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Agostino Consolo

8 October 2021
WORKING PAPER SERIES - No. 2601
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Abstract
We introduce a Bayesian Mixed-Frequency VAR model for the aggregate euro area labour market that features a structural identification via sign restrictions. The purpose of this paper is twofold: we aim at (i) providing reliable and timely forecasts of key labour market variables and (ii) enhancing the economic interpretation of the main movements in the labour market. We find satisfactory results in terms of forecasting, especially when looking at quarterly variables, such as employment growth and the job finding rate. Furthermore, we look into the shocks that drove the labour market and macroeconomic dynamics from 2002 to early 2020, with a first insight also on the COVID-19 recession. While domestic and foreign demand shocks were the main drivers during the Global Financial Crisis, aggregate supply conditions and labour supply factors reflecting the degree of lockdown-related restrictions have been important drivers of key labour market variables during the pandemic.
JEL Code
J6 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: 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. 275
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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. 269
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Abstract
The ECB’s price stability mandate has been defined by the Treaty. But the Treaty has not spelled out what price stability precisely means. To make the mandate operational, the Governing Council has provided a quantitative definition in 1998 and a clarification in 2003. The landscape has changed notably compared to the time the strategy review was originally designed. At the time, the main concern of the Governing Council was to anchor inflation at low levels in face of the inflationary history of the previous decades. Over the last decade economic conditions have changed dramatically: the persistent low-inflation environment has created the concrete risk of de-anchoring of longer-term inflation expectations. Addressing low inflation is different from addressing high inflation. The ability of the ECB (and central banks globally) to provide the necessary accommodation to maintain price stability has been tested by the lower bound on nominal interest rates in the context of the secular decline in the equilibrium real interest rate. Against this backdrop, this report analyses: the ECB’s performance as measured against its formulation of price stability; whether it is possible to identify a preferred level of steady-state inflation on the basis of optimality considerations; advantages and disadvantages of formulating the objective in terms of a focal point or a range, or having both; whether the medium-term orientation of the ECB’s policy can serve as a mechanism to cater for other considerations; how to strengthen, in the presence of the lower bound, the ECB’s leverage on private-sector expectations for inflation and the ECB’s future policy actions so that expectations can act as ‘automatic stabilisers’ and work alongside the central bank.
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
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. 267
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Abstract
This paper provides an assessment of the macroeconomic models regularly used for forecasting and policy analysis in the Eurosystem. These include semi-structural, structural and time-series models covering specific jurisdictions and the euro area within a closed economy, small open economy, multi-country or global setting. Models are used as analytical frameworks for building baseline projections and for supporting the preparation of monetary policy decisions. The paper delivers four main contributions. First, it provides a survey of the macroeconomic modelling portfolios currently used or under development within the Eurosystem. Second, it explores the analytical gaps in the Eurosystem models and investigates the scope for further enhancement of the main projection and policy models, and the creation of new models. Third, it reviews current practices in model-based analysis for monetary policy preparation and forecasting and provides recommendations and suggestions for improvement. Finally, it reviews existing cooperation modalities on model development and proposes alternative sourcing and organisational strategies to remedy any knowledge or analytical gaps identified.
JEL Code
C5 : Mathematical and Quantitative Methods→Econometric Modeling
E47 : Macroeconomics and Monetary Economics→Money and Interest Rates→Forecasting and Simulation: Models and Applications
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
F4 : International Economics→Macroeconomic Aspects of International Trade and Finance
21 September 2021
OCCASIONAL PAPER SERIES - No. 266
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Abstract
The digitalisation workstream report analyses the degree of digital adoption across the euro area and EU countries and the implications of digitalisation for measurement, productivity, labour markets and inflation, as well as more recent developments during the coronavirus (COVID-19) pandemic and their implications. Analysis of these key issues and variables is aimed at improving our understanding of the implications of digitalisation for monetary policy and its transmission. The degree of digital adoption differs across the euro area/EU, implying heterogeneous impacts, with most EU economies currently lagging behind the United States and Japan. Rising digitalisation has rendered price measurement more challenging, owing to, among other things, faster changes in products and product quality, but also new ways of price setting, e.g. dynamic or customised pricing, and services that were previously payable but are now “free”. Despite the spread of digital technologies, aggregate productivity growth has decreased in most advanced economies since the 1970s. However, it is likely that without the spread of digital technologies the productivity slowdown would have been even more pronounced, and the recent acceleration in digitalisation is likely to boost future productivity gains from digitalisation. Digitalisation has spurred greater automation, with temporary labour market disruptions, albeit unevenly across sectors. The long-run employment effects of digitalisation can be benign, but its effects on wages and labour share depend on the structure of the economy and its labour market institutions. The pandemic has accelerated the use of teleworking: roughly every third job in the euro area/EU is teleworkable, although there are differences across countries. ...
JEL Code
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
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
O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes
O57 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Comparative Studies of Countries
20 September 2021
ECONOMIC BULLETIN - ARTICLE
Economic Bulletin Issue 6, 2021
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Abstract
This article analyses the evolution of hours worked per worker in the euro area, in the light of their relevance for the labour contribution to the production of goods and services and for the capacity of the labour market to adjust to macroeconomic developments. Annual hours worked per worker in the euro area have been on a downward trend. Between 1995 and 2019, they declined by more than a hundred hours per worker, from 1,681 to 1,476. Most of this decline results from a rising share of part-time work which in turn can mainly be explained by the increasing labour force participation of women. Labour supply factors have a clear impact as most people working part-time do so voluntarily. Hours worked per worker also play an important role in the adjustment of the labour market during cyclical downturns, as some firms choose to reduce hours per worker to protect employment. This feature is an important factor in assessing the strength of the labour market during subsequent recoveries.
JEL Code
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
J22 : Labor and Demographic Economics→Demand and Supply of Labor→Time Allocation and Labor Supply
6 January 2021
ECONOMIC BULLETIN - ARTICLE
Economic Bulletin Issue 8, 2020
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Abstract
This article analyses labour market developments in the euro area since the onset of the coronavirus (COVID-19) pandemic. Total hours worked declined sharply in the first half of 2020. However, employment and unemployment reacted only weakly to the marked fall in GDP, as many workers remained employed under job retention schemes. These contributed to a fall in compensation per employee and an increase in compensation per hour worked. Participation in the labour force also dropped substantially, more than offsetting the increase observed since mid-2013. An analysis of the decomposition of labour market shocks via a sign-restricted structural vector-autoregressive model shows that both supply and demand shocks contributed to the decline in total hours worked. High-frequency indicators on hiring rates and job postings have declined sharply since April and continue to indicate a depressed level of labour demand. However, employment and hours worked recovered somewhat in the third quarter. Nonetheless, the COVID-19 pandemic is having a heterogeneous impact on employment across euro area countries and there is the risk of a further increase in geographic divergence in euro area labour markets. Temporary employees, the young and workers with low levels of education were the most affected, while teleworking may have played a role in supporting employment and hours worked for some workers in certain sectors. Activity sectors such as trade and transport and recreation activities have been disproportionately affected, with the largest decreases in hours worked. However, it is too early to assess the extent to which the pandemic will affect the need for labour reallocation across sectors, tasks and occupations.
JEL Code
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes
29 July 2020
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 5, 2020
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Abstract
This box examines high-frequency data to quantify the impact of the coronavirus (COVID-19) pandemic on both job postings and hiring patterns in the euro area. Prior to the COVID-19 crisis, both of these indicators had increased steadily year on year, reflecting a rise in the number of job findings in the euro area. However, both the Indeed job postings and the LinkedIn hiring rate have declined significantly since the onset of the COVID-19 crisis and the lockdowns, with the hiring rate bottoming out in May 2020. While the decline in the hiring rate was broad-based across sectors, the intensity of the COVID-19 shock is asymmetric, with sectors such as recreation, travel and manufacturing being more affected by the crisis than others, such as healthcare, software and IT services sectors. Based on the high-frequency information derived from the hiring rate, the implied unemployment rate is expected to peak during the second quarter of 2020 and to be around 2.3 percentage points higher than in February. Overall, the methodology and the high-frequency data used in this box allow for a timely assessment of developments in the euro area labour market. The use of job flows in and out of unemployment helps to enhance our understanding of the labour market adjustment during the current COVID-19 crisis.
JEL Code
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
E27 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Forecasting and Simulation: Models and Applications
29 July 2020
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 5, 2020
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Abstract
This box analyses labour market developments in the euro area since the onset of the coronavirus (COVID-19) pandemic, contrasting the developments in business and consumer survey data with the main headline labour market indicators for the euro area. On the one hand, business and consumer survey data point to a strong deterioration in the euro area labour market since the introduction of the containment measures to limit the spread of the virus. On the other hand, the extensive margin of the labour market has shown a muted response, with both employment and unemployment adjusting moderately to the COVID-19 shock. The adjustment of the euro area labour market is occurring instead via a strong decline in the average number of hours worked per employed person, shaped by the widespread use of short-time work schemes in the euro area. These schemes have been successful in containing dismissals, supporting incomes and helping firms to effectively reduce their payroll costs and liquidity needs, while maintaining the worker-job relationship. However, the continued success of the widespread use of short-term work schemes in supporting the euro area labour market depends critically on the dynamics and duration of the crisis.
