All occasional papers

Communication device to a broad audience

Our Occasional Paper Series (OPS) disseminates work carried out by, as a rule, ECB staff on subjects that relate to the main tasks and functions of the ECB and the ESCB. Occasional Papers (OPs) are addressed to a wide audience, including other policy-makers, financial analysts, academics, the media and the interested general public. Understanding the papers will normally require some prior knowledge of the topic.

No. 235
16 October 2019
Conditionality and design of IMF-supported programmes

Abstract

JEL Classification

F3 : International Economics→International Finance

F5 : International Economics→International Relations, National Security, and International Political Economy

Abstract

Conditionality is at the very heart of IMF lending and has been the subject of intense debates ever since the Fund’s inception. Its success is of crucial importance not only for countries’ chances of achieving the goals of IMF lending programmes, but also for the credibility of the Fund as a trusted adviser. This report provides information and a set of facts on the IMF arrangements approved after the global financial crisis, with a focus on ex post conditionality and on arrangements primarily financed through the General Resources Account (GRA). The analysis shows that between 2008 and 2018, the characteristics of IMF programmes evolved with the macroeconomic context; in particular, a tendency towards more structural conditionality and longer programme implementation horizons has emerged. In the aftermath of an IMF programme, all relevant macroeconomic variables tend to improve compared with the pre-programme period; in particular, external and fiscal positions improve considerably and growth typically rebounds, inflation declines and net private capital inflows stabilise or recover slightly. However, the improvement has generally fallen short of expectations, especially in terms of GDP growth and debt reduction. One area in which the effectiveness of IMF programmes has proven less than satisfactory is with serial borrowers, i.e. countries that fail to graduate from IMF financial assistance in due course. This highlights the importance of further analysing the factors behind the success of IMF programmes and points, inter alia, to the need to design and sequence the structural conditions attached to Fund loans more effectively

No. 234
30 September 2019
Early French and German central bank charts and regulations

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

N23 : Economic History→Financial Markets and Institutions→Europe: Pre-1913

Abstract

In some recent studies, the question of the origins of central banking has been revisited, suggesting that beyond Swedish and British central banking, a number of earlier European continental institutions would also have played an important role. However, it has often been difficult to access the charters and regulations of these early central banks – in particular in English. This paper contributes to closing this gap by introducing and providing translations of some charters and regulations of six pre 1800 central banks in France and Germany. The six early public banks displayed varying levels of success and duration, and qualify to a different degree as central banks. An overview table maps the articles of the early central banks’ charters and regulations into key central banking topics. The texts also provide evidence of the role of central banking legislation, and of the distinction between, on the one side, the statutes and charters of the banks, and on the other side the operational aspects which tend to be framed by separate rules and regulations. Finally, the texts provide evidence of the policy objectives of early central banks, including in particular those of a monetary nature. To put these documents into context, the objectives, balance sheet structure, achievements and closure of each central bank are briefly summarised.

No. 233
16 September 2019
Financial stability assessment for EU candidate countries and potential candidates

Abstract

JEL Classification

F31 : International Economics→International Finance→Foreign Exchange

F34 : International Economics→International Finance→International Lending and Debt Problems

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

G15 : Financial Economics→General Financial Markets→International Financial Markets

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper reviews and assesses financial stability challenges in countries preparing for EU membership, i.e. Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, Serbia and Turkey. The paper mainly focuses on the period since 2016 (unless the analysis requires a longer time span) and on the banking sectors that dominate financial systems in this group of countries. For the Western Balkans, the paper analyses recent trends in financial intermediation, as well as the two main challenges that have been identified in the past. Asset quality continues to improve, but the share of non-performing loans is still high in some countries, while regulatory, legal and tax impediments are still to be resolved in most cases. High unofficial euroisation is a source of indirect credit risk for countries with their own national legal tender, which calls for continued efforts to promote the use of domestic currencies in the financial system. At the same time, banking systems seem less prone to financial stress from maturity mismatches than certain EU peers. These risks are met with a solid shock-absorbing capacity in the Western Balkans, as exemplified by robust capital and liquidity buffers. Turkey experienced a period of heightened financial stress during 2018 and, while its banking system appears to have sufficient buffers to absorb shocks overall, significant forex borrowing of corporates and high rollover needs of banks in foreign exchange on the wholesale market constitute considerable financial stability risks.

No. 232
3 September 2019
Understanding low wage growth in the euro area and European countries

Abstract

JEL Classification

J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General

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

Abstract

Despite notable improvements in the labour market since 2013, wage growth in the euro area was subdued and substantially overpredicted in 2013-17. This paper summarises the findings of an ESCB expert group on the reasons for low wage growth and provides comparable analyses on wage developments in the euro area as a whole and in individual EU countries. The paper finds that cyclical drivers, as captured by a standard Phillips curve, seem to explain much of the weakness in wage growth during this period, but not all of it. Going beyond the drivers included in standard Phillips curves, other factors are also found to have played a role, such as compositional effects, the possible non-linear reaction of wage growth to cyclical improvements, and structural and institutional factors. In order to increase the robustness of wage forecasts, the paper also proposes ready-to-use tools for cross-checking euro area wage growth forecasts based on wage Phillips curves. These are derived based on a comprehensive real-time forecast evaluation exercise

No. 231
30 August 2019
Taking stock of the functioning of the EU fiscal rules and options for reform

Abstract

JEL Classification

H11 : Public Economics→Structure and Scope of Government→Structure, Scope, and Performance of Government

H50 : Public Economics→National Government Expenditures and Related Policies→General

H6 : Public Economics→National Budget, Deficit, and Debt

Abstract

This paper reviews developments in fiscal rules in the European Union (EU) from the entering into force of the Treaty on European Union (the “Maastricht Treaty”), which laid the foundations for the euro, until today. It seems safe to say that fiscal positions in the EU and the euro area are now more favourable than they would have been in the absence of the Maastricht Treaty and the Stability and Growth Pact (SGP). However, the aggregate picture masks significant cross-country heterogeneity, with less progress where it would be needed most. Furthermore, the design of the rules has not always followed economic logic and has often been the product of political constraints, giving rise to some flaws in the framework from the outset. Repeated attempts to adjust the fiscal framework to a multitude of circumstances over the past 25 years have made it overly complex and incoherent. The paper concludes that, in its current shape, the SGP is an insufficient disciplining device in economic good times, with the consequence that there are no fiscal buffers, particularly in high-debt countries, to support growth in economic troughs. This, together with the absence of a central fiscal stabilisation instrument, puts the burden of stabilisation mostly on the single monetary policy. The paper also reviews reform options on how to render the fiscal framework more effective in bringing about sounder public finances and avoiding the procyclicality observed over the past two decades.

No. 230
29 August 2019
In search for stability in crypto-assets: are stablecoins the solution?

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

L17 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Open Source Products and Markets

O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes

Abstract

Stablecoins claim to stabilise the value of major currencies in the volatile crypto-asset market. This paper describes the often complex functioning of different types of stablecoins and proposes a taxonomy of stablecoin initiatives. To this end it relies on a novel framework for their classification, based on the key dimensions that matter for crypto-assets, namely: (i) accountability of issuer, (ii) decentralisation of responsibilities, and (iii) what underpins the value of the asset. The analysis of different types of stablecoins shows a trade-off between the novelty of the stabilisation mechanism used in an initiative (from mirroring the traditional electronic money approach to the alleged introduction of an “algorithmic central bank”) and its capacity to maintain a stable market value. While relatively less innovative stablecoins could provide a solution to users seeking a stable store of value, especially if legitimised by the adherence to standards that are typical of payment services, the jury is still out on the potential future role of more innovative stablecoins outside their core user base.

No. 229
23 August 2019
Are instant payments becoming the new normal? A comparative study

Abstract

JEL Classification

E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

As a result of technological advancements, instant delivery of digital services has become the norm in today’s society. Yet, until recently, this trend did not extend to retail payment services, which normally took one or up to a few working days from the end user's perspective. Following Europe’s recent launch of its own SEPA-wide instant payment platform, now is the time to ask the question: will instant payment services become “the new normal” and what would this new normal look like? This paper assesses the overall prospects of instant payments in the euro area. It identifies structural drivers and blockers to the adoption of instant payments based on the analysis of country cases where instant payments became operational in the last few years.

No. 228
12 August 2019
Role of cross currency swap markets in funding and investment decisions

Abstract

JEL Classification

D53 : Microeconomics→General Equilibrium and Disequilibrium→Financial Markets

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions

G15 : Financial Economics→General Financial Markets→International Financial Markets

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

Abstract

A US dollar funding premium in the EUR/USD cross currency swap market has been in existence since 2008. Whilst there are many reasons behind this dislocation, since 2014 the divergence in monetary policy between the euro area and the United States has played a growing role. This paper aims at exploring and gaining more insight into the role the Eurosystem’s Expanded Asset purchase Programme (APP) has had in guiding investment and funding decisions and its influence on the cross currency basis. The downward pressure on yields, exerted by the APP, has made euro assets less attractive and has led investors to search for yield abroad. At the same time, the decline in yields and tighter credit spreads have attracted US corporate issuers to the euro market in search of cheaper funding costs. These cross-border flows from issuers and investors have played a strong role in driving the US dollar funding premium. The purpose of this study is to gauge whether these changing trends in cross-border flows have implications for the implementation of the Eurosystem’s APP. Beyond the structural increase in the US dollar funding premium described above, a cyclical component has led to an amplification of the premium over balance sheet reporting dates, due to new bank regulations. This paper also analyses the behaviour of euro area banks in cross currency swap markets over balance sheet reporting dates, using the money market statistical reporting (MMSR) dataset in order to discern whether the increase in the US dollar funding premium at these specific points in time has an adverse impact on the transmission of monetary policy.

No. 227
17 July 2019
Macroprudential policy at the ECB: Institutional framework, strategy, analytical tools and policies

Abstract

JEL Classification

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

G20 : Financial Economics→Financial Institutions and Services→General

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

K23 : Law and Economics→Regulation and Business Law→Regulated Industries and Administrative Law

Abstract

This occasional paper describes how the financial stability and macroprudential policy functions are organised at the ECB. Financial stability has been a key policy function of the ECB since its inception. Macroprudential policy tasks were later conferred on the ECB by the Single Supervisory Mechanism (SSM) Regulation. The paper describes the ECB’s macroprudential governance framework in the new institutional set-up. After reviewing the concept and origins of systemic risk, it reflects on the emergence of macroprudential policy in the aftermath of the financial crisis, its objectives and instruments, as well as specific aspects of this policy area in a monetary union such as the euro area. The ECB’s responsibilities required new tools to be developed to measure systemic risk at financial institution, country and system-wide level. The paper discusses selected analytical tools supporting financial stability surveillance and assessment work, as well as macroprudential policy analysis at the ECB. The tools are grouped into three broad areas: (i) methods to gauge the state of financial instability or prospects of near-term systemic stress, (ii) measures to capture the build-up of systemic risk focused on country-level financial cycle measurement and early warning methods, and (iii) the ECB stress testing framework for macroprudential purposes.

No. 226
2 July 2019
Macroprudential stress test of the euro area banking system

Abstract

JEL Classification

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

No. 225
19 June 2019
Firm heterogeneity and trade in EU countries: a cross-country analysis

Abstract

JEL Classification

F14 : International Economics→Trade→Empirical Studies of Trade

L25 : Industrial Organization→Firm Objectives, Organization, and Behavior→Firm Performance: Size, Diversification, and Scope

Abstract

Firms are heterogeneous, even within narrowly defined sectors. This paper surveys the relevant theoretical and empirical literature on firm heterogeneity and external trade. By innovatively exploiting rich cross-country micro-aggregated data sourced from the ECB Competitiveness Research Network (CompNet), this study then investigates the main implications of firm heterogeneity for trade of EU countries, showing a set of stylised facts. On the one hand, exporting firms are larger, more productive and pay higher wages than non-exporting firms. Only these firms are able to bear export costs, related to various factors, such as tariff and non-tariff trade barriers, the quality of the legal system or access to finance. Hence, only few enterprises actually export, and the intensity of aggregate export concentration within few large firms varies across countries and sectors. On the other hand, opening to trade boosts individual firms’ productivity growth, via a number of channels, and also enhances allocative efficiency across firms, in turn increasing aggregate productivity growth. One of the main standard determinants of export growth, namely changes in the real effective exchange rate, impacts aggregate performance differently across countries and sectors, depending on sectoral composition and on firm characteristics within a given sector

No. 224
13 June 2019
Economic structures 20 years into the euro

Abstract

JEL Classification

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

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.

No. 223
17 May 2019
Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes

Abstract

This paper summarises the outcomes of the analysis of the ECB Crypto-Assets Task Force. First, it proposes a characterisation of crypto-assets in the absence of a common definition and as a basis for the consistent analysis of this phenomenon. Second, it analyses recent developments in the crypto-assets market and unfolding links with financial markets and the economy. Finally, it assesses the potential impact of crypto-assets on monetary policy, payments and market infrastructures, and financial stability. The analysis shows that, in the current market, crypto-assets’ risks or potential implications are limited and/or manageable on the basis of the existing regulatory and oversight frameworks. However, this assessment is subject to change and should not prevent the ECB from continuing to monitor crypto-assets, raise awareness and develop preparedness.

No. 222
3 May 2019
Monetary policy, credit institutions and the bank lending channel in the euro area

Abstract

JEL Classification

E4 : Macroeconomics and Monetary Economics→Money and Interest Rates

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

G20 : Financial Economics→Financial Institutions and Services→General

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

As the euro area has a predominantly bank-based financial system, changes in the composition and strength of banks’ balance sheets can have very sizeable implications for the transmission of monetary policy. This paper provides an overview of developments in banks’ balance sheets, profitability and risk-bearing capacity and analyses their relevance for monetary policy. We show that, while the transmission of standard policy interest rate cuts to firms and households was diminished during the crisis, in a context of financial market stress and weak bank balance sheets, unconventional monetary policy measures have helped to restore monetary policy transmission and pass-through to interest rates. We also document the extent to which these non-standard measures were successful in stimulating lending and which bank business models were more strongly affected. Finally, we show that the estimated impact of recent monetary policy measures on bank profitability does not appear to be particularly strong when all the effects on the macroeconomy and asset quality are taken into account

No. 221
30 April 2019
The impact of global value chains on the euro area economy

Abstract

JEL Classification

F6 : International Economics→Economic Impacts of Globalization

F10 : International Economics→Trade→General

F14 : International Economics→Trade→Empirical Studies of Trade

F16 : International Economics→Trade→Trade and Labor Market Interactions

E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles

Abstract

The studies summarised in this paper focus on the economic implications of euro area firms’ participation in global value chains (GVCs). They show how, and to what extent, a large set of economic variables and inter-linkages have been affected by international production sharing. The core conclusion is that GVC participation has major implications for the euro area economy. Consequently, there is a case for making adjustments to standard macroeconomic analysis and forecasting for the euro area, taking due account of data availability and constraints.

No. 220
19 March 2019
The impact of lending standards on default rates of residential real estate loans

Abstract

JEL Classification

C25 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Discrete Regression and Qualitative Choice Models, Discrete Regressors, Proportions

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

This paper analyses the impact of lending standards for residential real estate (RRE) loans on default rates, using a novel loan-level dataset from the European DataWarehouse (EDW) that covers eight euro area countries. To the best of the authors’ knowledge, this paper is the first to use, for this purpose, a consistent set of loan-level data on loans originated in multiple euro area countries. Previous literature has used either national loan-level data, which does not allow for cross-country comparisons, or aggregate cross-country data. The dataset is first explored through an extensive descriptive analysis and this is followed by static probit regressions. The findings confirm the key influence of lending standards – in particular, loan-to-value and loan-to-income ratios at origination, original loan maturity and borrower employment status – on loan default rates. The impact of other variables, such as interest rate fixation and payment type, varies depending on the country of loan origination. These results are particularly relevant for microprudential supervisors in their ongoing assessment of banks’ credit policies. The highlighted country specificities should be taken into account in macroprudential policymaking.

No. 219
14 February 2019
Anticipating the bust: a new cyclical systemic risk indicator to assess the likelihood and severity of financial crises

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling

Abstract

This paper presents a tractable, transparent and broad-based domestic cyclical systemic risk indicator (d-SRI) that captures risks stemming from domestic credit, real estate markets, asset prices, and external imbalances. The d-SRI increases on average several years before the onset of systemic financial crises, and its early warning properties for euro area countries are superior to those of the total credit-to-GDP gap. In addition, the level of the d-SRI around the start of financial crises is highly correlated with measures of subsequent crisis severity, such as GDP declines. Model estimates suggest that the d-SRI has significant predictive power for large declines in real GDP growth three to four years down the line, as it precedes shifts in the entire distribution of future real GDP growth and especially of its left tail. The d-SRI therefore provides useful information about both the probability and the likely cost of systemic financial crises many years in advance. Given its timely signals, the d-SRI is a useful analytical tool for macroprudential policymakers.

No. 218
1 February 2019
Availability of high-quality liquid assets and monetary policy operations: an analysis for the euro area

Abstract

JEL Classification

D41 : Microeconomics→Market Structure and Pricing→Perfect Competition

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G1 : Financial Economics→General Financial Markets

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper provides an overview of supply and demand factors influencing the availability of euro-denominated debt instruments that qualify as high-quality liquid assets (HQLA) in the euro area. The paper estimates the supply of HQLA issued by the public and private sectors as well as the aggregated impact of Eurosystem monetary policy operations on the amount and composition of HQLA held by banks and other economic agents. An assessment of the main demand factors is also presented. Finally, the paper provides some insights into the interaction with and implications for the Eurosystem monetary policy implementation framework in the longer run.

