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A monetary policy framework for the European Central Bank to deal with uncertainty

03-12-2018

We argue that monetary policy faces different challenges to those faced during the period of the great moderation. Greater uncertainties over the ability of monetary policy to control inflation, the instruments that should be used and their effects on financial stability imply that we need to rethink whether the current framework is appropriate. We recommend a few adaptions to the current framework that would provide greater flexibility to the European Central Bank without departing very far from ...

We argue that monetary policy faces different challenges to those faced during the period of the great moderation. Greater uncertainties over the ability of monetary policy to control inflation, the instruments that should be used and their effects on financial stability imply that we need to rethink whether the current framework is appropriate. We recommend a few adaptions to the current framework that would provide greater flexibility to the European Central Bank without departing very far from current practices (to avoid risking the credibility that the ECB has acquired since its inception). This document was provided by Policy Department A at the request of the Committee on Economic and Monetary Affairs.

Externý autor

Grégory Claeys, Maria Demertzis, Jan Mazza

Does a single monetary policy need a single fiscal counterpart?

29-11-2018

The absence of a single fiscal policy in the euro area does not necessarily constitute a problem for the ECB. In a deep financial crisis poorly coordinated national fiscal policies are likely to be insufficient. But outside crisis periods spill-over effects of fiscal policy are likely to be small and of uncertain sign. Moreover, fiscal policy is always subject to policy errors and other shocks. With many different national policies, individual errors and shocks would tend to cancel out each other ...

The absence of a single fiscal policy in the euro area does not necessarily constitute a problem for the ECB. In a deep financial crisis poorly coordinated national fiscal policies are likely to be insufficient. But outside crisis periods spill-over effects of fiscal policy are likely to be small and of uncertain sign. Moreover, fiscal policy is always subject to policy errors and other shocks. With many different national policies, individual errors and shocks would tend to cancel out each other, at least partially, thus delivering a more stable policy in the aggregate, which should facilitate the task of the ECB to maintain price stability. EMU reform efforts should thus not aim at creating a unified fiscal policy. This document was provided by Policy Department A at the request of the Committee on Economic and Monetary Affairs.

Externý autor

Daniel Gros, CEPS

EMU reform and the ‘new normal’ for monetary policy

29-11-2018

The European Central Bank may already be facing the next crisis in the euro area but is still deploying the tools of unconventional monetary policy from the last crisis. This brief looks at the ECB as an institution amongst institutions and shows how even more unconventional approaches will not help the euro area economy. Additionally, given the complexity of money and the effects of expectations, expanding the ECB’s unconventional arsenal is likely to have deleterious consequences across Europe. ...

The European Central Bank may already be facing the next crisis in the euro area but is still deploying the tools of unconventional monetary policy from the last crisis. This brief looks at the ECB as an institution amongst institutions and shows how even more unconventional approaches will not help the euro area economy. Additionally, given the complexity of money and the effects of expectations, expanding the ECB’s unconventional arsenal is likely to have deleterious consequences across Europe. This document was provided by Policy Department A at the request of the Committee on Economic and Monetary Affairs.

Externý autor

Christopher A. Hartwell, CASE

The effects and risks of ECB collateral framework changes

16-07-2018

During the crisis, the ECB modified its collateral framework to face increased liquidity needs of commercial banks. This has taken two forms: the minimum required rating for different classes of assets has been reduced and the haircut associated to these assets has evolved conditional on the default risks of these assets. The benefits in terms of cushioning a liquidity crisis and enhancing monetary policy transmission have most probably exceeded the costs in terms of riskier central bank balance ...

During the crisis, the ECB modified its collateral framework to face increased liquidity needs of commercial banks. This has taken two forms: the minimum required rating for different classes of assets has been reduced and the haircut associated to these assets has evolved conditional on the default risks of these assets. The benefits in terms of cushioning a liquidity crisis and enhancing monetary policy transmission have most probably exceeded the costs in terms of riskier central bank balance sheet and potential capital losses. This document was provided by Policy Department A at the request of the Economic and Monetary Affairs Committee.

Externý autor

Christophe BLOT, Jérôme CREEL, Paul HUBERT (Sciences Po – OFCE)

ECB non-standard-policies and collateral constraints

16-07-2018

Collateral constitutes an indispensable lubricant for the financial system. Government bonds constitute the most important source of collateral, for use in inter-bank and repo transactions. But, the vast bond buying program of the ECB in the context of the Public Sector Purchase Programme has not led to any collateral scarcity. Banks still hold very large amounts of sovereign bonds and they have ample other collateral should they want to borrow more from the ECB for ‘standard’ monetary policy operations ...

Collateral constitutes an indispensable lubricant for the financial system. Government bonds constitute the most important source of collateral, for use in inter-bank and repo transactions. But, the vast bond buying program of the ECB in the context of the Public Sector Purchase Programme has not led to any collateral scarcity. Banks still hold very large amounts of sovereign bonds and they have ample other collateral should they want to borrow more from the ECB for ‘standard’ monetary policy operations. Banks tend to use less liquid assets as collateral with the ECB, but this does not mean necessarily more risk for the ECB for which liquidity is not important. This document was provided by Policy Department A at the request of the Committee on Economic and Monetary Affairs.

Externý autor

Daniel GROS, Willem Pieter de Groen (CEPS)

ECB non-standard monetary measures, collateral constraints and potential risks for monetary policy

02-07-2018

This paper takes a wide view of nonstandard measures in difficult situations. We explore how, and to what extent, prudential metrics written into the new prudential and surveillance regulations can be used as policy instruments. The paper does not try to reach a judgment on which measures will work best. Instead we explore how these policies work; why they depend on high quality collateral/assets; what happens if policymakers are driven to expand the bounds of “sufficient quality or liquidity”; how ...

This paper takes a wide view of nonstandard measures in difficult situations. We explore how, and to what extent, prudential metrics written into the new prudential and surveillance regulations can be used as policy instruments. The paper does not try to reach a judgment on which measures will work best. Instead we explore how these policies work; why they depend on high quality collateral/assets; what happens if policymakers are driven to expand the bounds of “sufficient quality or liquidity”; how new credit risks arise and for whom. Some of these risks are quite subtle, implicit or indirect. But they all reduce the effective-ness of the measures in question (a transmission problem). As a result, they require larger interventions to reach certain target values (a feasibility question, given the side effects). Thus, the new prudential regulation regimes offer several nonstandard policy instruments. But they depend of the availability of high quality and liquid collateral/assets. Poor collateral makes nonstandard measures less effective. Less credit and less cheap credit will be offered due to the increasing credit risks. This document was provided by Policy Department A at the request of the Economic and Monetary Affairs Committee.

Externý autor

Andrew Hughes Hallett, Paul Fisher

The ECB Collateral Policy Beyond Conventional Monetary Stimulus

02-07-2018

The importance of collateral as an instrument for monetary policy has increased in recent years not only in the light of the changes in the ECB’s collateral framework during the crisis but also due to the progressive replacement of the unsecured money market segment with the secured one in the euro area. Both aspects are set to have consequences for collateral availability and the scarcity of high-quality assets, particularly as these interact with non-standard monetary policy. In this note, we look ...

The importance of collateral as an instrument for monetary policy has increased in recent years not only in the light of the changes in the ECB’s collateral framework during the crisis but also due to the progressive replacement of the unsecured money market segment with the secured one in the euro area. Both aspects are set to have consequences for collateral availability and the scarcity of high-quality assets, particularly as these interact with non-standard monetary policy. In this note, we look for evidence of the ECB’s Expanded Asset Purchase Programme (EAPP) effects through the quantity and quality of collateral, based on the Eurosystem Collateral Data, as well as a review of the literature. We conclude that collateral is vital to the well-functioning of money markets, and the availability in principle of monetary policy beyond conventional remains an important tool to deal with the issue of potential shortages of high-quality collateral, at least in the short-term. This document was provided by Policy Department A at the request of the Economic and Monetary Affairs Committee.

