EB articles published in 2018

9 August 2018
The evolution of the ECB’s accountability practices during the crisis

Abstract

Abstract

This article examines the evolution of the ECB’s accountability practices during the financial crisis. After describing the challenges stemming from the crisis and changes resulting from the conferral of new supervisory tasks on the ECB, it provides evidence on how the strengthening of the ECB’s accountability has taken shape in the context of its relationship with the European Parliament in line with the latter’s key role as provided for in the Treaties. The ECB and the European Parliament, building on the accountability framework enshrined in primary law, have increased the frequency of their interactions, made innovations regarding the format and sharpened the focus of their exchanges, allowing increased scrutiny of the ECB’s policies. This has provided the ECB with more opportunities to explain its decisions and demonstrate that it is acting in accordance with its democratic mandate, which is a fundamental pillar of its legitimacy.

Economic Bulletin Issue 5, 2018
8 August 2018
Private consumption and its drivers in the current economic expansion

Abstract

Abstract

This article documents the key role that private consumption has played in recent output growth (2013 18), and asks how long the current growth in consumption can continue and whether it is self-sustaining. To that end, this article tries to identify the relative importance of different factors driving consumption, such as the recovery in the labour market, accommodative monetary policy, the 2014 15 drop in oil prices, the increase in asset prices, the easing of credit conditions and deleveraging. As the fall in consumption from 2008 to 2013 was very heterogeneous across countries, this article also sheds light on the extent to which the current expansion has actually led to a net increase in consumption over the past decade. This is relevant because private consumption is also a prime indicator of the economic well-being of households.

While the growth of consumption has been low compared with previous expansions, since 2013 it has exceeded initial expectations. It has been driven mainly by the recovery in the labour market, even though unemployment in some countries and for some groups of workers remains higher than before 2008. Looking forward, as labour markets continue to improve, private consumption should expand further in all countries and for all groups of workers. Through its impact on the labour market, the ECB’s accommodative monetary policy is not only contributing to the expansion of private consumption, but also to a decrease in inequality. At the same time, there is little evidence that low interest rates have led to generalised increases in household indebtedness, supporting the sustainability of the overall economic expansion.

Economic Bulletin Issue 5, 2018
7 August 2018
Measuring fragmentation in the euro area unsecured overnight interbank money market

Abstract

Abstract

The overnight money market plays an important role in the implementation and transmission of monetary policy in the euro area. Money market fragmentation is a sign of impairment in the transmission mechanism which merits the close monitoring of a set of suitable indicators. This article discusses concepts and measurement of fragmentation and proposes a new measure of fragmentation from a monetary policy transmission perspective.

Economic Bulletin Issue 5, 2018
28 June 2018
Measuring and interpreting the cost of equity in the euro area

Abstract

Abstract

Equity capital is among the main sources of funding for euro area non-financial corporations (NFCs), making it an important factor in the transmission of monetary policy. From a central bank perspective, improving the measurement and understanding of the cost of equity is therefore essential.

Unlike the cost of debt, which has declined substantially in recent years, the cost of equity has remained relatively stable at elevated levels. Results from the analysis performed in this article suggest that a persistently high “equity risk premium” (ERP) has been the key factor underpinning the high cost of equity for euro area NFCs. In fact, since the start of the global financial crisis, increases in the ERP have largely offset the fall in the yield of risk-free assets.

This article argues that the widely used workhorse model to derive the cost of equity and the ERP, namely the three stage dividend discount model, can be improved upon. In particular, incorporating short-term earnings expectations, discounting payouts to investors with a discount factor with appropriate maturity, and considering share buy-backs all yield beneficial refinements. This in turn would strengthen the theory and basis of the model and improve the robustness of its estimates. Most notably, share buy-back activity seems to matter, specifically for the level of the ERP. Notwithstanding such improvements in the modelling approach, estimating the ERP, particularly its level, remains subject to considerable uncertainty. Ultimately, such uncertainty advocates the use of a variety of models and survey estimates, as well as a focus on the dynamics, rather than on the level, of the ERP.

From an applied perspective, the article demonstrates that cost of equity modelling can be used to disentangle the different drivers of changes in equity prices. This is helpful from a monetary policy perspective, as changes in equity prices can contain important information about the economic outlook and warrant monitoring for financial stability purposes. Moreover, the article shows that adding an international perspective to the analysis of the ERP for the overall market may provide valuable insights for policymakers. For instance, the greater reliance on share buy-backs among companies in the United States than those in the euro area appears to be behind some of the recent steeper decline in the ERP in the United States when compared with the ERP in the euro area.

Economic Bulletin Issue 4, 2018
26 June 2018
Foreign direct investment and its drivers: a global and EU perspective

Abstract

Abstract

The relevance of foreign direct investment (FDI) as a source of economic activity has increased rapidly over the last decade. Between 2000 and 2016 the share of FDI stock in global GDP increased from 22% to 35%. Following a decline during the Great Recession, mergers and acquisitions (M&As), the most dynamic component of FDI, have recovered, reaching a record value of USD 1.2 trillion in the first quarter of 2018. The intensification of FDI activity has important implications for both origin and destination countries in terms of, for example, economic growth, productivity, wages and employment. Moreover, the expansion of multinational enterprises (MNEs) has been accompanied by the creation of complex cross-border production chains, which also has important implications.

This article presents several findings regarding the main developments in and determinants of FDI over the past decade, at both global and EU level. Since the beginning of the 2000s there has been a gradual shift in the global FDI landscape, with emerging market economies (EMEs) gaining in prominence both as a source of and as a destination for such investment. EMEs have attracted a growing share of FDI flows, reaching more than 50% of the world’s total inward FDI in 2013. In addition, FDI flows are dominated by a relatively small number of M&As. In 2016 M&As with a value in excess of USD 1 billion accounted for only 1% of all FDI projects, but they generated 55% of total FDI flows. Moreover, evidence suggests that FDI and exports are not competing but complementary strategies for serving foreign markets. Finally, since 2008 EU countries are no longer the world’s main FDI investors and recipients. Nevertheless, econometric analysis shows that belonging to the EU dramatically boosts FDI flows in member countries.

Economic Bulletin Issue 4, 2018
25 June 2018
Measures of underlying inflation for the euro area

Abstract

Abstract

Headline inflation can be noisy, blurring the signal on the medium-term inflationary pressure relevant for monetary policy. To help distinguish signal from noise in the data, central banks monitor measures of underlying inflation. As there are many ways of measuring underlying inflation, it is important to understand the properties of the various indicators and what factors may account for any divergence between them. This article describes in detail the measures of underlying inflation typically used at the ECB and evaluates them against a set of empirical criteria.

Economic Bulletin Issue 4, 2018
10 May 2018
Real convergence in central, eastern and south-eastern EuropeEconomic Bulletin Issue 3, 2018
10 May 2018
Risk sharing in the euro areaEconomic Bulletin Issue 3, 2018
8 May 2018
The impact of the corporate sector purchase programme on corporate bond markets and the financing of euro area non-financial corporationsEconomic Bulletin Issue 3, 2018
22 March 2018
The real effects of credit constraintsEconomic Bulletin Issue 2, 2018
20 March 2018
The economic impact of population ageing and pension reformsEconomic Bulletin Issue 2, 2018
7 February 2018
Labour supply and employment growthEconomic Bulletin Issue 1, 2018