No. 217
19 December 2018
The natural rate of interest: estimates, drivers, and challenges to monetary policy

Abstract

JEL Classification

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

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No. 216
31 October 2018
A euro area macroeconomic stabilisation function: assessing options in view of their redistribution and stabilisation properties

Abstract

JEL Classification

J65 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Unemployment Insurance, Severance Pay, Plant Closings

H53 : Public Economics→National Government Expenditures and Related Policies→Government Expenditures and Welfare Programs

F55 : International Economics→International Relations, National Security, and International Political Economy→International Institutional Arrangements

Abstract

A macroeconomic stabilisation function for the euro area - as envisaged in the Five Presidents’ Report - plays a central role in the debate on deepening Economic and Monetary Union (EMU). We evaluate a broad range of options, their impact on economic growth, macroeconomic stabilisation and synchronisation of the euro area business cycle, and review how they could be designed so they do not undermine incentives for welfare-enhancing national economic policies. A common macroeconomic stabilisation function, e.g. in the form of a European Unemployment Insurance (EUI), could in theory help stabilise the business cycle in the euro area, especially in some participating Member States. Yet, simulating the effects of such a function for 2002-2014 suggests that its stabilisation properties would have been relatively limited. At the same time, design options with meaningful safeguards and relatively low financing requirements would have been most efficient when comparing the degree of stabilisation with the size of the funds distributed among countries. Finally, we discuss some design elements of a scheme whose aim is to support the transition process towards more resilient economic structures in the euro area as envisaged in the Five Presidents’ Report.

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No. 215
29 October 2018
Business investment in EU countries

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity

D61 : Microeconomics→Welfare Economics→Allocative Efficiency, Cost?Benefit Analysis

Abstract

The article analyses recent developments in business investment for a large group of EU countries, using a broad set of analytical tools and data sources. We find that the assessment of whether or not investment is currently low varies across benchmarks and countries. At the euro area level and for most countries, the level of business investment is broadly in line with the level of overall activity. However rates of capital stock growth have slowed down since the crisis. The main cyclical determinants of investment developments in the euro area include foreign and domestic demand, uncertainty and financial conditions. Uncertainty seems to have played a negative role during the financial and sovereign debt crises; however, given its low levels more recently, it has not acted as a drag on business investment overall during the recovery. Credit constraints appear to have hindered investment during the twin crises, especially in stressed countries. Aside from cyclical developments, important secular factors – relating to demographics, the changing nature and location of production, and the business environment – have influenced investment. Another factor that may have amplified the decline in private investment, particularly in countries that were hit hardest by the sovereign debt crisis, is the low level of public investment. This is because when public investment enhances the productivity of the private sector, there may be positive spillovers from the former to the latter, including across countries. Finally, intra-sector capital misallocation, measured as the within-sector dispersion across firms in the marginal revenue product of capital, has been increasing in Europe since 2002, which may in turn have exerted a significant drag on total factor productivity dynamics, and hence on aggregate output growth.

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No. 214
4 October 2018
Systemic liquidity concept, measurement and macroprudential instruments

Abstract

Abstract

This study provides a conceptual and monitoring framework for systemic liquidity, as well as a legal assessment of the possible use of macroprudential liquidity tools in the European Union. It complements previous work on liquidity and focuses on the development of liquidity risk at the system-wide level. A dashboard with a total of 20 indicators is developed for the financial system, including banks and non-banks, to assess the build-up of systemic liquidity risk over time. In addition to examining liquidity risks, this study sheds light on the legal basis for additional macroprudential liquidity tools under existing regulation (Article 458 of the Capital Requirements Regulation (CRR), Articles 105 and 103 of the Capital Requirements Directive (CRD IV) and national law), which is a key condition for the implementation of macroprudential liquidity tools.

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No. 213
2 October 2018
A quantitative analysis of the size of IMF resources

Abstract

JEL Classification

F3 : International Economics→International Finance

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F38 : International Economics→International Finance→International Financial Policy: Financial Transactions Tax; Capital Controls

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

F65 : International Economics→Economic Impacts of Globalization→Finance

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

In this report, three methodological approaches are applied to assess the size of the International Monetary Fund: benchmarking Fund resources against a number of relevant global economic and financial indicators; an extrapolation of past and current IMF programme characteristics; and a shock scenario analysis. Overall, while the results of the different approaches depend on the assumptions and the timeframe considered, the quantitative analysis indicates that a prudent approach would call for maintaining Fund total resources at their current levels. Yet, the quantitative analysis of the size of the Fund made in this report should be seen only as one element to assess the adequacy of Fund resources. It does not take into account qualitative considerations, such as the increased resilience of the global economy and the efforts made to strengthen regulation and supervision since the financial crisis, which should complement the quantitative analysis to complete the analytical basis for decision makers. Moreover, the final decision on the appropriate size of Fund resources will need to include political judgement. Therefore, this report does not provide recommendations on the appropriate level of IMF resources after the expiration of borrowed resources.

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No. 212
17 July 2018
Real convergence in central, eastern and south-eastern Europe

Abstract

JEL Classification

E01 : Macroeconomics and Monetary Economics→General→Measurement and Data on National Income and Product Accounts and Wealth, Environmental Accounts

F15 : International Economics→Trade→Economic Integration

O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

O57 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Comparative Studies of Countries

Abstract

This paper analyses real income convergence in central, eastern and south-eastern Europe (CESEE) to the most advanced EU economies between 2000 and 2016. The relevance of this topic stems both from the far-reaching implications of real income convergence for economic welfare and the importance of convergence for economic and monetary integration with, and within the European Union. The paper establishes stylised facts of convergence, analyses the drivers of economic growth and identifies factors that might explain the differences between fast- and slow-converging economies in the region. The results show that the most successful CESEE economies in terms of the pace of convergence share common characteristics such as, inter alia, a strong improvement in institutional quality and human capital, more outward-oriented economic policies, favourable demographic developments and the quick reallocation of labour from agriculture into other sectors. Looking ahead, accelerating and sustaining convergence in the region will require further efforts to enhance institutional quality and innovation, reinvigorate investment, and address the adverse impact of population ageing.

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No. 211
25 June 2018
Macroeconomic imbalances in the euro area: where do we stand?

Abstract

JEL Classification

E02 : Macroeconomics and Monetary Economics→General→Institutions and the Macroeconomy

F45 : International Economics→Macroeconomic Aspects of International Trade and Finance

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

Abstract

This occasional paper reviews the macroeconomic developments in the euro area countries over the past 20 years. It analyses the accumulation of macroeconomic imbalances in the first decade of the EMU and their unwinding during the second decade. It shows that while flow imbalances have been corrected to a large extent, stock imbalances persist. The presence of large stock imbalances implies that the adjustment process needs to continue in the years to come. Accordingly, this paper reviews the national responses so far and the importance of well-functioning national economic structures for facilitating the adjustment process within the EMU. It shows that national structural policies are able to stimulate the supply side of the economy, increase adjustment capacity and mitigate the adverse growth effects of high debt and deleveraging. Finally, it gives an overview of the European response to address macroeconomic imbalances, i.e. the establishment of the Macroeconomic Imbalance Procedure (MIP). The MIP has contributed to increasing the general attention given to macroeconomic imbalances in the euro area and to the critical role that structural reforms play in facilitating their adjustment. Looking forward, further steps would appear to be warranted in order to move from greater awareness towards stronger ownership and implementation of reforms.

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No. 210
22 June 2018
Structural policies in the euro area

Abstract

JEL Classification

D60 : Microeconomics→Welfare Economics→General

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

H11 : Public Economics→Structure and Scope of Government→Structure, Scope, and Performance of Government

J08 : Labor and Demographic Economics→General→Labor Economics Policies

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

Abstract

Structural policies in the euro area are of great interest for the Eurosystem, particularly as they can support the smooth functioning of the Economic and Monetary Union (EMU) and the effectiveness of monetary policy. This paper adopts a broad definition of structural policies, analysing not only the benefits of efficient labour, product and financial market regulations, but also emphasising the importance of good governance and efficient institutions that ensure high quality and impartial public services, the rule of law and the control of rent-seeking. The paper concludes that there are many opportunities for enhanced structural policies in EU and euro area countries which can yield substantial gains by boosting long-term income and employment growth and supporting social fairness, also via better and more equal opportunities. It provides empirical and model-based analyses on the impacts and the interactions of structural policies, highlighting synergies between growth and inclusiveness, while acknowledging that structural policy changes need to be country-specific to reflect national conditions and social preferences. Welldesigned structural policies would also strengthen economic resilience and convergence of Member States, bringing the euro area closer to the requirements of an optimal currency area and improving the transmission of monetary policy. The paper also discusses the political economy causes of the sluggish implementation of socially beneficial structural policies and assesses ways to deal with possible shortterm costs of reforms.

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No. 209
30 April 2018
The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework Q2 2016 - Q4 2017

Abstract

JEL Classification

D02 : Microeconomics→General→Institutions: Design, Formation, and Operations

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes

G01 : Financial Economics→General→Financial Crises

Abstract

This paper provides a comprehensive overview of the use of the Eurosystem’s monetary policy instruments and the operational framework from the second quarter of 2016 to the last quarter of 2017. It reviews the context of Eurosystem market operations; the design and operation of the Eurosystem’s counterparty and collateral frameworks; the fulfilment of minimum reserve requirements; participation in credit operations and recourse to standing facilities; and the conduct of outright asset purchase programmes. The paper also discusses the impact of monetary policy implementation on the Eurosystem's balance sheet, excess liquidity and money market liquidity conditions.

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Annex
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No. 208
11 April 2018
Completing the Banking Union with a European Deposit Insurance Scheme: who is afraid of cross-subsidisation?

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

On 24 November 2015, the European Commission published a proposal to establish a European Deposit Insurance Scheme (EDIS). The proposal provides for the creation of a Deposit Insurance Fund (DIF) with a target size of 0.8% of covered deposits in the euro area and the progressive mutualisation of its resources until a fully-fledged scheme is introduced by 2024. This paper investigates the potential impact and appropriateness of several features of EDIS in the steady state.

The main findings are the following: first, a fully-funded DIF would be sufficient to cover payouts even in a severe banking crisis. Second, risk-based contributions can and should internalise specificities of banks and banking systems. This would tackle moral hazard and facilitate moving forward with risk sharing measures towards the completion of the Banking Union in parallel with risk reduction measures; this approach would also be preferable to lowering the target level of the DIF to take into account banking system specificities. Third, smaller and larger banks would not excessively contribute to EDIS relative to the amount of covered deposits in their balance sheet. Fourth, there would be no unwarranted systematic cross-subsidisation within EDIS in the sense of some banking systems systematically contributing less than they would benefit from the DIF. This result holds also when country-specific shocks are simulated. Fifth, under a mixed deposit insurance scheme composed of national deposit insurance funds bearing the first burden and a European deposit insurance fund intervening only afterwards, cross-subsidisation would increase relative to a fully-fledged EDIS.

The key drivers behind these results are: i) a significant risk-reduction in the banking system and increase in banks' loss-absorbing capacity in the aftermath of the global financial crisis; ii) a super priority for covered deposits, further contributing to protect EDIS; iii) an appropriate design of risk-based contributions, benchmarked at the euro area level, following a "polluter-pays" approach.

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No. 207
27 March 2018
Strengthening the Global Financial Safety Net

Abstract

JEL Classification

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F34 : International Economics→International Finance→International Lending and Debt Problems

F53 : International Economics→International Relations, National Security, and International Political Economy→International Agreements and Observance, International Organizations

F55 : International Economics→International Relations, National Security, and International Political Economy→International Institutional Arrangements

Abstract

Since the global financial crisis, the Global Financial Safety Net (GFSN), traditionally consisting mainly of countries’ own foreign exchange reserves with the International Monetary Fund (IMF) acting as a backstop, has expanded significantly with the continued accumulation of reserves, the sharp increase of swap lines between central banks, and the further development and creation of new Regional Financing Arrangements (RFAs). RFAs have expanded, reaching an aggregate size comparable to that of the IMF and becoming an integral layer of the safety net. Enhancing the cooperation between the IMF and RFAs so that they play complementary roles in case of global distress, becomes critical in order to further strengthen the multi-layered GFSN, while paying attention to issues such as moral hazard, stigma or exit strategies in connection with IMF-RFA cooperation. This paper presents recent experience and lessons learned in IMF-RFA cooperation and proposes how to improve their future interaction.

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No. 206
26 January 2018
The transition of China to sustainable growth – implications for the global economy and the euro area

Abstract

JEL Classification

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

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.

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No. 205
9 January 2018
Real and financial cycles in EU countries - Stylised facts and modelling implications

Abstract

JEL Classification

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

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

Abstract

This paper studies the cyclical properties of real GDP, house prices, credit, and nominal liquid financial assets in 17 EU countries, by applying several methods to extract cycles. The estimates confirm earlier findings of large medium-term cycles in credit volumes and house prices. GDP appears to be subject to fluctuations at both business-cycle and medium-term frequencies, and GDP fluctuations at medium-term frequencies are strongly correlated with cycles in credit and house prices. Cycles in equity prices and long-term interest rates are considerably shorter than those in credit and house prices and have little in common with the latter. Credit and house price cycles are weakly synchronous across countries and their volatilities vary widely – these differences may be related to the structural properties of housing and mortgage markets. Finally, DSGE models can replicate the volatility of cycles in house and equity prices, but not the persistence of house price cycles.

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No. 204
1 December 2017
Modelling euro banknote quality in circulation

Abstract

JEL Classification

C46 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Specific Distributions, Specific Statistics

C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

The quality of banknotes in the cash cycles of countries in the Eurosystem varies, despite all of these countries using identical euro banknotes. While it is known that this is dependent on national characteristics, such as public use and the involvement of the central bank in cash processing operations, the influence of all relevant parameters has not yet been established. This paper presents two computer-based models for the simulation of banknote cash cycles. The first model simulates a cash cycle using a theoretical approach based on key figures and models banknote fitness as a one-dimensional profile of fitness levels. The model identifies: (i) the frequency with which banknotes are returned to the central bank; (ii) the fitness threshold used in automated note processing at the central bank; and (iii) the note lifetime as the main drivers of banknote quality in circulation as well as central bank cash cycle costs. Production variations in new banknotes, the fitness threshold applied by commercial cash handlers and the accuracy of the fitness sensors used in the sorting process have been found to have a lower but non-trivial impact. The second model simulates banknotes in circulation as single entities and is oriented towards modelling country-specific cash cycles using available single-note data. The model is constructed using data collected by monitoring banknotes in circulation over the duration of a “circulation trial” carried out in three euro area countries. We compare the predicted quality results of the second data-based model against actual cash cycle data collected outside the circulation trial, discuss the reasons for the deviations found and conclude with considerations for an optimal theoretical national cash cycle.

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ECB Circulation Model V10
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ECB Circulation Model V10 - Manual
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ECB Circulation model V9
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ECB Circulation model V9 - Manual
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No. 203
1 December 2017
Real convergence in the euro area: a long-term perspective

Abstract

JEL Classification

E01 : Macroeconomics and Monetary Economics→General→Measurement and Data on National Income and Product Accounts and Wealth, Environmental Accounts

F15 : International Economics→Trade→Economic Integration

J11 : Labor and Demographic Economics→Demographic Economics→Demographic Trends, Macroeconomic Effects, and Forecasts

O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

O57 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Comparative Studies of Countries

Abstract

In the euro area, there is mixed evidence that the GDP per capita of lower-income economies has been catching up with that of higher-income economies since the start of monetary union. The significant real convergence performance of some of the most recent members contrasts with that of the economies of southern Europe, which have not met expectations. However, attributing all the blame for this outcome to the introduction of the single currency simply misses the point. By taking a “long view” and reviewing the evidence since the 1960s, this paper shows that certain member countries began to face a “non-convergence trap” long before the euro years. We also provide stylised facts on: (i) the central role of total factor productivity in driving real convergence in the euro area over time, alongside other factors; and (ii) the crucial interaction of real convergence with “Maastricht convergence” and institutional quality, the other two key components of sustainable economic convergence. We conclude that it is critical that the euro area countries facing convergence challenges enhance the resilience of their economic structures by improving the relevant institutions and governance.

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No. 202
30 November 2017
Developing macroprudential policy for alternative investment funds

Abstract

JEL Classification

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

Abstract

This joint ECB-DNB Occasional Paper aims to inform the ongoing discussions about an EU-level framework for operationalising macroprudential leverage limits for alternative investment funds (AIFs). It builds on, and extends, the analysis of an ECB-DNB special feature article published in the ECB’s Financial Stability Review in November 2016. First, this Occasional Paper presents new EU-level evidence suggesting that leveraged funds exhibit stronger sensitivity of investor outflows to bad past performance than unleveraged funds, which has the potential to exacerbate systemic risk. Second, it devises a framework for assessing financial stability risks from leverage in investment funds. This is applied to leveraged AIFs managed by asset managers in the Netherlands using Alternative Investment Fund Managers Directive (AIFMD) data for the two-year period from the first quarter of 2015 to the fourth quarter of 2016. Third, it discusses the potential effectiveness and efficiency of various designs for macroprudential leverage limits. To this end, it builds on the findings for the Dutch AIF sector and suggests design options for further exploration at EU level. Beyond assessing financial stability risks from leverage in the Dutch AIF sector, the case study aims to show how equivalent information on AIFs at the European level – which will be made available to the European Securities Markets Authority (ESMA) and the European Systemic Risk Board (ESRB) in the coming years – could be used when developing an EU-level framework for operationalising macroprudential leverage limits.

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No. 201
24 November 2017
The use of cash by households in the euro area

Abstract

JEL Classification

E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance

Abstract

Although euro banknotes and coins have been in circulation for fifteen years, not much is known about the actual use of cash by households. This paper presents an estimation of the number and value of cash transactions in all 19 euro area countries in 2016, based on survey results. It presents an extensive description of how euro area consumers pay at points of sale (POS). The aim of this study is to shed light on consumers’ payment behaviour and in particular to improve the understanding of consumers’ payment choices at POS, based on a large sample of countries. Therefore, it provides central banks and relevant payment system stakeholders with fundamental information for the development of their policies and strategic decisions that can contribute to improving the efficiency of the cash cycle and the payment system as a whole. Previous estimates of the value of cash usage by households in the euro area date from 2008. Since then some central banks have carried out their own research on cash usage. This paper is the first study to measure the transaction demand for cash in the euro area. The results show that in 2016 around 79% of all payments at POS were made with cash, 19% with cards and 2% with other payment instruments. In terms of value, the market share of main payment instruments was 54% for cash, 39% for cards and 7% for other instruments. However, results show substantial differences between euro area countries.

