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An adjustment period

We are emerging from an unprecedented situation and are in an adjustment period now, President Christine Lagarde says to CNBC. In previous crises, we’ve seen that bottlenecks in the economy, such as those occurring now, are resolved over the course of time.

Interview
ACCOUNTABILITY 24 September 2021

Hearing at the European Parliament

President Christine Lagarde will speak on 27 September before the European Parliament’s Committee on Economic and Monetary Affairs and answer questions from its members.

The hearing will be webcast live and starts at 13:45 CET.

Live webcast
SPEECH 23 September 2021

Tackling the climate challenge

We must transition to a greener economy soon and gradually, says Executive Board member Frank Elderson, commenting on the results of the ECB’s economy-wide stress test. This mitigates the costs of both the transition and the future impact of natural disasters.

Speech
ECONOMIC BULLETIN 23 September 2021

Economic Bulletin out now

This publication presents the economic and monetary information which forms the basis for the Governing Council’s policy decisions.

It is released eight times a year, two weeks after each monetary policy meeting.

Economic Bulletin Issue 6, 2021
24 September 2021
Panel contribution by Philip R. Lane, Member of the Executive Board of the ECB, to the 5th Joint Regional Financing Arrangements Research Seminar organised by the European Stability Mechanism
23 September 2021
Speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the 8th Conference on the Banking Union, Goethe University, Frankfurt am Main
20 September 2021
Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Annual Conference of Latvijas Banka on "Sustainable Economy in Times of Change"
Annexes
20 September 2021
15 September 2021
Presentation by Philip R. Lane, Member of the Executive Board of the ECB, at the IMFS Policy Webinar
15 September 2021
Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Bond Market Contact Group meeting
24 September 2021
Interview with Christine Lagarde, President of the ECB, conducted by Annette Weisbach, CNBC, on 23 September
17 September 2021
Interview with Luis de Guindos, Vice-President of the ECB, conducted by Joost van Kuppeveld and Daan Ballegeer
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16 September 2021
Interview with Christine Lagarde, President of the ECB, conducted by David Rubenstein, Bloomberg, on 13 September
1 September 2021
Interview with Christine Lagarde, President of the ECB, conducted by Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, on 30 August 2021
1 September 2021
Interview with Luis de Guindos, Vice-President of the ECB, conducted by Miquel Roig and Jorge Zuloaga on 26 August and published on 1 September 2021
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14 September 2021
Blog post by Isabel Schnabel, Member of the Executive Board of the ECB
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Summary
While rising inflation understandably worries people, current inflation rates should be interpreted with caution, writes Executive Board member Isabel Schnabel.
31 August 2021
Contribution by Isabel Schnabel, Member of the Executive Board of the ECB, to the International Monetary Fund’s magazine Finance and Development
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Summary
The existential threat posed by climate change implies that central banks must not stand on the sidelines in the fight against global warming, writes Executive Board member Isabel Schnabel. Our ambitious climate action plan outlines how the ECB will contribute within its mandate.
19 August 2021
Philip R. Lane, Member of the Executive Board of the ECB
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Summary
Our revised forward guidance is a fundamental step in fulfilling our commitment to 2% inflation, writes Chief Economist Philip R. Lane. He also discusses the three conditions that should be met before interest rates are raised.
27 July 2021
Blog post by Fabio Panetta, Member of the Executive Board of the ECB
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If we make the recovery fund work and if we embed the lessons from the pandemic in the EMU governance framework, we can emerge from the crisis with a stronger economy and greater social and political cohesion, says Executive Board member Fabio Panetta in The ECB Blog.
14 July 2021
Blog post by Fabio Panetta, Member of the Executive Board of the ECB
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Summary
We have decided to launch a project to prepare for possibly issuing a digital euro. A digital euro will be successful if it adds value for people, merchants and financial intermediaries in the euro area, explains Executive Board member Fabio Panetta in The ECB Blog.
23 September 2021
WORKING PAPER SERIES - No. 2590
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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 Code
D31 : Microeconomics→Distribution→Personal Income, Wealth, and Their Distributions
E12 : Macroeconomics and Monetary Economics→General Aggregative Models→Keynes, Keynesian, Post-Keynesian
E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
23 September 2021
WORKING PAPER SERIES - No. 2589
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Abstract
We explore the ties between bonds and individual dealers formed through home advantage and the persistence of previous underwriting relationships. Building on these connections, we show that the introduction of the leverage ratio for the European banks had a large impact on exposed bonds’ liquidity. Moreover, based on these ties, we show that bond mutual fund panic following the 2020 pandemic outbreak affected substantially more mutual funds with the larger exposures to dealer banks’ balance sheet constraints.
JEL Code
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
23 September 2021
ECONOMIC BULLETIN
23 September 2021
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 6, 2021
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Abstract
In its climate change action plan, the ECB committed to accelerating the development of new models and conducting theoretical and empirical analyses to monitor the implications of climate change and related policies for the economy. As a first step in its detailed roadmap of climate-related actions, the ECB envisages the inclusion of technical assumptions on carbon pricing in Eurosystem/ECB staff projections. Against this backdrop, this box summarises the genesis and basic features of the EU emissions trading system (ETS), the system setting the carbon price in the EU. The EU ETS, which began operating in 2005, is a “cap and trade” system where a cap is set by the EU on the total amount of greenhouse gases that can be emitted by the activities covered by the system. It has been implemented in “phases” designed to gradually reduce the cap while increasing the scope of the system. In July 2021 a revision of the EU ETS was proposed in the context of the “Fit for 55” package. Meanwhile, the price of emissions allowances traded on the EU ETS has increased from €8 per tonne of carbon dioxide equivalent at the beginning of 2018 to around €60 more recently. So far, the main impact of changes in emissions allowance prices has been on HICP energy inflation, and, overall, the risk that emissions allowance prices under the current EU ETS may translate into significantly higher headline inflation in the near term appears limited. However, against the backdrop of the ECB’s recently announced action plan, these and other climate change mitigation polices will be further explored with regard to their implications for macroeconomic modelling and monetary policy.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
Q43 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Energy and the Macroeconomy
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
23 September 2021
