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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
5 May 2021
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 3, 2021
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Abstract
We show how heterogeneous expectations across agents can change the macroeconomic outcomes of an increase in long-term inflation expectations. A broad-based expectation of higher longer-term inflation can be expected to lift the short to medium-term inflation outlook and have an expansionary effect on economic activity. If the financial markets are the only segment of the economy repricing higher longer-term inflation expectations, the associated tightening of financing conditions would hamper firms’ and households’ expenditure decisions and prevent any price pressures from building up.
JEL Code
E1 : Macroeconomics and Monetary Economics→General Aggregative Models
E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
I1 : Health, Education, and Welfare→Health
4 February 2021
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 1, 2021
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Abstract
We augment the ECB-BASE model using the predictive dynamics of an SIR model in order to assess the interplay between epidemiological fundamentals, containment policies and the macroeconomy, investigating the macro impact of pandemic-related risk factors associated with a medical solution to the COVID‑19 crisis.
JEL Code
E1 : Macroeconomics and Monetary Economics→General Aggregative Models
E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
I1 : Health, Education, and Welfare→Health
29 June 2020
WORKING PAPER SERIES - No. 2431
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Abstract
This paper studies the macroeconomic consequences of the COVID-19 pandemic and makes a first step in adapting the central bank modelling apparatus to the new economic landscape. We augment the ECB-BASE model with the predictive dynamics of the SIR model in order to assess the interplay between epidemiological fundamentals, containment policies and the macroeconomy. Containment policies considerably reduce the share of infected and deceased people, but generate a sharp decline in economic activity. Barring the materialization of amplification risks, the induced recession may remain broadly V-shaped under targeted confinement policies. By comparison, a "laissez-faire" approach to the pandemic emergency can even inflict in some cases higher long-term economic costs. Nevertheless, the depth of the recession and the speed of the recovery (if at all) crucially depend on the magnitude and persistence of the supply-side retrenchment, as well as on the risk of macro-financial feedback loops.
JEL Code
E1 : Macroeconomics and Monetary Economics→General Aggregative Models
E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
I1 : Health, Education, and Welfare→Health
23 September 2019
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 6, 2019
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Abstract
Using a structural vector autoregression (SVAR) model, the box suggests that the fall in industrial production growth in the euro area in the past year has been driven by both the intensification of global trade tensions and adverse domestic shocks. Whereas in the first half of 2018 weakness in international trade in an environment of global uncertainties was the main contributor to the fall in industrial production, since July 2018 euro area-specific developments have also played a major role.
JEL Code
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
F44 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Business Cycles
C50 : Mathematical and Quantitative Methods→Econometric Modeling→General
16 September 2019
WORKING PAPER SERIES - No. 2315
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Abstract
This paper presents the blueprint of a new ECB multi-country model. The version documentedin the following pages is estimated on euro area data. As a prelude to the countrymodels, this version is meant to enhance the understanding of the main model mechanisms,enlarge the suite of area wide tools, and provide a tool for a top down approach betweeneuro area and country modelling. The model converges to a well-de ned steady state and itsproperties are in line with macroeconomic theory and standard empirical benchmarks. Thedesign is aligned to its role as workhorse model in the context of the forecasting and policysimulation exercises at the ECB.
JEL Code
C3 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables
C5 : Mathematical and Quantitative Methods→Econometric Modeling
E1 : Macroeconomics and Monetary Economics→General Aggregative Models
E2 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
15 January 2019
WORKING PAPER SERIES - No. 2221
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Abstract
We show that medium-term interest rates in the euro area, Japan, UK and US are affected by domestic and foreign shocks. We find that US rates are the main source of spillovers globally and are less exposed to foreign shocks. Foreign spillovers to European rates were negligible only during the sovereign debt crisis and the introduction of more aggressive monetary policies by the ECB. We identify causal relations among asset prices through structural vector autoregressions (SVAR) and magnitude restrictions. We use preliminary regressions on event days to estimate key parameters employed to constrain the structural parameter space of the SVAR.
JEL Code
C3 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables
G2 : Financial Economics→Financial Institutions and Services
26 November 2018
WORKING PAPER SERIES - No. 2209
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Abstract
This paper finds that debt-financed fiscal multipliers vary depending on the location of the debt buyer. In a sample of 33 countries fiscal multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to when they are financed by issuing debt to home investors (residents). In a theoretical model, the location of the government creditor produces these differential responses through the extent that private investment is crowded out. International capital mobility of the resident private sector decreases the difference between the two types of financing both in the model and in the data.
JEL Code
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
H3 : Public Economics→Fiscal Policies and Behavior of Economic Agents
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
5 May 2017
WORKING PAPER SERIES - No. 2055
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Abstract
This paper studies spillovers among US and European sovereign yields. We provide a new method based on absolute magnitude restrictions of the impact matrix to identify the countries that were the main sources of spillovers. Despite the large size of shocks from euro area stressed countries, connectedness among sovereign yields declined between 2008 and 2012 due to financial fragmentation, particularly between countries with more divergent business and fiscal cycles. We show that none of the sovereign yields are insulated from foreign shocks and that shocks to the Greek bond market in 2010 explained 20-30% of the variance of sovereign yields in stressed countries, while in 2011-2012 Italy (not Spain) was the source of systemic risk.
JEL Code
C3 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables
G2 : Financial Economics→Financial Institutions and Services
30 August 2016
WORKING PAPER SERIES - No. 1953
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Abstract
This paper explores empirically the role of noisy information in cyclical developments and aims at separating fluctuations that are due to genuine changes in fundamentals from those due to temporary animal spirits or expectational errors (noise shocks). Exploiting the fact that the econometrician has a richer data-set in some dimensions than the consumers, we use a novel identification scheme in a structural vector-autoregressive (SVAR) framework. Our results show that noise shocks are more important for business cycle fluctuations than permanent (or technology) shocks. We also show that technology shocks turn negative a few years before recessions, while noise shocks are very positive at the cycle peaks. By contrast, the recovery from recessions is mostly led by technology shocks, noise shocks remaining negative for some time during this business cycle phase.
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