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Several central banks, including the European Central Bank since 2014, have added negative policy rates to their toolboxes after exhausting conventional easing measures. It is essential to understand the effects on the economy of prolonged negative rates. This paper explores the potential effects (and side effects) of negative rates in theory and examines the evidence to determine what these effects have been in practice in the euro area. This paper was provided by the Policy Department for Economic ...

Negative interest rate policies (NIRP) have become an established monetary policy instrument in the toolkit of the ECB. We discuss NIRP in the euro area based on theoretical considerations and available empirical evidence. We find that NIRP had some positive impact on loan growth and investment in the euro area, but that the room to further loosen monetary policy via NIRP may be small. NIRP is discussed also in the context of the general monetary policy environment. This paper was provided by ...

Policy rate cuts in negative territory have increased credit supply and improved the macroeconomic environment similar to cuts in positive territory. Dreaded disruptions to the monetary policy transmission channels as well as adverse side effects on bank profitability have so far largely failed to materialise. Thus, the evidence available today shows that the negative interest rate policy is an effective policy tool. However, systemic risks, including in the non-bank sector, should be closely monitored ...

This note is prepared in view of a regular public hearing with the Chair of the European Systemic Risk Board (ESRB), Christine Lagarde, which will take place on 1 July 2021. The aim of the meeting is to present the ESRB Annual Report and to discuss recent developments in macroprudential policy field, potential systemic risks looming ahead, notably the impact of the pandemic. The briefing takes stock of (i) the ESRB and national macroprudential authorities’ response to the pandemic outbreak; (ii ...

The main legacy of the post-Covid-19-crisis euro area fiscal framework should be the development of a unique integrated fiscal policy and of a permanent and independent Fiscal Fund to implement it. To arrive at this conclusion, we analyse the challenges and build on current research on the optimal design of a fiscal fund. We characterise the fiscal policy, and the development of the Fund, together with the role and form that the Stability and Growth Pact can take in the new fiscal framework.

In June 2014, the European Central Bank (ECB) was among the first major central banks to lower policy rates into negative territory. The deposit facility rate was subsequently cut four more times, lastly in September 2019 (to -0.5%). As an unconventional monetary policy instrument used over a prolonged period, negative interest rates require attention because of their uncertain or possibly negative side effects on the banking sector and economy at large. Four papers were prepared by the ECON Committee ...

A widespread concern about negative policy rates is that they might depress bank profits and encourage risk-taking. We find that the impact of negative rates per se is limited. Other policy measures (TLTROs, tiered deposits) have largely neutralised the impact of NIRP on bank profits. Asset purchases might have been more important by compressing the yield curve. Any small positive impact of negative rates on lending and aggregate demand may have been swamped by the negative impact of low rates on ...

In the first decade of the 21st century, loans denominated in or indexed to foreign currencies, in particular the Swiss franc, became very popular in a number of EU Member States, including Greece, Croatia, Hungary, Austria, Poland, Romania, and Slovenia, and also in two non-EU countries, Montenegro and Serbia. For a certain period, in some Member States these loans became the most popular type of loan issued to consumers. By pegging loans to a stable foreign currency, banks could lend more money ...

From the onset of the COVID-19 pandemic, fiscal, monetary and prudential authorities were quick to provide an unprecedented level of support to the real economy and the financial system. Most adopted measures are temporary and due to be phased out once economic and financial conditions start improving. However, an untimely and divergent phase-out would introduce potentially destabilising cliff effects that could lead to increased fragility among euro area governments, firms and households. Four ...

The Challenging Cliff-Edge

Részletes elemzés 01-03-2021

From an economic policy viewpoint, the harder part will come once the pandemic is over. The crisis will leave many scars that are likely to significantly slow growth down. Countering these effects will require continuous and well-targeted fiscal policy support. Monetary policy, which provided adequate support during the crisis, will have to eventually normalise its interest rates. The ECB could play a crucial role in reducing the large debts that fragilize several member countries. This paper was ...