Fons; Schwind, Patrick; Sosič, Nika; Messner, Teresa; Wauters, Joris; Mociunaite, Laura; Weinand, Sebastian |
| Abstract: | This paper – which takes into consideration overall experience with the Harmonised Index of Consumer Prices (HICP) as well as the improvements made to this measure of inflation since 2003 – finds that the HICP continues to fulfil the prerequisites for the index underlying the ECB’s definition of price stability. Nonetheless, there is scope for enhancing the HICP, especially by including owner-occupied housing (OOH) using the net acquisitions approach. Filling this long-standing gap is of utmost importance to increase the coverage and cross-country comparability of the HICP. In addition to integrating OOH into the HICP, further improvements would be welcome in harmonisation, especially regarding the treatment of product replacement and quality adjustment. Such measures may also help reduce the measurement bias that still exists in the HICP. Overall, a knowledge gap concerning the exact size of the measurement bias of the HICP remains, which calls for further research. More generally, the paper also finds that auxiliary inflation measures can play an important role in the ECB’s economic and monetary analyses. This applies not only to analytical series including OOH, but also to measures of underlying inflation or a cost of living index. JEL Classification: C43, C52, C82, E31, E52 |
| Keywords: | HICP inflation, inflation measurement, measurement bias, Monetary policy review, owner-occupied housing, underlying inflation |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021265&r= |