Externý autor

Corrado MACCHIARELLI and Mara MONTI

An economic recovery with little sign of inflation acceleration: A transitory phenomenon or evidence of a structural change?

15-02-2018

This paper investigates the possibility that there has been a structural shift in inflation (upward) in the euro area since the recovery in 2014 or 2015. From the perspective of policy, it is important to be sure that any such shifts are significant statistically, sustained or likely to be sustained (durable) over the near future, and are evenly distributed over the member economies so that no one of them is damaged by anti-inflation measures taken to help the others. We approach the problem in two ...

This paper investigates the possibility that there has been a structural shift in inflation (upward) in the euro area since the recovery in 2014 or 2015. From the perspective of policy, it is important to be sure that any such shifts are significant statistically, sustained or likely to be sustained (durable) over the near future, and are evenly distributed over the member economies so that no one of them is damaged by anti-inflation measures taken to help the others. We approach the problem in two steps: we first examine the circumstantial and informal evidence, and then conduct formal statistical tests for structural changes in euro area inflation in 2015 or 2016. We find no evidence of a structural change under the four criteria mentioned. The even distribution of inflation criterion is the closest to being satisfied, but the other three are far from satisfied in any formal sense. There was a brief acceleration in inflation in mid-2016 towards 2%, but it flattened out in 2017 and has been constant at 1.5% ever since. Core inflation was constant at 0.9% throughout. The question is why has there been no inflation in the recovery and how long is that likely to last? In a third step, we explain how low growth in real wages and self-reinforcing low productivity growth produces slow output growth and low inflation. This model fits the data pretty well, down to the lack of labour and total factor productivity and to substituting cheaper labour for excess capital stock. It implies a fall in investment spending (also seen in the data) which in turn extends the period for which low productivity-low inflation outcomes apply.

Externý autor

Andrew HUGHES HALLETT

Why does the recovery show so little inflation?

15-02-2018

We investigate the determinants of inflation in the euro area since 2000 and show that the most important determinants are inflation expectations and wage growth. Both indicators have contributed negatively to inflation since 2014 but inflation expectations less so since 2015 whereas the contribution of wage growth has remained negative. We suggest that structural reforms may have put a drag on the ability of the ECB to reach its inflation target rapidly.

We investigate the determinants of inflation in the euro area since 2000 and show that the most important determinants are inflation expectations and wage growth. Both indicators have contributed negatively to inflation since 2014 but inflation expectations less so since 2015 whereas the contribution of wage growth has remained negative. We suggest that structural reforms may have put a drag on the ability of the ECB to reach its inflation target rapidly.

Externý autor

Christophe BLOT, Jérôme CREEL, Paul HUBERT, OFCE (Sciences Po)

Economic recovery and inflation

15-02-2018

In the last decade, advanced economies, including the euro area, experienced deflationary pressures caused by the global financial crisis of 2007-2009 and the anti-crisis policies that followed—in particular, the new financial regulations (which led to a deep decline in the money multiplier). However, there are numerous signs in both the real and financial spheres that these pressures are disappearing. The largest advanced economies are growing up to their potential, unemployment is systematically ...

In the last decade, advanced economies, including the euro area, experienced deflationary pressures caused by the global financial crisis of 2007-2009 and the anti-crisis policies that followed—in particular, the new financial regulations (which led to a deep decline in the money multiplier). However, there are numerous signs in both the real and financial spheres that these pressures are disappearing. The largest advanced economies are growing up to their potential, unemployment is systematically decreasing, the financial sector is more eager to lend, and its clients—to borrow. Rapidly growing asset prices signal the possibility of similar developments in other segments of the economy. In this new macroeconomic environment, central banks should cease unconventional monetary policies and prepare themselves to head off potential inflationary pressures.

Externý autor

Marek Dabrowski, CASE

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