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Tables and charts
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Data set and data explanation
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No. 200
14 November 2017
The distribution of excess liquidity in the euro area

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General

G01 : Financial Economics→General→Financial Crises

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

D39 : Microeconomics→Distribution→Other

E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money

Abstract

Since 2008, excess liquidity – defined as the sum of holdings of central bank reserves in excess of reserve requirements and holdings of equivalent central bank deposits – has tended to accumulate in specific euro area countries and in a small, slowly changing group of credit institutions. Despite the stability of the concentration of excess liquidity in specific countries over time, the relevance of individual drivers has changed. First, risk aversion has played a much smaller role in explaining the concentration since 2013 than it did at the time of “flight-to-quality” phenomena in the period 2010-12. Second, the location of the relevant market infrastructures (i.e. central securities depositories, securities settlement systems and TARGET2 accounts) used by counterparties that sold assets to the Eurosystem has been a more important driver directing flows in the period 2015-16. In addition, the more recent concentration of excess liquidity is explained by the combination of a number of factors, such as banks following strict internal credit limits, investment incentives created by yield differences across the euro area and the “home bias” in euro area government bond holdings. Overall, the net cross-border flows of liquidity that resulted also determined TARGET2 balances. At the individual bank level, when controlling for banks’ capital, non-performing loans, credit risk and profitability, excess liquidity holdings in relation to total assets are found to be higher for smaller and better-capitalised banks, and for banking groups with liquidity centralised at the head institution. In addition, participation in Eurosystem longer-term refinancing operations and deposit inflows are associated with liquidity accumulation. Finally, new regulatory initiatives such as the liquidity coverage ratio are explained to be creating incentives to hold or not to distribute liquidity, thereby affecting its distribution.

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No. 199
8 November 2017
Tracing European structured finance counterparty networks

Abstract

JEL Classification

G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill

D85 : Microeconomics→Information, Knowledge, and Uncertainty→Network Formation and Analysis: Theory

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

Abstract

Asset-backed securities (ABSs) and covered bonds (CBs) are structured finance instruments that require a range of key services, which may be provided by many firms. However, despite the prevalence of structured finance instruments in Europe, the network between issuers and service providers has to date remained unexplored. This paper traces and describes these connections, using a new database covering the majority of public ABSs and CBs outstanding between August 2008 and March 2017. It appears that ABS and CB issuers are highly reliant on affiliated counterparties (“close links”) to provide the above-mentioned key services, especially when programmes are larger and/or are retained by the issuer for use as collateral with the Eurosystem. When only “non-close links” across banking groups are considered, instances of reliance on just a few service providers have gradually decreased in number, with a more balanced system developing over time. The paper finds similar results for networks based on the use of securities as Eurosystem collateral. These findings help demonstrate the importance of the Eurosystem’s risk management framework for ABSs and CBs, and support the orientation of recent regulatory efforts at the European level.

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No. 198
13 October 2017
Large net foreign liabilities of euro area countries

Abstract

JEL Classification

F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F34 : International Economics→International Finance→International Lending and Debt Problems

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

F45 : International Economics→Macroeconomic Aspects of International Trade and Finance

Abstract

Over recent years, several euro area countries have registered large and persistent net foreign liabilities. This paper examines the risks arising from these external stock imbalances, the prospects for their smooth unwinding and the menu of policy options. The paper demonstrates that external stock imbalances remain a source of vulnerabilities in the (former) programme countries and, to a lesser extent, the euro area countries in central and eastern Europe. The net foreign liabilities of these economies stand at levels that are typically associated with an increased susceptibility to external crises. Mechanical projections indicate that the net foreign liabilities of the (former) programme countries will remain at elevated levels over the next decade despite some gradual adjustments, while those of the central and eastern European (CEE) countries could return to more sustainable levels more quickly. There are also vulnerabilities related to the composition of external positions, most notably the unfavourable debt-equity mix in the (former) programme countries. However, the long maturity of public external debt – which is often owed to official creditors – and, in the CEE countries, the prevalence of stable foreign direct investment should mitigate external sustainability risks. Furthermore, the net payments associated with the external positions of the euro area debtor countries are relatively low at the current juncture, although the burden could increase markedly if euro area interest rates were to normalise again. Against this backdrop, a timely and well-designed policy response would provide critical support to the orderly unwinding of the remaining external stock imbalances in the euro area. An optimal policy mix would consist of measures simultaneously fostering GDP growth and sustainable current account improvements in the debtor economies, in particular reforms aimed at enhancing productivity growth and export performance.

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No. 197
27 September 2017
Access to finance in the Western Balkans

Abstract

JEL Classification

E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity

G30 : Financial Economics→Corporate Finance and Governance→General

O16 : Economic Development, Technological Change, and Growth→Economic Development→Financial Markets, Saving and Capital Investment, Corporate Finance and Governance

Abstract

Limited access to finance is one of the main obstacles for firms located in the Western Balkans and hampers economic growth as well as the transmission of monetary policy. The aim of this paper is to undertake an in-depth analysis of access to finance constraints in this region, where countries as EU candidates or potential candidates have a prospect of joining the European Union. Besides touching upon macroeconomic and banking sector indicators that influence access to finance, this paper empirically assesses firm-level factors that determine whether a firm operating in the Western Balkans is credit-constrained, both in actual and perceived terms. In line with the literature, the results suggest that size, age, location, being audited, having outstanding loans and expectations about future performance matter for actual credit availability. The econometric analysis is complemented by a review of the Western Balkan countries’ Economic Reform Programmes, which indicate that financing constraints are tackled by most national authorities through specific policy measures, mostly for small and medium-sized enterprises.

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No. 196
15 September 2017
The Eurosystem’s asset purchase programme and TARGET balances

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G02 : Financial Economics→General→Behavioral Finance: Underlying Principles

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

Abstract

TARGET balances have risen during the period of the Eurosystem’s asset purchase programme (APP). The APP gives rise to substantial cross-border flows of reserves at the time of asset purchases and beyond, reflecting the interaction of decentralised monetary policy implementation and the integrated euro area financial structure. This financial structure, in which only a handful of locations act as gateways between the euro area and the rest of the world, leads to rising TARGET balances at the time of APP purchases and the persistence of TARGET balances in the context of subsequent portfolio rebalancing. TARGET balances per se are not necessarily an indicator of stress in bank funding markets, financial market fragmentation or unsustainable balance of payments developments.

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No. 195
8 August 2017
The profitability of banks in a context of negative monetary policy rates: the cases of Sweden and Denmark

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

This paper looks at how the profitability of banks in Sweden and Denmark has evolved in the context of negative interest rates. Overall, it finds that profitability has continued to improve, even with negative monetary policy rates. Data and modelbased evidence confirm that the monetary policy transmission to bank lending rates has so far not been impaired, though they point to a downward stickiness in the bank deposit rate. Swedish and Danish banks rely mainly on wholesale funding to finance their activities, and the fall in wholesale funding costs has led to a significant decline in interest expenses, thereby bolstering the resilience of the net interest income margin. All in all, this has created the prerequisites for positive credit supply developments, and possible unintended consequences of negative monetary policy rates, such as a reduction in credit supply, have not materialised. However, according to Sveriges Riksbank and Danmarks Nationalbank, the prevailing low level of interest rates has aggravated financial stability risks stemming from the large exposure of the banking sector to the housing market in both economies, in a context of rapidly rising housing prices and the resultant growing indebtedness of the household sector.

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No. 194
31 July 2017
A new database for financial crises in European countries

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

E60 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General

H12 : Public Economics→Structure and Scope of Government→Crisis Management

Abstract

This paper presents a new database for financial crises in European countries, which serves as an important step towards establishing a common ground for macroprudential oversight and policymaking in the EU. The database focuses on providing precise chronological definitions of crisis periods to support the calibration of models in macroprudential analysis. An important contribution of this work is the identification of financial crises by combining a quantitative approach based on a financial stress index with expert judgement from national and European authorities. Key innovations of this database are (i) the inclusion of qualitative information about events and policy responses, (ii) the introduction of a broad set of non-exclusive categories to classify events, and (iii) a distinction between event and post-event adjustment periods. The paper explains the two-step approach for identifying crises and other key choices in the construction of the dataset. Moreover, stylised facts about the systemic crises in the dataset are presented together with estimations of output losses and fiscal costs associated with these crises. A preliminary assessment of the performance of standard early warning indicators based on the new crises dataset confirms findings in the literature that multivariate models can improve compared to univariate signalling models.

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European financial crises database
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No. 193
11 July 2017
Dark pools in European equity markets: emergence, competition and implications

Abstract

JEL Classification

G10 : Financial Economics→General Financial Markets→General

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

Abstract

This paper considers the growth of dark pools: trading venues for equities without pre-trade transparency. It first documents the emergence and expansion of dark pools in European equity markets in the context of regulatory changes and increased high-frequency trading (HFT). It finds that the market share of trading conducted in dark pools has stabilised below 10% and is similar across groups of stocks from different countries. Second, this paper assesses the nature of competition between dark pools, which is based on price and services offered to clients. It documents a substantial degree of horizontal differentiation among European dark pools, with venues providing different options for placing and processing orders likely to attract different types of traders. The hypothesis that most dark pools are primarily used to shield large orders from information leakage is not supported by evidence. This finding is based on a simple indicator that assesses different dark pools in terms of the level of protection from information leakage due to trading with HFT or predatory traders. Finally, this paper evaluates the benefits and costs of the use of dark pools from the perspective of individual traders as well as for market efficiency and financial stability. Recent evidence appears to reject the notion that dark pools adversely affect volatility in stock markets.

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No. 192
23 June 2017
Labour market adjustment in Europe during the crisis: microeconomic evidence from the Wage Dynamics Network survey

Abstract

JEL Classification

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General

J52 : Labor and Demographic Economics→Labor?Management Relations, Trade Unions, and Collective Bargaining→Dispute Resolution: Strikes, Arbitration, and Mediation, Collective Bargaining

J68 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Public Policy

Abstract

Against the backdrop of continuing adjustment in EU labour markets in response to the Great Recession and the sovereign debt crisis, the European System of Central Banks (ESCB) conducted the third wave of the Wage Dynamics Network (WDN) survey in 2014-15 as a follow-up to the two previous WDN waves carried out in 2007 and 2009. The WDN survey collected information on wage-setting practices at the firm level. This third wave sampled about 25,000 firms in 25 European countries with the aim of assessing how firms adjusted wages and employment in response to the various shocks and labour market reforms that took place in the European Union (EU) during the period 2010-13. This paper summarises the main results of WDN3 by identifying some patterns in firms’ adjustments and labour market reforms. It seeks to lay out the main lessons learnt from the survey in terms of both the general response of EU labour markets to the crisis and how these responses varied across the countries that took part in the survey.

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No. 191
16 May 2017
The transmission channels of monetary, macro- and microprudential policies and their interrelations

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper investigates the interrelations between monetary macro- and microprudential policies. It first provides an overview of the three policies, starting with their main instruments and objectives. Monetary policy aims at maintaining price stability and promoting balanced economic growth, macroprudential policies aim at safeguarding the stability of the overall financial system, while microprudential policies contribute to the safety and soundness of individual entities. Subsequently, the paper provides a simplified description of their respective transmission mechanisms and analyses the interactions between them. A conceptual framework is first presented on the basis of which the analysis of the interactions across the different policies can be demonstrated in a stylised manner. These stylised descriptions are then further complemented by model-based simulations illustrating the significant complementarities and interactions between them. Finally, the paper concludes that from a conceptual point of view there are numerous areas of interaction between the policies. These create scope for synergies, which can be reaped by sharing information and expertise across the various policy areas.

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No. 190
15 May 2017
Financial stability assessment of EU candidate and potential candidate countries

Abstract

JEL Classification

F31 : International Economics→International Finance→Foreign Exchange

F34 : International Economics→International Finance→International Lending and Debt Problems

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

G15 : Financial Economics→General Financial Markets→International Financial Markets

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper reviews and assesses financial stability challenges in countries preparing for EU membership i.e. Albania, Bosnia and Herzegovina, Kosovo, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey. The paper focuses on the period since 2014 and on the banking sectors that dominate financial systems in this group of countries. It identifies two main near-term challenges applying to most of them. The first relates to credit risk, which remains substantial despite some progress in reducing the burden of non-performing loans on banks’ balance sheets in the period under review. However, progress so far is limited, partly owing to structural impediments. The second relates to the still high share of foreign exchange denominated loans and deposits, which poses an indirect credit risk in the case of lending to unhedged borrowers and impairs the monetary transmission channel. In addition, profitability is worth monitoring going forward, as it remains subdued in many countries given high provisioning needs and a lacklustre credit growth and low interest rate environment. These concerns are generally met with a solid shock-absorbing capacity, as exemplified by robust capital and liquidity buffers.

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No. 189
10 May 2017
The Eurosystem collateral framework explained

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

The Eurosystem collateral framework ESCF) has played a key role in the ECB monetary policy implementation since 1999. Moreover, the financial and sovereign debt crisis and with it the increased reliance of banks on central bank credit have underlined the importance of central bank collateral frameworks. Broad collateral frameworks have helped prevent large-scale liquidity-driven defaults of financial institutions in all major advanced economies. More recently, they have allowed central banks to provide a large amount of – at times targeted – longer-term credit. Nevertheless, a number of authors have argued that the ESCF is too forthcoming or broad and that it does not afford the central bank sufficient protection. This paper first explains and justifies the logic of collateral frameworks in general and that of the ESCF in particular. It then reviews the main critical comments. It concludes that the ESCF has been effective (i) in providing an adequate level of elasticity for Eurosystem credit, and (ii) in protecting the Eurosystem from financial losses despite the severity of the financial and sovereign debt crisis and the large amounts of longer-term credit provided by the Eurosystem.

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No. 188
2 May 2017
The use of the Eurosystem’s monetary policy instruments and operational framework since 2012

Abstract

JEL Classification

D02 : Microeconomics→General→Institutions: Design, Formation, and Operations

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes

G01 : Financial Economics→General→Financial Crises

Abstract

This paper provides a comprehensive overview of the use of the Eurosystem's monetary policy instruments and the operational framework from the third quarter of 2012 until the first quarter of 2016. The paper reviews the context of Eurosystem market operations, counterparty and collateral framework, participation in tender operations, recourse to standing facilities, patterns of reserve fulfilment, outright asset purchase programmes, as well as the impact of the ECB’s monetary policy implementation on the Eurosystem's balance sheet and liquidity conditions.

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No. 187
28 April 2017
The Analytical Credit Dataset - A magnifying glass for analysing credit in the euro area

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

C81 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Microeconomic Data, Data Access

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

Abstract

In May 2016 the Governing Council adopted the AnaCredit Regulation ECB/2016/13) providing the legal basis for the European System of Central Banks (ESCB) to collect granular information on loans from banks to corporates and other legal persons based on a core set of harmonised concepts and definitions. Starting with reference data from September 2018, credit institutions in the euro area, and possibly elsewhere in the EU, will report to the ECB via the national central banks (NCBs) individual credit exposures falling within the reporting scope. The reporting framework is the outcome of in-depth discussions within the ESCB involving several rounds of consultations with users, the industry and other stakeholders. As set out in the Regulation, AnaCredit will, already in Stage 1, significantly enhance the value for analysis on credit and credit risk in the euro area by providing detailed, timely and harmonised information on individual exposures to legal entities as counterparts. The new data will be useful for several key tasks of the ESCB for a better analysis of credit distribution to the economy, e.g. for monetary policy analysis and operation (risk and collateral management), financial stability, economic research and statistics. The scope of the project might be further expanded in future stages to cover additional lenders, borrowers and instruments. The purpose of this paper is to reflect and illustrate the methodological work and process leading to the definition of the AnaCredit requirements that were eventually included in the Regulation.

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No. 186
19 April 2017
EU consumers’ quantitative inflation perceptions and expectations: an evaluation

Abstract

JEL Classification

D8 : Microeconomics→Information, Knowledge, and Uncertainty

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

Abstract

This report updates and extends earlier assessments of quantitative inflation perceptions and expectations of consumers in the euro area and the EU using an anonymised micro data set collected by the European Commission in the context of the Harmonised EU Programme of Business and Consumer Surveys. Confirming earlier findings, consumers' quantitative estimates of inflation are found to be higher than actual HICP (Harmonised Index of Consumer Prices) inflation over the entire sample period (2004-2015). The analysis shows that European consumers hold different opinions of inflation depending on their income, age, education and gender. Although many of the features highlighted for the EU and the euro area aggregates are valid across individual Member States, differences exist also at the country level. Despite the higher inflation estimates, there is a high level of co-movement between measured and estimated (perceived/expected) inflation. Even respondents providing estimates largely above actual HICP inflation, demonstrate understanding of the relative level of inflation during both high and low inflation periods. Based on these economically plausible results, the report concludes that further work should be devoted to defining concrete aggregate indicators of consumers' quantitative inflation perceptions and expectations on the basis of the dataset used in this study. Moreover, it outlines a number of future research topics that can be addressed by exploiting the enormous potential of the data set.

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No. 185
10 April 2017
Debt sustainability analysis for euro area sovereigns: a methodological framework

Abstract

JEL Classification

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

H62 : Public Economics→National Budget, Deficit, and Debt→Deficit, Surplus

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

H68 : Public Economics→National Budget, Deficit, and Debt→Forecasts of Budgets, Deficits, and Debt

Abstract

The euro area sovereign debt crisis has highlighted the importance of reducing public debt levels and building up sufficient fiscal buffers during normal and good times. It has also reaffirmed the need for a thorough debt sustainability analysis (DSA) to act as a warning system for national policies. This paper introduces a comprehensive DSA framework for euro area sovereigns that could be used for analysis of fiscal risks and vulnerabilities. Specifically, this framework consists of three main building blocks: (i) a deterministic DSA, which embeds debt simulations under a benchmark and various narrative shock scenarios; (ii) a stochastic DSA, providing for a probabilistic approach to debt sustainability; and (iii) other relevant indicators capturing liquidity and solvency risks. The information embedded in the three main DSA blocks can be summarised in a heat map, which can provide guidance on the overall assessment of risks to debt sustainability. This method reflects the need to have a broad-based assessment, cross-checking information and perspectives from various sources with a view to deriving a robust debt sustainability assessment.

