Mark Kerssenfischer
- 30 June 2025
- OCCASIONAL PAPER SERIES - No. 372Details
- Abstract
- This report focuses on the implications of the changed inflation environment for the ECB’s monetary policy strategy, including the lessons learned from both the low inflation and high inflation periods, and the transition from one to the other. The starting point of the report is the outcome of the Monetary Policy Strategy Review 2020-21. While the previous review was conducted in an economic environment of low inflation, with interest rates in proximity to the effective lower bound (ELB), the inflation surge that followed the COVID-19 pandemic underscores the importance of a monetary policy strategy that enables the Governing Council to effectively respond to major changes in the inflation environment.
- 10 June 2024
- WORKING PAPER SERIES - No. 2944Details
- Abstract
- We use outages as natural experiments to study sovereign bond market functioning. When the euro area futures market goes down, trading activity on the cash market declines, liquidity evaporates, and transaction prices deviate from fundamental values. Tracing back this macrolevel market breakdown to the micro-level, we show that particularly dealers withdraw from the cash market during outages. While most of their remaining trades remain fairly priced, dealer’s capacity to intermediate trades on the cash market is reduced, forcing more clients to trade directly with each other, leading to substantial mispricing. Lastly, outages on cash trading venues barely affect the futures market, suggesting that price formation and liquidity provision is a one-way street, and outages on the US and euro area futures market barely affect each other, in stark contrast to the significant price spillovers. Our results reveal the trade-offs between a (de)centralized market structure, they support cross-asset learning models to explain the link between liquidity and arbitrage, and they demonstrate how financial intermediaries can impose important limits to arbitrage.
- JEL Code
- G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
- 30 September 2016
- WORKING PAPER SERIES - No. 1967Details
- Abstract
- Mainstream macroeconomic theory predicts a rapid response of asset prices to monetary policy shocks, which conventional empirical models are unable to reproduce. We argue that this is due to a deficient information set: Forward-looking economic agents observe vastly more information than the handful of variables included in standard VAR models. Thus, small-scale VARs are likely to suffer from nonfundamentalness and yield biased results. We tackle this problem by estimating a Structural Factor Model for a large euro area dataset. We find quicker and larger effects of monetary policy shocks, consistent with mainstream theory and the observed large swings in asset prices. Our results point to stronger financial stability consequences of an exogenous monetary policy tightening, also in the form of a quicker than expected unwinding of QE, than commonly thought.
- 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
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
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy