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David Lodge

21 September 2021
OCCASIONAL PAPER SERIES - No. 263
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Abstract
This paper assesses how globalisation has shaped the economic environment in which the ECB operates and discusses whether this warrants adjustments to the monetary policy strategy. The paper first looks at how trade and financial integration have evolved since the last strategy review in 2003. It then examines the effects of these developments on global productivity growth, the natural interest rate (r*), inflation trends and monetary transmission. While trade globalisation initially boosted productivity growth, this effect may be waning as trade integration slows and market contestability promotes a winner-takes-all environment. The impact of globalisation on r* has been ambiguous: downward pressures, fuelled by global demand for safe assets and an increase in the propensity to save against a background of rising inequality, are counteracted by upward pressures, from the boost to global productivity associated with greater trade integration. Headline inflation rates have become more synchronised globally, largely because commodity prices are increasingly determined by global factors. Meanwhile, core inflation rates show a lower degree of commonality. Globalisation has made a rather modest contribution to the synchronised fall in trend inflation across countries and contributed only moderately to the reduction in the responsiveness of inflation to changes in activity. Regarding monetary transmission, globalisation has made the role of the exchange rate more complex by introducing new mechanisms through which it affects financial conditions, real activity and price dynamics. Against the background of this discussion, the paper then examines the implications for the ECB’s monetary policy strategy. In doing so, it asks two questions. How is the ECB’s economic and monetary analysis affected by globalisation? And how does globalisation influence the choice of the ECB’s monetary policy objective and instruments? ...
JEL Code
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
F44 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Business Cycles
F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts
F65 : International Economics→Economic Impacts of Globalization→Finance
20 May 2019
WORKING PAPER SERIES - No. 2282
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Abstract
This paper provides a quantitative assessment of the relative importance of global structural shocks for changes in financial conditions across a sample of emerging market economies. We disentangle four key drivers of global financial markets (oil supply shocks, global economic news shocks, US-specific economic news shocks and US monetary shocks) and show that these global factors account for about half of the variation in risky asset prices across EMEs. The influence of global factors for EME interest rates and currencies is much smaller, suggesting that factors beyond the identified global shocks (e.g. domestic or regional shocks) might be more important. In contrast to the recent literature on the global financial cycle which has emphasised the prominent role of US monetary policy, we find that although US monetary shocks have some influence in shaping EME financial markets, the broader global environment plays a significantly stronger role.
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
G15 : Financial Economics→General Financial Markets→International Financial Markets
12 March 2019
WORKING PAPER SERIES - No. 2248
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Abstract
This paper compares the role of monetary and fiscal policy shocks in advanced and emerging economies. Using a model with a hierarchical structure we capture the variability of GDP response to policy shocks both between and within the groups of advanced and emerging countries. Our results provide evidence that fiscal policy effects are heterogeneous across countries, with higher multipliers in advanced economies compared to emerging markets, while monetary policy is found to have more homogeneous effects on GDP. We then quantify the policy contribution on GDP growth in the last decade by means of a structural counterfactual analysis based on conditional forecasts. We find that global GDP growth benefited from substantial policy support during the global financial crisis but policy tightening thereafter, particularly fiscal consolidation, acted as a significant drag on the subsequent global recovery. In addition we show that the role of policy has differed across countries. Specifically, in advanced economies, highly accommodative monetary policy has been counteracted by strong fiscal consolidation. By contrast, in emerging economies, monetary policy has been less accommodative since the global recession.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
18 February 2019
WORKING PAPER SERIES - No. 2244
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Abstract
This paper presents empirical evidence of the role of financial conditions in China’s business cycle. We estimate a Bayesian-VAR for the Chinese economy, incorporating a financial conditions index for China that captures movements across a range of financial variables, including interest rates and interbank spreads, bond returns, and credit and equity flows. We impose sign restrictions on the impulse response functions to identify shocks to financial conditions and shocks to monetary policy. The model suggests that monetary policy, credit and financial conditions have played an important role in shaping China’s business cycle. Using conditional scenarios, we examine the role of credit in shaping economic outcomes in China over the past decade. Those scenarios underscore the important role of credit growth in supporting activity during the past decade, particularly the surge in credit following the global financial crisis in 2008. The financial tightening since the end of 2016 has contributed to a modest slowing of credit growth and activity.
JEL Code
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E17 : Macroeconomics and Monetary Economics→General Aggregative Models→Forecasting and Simulation: Models and Applications
26 January 2018
OCCASIONAL PAPER SERIES - No. 206
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Abstract
China’s rise has been the economic success story of the past four decades but economic growth has been slowing and domestic imbalances have widened. This paper analyses the recent evolution of China’s imbalances, the risks they pose to the economic outlook and the potential impact of a transition to sustainable growth in China on the global and euro area economies. The paper documents China’s heavy reliance on investment and credit as drivers of growth, which has created vulnerabilities in a number of sectors and has been accompanied by increased complexity and leverage in the financial system. China retains some buffers, including policy space, to cushion against adverse shocks for the time being, but additional structural reforms would facilitate a shift of China’s economy onto a sustainable and strong growth trajectory in the medium term. China’s size, trade openness, dominant position as consumer of commodities and growing financial integration mean that its transition to sustainable growth is crucial for the global economic outlook. Simulation analysis using global macro models suggests that the spillovers to the euro area would be limited in the case of a modest slowdown in China’s GDP growth, but significant in the case of a sharp downturn. Sensitivity analysis underscores that the spillovers are dependent on the strengths of the various transmission channels, as well as the policy reaction by central banks and governments.