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No. 184
17 March 2017
Benchmarking institutional and structural indicators in EU candidate and potential candidate countries

Abstract

JEL Classification

F13 : International Economics→Trade→Trade Policy, International Trade Organizations

F15 : International Economics→Trade→Economic Integration

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

Abstract

This paper reviews institutional and structural challenges in countries preparing for EU membership, i.e. Albania, Bosnia and Herzegovina, Kosovo*, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey. Sound institutions and solid economic structures are not only the cornerstones of EU accession (as defined by the Copenhagen political and economic criteria), but are also crucial for achieving higher income levels and sustainable long-term growth. This paper finds that the EU candidate and potential candidate countries (EU CC/PCC) fare worse than the majority of EU Member States in a number of institutional and structural metrics, such as business environment, access to finance, judicial system, trade and competitiveness, labour market and education and institutional governance. When comparing EU CC/PCC among themselves, large intra-group disparities emerge. Countries such as the former Yugoslav Republic of Macedonia, Montenegro and, to a certain extent, Serbia and Turkey, tend to score on average higher than Albania, Bosnia and Herzegovina and Kosovo. While many EU CC/PCC have improved the quality of their institutions and economic governance over the past decade, it is crucial that they preserve the reform momentum to enable a sustainable convergence with the EU. / / * This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo Declaration of Independence.

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No. 183
21 February 2017
Stress-Testing of liquidity risk in TARGET2

Abstract

JEL Classification

C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G01 : Financial Economics→General→Financial Crises

Abstract

The paper reports the outcome of the stress-testing of liquidity risk in the TARGET2 payment system, with the study having been conducted by an ad-hoc group composed of operators and overseers of TARGET2. The study aims to assess the resilience of the system, defined as the network of its participants, and the appropriateness of liquidity levels under tightened liquidity conditions. The scenarios analysed are based on extreme shocks to the value of collateral of different levels and types that lead to a decrease in the intraday credit lines available in TARGET2 and, as a result, the payment capacity of TARGET2 participants. The tool used to perform these stress tests is the TARGET2 simulator, which provides access to real transaction level data and allows simulations to be run by changing parameters, in this case the credit lines. The period under analysis is one maintenance period for the years 2008 to 2013. In general, the stress-testing indicates that the system is resilient under the stress scenarios; liquidity levels seem to be appropriate and supported by the efficient liquidity management features of TARGET2. Even in the worst simulated event of a 70% drop in all collateral value, 80-90% of TARGET2 turnover would have been settled. The scenario results take also into account that the period under analysis was characterised by unconventional monetary policy measures.

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No. 182
31 January 2017
Euro area fiscal stance

Abstract

JEL Classification

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

Abstract

This paper analyses the appropriateness of the euro area fiscal stance. In this context, the paper presents the relevant definitions and how the euro area fiscal stance has evolved over time. Furthermore, it contains an evaluation of the appropriateness of the euro area aggregated fiscal stance set out in the European Commission

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No. 181
25 January 2017
Low inflation in the euro area: Causes and consequences
Task force on low inflation (LIFT)

Abstract

JEL Classification

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

Abstract

After 2012, inflation has been unexpectedly low across much of the developed world and economists speak of a

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No. 180
30 September 2016
Dealing with large and volatile capital flows and the role of the IMF

Abstract

JEL Classification

F3 : International Economics→International Finance

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F38 : International Economics→International Finance→International Financial Policy: Financial Transactions Tax; Capital Controls

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

F65 : International Economics→Economic Impacts of Globalization→Finance

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

The last decade has been characterised by the pronounced volatility of capital flows. While cross-border capital flows can have many benefits for both advanced and emerging market economies, they may also carry risks, which require appropriate policy responses. Disentangling the push from the pull factors driving capital flows is key to designing appropriate policies to deal with them. Strong institutions, sound fundamentals and a large domestic investor base tend to shield economies from adverse global conditions and attract less volatile types of capital. However, when the policy space for using traditional macroeconomic policies is limited, countries may also turn to macroprudential and capital flow management policies in a pragmatic manner. The IMF can play an important role in helping countries to deal with capital flows, through its surveillance and lending policy and through international cooperation.

No. 179
19 September 2016
The euro area bank lending survey

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

The euro area bank lending survey (BLS) serves as an important tool in the analysis of bank lending conditions in the euro area and across euro area countries, providing otherwise unobservable qualitative information on bank loan demand and supply from/to euro area enterprises and households. Since its introduction in 2003, the BLS has received growing attention and has become of key importance for the analysis and assessment of bank lending conditions in the euro area and at the national level. In particular in the context of the financial crisis, the BLS was used to gather additional information on the impact of the crisis and of the ECB

No. 178
15 September 2016
Understanding the weakness in global trade - What is the new normal?

Abstract

JEL Classification

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

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

No. 177
15 September 2016
What do we know about the global financial safety net? Rationale, data and possible evolution

Abstract

JEL Classification

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F34 : International Economics→International Finance→International Lending and Debt Problems

G01 : Financial Economics→General→Financial Crises

H87 : Public Economics→Miscellaneous Issues→International Fiscal Issues, International Public Goods

Abstract

This paper critically reviews the theoretical basis for the provision of the global financial safety net (GFSN) and provides a comprehensive database covering four elements of the GFSN (foreign exchange reserves, IMF financing, central bank swap lines and regional financing arrangements) for over 150 countries in the sample period 1960-2015. This paper also presents some key stylised facts regarding the provision of GFSN financing and compares macroeconomic outcomes in capital flow reversal episodes depending on how much GFSN financing was available to countries. Finally, this paper concludes with some avenues for further research on the possible evolution of the GFSN.

No. 176
11 August 2016
The fiscal and macroeconomic effects of government wages and employment reform

Abstract

JEL Classification

H50 : Public Economics→National Government Expenditures and Related Policies→General

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

J45 : Labor and Demographic Economics→Particular Labor Markets→Public Sector Labor Markets

Abstract

This paper examines the overall macroeconomic impact arising from reform in government wages and employment, at times of fiscal consolidation. Reform of these two components of the government wage bill appeared necessary for containing the deterioration of the public finances in several EU countries, as a consequence of the financial crisis. Such reforms entailed in some instances, but not always, the implementation of cost-cutting measures affecting the government wage bill, as part of broader consolidation packages that typically hinged more heavily on other fiscal instruments, like public investment. While such measures have adverse short-term macroeconomic effects, public wage bill restraining policy changes present the idiosyncrasy that they can yield medium- to longer-term benefits due to possible competitiveness and efficiency gains through their impact on labour market dynamics. This paper provides some evidence of such medium- to long-run effects, based on a wealth of micro and macro data in the euro area and the EU. It concludes that appropriately designed government wage bill moderation could indeed produce positive dividends to the economy, which depend on certain country-specific conditions. These gains can be reinforced by relevant fiscal-structural reforms.

No. 175
10 August 2016
Labour market modelling in the light of the financial crisis

Abstract

JEL Classification

E10 : Macroeconomics and Monetary Economics→General Aggregative Models→General

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

J64 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Unemployment: Models, Duration, Incidence, and Job Search

Abstract

This paper revisits the empirical relationship between unemployment and output, and its evolution following the financial crisis of 2008, with the aim of drawing potential consequences for labour market modelling strategies in place within the European System of Central Banks (ESCB). First, the negative correlation between output and unemployment (Okun’s law) at cyclical frequencies is found to be a robust feature of macro data across time, countries and identification schemes. Focusing on the euro area, the financial distress seems to have altered the dynamics of output and unemployment mainly at lower frequencies, interpreted as trend developments by the statistical filters used in the analysis. Looking at the implications for modelling strategies, we propose an extension of the standard labour search and matching model in which financial frictions impinge directly on the labour market rather than on the capital market, opening the way to protracted and lagged response of employment after a “financial” crisis. In terms of policy implications, the importance of the interplay between financial and labour market frictions in trend developments should be read as strong support for an ambitious structural reform agenda in Europe, so as to make our labour (and goods) markets more flexible and resilient.

No. 174
27 June 2016
Shadow banking in the euro area: risks and vulnerabilities in the investment fund sector

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G20 : Financial Economics→Financial Institutions and Services→General

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper first highlights the structural features of shadow banking in the euro area, focussing on investment funds. It then discusses the potential systemic risks that the recent expansion of the investment fund sector presents. While investment funds provide important intermediation services to the real sector, including market and liquidity risk-sharing and the bridging of information gaps, their rapid expansion may present systemic risks that need to be detected, monitored and managed. In particular, the risk of fund outflows and the possible negative impacts on the wider financial system have risen due to the rapid expansion of the investment fund sector, its growing involvement in capital markets, its use of synthetic leverage, and the inherent and growing maturity and liquidity mismatch arising from the demandable nature of fund share investments. While available data suggest that vulnerabilities within the investment fund sector are growing and links to the wider financial system and real economy have strengthened, data limitations prevent drawing a definitive conclusion on the sectors' contribution to systemic risk.

No. 173
20 May 2016
Safeguarding the euro as a currency beyond the state

Abstract

JEL Classification

E4 : Macroeconomics and Monetary Economics→Money and Interest Rates

E6 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

F15 : International Economics→Trade→Economic Integration

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

Abstract

This paper reviews the debate on the longer-term requirements for safeguarding the euro as a currency beyond the state that is anchored through collective governance instead of a central government. The strengthening of EU economic and financial governance in the wake of the euro area crisis goes a long way towards creating the minimum conditions for a more perfect EMU. At the same time, the current principle of nation states coordinating their sovereignty to

No. 172
22 April 2016
Distributed ledger technologies in securities post-trading - Revolution or evolution?

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

L15 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Information and Product Quality, Standardization and Compatibility

O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes

Abstract

Over the last decade, information technology has contributed significantly to the evolution of financial markets, without, however, revolutionising the way in which financial institutions interact with one another. This may be about to change, as some market players are now predicting that new database technologies, such as blockchain and other distributed ledger technologies (DLTs), could be the source of an imminent revolution. This paper analyses the main features of DLTs that could influence their potential adoption by financial institutions and discusses how the use of these technologies could affect the European post-trade market for securities.

The original protocol underlying DLTs has its roots in the anarchic world of virtual currencies, which operate outside the conventional financial system. The public debate on DLTs has also been very much focused on the revolutionary potential of the technology. This paper concludes that, irrespective of the technology used and the market players involved, certain processes that feature in the post-trade market for securities will still need to be performed by institutions. DLTs could, however, stimulate a reorganisation of financial markets, which could in turn: (i) reduce reconciliation costs, (ii) streamline the post-trade value chain, and (iii) allow more efficient use to be made of collateral and regulatory capital. It should, nevertheless, be remembered that research into DLTs and their uses is at an early stage. The scope for financial institutions to adopt DLTs and their potential impact on mainstream financial markets are still unclear.

This paper discusses three potential models of how market players could adopt DLTs for performing core post-trade functions. The DLT could be adopted either: (i) in clusters, (ii) collectively, or (iii) peer to peer. The evaluation of the three adoption models assumes that they are all equally compatible with the regulatory framework. It shows that, assuming this to be the case, they would each have different advantages and costs.

No. 171
15 April 2016
Basel III and recourse to Eurosystem monetary policy operations

Abstract

JEL Classification

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

Following the emergence of the financial crisis in August 2007, the Basel Committee on Banking Supervision established in 2010 a new global regulatory framework. In addition to raising capital requirements, it introduced three ratios, two of which set out minimum standards for liquidity and funding risk, i.e. the liquidity coverage ratio and the net stable funding ratio, and one which aims to limit leverage in the banking system, i.e. the leverage ratio. All three ratios can have a number of implications for monetary policy implementation, in particular the liquidity coverage ratio and the net stable funding ratio owing to the special role of central banks in providing liquidity. This paper investigates the extent to which the regulatory initiatives might have already had an impact on banks

No. 170
8 April 2016
Strengthening the role of local currencies in EU candidate and potential candidate countries

Abstract

JEL Classification

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

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

F31 : International Economics→International Finance→Foreign Exchange

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper deals with the phenomenon of high levels of unofficial euroisation in countries preparing for EU membership (Albania, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Serbia and Turkey). The challenges stemming from unofficial euroisation are particularly relevant for central banks as high degrees of euroisation reduce the effectiveness of monetary policy and create risks to financial stability. Unofficial euroisation in these countries is fuelled by legacies of inflation and macroeconomic imbalances, close economic and financial linkages with the euro area, as well as the perspective of EU membership. While euroisation (or, more generally, dollarisation) is typically a sticky phenomenon that is difficult to reverse, entrenched as it is in the behaviour and mind-set of economic agents, the paper finds - based also on the experience of countries outside the region - that there is a set of policies under the competence of domestic authorities which are conducive to strengthening the use of domestic currencies, even though efforts to bring down dollarisation or euroisation rates typically take a long time to show results. In this context, macroeconomic stabilisation is a necessary but not sufficient condition. It needs to be flanked by targeted prudential and regulatory measures, as well as efforts to develop local currency capital markets. Authorities in EU candidate and potential candidate countries have already engaged in such endeavours and euroisation rates have gone down to some extent in recent years, though at different levels and at an uneven pace. Nevertheless, further efforts are needed, while acknowledging that some specific factors like the strong presence of euro area headquartered banks in these countries as well as their EU accession perspective are conducive to euroisation.

No. 169
5 April 2016
Profit distribution and loss coverage rules for central banks

Abstract

JEL Classification

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

M48 : Business Administration and Business Economics, Marketing, Accounting→Accounting and Auditing→Government Policy and Regulation

Abstract

The issue of central bank profit distribution is both complex and often politically controversial. Based on the replies of 57 central banks worldwide to an ECB questionnaire, this paper analyses how profit distribution rules can affect the amounts distributed and the financial strength of central banks. The paper also investigates the link between profit distribution, accounting rules and financial strength. Research shows that central banks apply divergent rules as regards profit distribution and loss coverage. While they are not a measure of central bank performance, in the long run profits strengthen the credibility of central banks and contribute to their financial independence, whereas profit distribution rules that do not allow central banks to set up adequate reserves might have the opposite effect.

The interaction of profit distribution rules and accounting rules also plays an important role in central banks achieving financial strength. Accounting frameworks can materially influence central banks

No. 168
4 February 2016
What's so special about specialization in the euro area?

Abstract

JEL Classification

E01 : Macroeconomics and Monetary Economics→General→Measurement and Data on National Income and Product Accounts and Wealth, Environmental Accounts

F45 : International Economics→Macroeconomic Aspects of International Trade and Finance

J21 : Labor and Demographic Economics→Demand and Supply of Labor→Labor Force and Employment, Size, and Structure

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

Abstract

Euro area countries exhibited modest convergence prior to the financial crisis and diverged thereafter. Such divergence has been examined from many angles, and various narratives of the crisis have developed. Surprisingly, the gradual transformation of the economic structures of euro area countries over the last 15-20 years has, however, received less attention. This paper brings together several strands of evidence - both macro and micro - on such economic transformation. It makes three contributions. First, profound changes are found in the allocation of countries

No. 167
28 January 2016
Savings and investment behaviour in the euro area

Abstract

JEL Classification

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

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

Abstract

Although monetary union created the conditions for improving economic and

financial integration in the euro area, in the context of the financial and sovereign

crises, it has also been accompanied by the emergence of severe imbalances

in savings and investment, credit and housing booms in some countries and the

allocation of resources towards less productive sectors. The global financial crisis

and the euro area sovereign debt crisis then led to major and abrupt adjustments

as the risks posed by the large imbalances materialised. Although the institutional

shortcomings in the EU that permitted the emergence of imbalances have been

largely addressed since 2008, the adjustment process is not yet complete. From a

macroeconomic perspective, the imbalances in the external accounts have led to

the accumulation of high levels of external liabilities that need to be reduced, which,

in turn, is weakening investment and therefore weighing on growth prospects and

growth potential. From a macroprudential perspective, the lingering imbalances have

added to systemic risk and rendered the euro area more vulnerable to risks. This

Occasional Paper analyses the dynamic patterns in macroeconomic imbalances

primarily from the former perspective, addressing in particular the connections

between macroeconomic and sectoral adjustments of imbalances and the challenges

for economic growth and performance over a longer horizon.

No. 166
23 September 2015
The side effects of national financial sector policies: framing the debate on financial protectionism

Abstract

JEL Classification

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts

Abstract

The decrease of financial integration both at the global and European level reflects, to a certain extent, a market response to the crisis. It might, however, also be partly driven by policies such as capital flow management measures (CFMs). In addition, several other measures taken by central banks, regulators and governments in response to the crisis may have had less obvious negative side effects on financial integration. Against this backdrop, this paper explores broad definitions of financial protectionism in order to raise awareness of the fact that the range of policies which could negatively affect financial integration may be much wider than residency-based CFMs. At the same time, the paper acknowledges that these measures have mostly been taken for legitimate financial stability purposes and with no protectionist intentions. The paper considers five categories of policy measures which could contribute to financial fragmentation both at the global and at the EU level: currency-based measures directed towards banks, geographic ring fencing, some financial repression policies, crisis resolution policies with a national bias, and some financial sector taxes.

No. 165
28 August 2015
Public debt, population ageing and medium-term growth

Abstract

JEL Classification

E17 : Macroeconomics and Monetary Economics→General Aggregative Models→Forecasting and Simulation: Models and Applications

E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications

J1 : Labor and Demographic Economics→Demographic Economics

Abstract

This paper analyses the challenges that high public debt and ageing populations pose to medium-term growth. First, macroeconometric model simulations suggest that medium-term growth can benefit from credible fiscal consolidation, partly through reductions in sovereign risk premia. Second, a disaggregated growth accounting exercise suggests that the impact of population ageing on medium-term growth can be mitigated by structural reforms boosting labour force participation. Finally, general equilibrium models suggest that pay-as-you-go public pension systems will require reforms combining lower benefits, a later retirement age and higher social contributions. These findings suggest several policy recommendations: (a)

No. 164
20 August 2015
Financial stability challenges in EU candidate and potential candidate countries

Abstract

JEL Classification

F31 : International Economics→International Finance→Foreign Exchange

F34 : International Economics→International Finance→International Lending and Debt Problems

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper reviews financial stability challenges in countries preparing for EU membership, i.e. Albania, Bosnia and Herzegovina, Kosovo*, Iceland, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey. The paper has been prepared by an expert group of staff from the European System of Central Banks (ESCB) in which experts from EU candidate and potential candidate country central banks also participated. The paper finds that near-term challenges to financial stability primarily relate to credit risks from the generally weak economic dynamics in combination with already high non-performing loan burdens in many banking systems, especially in the Western Balkans. In the medium-term, challenges to financial stability stem from indirect market risks to banks related to foreign currency lending as well as lingering exposures to funding risks, with Western Balkan economies again appearing as relatively more vulnerable. Looking further ahead, the paper highlights that the magnitude of the challenge to reach a

No. 163
15 July 2015
Compendium on the diagnostic toolkit for competitiveness

Abstract

JEL Classification

F14 : International Economics→Trade→Empirical Studies of Trade

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

F60 : International Economics→Economic Impacts of Globalization→General

D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

Abstract

This Compendium describes the contribution of CompNet to the improvement of the analytical framework and indicators of competitiveness. It does this by presenting a comprehensive database of novel competitiveness indicators. These are more than 80 novel indicators designed by CompNet members that capture macro, micro and cross-country dimensions, thus providing a comprehensive view of the competitive position of EU countries and their peers. A short description of each innovative indicator

No. 162
10 June 2015
Fiscal multipliers and beyond

Abstract

JEL Classification

H30 : Public Economics→Fiscal Policies and Behavior of Economic Agents→General

H6 : Public Economics→National Budget, Deficit, and Debt

E6 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

Abstract

This paper seeks to link the debate surrounding short-term fiscal multipliers with the

medium and longer-term impact of fiscal consolidation on public debt sustainability.

A literature review and empirical findings for state-dependent multipliers confirm that

there is considerable uncertainty surrounding the size of the short-term multiplier.

Notably, multipliers may be larger in deep recessions or financial crises, but the

negative impact of fiscal consolidation is mitigated when public finances are weak.

Using a stylised framework and a range of plausible values for the fiscal multiplier,

simulations suggest that an increase in the debt ratio following episodes of fiscal

consolidation is likely to be short-lived. Even in a macroeconomic context in which

multipliers are high, a front-loaded fiscal consolidation reduces the total consolidation

effort and implies a faster stabilisation of the debt ratio. In general, back-loading is

subject to higher implementation risks, most notably in the light of political economy

considerations. Overall, when determining the fiscal adjustment path, both the short-term

costs and the longer-term benefits need to be taken into account. Particular

attention should be paid to the composition of consolidation packages, with well-designed

adjustments likely to imply a faster stabilisation of the debt ratio.

No. 161
18 May 2015
Critique of accommodating central bank policies and the 'expropriation of the saver' - A review

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

O40 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→General

Abstract

In parts of the German media, with the support of a number of German economists, the ECB

No. 160
6 February 2015
The four unions "PIE" on the Monetary Union "CHERRY": a new index of European Institutional Integration

Abstract

JEL Classification

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

N24 : Economic History→Financial Markets and Institutions→Europe: 1913?

Abstract

This paper presents a European Index of Regional Institutional Integration (EURII), which maps developments in European integration from 1958 to 2014 on the basis of a monthly dataset. EURII captures what we call: (i) the “Common Market Era”, which lasted from 1958 until 1993; and (ii) the first twenty years of the “Union Era” that started in 1994, but gained new impetus in response to the euro area crisis. The paper complements the economic narratives of the crisis with an institutional approach highlighting the remedies to the flaws in the initial design of Economic and Monetary Union (EMU). In fact, since 2010, EMU’s institutional framework has been substantially reformed. While work on EMU’s new governance is still in progress, the broad contours of a “genuine union” have been outlined in the Four Presidents’ Report of December 2012. The report envisages a more effective economic union, a fiscal union, a financial union, and a commensurate political union. The aim of the EURII index is threefold: (i) to provide a tool to synthesise and monitor the process of European institutional integration since 1958 and, in particular, track institutional reforms since 2010; (ii) to expand a previous integration index by showing that monetary unification – which was initially understood as “the cherry on the Internal Market pie” – implied a major discontinuity in the process and nature of European integration, that is, a new “pie on the cherry”; and (iii) to offer a tool for further research, policy analysis and communication.

No. 159
6 February 2015
Comparisons and contrasts of the impact of the crisis on euro area labour markets

Abstract

JEL Classification

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

J08 : Labor and Demographic Economics→General→Labor Economics Policies

J21 : Labor and Demographic Economics→Demand and Supply of Labor→Labor Force and Employment, Size, and Structure

J23 : Labor and Demographic Economics→Demand and Supply of Labor→Labor Demand

J24 : Labor and Demographic Economics→Demand and Supply of Labor→Human Capital, Skills, Occupational Choice, Labor Productivity

J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General

J61 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Geographic Labor Mobility, Immigrant Workers

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

Abstract

The global financial and economic crisis

No. 158
30 January 2015
IMF Surveillance in Europe

Abstract

JEL Classification

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

F53 : International Economics→International Relations, National Security, and International Political Economy→International Agreements and Observance, International Organizations

Abstract

The International Monetary Fund has significantly improved its surveillance of the EU and the euro area, along the lines suggested by the Fund

No. 157
19 November 2014
The identification of fiscal and macroeconomic imbalances - unexploited synergies under the strengthened EU governance framework

Abstract

JEL Classification

H3 : Public Economics→Fiscal Policies and Behavior of Economic Agents

H6 : Public Economics→National Budget, Deficit, and Debt

E02 : Macroeconomics and Monetary Economics→General→Institutions and the Macroeconomy

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

Abstract

In the light of the lessons learned from the euro area sovereign debt crisis, the EU fiscal and macroeconomic governance framework was overhauled in 2011. Against this background, this paper analyses whether the broadened surveillance of fiscal and macroeconomic indicators under the strengthened governance framework would have facilitated the identification of emerging imbalances, had it been in place before the crisis. The findings suggest that the strengthened governance framework would have given earlier signals about emerging excessive fiscal and macroeconomic imbalances. Euro area countries thus would have been obliged to take preventive and corrective action at an earlier stage, provided that the stricter rules had been effectively implemented. At the same time, the paper concludes that the increased reliance of the EU fiscal governance framework on unobservable magnitudes such as the structural budget balance, which are difficult to measure in real time, will continue to impede the timely identification of underlying fiscal imbalances. It is suggested that the new macroeconomic imbalance procedure could have given earlier indications about the emergence of excessive macroeconomic imbalances, which in turn posed risks for fiscal sustainability. Looking forward, these preliminary findings suggest possible synergies between the, until now largely unrelated, fiscal and macroeconomic governance frameworks.

No. 156
3 November 2014
Potential output from a euro area perspective

Abstract

JEL Classification

E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production

E25 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Aggregate Factor Income Distribution

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

O49 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Other

Abstract

This paper reviews potential output from a euro area perspective by summarising the developments according to international institutions and assessing the impact of the crisis. The paper also considers the methodological basis for potential output estimates, and the high degree of uncertainty that surrounds them. Although it is too early to see the full effects of structural reforms implemented since 2007/08, further structural reforms are needed to support euro area potential growth, especially in view of the negative impact that population ageing is expected to have on potential growth in the future.

No. 155
17 September 2014
The retail bank interest rate pass-through: The case of the euro area during the financial and sovereign debt crisis

Abstract

JEL Classification

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

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection

C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods

Abstract

This paper analyses the cross-country heterogeneity in retail bank lending rates in the euro area and presents newly developed pass-through models that account for the riskiness of borrowers, the balance sheet constraints of lenders and sovereign debt tensions affecting interest rate-setting behaviour. Country evidence for the four largest euro area countries shows that downward adjustments in policy rates and market reference rates have translated into a concomitant reduction in bank lending rates. In the case of Spain and Italy, however, sovereign bond market tensions and a deteriorating macroeconomic environment have put upward pressure on composite lending rates to non-financial corporations and households. At the same time, model simulations suggest that higher lending rates have propagated to the broader economy by depressing economic activity and inflation. As a response to increasing financial fragmentation, the ECB has introduced several standard and non-standard monetary policy measures. These measures have gone a long way towards alleviating financial market tensions in the euro area. However, in order to ensure the adequate transmission of monetary policy to financing conditions, it is essential that the fragmentation of euro area credit markets is reduced further and the resilience of banks strengthened where needed. Simulation analysis confirms that receding financial fragmentation could help to boost economic activity in the euro area in the medium term.

No. 154
28 July 2014
The impact of regulating occupational pensions in Europe on investment and financial stability

Abstract

JEL Classification

G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

C13 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Estimation: General

C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models

Abstract

This study examines the European Commission

No. 153
27 May 2014
Why accounting matters: a central bank perspective

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

M41 : Business Administration and Business Economics, Marketing, Accounting→Accounting and Auditing→Accounting

M48 : Business Administration and Business Economics, Marketing, Accounting→Accounting and Auditing→Government Policy and Regulation

Abstract

This paper analyses how accounting frameworks can affect three important areas of responsibility of many central banks, namely monetary policy, financial stability and banking supervision. The identified effects of accounting rules and accounting information on the activities of a central bank are manifold. First, the effectiveness of monetary policy crucially hinges on the financial independence of a central bank, which can be evidenced, inter alia, by its financial strength. Using a new simulation of the financial results of the European Central Bank (ECB), this paper shows that the reported annual profit and financial buffers of a central bank can be significantly affected by accounting, profit distribution and loss coverage rules. Second, in respect of financial stability, the accounting frameworks applied by commercial banks can not only affect their behaviour, but also that of financial markets. Indeed, there is evidence that accounting frameworks amplified pro-cyclicality during the recent crisis, and thus posed risks to the stability of the financial system. This being so, the accounting frameworks of credit institutions have obvious implications for central banks

No. 152
11 October 2013
A macro stress testing framework for assessing systemic risks in the banking sector

Abstract

JEL Classification

C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods

D85 : Microeconomics→Information, Knowledge, and Uncertainty→Network Formation and Analysis: Theory

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

E47 : Macroeconomics and Monetary Economics→Money and Interest Rates→Forecasting and Simulation: Models and Applications

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

The use of macro stress tests to assess bank solvency has developed rapidly over the past few years. This development was reinforced by the financial crisis, which resulted in substantial losses for banks and created general uncertainty about the banking sector's loss-bearing capacity. Macro stress testing has proved a useful instrument to help identify potential vulnerabilities within the banking sector and to gauge its resilience to adverse developments. To support its contribution to safeguarding financial stability and its financial sector-related work in the context of EU/IMF Financial Assistance Programmes, and looking ahead to the establishment of the Single Supervisory Mechanism (SSM), the ECB has developed a top-down macro stress testing framework that is used regularly for forward-looking bank solvency assessments. This paper comprehensively presents the main features of this framework and illustrates how it can be employed for various policy analysis purposes.

No. 151
8 August 2013
Corporate finance and economic activity in the euro area

Abstract

JEL Classification

E0 : Macroeconomics and Monetary Economics→General

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

Abstract

This report analyses and reviews the corporate finance structure of non-financial corporations (NFCs) in the euro area, including how they interact with the macroeconomic environment. Special emphasis is placed on the crisis that began in 2007-08, thus underlining the relevance of financing and credit conditions to investment and economic activity in turbulent times. When approaching such a broad topic, a number of key questions arise. How did the corporate sector

No. 150
4 July 2013
"Loose lips sinking markets?": the impact of political communication on sovereign bond spreads

Abstract

JEL Classification

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

D70 : Microeconomics→Analysis of Collective Decision-Making→General

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

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

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

F50 : International Economics→International Relations, National Security, and International Political Economy→General

Abstract

Taking a cue from the assertion that "loose lips sink markets" (Carmassi and Micossi, 2010), this paper investigates to what extent and why political communication has had an impact on the sovereign bond spreads of selected euro area countries over the German Bund. Drawing on 25,000 news media releases between January 2009 and October 2011, it empirically compares political communication across various political actors at the supranational and national levels in the euro area. It finds empirical evidence that, in the short term, certain types of political communication have a quantifiable effect on sovereign bond spreads. This effect can be positive or negative depending on the type of communication, possibly fuelling self-reinforcing feedback loops between markets and policy actions. Subsequently, this paper explores possible reasons for this observed phenomenon. It analyses the specific economic, political and institutional context in which political communication works in Europe and finds that the potential for miscommunication is structurally higher in the euro area than in other nation-based currency areas. Finally, the paper identifies avenues to make communication policy more effective and puts forward possible measures to mitigate the risks of miscommunication.

No. 146
27 June 2013
Islamic finance in Europe

Abstract

JEL Classification

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

F6 : International Economics→Economic Impacts of Globalization

F65 : International Economics→Economic Impacts of Globalization→Finance

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G22 : Financial Economics→Financial Institutions and Services→Insurance, Insurance Companies, Actuarial Studies

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

G3 : Financial Economics→Corporate Finance and Governance

G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill

M14 : Business Administration and Business Economics, Marketing, Accounting→Business Administration→Corporate Culture, Diversity, Social Responsibility

Abstract

Islamic finance is based on ethical principles in line with Islamic religious law. Despite its low share of the global financial market, Islamic finance has been one of this sector's fastest growing components over the last decades and has gained further momentum in the wake of the financial crisis. The paper examines the development of and possible prospects for Islamic finance, with a special focus on Europe. It compares Islamic and conventional finance, particularly as concerns risks associated with the operations of respective institutions, as well as corporate governance. The paper also analyses empirical evidence comparing Islamic and conventional financial institutions with regard to their: (i) efficiency and profitability; and (ii) stability and resilience. Finally, the paper considers the conduct of monetary policy in an Islamic banking context. This is not uncomplicated given the fact that interest rates - normally a cornerstone of monetary policy - are prohibited under Islamic finance. Liquidity management issues are thus discussed here, with particular reference to the euro area.

No. 149
26 June 2013
Introducing the ECB indicator on euro area industrial new orders

Abstract

JEL Classification

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

Abstract

Following the discontinuation of the official statistics on industrial new orders by Eurostat in mid-2012, this paper introduces the ECB indicator on euro area industrial new orders, which aims to fill the new statistical gaps for euro area total new orders as well as for various breakdowns. Despite the discontinuation of the data collection at European level, a large number of euro area countries are expected to continue with the data collection nationally. For those countries which have discontinued the collection of national data, model-estimates are used in calculating the ECB indicator on euro area industrial new orders. New orders are modelled across EU countries using "soft" data (business opinion surveys) as well as "hard" data (industrial turnover) and applying a common modelling framework. The model determinants significantly explain the monthly growth rates in new orders across approximately 200 estimated equations. Various tests show that the estimates are robust. This paper demonstrates that, besides the leading information content of industrial new orders for euro area industrial production, the monitoring of the ECB indicator on new orders is useful for cross-checking developments in industrial production in real time.

No. 148
19 June 2013
The use of credit claims as collateral for Eurosystem credit operations

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G30 : Financial Economics→Corporate Finance and Governance→General

Abstract

Credit claims (or bank loans) represent a large share of the collateral accepted by the Eurosystem in its credit operations in recent years. Hence the techniques and procedures used in the use of credit claims as collateral have become significant elements of the monetary policy implementation mechanism in the euro area. The procedures involved in credit claim collateralisation, however, are generally more complex than those for marketable assets traded in regulated markets or in other markets accepted by the Eurosystem. While several types of credit claims are eligible as Eurosystem collateral, each type of credit claim has different characteristics which require specific considerations in the eligibility assessment. This paper provides an overview of the issues involved in the use of credit claims as collateral and relates these to some measures taken by both the public and the private sector aimed at facilitating their use in the euro area. The paper also elaborates on the syndicated loan market in the euro area as this market is sizeable, while it appears that the use of such loans as collateral remains limited.

No. 147
18 June 2013
Convergence in European retail payments

Abstract

JEL Classification

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

G20 : Financial Economics→Financial Institutions and Services→General

Abstract

Financial integration in some segments of the financial markets started to deteriorate during the recent period of economic turmoil in Europe. This paper examines whether this phenomenon also holds true for the European retail payments market. In comparison with other segments of the financial markets, the integration of the retail payments market has been more difficult to quantify, and the effects of recent developments - including the creation of the Single Euro Payments Area (SEPA) and the economic crisis - have been hard to evaluate using existing measures of integration. As an indicator of financial integration, convergence in the European retail payments market is measured during the period 1995-2011 for the most used retail payment instruments: cash, debit card, credit card, direct debit, credit transfer, cheque and e-money. Two methods for estimating convergence are used: sigma convergence and beta convergence. There is some evidence of convergence for all payment instruments, except for cheques and e-money. The results suggest that the cross-country dispersion of the use of payment instruments has declined over time in Europe. The pace of convergence has picked up since the introduction of the single currency. There is also some evidence of beta convergence. In contrast to some other segments of the financial markets, integration in the retail payments market has not deteriorated during the financial crisis.

No. 145
25 April 2013
Statistics and indicators for financial stability analysis and policy

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G22 : Financial Economics→Financial Institutions and Services→Insurance, Insurance Companies, Actuarial Studies

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

E60 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General

Abstract

Timely and accurate data are key to the preparation of macro-prudential policy recommendations and decisions by the ESRB, as well as to monitoring policy decisions in terms of their impact on, or transmission to, the financial and non-financial economy. This paper illustrates the work that has been carried out by the European Central Bank, the European Systemic Risk Board and the European Supervisory Authorities over a period of more than two years from 2010 to 2012 to prepare, develop, implement and manage the initial set of statistical and supervisory information necessary to support the European Systemic Risk Board, from its inception in January 2011. The paper also touches on the statistical information that is provided to support the financial stability function of the European Central Bank.

No. 144
25 February 2013
The mutating euro area crisis: is the balance between "sceptics" and "advocates" shifting?

Abstract

JEL Classification

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

N24 : Economic History→Financial Markets and Institutions→Europe: 1913?

Abstract

The destructive potential of the sovereign debt crisis of the euro area has been slowly abating since last summer, but still remains considerable. One reason for it is the sheer complexity of the crisis, which brings together several harmful factors, some long-standing, others more recent, like acts of an ever-growing and mutating tragedy. It combines the features of a financial crisis in some countries with those of a balance-of-payment crisis or sluggish growth in another, overlapping group of countries. All these factors have struck Europe before, but never all at the same time, in so many countries sharing a currency, and with limited adjustment mechanisms. Some countries must undertake sizeable stock-flow adjustments, and reinvent parts of their economies. But the crisis also has two additional dimensions, one being flaws in the governance of the euro area, and the other being an erosion of trust in the viability of the euro area itself. Such concerns have led to talk of a "bailout union", a "permanent transfer union", or the hegemony of a country, the lack of solidarity or of risk-sharing, the lack of vision, the risks of fiscal or financial dominance, and so on. The aim of this paper is to give expression to some thoughts on the various dimensions of the crisis without claiming to offer a coherent and conclusive view either of the crisis or the future of the euro area. While the crisis is a traumatic wake-up call, it is also a catalyst for change. Understanding the reform efforts under way will help rebalancing the views of sceptics.

No. 143
25 February 2013
Financial shocks and the macroeconomy: heterogeneity and non-linearities

Abstract

JEL Classification

C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation

D11 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Theory

Abstract

This paper analyses the transmission of financial shocks to the macro-economy. The role of macro-financial linkages is investigated from an empirical perspective for the euro area as a whole, for individual euro area member countries and for other EU and OECD countries. The following key economic questions are addressed: 1) Which financial shocks have the largest impact on output over the full sample on average? 2) Are financial developments leading real activity? 3) Is there heterogeneity or a common pattern in macro-financial linkages across the euro area and do these linkages vary over time? 4) Do cross-country spillovers matter? 5) Is the transmission of financial shocks different during episodes of high stress than it is in normal times, i.e. is there evidence of non-linearities? In summary, it is found that real asset prices are significant leading indicators of real activity whereas the latter leads loan developments. Furthermore, evidence is presented that macro-financial linkages are heterogeneous across countries

No. 142
4 February 2013
China's economic growth and rebalancing

Abstract

JEL Classification

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

E25 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Aggregate Factor Income Distribution

F14 : International Economics→Trade→Empirical Studies of Trade

F43 : International Economics→Macroeconomic Aspects of International Trade and Finance→Economic Growth of Open Economies

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

Abstract

In this paper we provide an overview of the growth model in China and its prospects, taking a medium-run to long-run perspective. Our main conclusions are as follows. First, the still prevailing producer-biased model of managed capitalism in China tends to engender, as an inherent by-product, serious imbalances which cannot be unwound without a fundamental overhaul of the model itself. Second, given the lack of a critical mass of economic reforms thus far, imbalances may (re-)escalate once global and domestic economic conditions normalise. Third, the fundamental factors underpinning growth in China are likely to remain supportive, at least over the medium run. Although this could help mitigate the economic costs of imbalances for some time to come, it could also reduce the incentives for policy-makers to enact much needed reforms. Fourth, delayed policy action and the persistence of the model of growth cum imbalances would increase the risk of China getting caught in the middle-income trap in the long run. Greater political will to redirect China's growth model towards a more sustainable path is therefore needed.

No. 141
31 January 2013
External competitiveness of EU candidate countries

Abstract

JEL Classification

F1 : International Economics→Trade

F43 : International Economics→Macroeconomic Aspects of International Trade and Finance→Economic Growth of Open Economies

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

P22 : Economic Systems→Socialist Systems and Transitional Economies→Prices

Abstract

As the current financial crisis has shown, macroeconomic imbalances such as persistent current account and trade deficits, can seriously undermine a country's resilience to economic shocks. Maintaining and enhancing external competitiveness has thus become of increasing concern, particularly to European Union (EU) candidate countries whose economic growth models have been challenged in recent years. Drawing on previous studies, this paper assesses developments in the external competitiveness of EU candidate countries between 1999 and 2011. Taking a broad approach to the issue of competitiveness, the paper considers various indicators of both short and long-term competitiveness, including those related to domestic prices and costs, export performance, and institutional and structural issues. In the context of EU integration, comparisons are drawn with developments in the EU12. We find that, during the pre-crisis period, all candidate countries experienced robust export market growth, but also suffered losses in price and cost competitiveness. In terms of export characteristics, progress has been heterogeneous and also fairly slow when compared with the EU12. All candidate countries have increased their number of export products and trading partners, but only a few have been able to export more complex products. As regards structural issues such as corruption and bureaucratic efficiency, all countries have performed quite poorly with the exception of Iceland.

No. 140
15 January 2013
Financial stability analysis: insights gained from consolidated banking data for the EU

Abstract

JEL Classification

C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

This occasional paper explores the Consolidated Banking Data (CBD), a key component of the ECB statistical toolbox for financial stability analysis. We show that non-consolidated, host-country Monetary Financial Institutions (MFI) balance sheet data, which constitutes a key source of input into monetary analysis, are a rather weak proxy for consolidated, home-country data and therefore cannot easily substitute CBD for the purposes of macro-prudential assessment. In addition, it is argued that, notwithstanding the relevance of large banks, medium-sized and small banks must also be taken into account in financial stability analysis, given their relevance in several EU countries and their different business models. A discussion follows on how aggregate data, broken down by bank size, can be used to complement micro data, in particular by signalling where and what to look for, again highlighting the differences between large banks on the one hand and small and medium sized banks on the other.

No. 139
7 December 2012
Competitiveness and external imbalances within the euro area

Abstract

JEL Classification

F10 : International Economics→Trade→General

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

F43 : International Economics→Macroeconomic Aspects of International Trade and Finance→Economic Growth of Open Economies

F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

Abstract

The onset of the financial crisis in 2008 has highlighted the problems of diverging external imbalances within Economic and Monetary Union (EMU) and the role of persistent losses in competitiveness. This paper starts by investigating some of the competitiveness factors which contributed to external imbalances in euro area countries. The evidence suggests significant heterogeneity across countries in both price/cost and non-price competitiveness in the euro area and that there is no one factor, but rather a range of potential factors explaining diverging external imbalances. In particular, while non-price competitiveness effects contributed largely to the trade surplus in some countries, for some southern European countries the trade balance was also driven by price factors. The second part of the paper studies the implications of competitiveness adjustment by means of quantitative tools. Using four different multi-country macro models, improvements in both price/cost aspects (namely wage reduction, productivity improvements or fiscal devaluation) and non-price competitiveness factors (quality improvements) were shown - under certain conditions - to improve external imbalances. The analysis suggests differences in countries' composition of trade could lead to heterogeneity in the potential gains from improvements in competitiveness.

No. 138
31 October 2012
Euro area labour markets and the crisis

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

F15 : International Economics→Trade→Economic Integration

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

Abstract

Between the start of the economic and financial crisis in 2008, and early 2010, almost four million jobs were lost in the euro area. Employment began to rise again in the first half of 2011, but declined once more at the end of that year and remains at around three million workers below the pre-crisis level. However, in comparison with the severity of the fall in GDP, employment adjustment has been relatively muted at the aggregate euro area level, mostly due to significant labour hoarding in several euro area countries. While the crisis has, so far, had a more limited or shorter-lived impact in some euro area countries, in others dramatic changes in employment and unemployment rates have been observed and, indeed, more recent data tend to show the effects of a re-intensification of the crisis. The main objectives of this report are: (a) to understand the notable heterogeneity in the adjustment observed across euro area labour markets, ascertaining the role of the various shocks, labour market institutions and policy responses in shaping countries

No. 137
1 October 2012
The social and private costs of retail payment instruments: a European perspective

Abstract

JEL Classification

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

D23 : Microeconomics→Production and Organizations→Organizational Behavior, Transaction Costs, Property Rights

D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

Abstract

The European Central Bank (ECB) carried out a study of the social and private costs of different payment instruments with the participation of 13 national central banks in the European System of Central Banks (ESCB). It shows that the costs to society of providing retail payment services are substantial. On average, they amount to almost 1% of GDP for the sample of participating EU countries. Half of the social costs are incurred by banks and infrastructures, while the other half of all costs are incurred by retailers. The social costs of cash payments represent nearly half of the total social costs, while cash payments have on average the lowest costs per transaction, followed closely by debit card payments. However, in some countries, cash does not always yield the lowest unit costs. Despite countries' own market characteristics, the European market for retail payments can be grouped into five distinct payment clusters with respect to the social costs of payment instruments, market development, and payment behaviour. The results from the present study may trigger a constructive debate about which policy measures and payment instruments are suitable for improving social welfare and realising potential cost savings along the transaction value chain.

No. 136
28 September 2012
Financial stability challenges for EU acceding and candidate countries: making financial systems more resilient in a challenging environment

Abstract

JEL Classification

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This Occasional Paper reviews financial stability challenges in countries preparing for EU membership with a candidate country status, i.e. Croatia (planned to accede to the EU on 1 July 2013), Iceland, the former Yugoslav Republic of Macedonia, Montenegro and Turkey. It follows a macro-prudential approach, emphasising systemic risks of financial systems as a whole. After recalling that some EU candidate countries went through a pronounced boom-and-bust credit cycle in recent years, the paper identifies current challenges for the bank-based financial sectors as mainly stemming from: (i) high or rising domestic credit risk; (ii) unhedged borrowing in foreign currencies; and (iii) strains related to the euro area debt crisis, which is impacting the EU candidate countries via a number of channels. The main channels of transmission of the euro area debt crisis to the EU candidate countries operate via: (i) trade and foreign direct investment; (ii) an increased market focus on sovereign risk; and (iii) "deleveraging", e.g. via a decline of external funding to local subsidiaries of EU parent banks. A macro-stress-test exercise performed by the national authorities of the EU candidate countries in February 2012 suggests that large capital buffers can absorb a shock to credit quality stemming from a drop in economic activity in the EU and renewed strains from the euro area debt crisis. With respect to supervisory practices, the paper finds that the EU candidate countries have made good progress, but some gaps with respect to international and EU standards remain.

No. 135
17 August 2012
The use of the Eurosystem's monetary policy instruments and operational framework since 2009

Abstract

JEL Classification

D02 : Microeconomics→General→Institutions: Design, Formation, and Operations

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes

Abstract

This paper provides a comprehensive overview of the use of the Eurosystem's monetary policy instruments and the operational framework from the first quarter of 2009 until the second quarter 2012. The paper discusses in detail, from a liquidity management perspective, the standard and non-standard monetary policy measures taken over this period. The paper reviews the evolution of the Eurosystem balance sheet, participation in tender operations, the outright purchase programmes, patterns of reserve fulfilment, recourse to standing facilities as well as the steering of money market interest rates.

No. 134
28 June 2012
Revisiting the effective exchange rates of the euro

Abstract

JEL Classification

F10 : International Economics→Trade→General

F30 : International Economics→International Finance→General

F31 : International Economics→International Finance→Foreign Exchange

F40 : International Economics→Macroeconomic Aspects of International Trade and Finance→General

Abstract

This paper describes in detail the methodology currently used by the European Central Bank (ECB) to determine the nominal and real effective exchange rate indices of the euro. Building on the work of Buldorini et al. (2002), it shows how the ECB's techniques for calculating effective exchange rates have been updated over time and explains the related theoretical foundations. In particular, the paper discusses the use and development of trade weights based on trade in manufactured goods (taking account of third market effects), the trading partners selected, and the choice of deflators for constructing the real effective exchange rate indices. In addition, it presents evidence on exchange rate and competitiveness developments for both the euro area as a whole and individual Member States. While the growing importance of China is reflected in the updated trade weights of euro effective exchange rates, it appears that the increasing integration of the euro area with other European economies accounts for the largest variation in trade weights. The US dollar, an anchor currency for a number of large emerging markets, continues to play an important role for the effective exchange rate of the euro and euro area competitiveness. Overall, euro area competitiveness has improved slightly since the introduction of the single currency, despite significant heterogeneity within the euro area.

No. 133
30 April 2012
Shadow banking in the Euro area: an overview

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G15 : Financial Economics→General Financial Markets→International Financial Markets

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

Shadow banking, as one of the main sources of financial stability concerns, is the subject of much international debate. In broad terms, shadow banking refers to activities related to credit intermediation and liquidity and maturity transformation that take place outside the regulated banking system. This paper presents a first investigation of the size and the structure of shadow banking within the euro area, using the statistical data sources available to the ECB/Eurosystem. Although overall shadow banking activity in the euro area is smaller than in the United States, it is significant, at least in some euro area countries. This is also broadly true for some of the components of shadow banking, particularly securitisation activity, money market funds and the repo markets. This paper also addresses the interconnection between the regulated and the non-bank-regulated segments of the financial sector. Over the recent past, this interconnection has increased, likely resulting in a higher risk of contagion across sectors and countries. Euro area banks now rely more on funding from the financial sector than in the past, in particular from other financial intermediaries (OFIs), which cover shadow banking entities, including securitisation vehicles. This source of funding is mainly shortterm and therefore more susceptible to runs and to the drying-up of liquidity. This finding confirms that macro-prudential authorities and supervisors should carefully monitor the growing interlinkages between the regulated banking sector and the shadow banking system. However, an in-depth assessment of the activities of shadow banking and of the interconnection with the regulated banking system would require further improvements in the availability of data and other sources of information.

No. 132
18 October 2011
The size and composition of government debt in the euro area

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

P24 : Economic Systems→Socialist Systems and Transitional Economies→National Income, Product, and Expenditure, Money, Inflation

Abstract

This paper explains the various concepts of government debt in the euro area with particular emphasis on its size and composition. In terms of size, the paper focuses on different definitions that are in use, in particular the concept of gross general government debt used in the surveillance of the euro area countries, the total liabilities from the government balance sheet approach, and the net debt concept which subtracts government financial assets from the liability side. In addition, it discusses

No. 131
7 October 2011
Interchange fees in card payments

Abstract

JEL Classification

C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

Abstract

The present paper explores issues surrounding multilateral interchange fees (MIFs) in payment card markets from various angles. The Eurosystem

No. 130
7 October 2011
Some lessons from the financial crisis for the economic analysis

Abstract

JEL Classification

C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation

D91 : Microeconomics→Intertemporal Choice→Intertemporal Household Choice, Life Cycle Models and Saving

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

Abstract

The economics profession in general, and economic forecasters in particular, have faced some understandable criticism for their failure to predict the timing and severity of the recent economic crisis. In this paper, we offer some assessment of the performance of the Economic Analysis conducted at the ECB both in the run up to and since the onset of the crisis. Drawing on this assessment, we then offer some indications of how the analysis of economic developments could be improved looking forward. The key priorities identifi ed include the need to: i) extend existing tools and/or develop new tools to account for important feedback mechanisms, for instance, improved real-fi nancial linkages and non-linear dynamics; ii) develop ways to handle the complexity arising from the presence of multiple models and alternative economic paradigms; and iii) given the limitations of point forecasts, to further develop risk and scenario analysis around baseline projections.

No. 128
30 September 2011
Structural features of distributive trades and their impact on prices in the euro area

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

Abstract

The distributive trades sector, which is primarily accounted for by wholesale and retail trade, is not only economically important in its own right, but also relevant to monetary policy. Ultimately, it is retailers who set the actual prices of most consumer goods. They are the main interface between producers of consumer goods and consumers, with around half of private consumption accounted for by retail trade. The

No. 129
22 September 2011
The Stability and Growth Pact - crisis and reform

Abstract

JEL Classification

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

Abstract

The sovereign debt crisis in the euro area is a symptom of policy failures and deficiencies in

No. 127
22 September 2011
Beyond the economics of the euro - analysing the institutional evolution of EMU 1999-2010

Abstract

JEL Classification

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations

Abstract

This Occasional Paper examines how and why the institutional framework governing EMU has evolved since the creation of the euro. Building on theories of institutionalism, the paper in particular investigates to what extent functional spillovers from the single currency into other policy domains, like macroeconomic policies or financial regulation, met with an adequate

institutional response, and to what extent the existing institutional framework conditioned the response to the financial crisis. The interaction between policy requirements and institutional capabilities is examined both in

No. 126
27 July 2011
Euro area cross-border financial flows and the global financial crisis

Abstract

JEL Classification

D8 : Microeconomics→Information, Knowledge, and Uncertainty

C7 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory

Abstract

This paper analyses the impact of the global financial crisis on euro area cross-border financial flows by comparing recent developments with the main pre-crisis trends. Two prominent features of the period of turmoil were (i) the sizeable deleveraging of external financial exposures by the private sector and, in particular, the banking sector from 2008 and (ii) the significant changes in the composition of euro area cross-border portfolio flows, as investors shifted from equity to debt instruments, from long-term to short- term debt instruments and from private to public sector securities. Since 2009 such trends have started reversing. However, as balance sheet restructuring by financial and non-financial corporations continues, cross-border financial flows have remained well below pre-crisis levels. The degree of resumption and volatility of crossborder financial activity may have a major bearing on growth prospects for the euro area and may also matter from a financial stability perspective. We argue that the recent experience, first of extraordinary growth and then of scaling down of international financial activity, calls for enhanced monitoring of developments in crossborder financial flows so that the underlying risks to the domestic economy stemming from the financial sector can be better assessed. Looking forward, successful implementation of policy actions to promote macroeconomic discipline and enhance financial regulation and supervision could influence, inter alia, the composition and volume of cross-border capital flows, contributing to a more efficient and sustainable allocation of resources.

No. 125
8 April 2011
Household sector borrowing in the euro area - a micro data perspective

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

Abstract

This paper uses micro data from the European Union Statistics on Income and Living Conditions (EU-SILC) to generate structural information for the euro area on the incidence of household indebtedness and the debt service burden. It breaks down incidence by characteristics such as income, age and employment status, all features that can be cross-referenced in the light of theories such as the life-cycle hypothesis. Overall, income appears to be the dominant feature determining the debt status of a household. The paper also examines the evolution of indebtedness and debt service burdens over time and compares the situation in the euro area with that in the United States. In general, the results suggest that the macroeconomic implications of indebtedness for monetary transmission and financial stability are not associated with the mean but with the tails of the distribution.

No. 124
18 March 2011
Who has been affected, how and why? The spillover of the global financial crisis to Sub-Saharan Africa and ways to recovery

Abstract

JEL Classification

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations

Abstract

This paper first presents a comprehensive analysis of the significance of different transmission channels of the global economic and financial crisis to Sub-Saharan African countries. It then examines the repercussions of the crisis for the growth of gross domestic product (GDP) and its components; this is complemented by a study of the responses of monetary and fiscal authorities to the challenges posed by the crisis, both in regional terms and on the basis of selected country case studies. Finally, the paper highlights medium-term to long-term challenges for ensuring a sustainable recovery and for fostering resilience against potential future shocks.The authors find that the intensity of the impact of the crisis varies widely across countries, with a lack of export diversification apparently having been particularly conducive to its transmission. However, the analysis of the magnitude of the observed swings in macroeconomic variables also reveals that although they were large, they were not exceptional and are comparable to fl uctuations Sub-Saharan Africa has witnessed in the recent past. Furthermore, in a non-negligible number of instances the extent of the slowdown seems to have been determined by domestic factors as well. Particularly, policies and conditions prior to the global recession, rather than crisis contagion per se, appear decisively to have shaped the scope of possible responses in many cases.As a result, many of the policy lessons Sub- Saharan Africa might draw from the crisis do not involve radical deviation from the policies in place before. Efforts to improve the management of resource revenue for commodity-dependent countries, necessary reforms of the economic and business environment to enable a diversification of the export base, and further regional integration might help to alleviate possible future external shocks. Additionally, the crisis re-emphasises the need to back growth prospects by redefining sectoral priorities.

No. 123
9 February 2011
The international monetary system after the financial crisis

Abstract

JEL Classification

C21 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Cross-Sectional Models, Spatial Models, Treatment Effect Models, Quantile Regressions

C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation

G15 : Financial Economics→General Financial Markets→International Financial Markets

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

The main strength of today

No. 122
14 January 2011
The impact of the Eurosystem's covered bond purchase programme on the primary and secondary markets

Abstract

JEL Classification

E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity

L63 : Industrial Organization→Industry Studies: Manufacturing→Microelectronics, Computers, Communications Equipment

L86 : Industrial Organization→Industry Studies: Services→Information and Internet Services, Computer Software

O3 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

Abstract

This paper provides an assessment of the impact of the covered bond purchase programme (hereafter referred to as the CBPP) relative to its policy objectives. The analysis presented on the impact of the CBPP on both the primary and secondary bond markets indicates that the Programme has been an effective policy instrument. It has contributed to: (i) a decline in money market term rates, (ii) an easing of funding conditions for credit institutions and enterprises, (iii) encouraging credit institutions to maintain and expand their lending to clients, and (iv) improving market liquidity in important segments of the private debt securities market. The paper also provides an overview of the investment strategy of the the Eurosystem with regard to the CBPP portfolio.

No. 121
5 November 2010
The benefits of fiscal consolidation in uncharted waters

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

This paper looks at fiscal sustainability and fiscal risks from a comprehensive, global perspective. It argues that the benefits of consolidation have to be re-assessed given that industrialised countries have entered uncharted waters with unsustainable public debt dynamics and enormous contingent liabilities across sectors and countries coinciding with strong, non-linear and potentially highly adverse fiscal-financial interlinkages. This suggests that there would be significant benefits from fiscal consolidation without delay and that there is a need for caution against excessive faith in fiscal engineering.

No. 120
21 October 2010
Dancing together at arm's length? - the interaction of central banks with governments in the G7

Abstract

JEL Classification

D83 : Microeconomics→Information, Knowledge, and Uncertainty→Search, Learning, Information and Knowledge, Communication, Belief

C62 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Existence and Stability Conditions of Equilibrium

E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General

Abstract

Central bank independence is a common feature in advanced economies. Delegation of monetary policy to an independent central bank with a clear mandate for price stability has proven to be successful in keeping a check on inflation and providing a trusted currency. However, it is also a fact that central banks in most countries have regular contacts with the government and cooperate with them on a number of issues. This paper looks into the various forms of cooperation between central banks and governments in the G7. The focus is on those central banks that exercise a monetary policy decision-making function, i.e. the ECB and the central banks of the four G7 countries outside the euro area (the US, UK, Japan and Canada). The paper first reviews the objectives of and arrangements for central bank/government cooperation in the US, UK, Japan and Canada in areas such as monetary policy and its interlink with economic policy; foreign exchange operations and foreign reserve management; international cooperation; payment systems/securities learing and settlement systems; upervision, regulation and financial stability; banknotes and coins; collection of statistics; and the role of fiscal agent for the government. In parallel the paper looks into the objectives of and arrangements for cooperation between the ECB and relevant European counterparts, reflecting the specific European institutional environment characterised by the absence of a

No. 119
18 October 2010
The global downturn and its impact on euro area exports and competitiveness

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development

Abstract

World trade contracted sharply in late 2008 and early 2009 following the deepening of the financial crisis in September 2008. This paper discusses the main mechanisms behind the global downturn in trade and its impact on euro area exports and competitiveness. It finds that the euro area was hit particularly hard by the contraction in global demand. Moreover, the collapse in the demand for euro area products during the downturn was exacerbated to some degree by unfavourable developments in price competitiveness, resulting in further losses in competitiveness compared to our main trading partners, in line with pre-crisis trends. This view is also confirmed by evidence from broad-based competitiveness measures, which show that euro area countries recorded losses in productivity during this period. Going forward, the recovery in world trade will depend mainly on a resurgence in global demand and its expenditure composition. With regard to the euro area, as the global economy recovers at varying speeds and given the current growth momentum in emerging economies, the performance of the external sector may be hindered by the geographical orientation of its export markets, which are mainly focused on advanced economies and other EU member states. Furthermore, the strength and sustainability of the recovery in exports will also depend on the structuring process undertaken by European firms in response to globalisation-related challenges. Governments within the European Union should therefore focus on policies to strengthen competition and increase market integration, in order to benefit fully from the globalisation process going forward. In contrast, a resurgence in global protectionist policies could dampen the prospects for world and euro area trade and should be strongly resisted.

No. 118
12 August 2010
The impact of the global financial turmoil and recession on Mediterranean countries' economies

Abstract

JEL Classification

C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation

C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation

D91 : Microeconomics→Intertemporal Choice→Intertemporal Household Choice, Life Cycle Models and Saving

Abstract

This paper reviews the impact of the global financial turmoil and the subsequent recession on the economies of southern and eastern Mediterranean countries. The major effects on the economies of this region have come through transmission channels associated with the real economy, i.e. the global recession. These are, in particular, declines in exports, oil revenues, tourism receipts, remittances and foreign direct investment (FDI) inflows, with the drop in exports so far appearing to have had the strongest impact. As a result, real GDP growth has weakened in the wake of the global crisis. However, the weakening of economic activity in the Mediterranean region has been less pronounced than in advanced economies and most other emerging market regions. The main reason for this is that the direct impact of the global financial turmoil on banking sectors and financial markets in Mediterranean countries has been relatively limited. This is mainly due to (i) their lack of exposure to US mortgage-related assets that turned

No. 115
26 July 2010
Financial stability challenges in EU candidate countries - Financial systems in the aftermath of the global crisis

Abstract

JEL Classification

E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles

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

Abstract

This paper reviews financial stability challenges in the EU candidate countries: Croatia, the former Yugoslav Republic of Macedonia and Turkey. It follows a macro-prudential approach, emphasising systemic risks and the stability of financial systems as a whole. The paper recalls that the economies of all three countries experienced a recession in 2008-09 and shows how this slowed the rapid process of financial deepening that had been taking place since the beginning of the last decade. The deteriorating economic and financial conditions manifested themselves, first and foremost, through a marked deterioration in asset quality. These direct credit risks were compounded by the transformation of exchange and interest rate risks through a widespread use of foreign exchange-denominated or indexed loans and variable or adjustable interest rate loans. Moreover, funding and liquidity risks also materialised to some extent, although fully fledged bank runs were avoided, and none of the countries experienced a sharp reversal in external financing. Overall, the deterioration in asset quality has so far been managed well by the banking systems of the candidate countries, facilitated by large capital buffers, pro-active macro-prudential policies pursued by the authorities both before and during the crisis and the relative stability of exchange rates. Looking ahead, although uncertainties remain high regarding credit quality, the shock-absorbing capacities of the banking systems are fairly robust, as also evidenced by their relative resilience so far. Nevertheless, as the economic recovery sets in, the central banks should return to and possibly reinforce the implementation of measures to avoid a pro-cyclical build-up of credit asset) boom-bust cycles. Furthermore, given the relevance of foreign-owned banks in two of the three countries, a continued strengthening of home-host cooperation in the supervisory area will be crucial to avoid any kind of regulatory arbitrage.

No. 117
8 July 2010
Extraordinary measures in extraordinary times: public measures in support of the financial sector in the EU and the United States

Abstract

JEL Classification

C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

R31 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→Housing Supply and Markets

Abstract

The extensive public support measures for the financial sector have been key for the management of the current financial crisis. This paper gives a detailed description of the measures taken by central banks and governments and attempts a preliminary assessment of the effectiveness of such measures. The geographical focus of the paper is on the European Union (EU) and the United States. The crisis response in both regions has been largely similar in terms of both tools and scope, and monetary policy actions and bank rescue measures have become increasingly intertwined. However, there are important differences, not only between the EU and the United States (e.g. with regard to the involvement of the central bank), but also within the EU (e.g. asset relief schemes).

No. 116
8 July 2010
Securities clearing and settlement in China: markets, infrastructures and policy-making

Abstract

JEL Classification

C21 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Cross-Sectional Models, Spatial Models, Treatment Effect Models, Quantile Regressions

C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

Abstract

China is taking a more active role on the world stage, even more so since its rapid and strong recovery from the global recession. In the financial realm this expansion is underpinned by a strategy to build strong and competitive capital markets at home. In order to achieve this goal, well-functioning and sound securities infrastructures are an important pre-requisite, and therefore they receive a lot of attention from Chinese policy-makers, as well as from market participants both in China and abroad. This paper evaluates the current market infrastructure, including the legal and regulatory framework, for securities trading, clearing and settlement in mainland China, and analyses the policy-making in this field. The paper finds that, following huge progress in recent years, the post-trading processes are increasingly safe and efficient. It concludes that, given the effectiveness of the policy process, Chinese clearing and settlement are likely to develop into the

No. 114
30 June 2010
The impact of the global economic and financial crisis on central, eastern and south-eastern Europe: A stock-taking exercise
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

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

Abstract

The paper first reviews the main drivers of the growth and real convergence process in central, eastern and south-eastern Europe (CESEE) since 2000 and assesses the key macro-financial strengths and vulnerabilities of the region at the beginning of the global economic and financial crisis. The main part of the paper reviews financial and real economic developments in these countries since the crisis started to impact the CESEE region. The paper finds that developments have been rather heterogeneous in the region. CESEE countries with the largest economic imbalances tended to be most affected. National and international support measures appear to have helped to stabilise financial markets, and parent banks of foreign bank subsidiaries in CESEE were committed to sustaining their exposure to the region. The degree to which CESEE governments were able to use policy instruments to counter the real effects of the crisis is rather heterogeneous, depending inter alia on the exchange rate regime in place and the initial fiscal positions.

No. 112
21 June 2010
Public wages in the euro area - towards securing stability and competitiveness
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity

E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General

Abstract

This paper examines the role of government wages in ensuring macroeconomic stability and competitiveness in the euro area. Recent empirical evidence suggests that government wage expenditure is subject to a pro-cyclical bias in most euro area countries and at the euro area aggregate level. Moreover, the evidence points to a strong positive correlation and co-movement between public and private wages in the short to medium term, both directly and indirectly via the price level, in most euro area countries. In a number of countries this interrelation between public and private wages coincided with strong public wage growth and competitiveness losses. These findings underpin the need for prudent public wage policies supported by strong domestic fiscal frameworks and appropriate wage-setting institutions in order to enhance economic stability and competitiveness in Economic and Monetary Union.

No. 113
16 June 2010
Energy markets and the euro area macroeconomy
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

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

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.

No. 110
31 May 2010
Protectionist responses to the crisis – global trends and implications
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

F13 : International Economics→Trade→Trade Policy, International Trade Organizations

F15 : International Economics→Trade→Economic Integration

F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements

F53 : International Economics→International Relations, National Security, and International Political Economy→International Agreements and Observance, International Organizations

Abstract

In this paper we take a systematic look at recent trends in global protectionism and at the potential implications of a protectionist backlash for economic growth, using results from the recent economic literature and new model simulations. We find that there has so far been a moderate increase in actual protectionist measures to restrict trade through tariff and non-tariff barriers. At the same time, evidence from surveys shows that public pressure for more economic protection has been mounting since the mid-2000s, and has possibly intensified since the start of the financial crisis. However, no World Trade Organization (WTO) member has retreated into widespread trade restrictions or protectionism to date. Our model-based simulations suggest that the impairment of the global flow of trade would hamper the recovery from the crisis, as well as the long-term growth potential of the global economy. At the same time, it is unlikely that protectionism would help to correct existing current account imbalances. Moreover, the countries implementing protectionist measures should expect a deterioration of their international competitiveness, which would further affect the potential for longer-term real GDP growth.

No. 111
14 May 2010
Main drivers of the ECB financial accounts and ECB financial strength over the first 11 years
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

D21 : Microeconomics→Production and Organizations→Firm Behavior: Theory

D92 : Microeconomics→Intertemporal Choice→Intertemporal Firm Choice, Investment, Capacity, and Financing

E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

Abstract

This paper analyses the main drivers of the ECB

No. 109
14 April 2010
Euro area fiscal policies and the crisis
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

E2 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy

Abstract

In mid-September 2008, a global financial crisis erupted which was followed by the most serious worldwide economic recession for decades. As in many other regions of the world, governments in the euro area stepped in with a wide range of emergency measures to stabilise the financial sector and to cushion the negative consequences for their economies. This paper examines how and to what extent these crisis-related interventions, as well as the fall-out from the recession, have had an impact on fiscal positions and endangered the longer-term sustainability of public finances in the euro area and its member countries. The paper also discusses the appropriate design of fiscal exit and consolidation strategies in the context of the Stability and Growth Pact to ensure a rapid return to sound and sustainable budget positions. Finally, it reviews some early lessons from the crisis for the future conduct of fiscal policies in the euro area.

No. 108
16 March 2010
Trade consistency in the context of the Eurosystem projection exercises - an overview
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models

D92 : Microeconomics→Intertemporal Choice→Intertemporal Firm Choice, Investment, Capacity, and Financing

E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

G31 : Financial Economics→Corporate Finance and Governance→Capital Budgeting, Fixed Investment and Inventory Studies, Capacity

G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill

Abstract

The Eurosystem macroeconomic projection exercises are part of the input prepared for the Governing Council

No. 107
29 December 2009
The collateral frameworks of the Eurosystem, the Federal Reserve System and the Bank of England and the financial market turmoil
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

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

G01 : Financial Economics→General→Financial Crises

G20 : Financial Economics→Financial Institutions and Services→General

Abstract

In response to the turmoil in global financial markets which began in the second half of 2007, central banks have changed the way in which they implement monetary policy. This has drawn particular attention to the type of collateral used for backing central banks

No. 105
31 August 2009
Flow-of-funds analysis at the ECB: framework and applications
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E47 : Macroeconomics and Monetary Economics→Money and Interest Rates→Forecasting and Simulation: Models and Applications

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

Abstract

The financial crisis has enhanced the need for close monitoring of financial flows in the economy of the euro area and at the global level focusing, in particular, on the development of financial imbalances and financial intermediation. In this context flow-of-funds analysis appears particularly useful, as flow-of-funds data provide the most comprehensive and consistent set of macro-financial information for all sectors in the economy. This occasional paper presents different uses of flow-of-funds statistics for economic and monetary analysis in the euro area. Flow-of-funds data for the euro area have developed progressively over the past decade. The first data were published in 2001, and fully-fledged quarterly integrated economic and financial accounts by institutional sector have been published since 2007. The paper illustrates how flow-of-funds data enable portfolio shifts between money and other financial assets to be assessed and trends in bank intermediation to be monitored, in particular. Based on data (and first published estimates) on financial wealth over the period 1980-2007, the paper analyses developments in the balance sheet of households and non-financial corporations in euro area countries over the last few decades and looks at financial soundness indicators using flow-of-funds data, namely debt and debt service ratios, and measures of financial wealth. Interactions with housing investment and saving are also analysed. In addition, the paper shows how flow-of-funds data can be used for assessing financial stability. Finally, the paper presents the framework for and use of flow-of-funds projections produced in the context of the Eurosystem staff macroeconomic projection exercises, and reports the outcome of a sensitivity analysis that considers the impact of interest rate changes on the interest payments and receipts of households and non-financial corporations.

No. 106
19 August 2009
Monetary policy strategy in a global environment
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

Abstract

This paper discusses the structural implications of real and financial globalisation, with the aim of drawing lessons for the conduct of monetary policy and, in particular, for the assessment of risks to price stability. The first conclusion of the paper is that globalisation may have played only a limited role in reducing inflation and output volatility in developed economies. Central banks should remain focused on their mandate to preserve price stability. However, the globalisation of financial markets over the last 25 years has had major implications for the conduct of monetary policy. Four elements characterise the new financial landscape: the decline in the "home bias"; the increase in the size of international financial transactions relative to transactions in goods and services; the increase in the number of countries adopting inflation targeting and currency peg monetary regimes; and the transformation of financial market microstructure. The paper argues that in this new environment monetary policy should systematically incorporate financial analysis into its assessment of the risks to price stability. Monetary policy should "lean against the wind" of asset price bubbles that could burst at a high cost and hinder the maintenance of macroeconomic and financial stability. Further, in view of the interlinkages among financial markets worldwide, macro-financial surveillance at the international level needs to be strengthened and monetary policymakers need to cooperate and exchange information on a wider scale and at a deeper level with financial supervisors. Finally, the paper reviews the rationale for a central bank to act (in concert with other central banks) as the ultimate provider of liquidity to financial markets in situations of extreme instability and market malfunctioning.