JEL Code
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes
19 June 2019
ECONOMIC BULLETIN - ARTICLE
Economic Bulletin Issue 4, 2019
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Abstract
In this article we look at the euro area labour market using the framework underlying the Beveridge curve, which captures the negative relationship between the unemployment rate and the job vacancy rate. The Beveridge curve shows that, at a given moment in time, there are jobs vacant and people unemployed, while the shape and the position of the curve provide important information about the functioning of the labour market. There are two key concepts associated with the Beveridge curve: labour market tightness and matching efficiency. Labour market tightness is the number of vacant posts per each unemployed person and matching efficiency reflects the market’s ability to match individuals to jobs. We analyse the importance of these two concepts for wage developments using a simple version of the search and matching model, where unemployment, wages and vacancies are jointly determined and the Beveridge curve features prominently. First, we derive two aggregate measures that encapsulate the changes in the vacancy -unemployment space: labour market tightness and matching efficiency. Second, we look at the information content behind market tightness and job matching efficiency to analyse the euro area labour market and its cyclical conditions. Third, aggregate measures of labour market tightness and efficiency are used in a standard wage Phillips curve equation to measure their marginal impact. The results support the view that labour market tightness and labour market efficiency both play a role in explaining wage developments. However, the quantitative implications for wages differ only marginally from those of the standard Phillips curve approach. Overall, labour market efficiency provides an important qualitative margin of labour market functioning that is not captured in standard wage Phillips curve specifications.
JEL Code
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
J63 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Turnover, Vacancies, Layoffs
J64 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Unemployment: Models, Duration, Incidence, and Job Search
13 June 2019
OCCASIONAL PAPER SERIES - No. 224
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Abstract
Well-functioning economic structures are key for resilient and prospering euro area economies. The global financial and sovereign debt crises exposed the limited resilience of the euro area’s economic structures. Economic growth was masking underlying weaknesses in several euro area countries. With the inception of the crises, significant efforts have been undertaken by Member States individually and collectively to strengthen resilience of economic structures and the smooth functioning of the euro area. National fiscal policies were consolidated to keep the increase in government debt contained and structural reform momentum increased notably in the second decade, particularly in those countries most hit by the crisis. The strengthened national economic structures were supported by a reformed EU crisis and economic governance framework. However, overall economic structures in euro area countries are still not fully commensurate with the requirements of a monetary union. Moreover, remaining challenges, such as population ageing, low productivity and the implications of digitalisation, will need to be addressed to increase economic resilience and long-term growth.
JEL Code
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
E60 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
F10 : International Economics→Trade→General
J11 : Labor and Demographic Economics→Demographic Economics→Demographic Trends, Macroeconomic Effects, and Forecasts
O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth
29 October 2018
WORKING PAPER SERIES - No. 2189
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Abstract
This paper presents new evidence on the importance of insolvency frameworks for private sector debt deleveraging and for the resolution of non-performing loans (NPL). We construct an aggregate insolvency framework index (IFI), which is used as explanatory variable in the empirical analysis. By means of panel estimates over 2003-2016, we show that OECD countries with better IFI deleverage faster and adjust their NPL levels more rapidly than countries with worse IFI. We also show that there is a strong correlation between the level of NPL and IFI, which appears to be state-dependent, i.e. in a situation of high unemployment relative to its historical average the NPL ratio is generally lower for a higher IFI. Finally, our results indicate that better insolvency frameworks lead to faster NPL reductions and to lower NPL increases during economic bad times.
JEL Code
C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models
E02 : Macroeconomics and Monetary Economics→General→Institutions and the Macroeconomy
E05 : Macroeconomics and Monetary Economics→General
O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe
16 June 2010
OCCASIONAL PAPER SERIES - No. 113
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Abstract
This report aims to analyse euro area energy markets and the impact of energy price changes on the macroeconomy from a monetary policy perspective. The core task of the report is to analyse the impact of energy price developments on output and consumer prices. Nevertheless, understanding the link between energy price fluctuations, inflationary pressures and the role of monetary policy in reacting to such pressure requires a deeper look at the structure of the economy. Energy prices have presented a challenge for the Eurosystem, as the volatility of the energy component of consumer prices has been high since the creation of EMU. At the same time, a look back into the past may not necessarily be very informative for gauging the likely impact of energy price changes on overall inflation in the future. For instance, the reaction of HICP inflation to energy price fluctuations seems to have been more muted during the past decade than in earlier periods such as the 1970s.
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
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
Network
Eurosystem Monetary Transmission Network