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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 ...

Once More, the US Leads Europe

Išsami analizė 29-06-2021

The US and European economic approaches to the COVID-19 pandemic have differed in many ways. It is most likely that the US recovery will come sooner and will be stronger than in Europe, pretty much as has been the case with the global financial crisis a decade ago. In order to achieve a solid and lasting recovery, Europe needs to learn from the previous crisis and to prepare for the effects of the coming rapid US expansion. This paper was provided by the Policy Department for Economic, Scientific ...

We present a review of the channels through which the US fiscal and monetary post-pandemic policies may affect the euro area. US spillovers will likely be relevant and worth considering while setting the policy stance in the euro area, at a crossroad between economic global recovery and global overheating. A key role is going to be played by global financial markets, their appetite for open-ended stimulative policies and fears of hard disinflation scenarios affecting central banks' ability to keep ...

The recent US fiscal packages have raised some concerns on their magnitude, but also their spillovers to the euro area economy. After discussing US fiscal measures and reviewing the literature on international spillovers, we show that the US policy mix may have rather positive macroeconomic effects on the euro area. We conclude though that these effects need to be balanced against growing financial risks. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life ...

The US has undertaken much larger discretionary fiscal packages than euro area governments, particularly in 2021. The large 2021 US fiscal package is likely to provide a welcome boost to the euro area economy. There is a risk, however, that US fiscal policy could lead to overheating of the US economy and a possible monetary tightening from the Fed which could trigger a recession. This paper argues this scenario is unlikely to occur but discusses the implications for the ECB if it did. This paper ...

The main thrust of fiscal and monetary responses to the pandemic in the EU and the US are contrasted. Estimates of the spillovers from US fiscal policy to Europe are estimated. They are found to be significant but economically modest. Consequences for debt and debt sustainability in the long-run are also examined. Concerns over debt sustainability in the EU and the US are warranted. Observers advocating much higher debt levels need to consider lessons from history. This paper was provided by the ...

The United States (US) have responded to the COVID-19 shock with a massive fiscal stimulus in 2020 and 2021. At the same time, the Federal Reserve (Fed) has maintained a highly accommodative monetary policy stance. However, the Fed’s new average inflation targeting regime is being put to the test by the spike in inflation observed in recent months. Due to the global influence of the US economy and interlinkages with the euro area, questions arise over the possibility of significant spillovers from ...

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 ...

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 ...

We present a general framework apt to explain why central banks care about the co-existence of different transmission channels of monetary policy, and hence they endow themselves with different policy instruments. Within this framework, we then review and examine the key instruments adopted by the ECB to tackle the post-pandemic challenges, with a view to their consistency and efficacy. Finally, we make a few considerations about the future perspectives of monetary policy. This paper was provided ...