JEL Code
E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E27 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Forecasting and Simulation: Models and Applications
F10 : International Economics→Trade→General
F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications
O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development
O53 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Asia including Middle East
13 March 2017
WORKING PAPER SERIES - No. 2034
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Abstract
We present estimates of finance-adjusted output gaps which incorporate the information on the domestic and global credit cycles for a sample of emerging market economies (EMEs). Following recent BIS research, we use a state-space representation of an HP filter augmented with a measure of the credit gap to estimate finance-adjusted output gaps. We measure the domestic and global credit gaps as the deviation of private-sector real credit growth and net capital flows to EMEs from long-term trends, using the asymmetric Band-Pass filter. Overall, we find that financial cycle information is associated with cyclical movements in output. In the current circumstances, the estimates suggest that if financing and credit conditions were to tighten, it would be associated with a moderation in activity in some EMEs.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
15 September 2016
OCCASIONAL PAPER SERIES - No. 178
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Abstract
Global trade has been exceptionally weak over the past four years. While global trade grew at approximately twice the rate of GDP prior to the Great Recession, the ratio of global trade to GDP growth has declined to about unity since 2012. This paper assesses to what extent the change in the relationship between global trade and global economic activity is a temporary phenomenon or constitutes a lasting change. It finds that global trade growth has been primarily dampened by two factors. First, compositional factors, including geographical shifts in economic activity and changes in the composition of aggregate demand, have weighed on the sensitivity of trade to economic activity. Second, structural developments, such as waning growth in global value chains, a rise in non-tariff protectionist measures and a declining marginal impact of financial deepening, are dampening the support from factors that boosted global trade in the past. Notwithstanding the particularly pronounced weakness in 2015 that is assessed to be mostly a temporary phenomenon owing to a number of country-specific adverse shocks, the upside potential for trade over the medium term appears to be limited. The
JEL Code
F10 : International Economics→Trade→General
F13 : International Economics→Trade→Trade Policy, International Trade Organizations
F14 : International Economics→Trade→Empirical Studies of Trade
F15 : International Economics→Trade→Economic Integration
29 August 2016
WORKING PAPER SERIES - No. 1948
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Abstract
A number of studies document the prominent role of global factors in domestic inflation developments (e.g. Borio and Filardo, 2007; Ciccarelli and Mojon, 2010). In this paper we investigate global dimensions of advanced economy inflation. We estimate open-economy Phillips curves for 19 advanced economies. We include backwardand forward-looking survey measures of inflation expectations and augment Phillips curves with global factors including global economic slack, global inflation and commodity prices. Our results provide little support for the existence of direct effects of global economic slack on domestic inflation. Moreover, the results suggest that the importance of global inflation in forecasting domestic inflation has its roots solely in its ability to capture slow-moving trends in inflation rates. In the Phillips curve context much the same role is performed by domestic forward-looking inflation expectations. With the exception of commodity prices therefore our results reveal little reason to include global factors into traditional reduced form Phillips curves.
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
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
Network
Task force on low inflation (LIFT)
28 November 2014
WORKING PAPER SERIES - No. 1743
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Abstract
In this paper, we develop financial conditions indices (FCIs) for 3 industrialized (US, Japan, UK) and 5 emerging (China, Brazil, Russia, India, Turkey) economies. The FCIs are formed as the principal component of a range of financial series for each country and are constructed to account for fluctuations in the business cycle. We show that these FCIs can help predict growth developments and thereby provide a potential leading indicator for the external environment of the Euro area. While we draw upon established methodological considerations in the literature, our main contribution lies in providing FCIs which are available for a broad set of countries, including many emerging economies, and whose movements can intuitively be interpreted. This latter fact allows us to track developments in the 8 investigated financial markets over the last decade.
JEL Code
C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation
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
G1 : Financial Economics→General Financial Markets
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
9 January 2009
OCCASIONAL PAPER SERIES - No. 100
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Abstract
The first part of this paper provides a brief survey of the recent literature that employs survey data on household finance and consumption. Given the breadth of the topic, it focuses on issues that are particularly relevant for policy, namely: i) wealth effects on consumption, ii) housing prices and household indebtedness, iii) retirement income, consumption and pension reforms, iv) access to credit and credit constraints, v) financial innovation, consumption smoothing and portfolio selection and vi) wealth inequality. The second part uses concrete examples to summarise how results from such surveys feed into policy-making within the central banks that already conduct such surveys.
JEL Code
C42 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Survey Methods
D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis
D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance
Network
Eurosystem Monetary Transmission Network