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On 24 February 2022, Russia launched an invasion of Ukraine. The war itself, as well as related sanctions and countersanctions are expected to have a significant impact on the euro area economy. This paper summarises the recent monetary policy decisions of the European Central Bank (ECB)'s Governing Council and outlines some policy issues and challenges that might arise in the context of the war, related to price stability, financial stability, climate and energy policies, ECB/Eurosystem staff projections ...

Understanding inflation dynamics requires an understanding of the underlying concept and how it is measured. Inflation is defined as a process of continuously rising prices and falling purchasing power. In other words, a general and broad-based increase in the price of goods and services over an extended period. The main objective of central banks is to keep prices stable, to preserve the integrity and purchasing power of people's money. The most common inflation indicator measures the average change ...

A new database on exceptional fiscal spending adopted during the COVID-19 crisis is presented for 14 EU countries. The composition and evolution of fiscal measures differ across countries. We analyse (a) whether national economic characteristics determined the type of fiscal response adopted and (b) how the different fiscal measures affected the macroeconomic outcomes and consumer confidence. We assess whether measures have been sufficiently targeted and make recommendations as to which adjustments ...

This paper examines the importance of communication of monetary policy in the light of the complex challenges central banks face post GFC in their role as ‘crisis managers’, confronting financial stability concerns, the economic consequences of the COVID pandemic and the risks arising from climate change and unsustainable activities. Effective central bank communication becomes ever more critical in order to preserve credibility and legitimacy. Such communication is an important component of accountability ...

Central banks attach great importance to inflation expectations. Households’ and firms’ expectations about the future path of inflation affect wage and price setting as well as consumption and investment decisions. Financial market participants’ expectations are relevant because they influence financial prices and financing conditions. Inflation expectations “anchored” around the inflation target are seen as a pre-condition for maintaining price stability and credibility of the central bank. Starting ...

With growing complexity of monetary policy following the global financial crisis, communication gradually became mission-critical for central banks in order to preserve legitimacy and credibility. The public, legislators and financial market participants each require a different type and channel of communication. Looking forward, the aftermath of the COVID-19 crisis will bring considerable challenges for the European Central Bank (ECB)’s communication and accountability in the context of the complex ...

In July 2021, the European Central Bank (ECB)’s Governing Council concluded the review of its monetary policy strategy. One of the main outcomes of the review was the revised price stability target. The ECB is now committed to “an inflation rate of 2% over the medium term”. The new target is symmetric, which means that negative and positive deviations from the target are considered as equally undesirable. Four papers were prepared by the ECON Committee’s Monetary Expert Panel, explaining the main ...

The original full study presents data from 27 banking groups in 10 EU Member States, where it is found that banks have used COVID-19 relief measures extensively, with some cross-country differences as for the intensity of use. Flexibility in risk classification does not seem to have impaired banks’ ability to report and recognise risk properly, even for loans under moratoria. The findings suggest that the impact of the measures on banks’ credit supply has been overall positive and mainly driven ...

The concept of financial dominance may be simplified as a situation where monetary policy becomes dominated by short-term concerns about the financial sector. As such, it may distract the central bank from its primary objective of maintaining price stability. While other policies, e.g. macroprudential, are considered the first line of defence against financial instability, following the 2007-2008 global financial crisis, financial stability considerations became an integral part of monetary policy ...

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 ...