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 6, 2021
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Abstract
This box documents recent transport and input-related bottlenecks in global trade and shows how euro area countries have been particularly affected. An empirical analysis assesses the impact of supply bottlenecks on global and euro area export growth and estimates the cumulated shortfall for the level of goods exports to be 6.7% for the euro area and 2.3% for the rest of the world.
JEL Code
F10 : International Economics→Trade→General
D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity
E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
22 September 2021
OTHER PUBLICATION
22 September 2021
OCCASIONAL PAPER SERIES - No. 282
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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 Code
E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
22 September 2021
OCCASIONAL PAPER SERIES - No. 281
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Abstract
Climate change is one of the greatest challenges facing humankind this century. If left unchecked, it is likely to result in more frequent and severe climatic events, with the potential to cause substantial disruption to our economies, businesses and livelihoods in the coming decades. Yet the associated risks remain poorly understood, as climate shocks differ from the financial shocks observed during previous crises. This paper describes the ECB’s economy-wide climate stress test, which has been developed to assess the resilience of non-financial corporates (NFCs) and euro area banks to climate risks, under various assumptions in terms of future climate policies. This stress test comprises three main pillars: (i) climate-specific scenarios to project climate and macroeconomic conditions over the next 30 years; (ii) a comprehensive dataset that combines climate and financial information for millions of companies worldwide and approximately 1,600 consolidated euro area banks; (iii) a novel set of climate-specific models to capture the direct and indirect transmission channels of climate risk drivers for firms and banks.
JEL Code
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
C55 : Mathematical and Quantitative Methods→Econometric Modeling→Modeling with Large Data Sets?
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
22 September 2021
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 6, 2021
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Abstract
This box assesses the health of the euro area non-financial corporate sector at an aggregate level during the coronavirus (COVID-19) pandemic using the quarterly sectoral accounts. The results suggest that non-financial corporate liquidity was safeguarded at the aggregated sector level. This was mainly due to a build-up of cash buffers, as is typical for crisis periods, and the timely and extensive reactions from the monetary, fiscal and supervisory authorities. Policy interventions provided direct and indirect support to non-financial corporations and enabled firms to substantially increase their recourse to debt financing. However, non-financial corporate profitability, operating efficiency, indebtedness and vulnerabilities came under pressure, increasing the risk of a rise in firm defaults in the future.
JEL Code
E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
22 September 2021
RESEARCH BULLETIN - No. 87.3
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Abstract
Many countries have implemented macroprudential policies. The aims are twofold: first, to render the financial system more resilient to shocks and, second, to prevent booms and busts in the financial system in response to economic cycles. This article provides theoretical and empirical evidence which shows the positive impact that these measures have on financial stability, as well as the gains in economic growth derived from a stronger financial system.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
22 September 2021
RESEARCH BULLETIN - No. 87.2
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Abstract
The effect of policy rate cuts on bank lending and risk-taking depends on how the low interest rate environment affects banks’ ability to raise external financing. When interest rates are low, easing monetary policy relaxes banks’ external financing constraint less than when interest rates are high. This reduces the stimulus to bank lending and induces banks to take more risk. There are indeed side effects of monetary stimulus at the zero-lower bound (ZLB).
JEL Code
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G20 : Financial Economics→Financial Institutions and Services→General
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
22 September 2021
RESEARCH BULLETIN - No. 87.1
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Abstract
When considering the use of macroprudential instruments to manage financial imbalances, macroprudential policymakers face an intertemporal trade-off between facilitating short-term expected growth and containing medium-term downside risks to the economy. To assist policymakers in assessing this trade-off, in this article we propose a risk management framework which extends the well-known notion of growth-at-risk to consider the entire predictive real GDP growth distribution, with a view to quantifying the macroprudential policy stance. A novel empirical model fitted to euro area data allows us to study direct and indirect interactions between financial vulnerabilities, financial stress and real GDP growth, incorporating non-linear amplification effects among all variables. Our framework can support policymakers by facilitating model-based macro-financial stress tests and model-based assessments of when to adjust macroprudential instruments.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models
21 September 2021
OCCASIONAL PAPER SERIES - No. 280
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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 Code
C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts
J11 : Labor and Demographic Economics→Demographic Economics→Demographic Trends, Macroeconomic Effects, and Forecasts
J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General
21 September 2021
OCCASIONAL PAPER SERIES - No. 279
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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 Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
21 September 2021
OCCASIONAL PAPER SERIES - No. 278
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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 Code
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E47 : Macroeconomics and Monetary Economics→Money and Interest Rates→Forecasting and Simulation: Models and Applications
21 September 2021
OCCASIONAL PAPER SERIES - No. 277
Details
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 Code
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E47 : Macroeconomics and Monetary Economics→Money and Interest Rates→Forecasting and Simulation: Models and Applications
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
21 September 2021
OCCASIONAL PAPER SERIES - No. 276
Details
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 Code
K23 : Law and Economics→Regulation and Business Law→Regulated Industries and Administrative Law
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
21 September 2021
OCCASIONAL PAPER SERIES - No. 275
Details
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 Code
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
21 September 2021
OCCASIONAL PAPER SERIES - No. 274
Details
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 Code
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
21 September 2021
OCCASIONAL PAPER SERIES - No. 273
Details
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 Code
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance

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