No. 104
25 June 2009
Fiscal policy challenges in oil-exporting countries: a review of key issues
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy

H30 : Public Economics→Fiscal Policies and Behavior of Economic Agents→General

H60 : Public Economics→National Budget, Deficit, and Debt→General

Q32 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Nonrenewable Resources and Conservation→Exhaustible Resources and Economic Development

Q38 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Nonrenewable Resources and Conservation→Government Policy

Abstract

Fiscal policy choices have a particularly significant impact on economic performance in oil-exporting countries, owing to the importance of the oil sector in the economy and the fact that in most countries oil revenues accrue to the government. At the same time, fiscal policy in oil-centred economies is facing specific challenges, both in the long run, as regards intergenerational equity and fiscal sustainability, and in the short run, as regards macroeconomic stabilisation and fiscal planning. Institutional responses to the specific fiscal challenges in oil-exporting countries involve conservative oil price assumptions in the budget, the establishment of oil stabilisation and savings funds and fiscal rules. Fiscal policy in most oil-exporting countries has been expansionary over the past years in the wake of high oil prices. Fiscal expansion has added to inflationary pressure, and monetary policy has been constrained in tackling inflation as a result of prevailing exchange rate regimes. While, in this context, fiscal policy is the major tool for macroeconomic stabilisation, it has faced competing objectives and considerations. Cyclical considerations would have warranted fiscal restraint, but, in times of high oil prices, pressures to increase public spending have been mounting. Such pressures stem from primarily distribution-related considerations, development-related spending needs (e.g. in the areas of physical and social infrastructure) and international considerations in the context of, for example, global imbalances. The sharp fall in oil prices since mid-2008 has brought to the fore a different question - whether oil exporters can sustain spending levels reached in previous years.

No. 103
27 April 2009
Transnational governance in global finance: the principles for stable capital flows and fair debt restructuring in emerging markets
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

F34 : International Economics→International Finance→International Lending and Debt Problems

F51 : International Economics→International Relations, National Security, and International Political Economy→International Conflicts, Negotiations, Sanctions

F53 : International Economics→International Relations, National Security, and International Political Economy→International Agreements and Observance, International Organizations

G15 : Financial Economics→General Financial Markets→International Financial Markets

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

Abstract

This paper analyses and assesses the track record and effectiveness of the so-called "Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets", which have emerged as an important instrument for crisis prevention and crisis resolution in the international financial system. The paper argues that, notwithstanding their low profile, the Principles which were jointly agreed between sovereign debtors and their private creditors in 2004 have proved to be an effective instrument in spite of their voluntary and nonbinding nature. Indeed, an increasing number of sovereign debtors and private creditors have adopted the Principles' recommendations on transparency and the timely flow of information, close dialogue, "good faith" actions and fair treatment. Two elements have been critical to the success of the Principles: (i) their specific design feature as a soft mode of governance agreed by a transnational public-private partnership and (ii) the "hardening" after their launch in terms of precision and delegation, thus moving them somewhat along the continuum of soft law and hard law towards the latter. The paper also makes the case that the Principles and their design features can provide some lessons for the current international policy debate on codes of conduct in global financial regulation.

No. 102
20 April 2009
Domestic financial development in emerging economies: evidence and implications
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

F3 : International Economics→International Finance

F4 : International Economics→Macroeconomic Aspects of International Trade and Finance

G1 : Financial Economics→General Financial Markets

G2 : Financial Economics→Financial Institutions and Services

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

C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access

Abstract

We construct, on the basis of an original methodology and database, composite indices to measure domestic financial development in 26 emerging economies, using mature economies as a benchmark. Twenty-two variables are used and grouped according to three broad dimensions: (i) institutions and regulations; (ii) size of and access to financial markets and (iii) market performance. This new evidence aims to fill a gap in the economic literature, which has not thus far developed comparable time series including both emerging and mature economies. In doing so, we provide a quantitative measure of the - usually considerable - scope for the selected emerging countries and regions to "catch up" in financial terms. Moreover, we find evidence that a process of financial convergence towards mature economies has already started in certain emerging economies. Finally, we conduct an econometric analysis showing that different levels of domestic financial development tend to be associated with the building up of external imbalances across countries.

No. 101
31 March 2009
Housing finance in the euro area
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

R21 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Household Analysis→Housing Demand

Abstract

This report analyses the main developments in housing finance in the euro area in the decade, covering the period from 1999 to 2007. It looks at mortgage indebtedness, various characteristics of loans for house purchase, the funding of such loans and the spreads between the interest rates on loans granted by banks and the interest rates banks had to pay on their funding, or the return they made on alternative investments. In addition, the report contains a comparison of key aspects of housing finance in the euro area with those in the United Kingdom and the United States. At the end, the report briefly discusses aspects of the transmission of monetary policy to the economy.

No. 100
9 January 2009
Survey data on household finance and consumption: research summary and policy use
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

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

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.

No. 99
7 November 2008
The ECB and IMF indicators for the macro-prudential analysis of the banking sector: a comparison of the two approaches
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access

G20 : Financial Economics→Financial Institutions and Services→General

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill

Abstract

In January 2007 the International Monetary Fund (IMF) published, on an ad hoc basis, a series of financial soundness indicators (FSIs) based on a common methodology (the IMF compilation Guide) for 62 countries, including all 27 European Union countries. The European Central Bank (ECB), jointly with the Banking Supervision Committee (BSC), has an interest in monitoring the development of this IMF initiative in the context of its own work on compiling macro-prudential indicators (MPIs). The aim of this paper is to identify the main similarities and differences between the FSIs and the MPIs for national banking sectors, as the overlap between MPIs and FSIs in this sub-set is greatest. As a result of the recently issued amendments to the IMF compilation Guide for FSIs, some key methodological differences between the two approaches have been eliminated and it is therefore expected that the figures published by the two institutions will soon converge. The paper concludes with an investigation of the few other areas where the remaining differences could potentially be narrowed.

No. 98
7 October 2008
Will oil prices decline over the long run?
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

Q41 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Demand and Supply, Prices

Q42 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Alternative Energy Sources

Q43 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Energy and the Macroeconomy

Abstract

At present, oil markets appear to be behaving in a fashion similar to that in the late 1970s and early 1980s when oil prices rose sharply over an extended period. Furthermore, like at that time, analysts are split on whether such increases will persist or reverse, and if so by how much. The present paper argues that the similarities between the two episodes are not as strong as they might appear at first sight, and that the likelihood of sharp reversals in prices is not particularly great. There are a number of reasons in support of the view that it is unlikely that the first two decades of this century will mimic the last two decades of the previous century. First, oil demand is likely to grow significantly in line with strong economic growth in non-OECD countries. Second, on the supply side, OPEC is likely to enhance its control over markets over the next two decades, as supply increases in newly opened areas will only partially offset declining rates of production in other geologically mature non-OPEC oil regions. Moreover, while concerns about climate change will spur global efforts to reduce carbon emissions, these efforts are not expected to reduce oil demand. Finally, although there is much talk about alternative fuels, few of these are economically viable at the prices currently envisioned, and given the structural impediments, there is a reduced likelihood that the market will be able to generate sufficient quantities of these alternative fuels over the forecast horizon. The above factors imply that oil prices are likely to continue to exceed the USD 70 to USD 90 range over the long term.

No. 96
30 September 2008
The monetary presentation of the euro area balance of payments
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

F40 : International Economics→Macroeconomic Aspects of International Trade and Finance→General

Abstract

This occasional paper describes the monetary presentation of the euro area balance of payments and its use. The monetary presentation is a tool for assessing the impact of balance of payments transactions involving non-bank residents on monetary developments. The paper explains in detail the principle underlying this approach, i.e. the link between the external counterpart of money, as reflected in the balance sheet of the banking sector, and the balance of payments. From a statistical perspective, it is shown that the monetary presentation of the balance of payments, which is based on international statistical standards, may be applied in any country or currency union. With regard to euro area statistics, the paper elaborates on the practical implementation of the monetary presentation, while also describing a few approximations and remaining statistical challenges. Finally, the paper assesses how the monetary presentation of the balance of payments has been used for analysing monetary developments in the euro area, and highlights the significant impact of balance of payments transactions on monetary dynamics in certain periods.

No. 97
19 September 2008
Globalisation and the competitiveness of the euro area
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

F15 : International Economics→Trade→Economic Integration

F43 : International Economics→Macroeconomic Aspects of International Trade and Finance→Economic Growth of Open Economies

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

Abstract

Against the background of increasing competition and other signifi cant structural changes implied by globalisation, maintaining and enhancing competitiveness has evolved into one of the prime concerns in most countries. Following up on previous work (see in particular ECB Occasional Papers No. 30 and No. 55), this Occasional Paper examines the latest developments and prospects for the competitiveness and trade performance of the euro area and the euro area countries. Starting from an analysis of most commonly used, traditional competitiveness indicators, the paper largely confirms the findings of previous studies that there have been substantial adjustments in euro area trade. Euro area firms have taken advantage of the new opportunities offered by globalisation, and have at the same time been increasingly challenged by emerging economies. This is primarily refl ected in the loss of export market shares which have been recorded over the last decade. While these can partly be related to the losses in the euro area's price competitiveness, further adjustment also seems warranted with regard to the export specialisation. Compared with other advanced competitors, the euro area remains relatively more specialised in labourintensive categories of goods and has shown only a few signs of a stronger specialisation in research-intensive goods. Nevertheless, the paper generally calls for a more cautious approach when assessing the prospects for euro area competitiveness, as globalisation has made it increasingly difficult to define and measure competitiveness. Stressing the need to take a broader view on competitiveness, specifically with a stronger emphasis on productivity performance, the paper also introduces a more elaborate framework that takes into account the interactions between country-specificfactors and firm-level productivity. It thus makes it possible to construct more broadly defined competitiveness measures..

No. 95
8 September 2008
Financial stability challenges in candidate countries managing the transition to deeper and more market-oriented financial systems
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper reviews financial stability challenges in the EU candidate countries Croatia, Turkey and the former Yugoslav Republic of Macedonia. It examines the financial sectors in these three economies, which, while at very different stages of development and embedded in quite diverse economic settings, are all in a process of rapid financial deepening. This manifests itself most clearly in the rapid pace of growth in credit to the private sector. This process of financial deepening is largely a natural and welcome catching-up phenomenon, but it has also increased the credit risks borne by the banking sectors in the three economies. These credit risks are compounded by the widespread use of foreign currency-denominated or -indexed loans, leaving unhedged bank customers exposed to potential swings in exchange rates or foreign interest rates. Moreover, these financial risks form part of a broader nexus of vulnerabilities in the economies concerned, in particular the external vulnerabilities arising from increasing private sector external indebtedness. That said, the paper also finds that the authorities in the three countries have taken several policy actions to reduce these financial and external vulnerabilities and to strengthen the resilience of the financial sectors.

No. 94
8 September 2008
The changing role of the exchange rate in a globalised economy
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles

F15 : International Economics→Trade→Economic Integration

F31 : International Economics→International Finance→Foreign Exchange

Abstract

In addition to its direct effects on the global trading and production structure, the ongoing process of globalisation may have important implications for the interaction of exchange rates and the overall economy. This paper presents evidence regarding possible changes in the role of exchange rates in a more globalised economy. First, it analyses the link between exchange rates and prices, showing that there is at most a moderate decline in exchange rate pass-through for the euro area. Next, it turns to the effect of exchange rate changes on trade flows. The findings indicate that the responsiveness of euro area exports to exchange rate changes may have declined somewhat as a result of globalisation, reflecting mainly shifts in the geographical and sectoral composition of trade flows. The paper also provides a firm-level analysis of the impact of exchange rate changes on corporate profits, which suggests that overall this relationship appears to be relatively stable over time, although there are important cross-country differences. In addition, it studies the overall impact of exchange rates on GDP and the potential role of valuation effects as a transmission channel in the case of the euro area.

No. 93
7 August 2008
Russia, EU enlargement and the euro
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

F14 : International Economics→Trade→Empirical Studies of Trade

F15 : International Economics→Trade→Economic Integration

F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

Abstract

This paper reviews selected aspects of economic relations between the EU and Russia, focusing on the impact that the last two waves of EU enlargement have had on Russia, as well as the role of the euro in Russia. The analysis suggests that if EU enlargement has had any diversion effects on trade between the EU and Russia at all, they have been minimal, while robust growth in both the EU and Russia, as well as high oil and gas prices, has boosted trade. Likewise, FDI to and from Russia has increased, with the direct impact of enlargement again difficult to disentangle from other factors. Use of the euro by Russian residents and authorities in international transactions has increased, albeit at an uneven pace. While, in general, the US dollar remains the major foreign currency used by Russian residents, the euro has gained importance as an anchor and reserve currency in Russian exchange rate policies. This has happened in the context of an overall monetary policy strategy aiming at a gradual shift from an exchange rate-oriented monetary policy to inflation targeting.

No. 92
23 July 2008
The Gulf Cooperation Council countries: economic structures, recent developments and role in the global economy
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

F40 : International Economics→Macroeconomic Aspects of International Trade and Finance→General

F30 : International Economics→International Finance→General

F14 : International Economics→Trade→Empirical Studies of Trade

E60 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General

N15 : Economic History→Macroeconomics and Monetary Economics, Industrial Structure, Growth, Fluctuations→Asia including Middle East

O53 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Asia including Middle East

Q40 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→General

Abstract

In the wake of high and rising oil prices since 2003, the member states of the Gulf Cooperation Council (GCC) have seen dynamic economic development, enhancing their role in the global economy as investors and trade partners. Real GDP growth has been buoyant, with non- oil activity expanding faster than oil GDP. Macroeconomic developments have also been characterised by large fiscal and current account surpluses as a result of rising oil revenues, notwithstanding fiscal expansion and rapid import growth. The most significant macroeconomic challenge faced by GCC countries is rising inflation in an environment in which the contribution of monetary policy to containing inflationary pressure is constrained by the exchange rate regimes. The overall favourable macroeconomic backdrop of recent years has provided GCC countries with an opportunity to tackle long-standing structural challenges, such as the diversification of oil-centred economies and reform of the labour markets. In a global context, apart from developing into a pole of global economic growth, GCC countries - together with other oil-exporting countries - have become a major net supplier of capital in global markets, second only to East Asia. As a result, they have become part of the international policy debate on global imbalances. Furthermore, GCC countries are home to some of the world's largest sovereign wealth funds, which raises several financial stability issues. Their role as trade partners has also increased, with the European Union being the only major region in the world maintaining a significant surplus in bilateral trade with the GCC. GCC countries are also key players in global energy markets in terms of production, exports and the availability of spare capacity. Their role is likely to become even more pivotal in the future as they command vast oil and gas reserves and benefit from relatively low costs in exploiting oil reserves.

No. 90
4 July 2008
Wage growth dispersion across the euro area countries: some stylised facts

Abstract

JEL Classification

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

C10 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→General

Abstract

This study presents some stylised facts on wage growth differentials across the euro area countries in the years before and in the first eight years after the introduction of Economic and Monetary Union (EMU) in 1999. The study shows that wage growth dispersion, i.e. the degree of difference in wage growth at a given point in time, has been on a clear downward trend since the early 1980s. However, wage growth dispersion across the euro area countries still appears to be higher than the degree of wage growth dispersion within West Germany, the United States, Italy and Spain. Differences in wage growth rates between individual euro area countries and the euro area in the years before and in the first eight years after the introduction of EMU appear to be positively related to the respective differences between their Harmonised Index of Consumer Prices (HICP) infl ation and average HICP inflation in the euro area. Conversely, relative wage growth differentials across euro area countries have been somewhat unrelated to relative productivity growth differentials. Some countries combine positive wage growth differentials and negative productivity growth differentials vis-

No. 91
2 July 2008
The impact of sovereign wealth funds on global financial markets
Eurosystem Monetary Transmission Network

Abstract

JEL Classification

F30 : International Economics→International Finance→General

F40 : International Economics→Macroeconomic Aspects of International Trade and Finance→General

G15 : Financial Economics→General Financial Markets→International Financial Markets

Abstract

wealth funds (SWFs) on global financial markets. It presents back-of-the-envelope calculations which simulate the potential impact of a transfer of traditional foreign exchange reserves to SWFs on global capital flows. If SWFs behave as CAPM-type investors and thus allocate foreign assets according to market capitalisation rather than liquidity considerations, official portfolios reduce their "bias" towards the major reserve currencies. As a result, more capital flows "downhill" from rich to less wealthy economies, in line with standard neoclassical predictions. More specifically, it is found that under the assumption of SWFs investing according to market capitalisation weights, the euro area and the United States could be subject to net capital outflows while Japan and the emerging markets would attract net capital inflows. It is also shown that these findings are sensitive to alternative assumptions for the portfolio objectives of SWFs. Finally, the paper discusses whether a change in net capital flows triggered by SWFs could have an impact on stock prices and bond yields. Based on an event study approach, no evidence can be found for a stock price impact of non-commercially motivated stock sales by Norway's Government Pension Fund.

No. 89
30 June 2008
An analysis of youth unemployment in the euro area

Abstract

JEL Classification

I2 : Health, Education, and Welfare→Education and Research Institutions

J11 : Labor and Demographic Economics→Demographic Economics→Demographic Trends, Macroeconomic Effects, and Forecasts

J13 : Labor and Demographic Economics→Demographic Economics→Fertility, Family Planning, Child Care, Children, Youth

J21 : Labor and Demographic Economics→Demand and Supply of Labor→Labor Force and Employment, Size, and Structure

J64 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Unemployment: Models, Duration, Incidence, and Job Search

Abstract

The paper starts by presenting some stylised facts on youth unemployment over the last two decades, both at the euro area and the country level. It shows that despite declining considerably over the last few years, youth unemployment has remained at a high level relative to other age groups in most euro area countries. The paper finds that there is a positive relationship between the share of young people in the total population and the youth unemployment rate, i.e. the smaller the share of young people in the population, the lower the risk of them being unemployed. At the same time, economic conditions are negatively correlated with the youth unemployment rate, i.e. the youth unemployment rate increases when the economic situation worsens. Moreover, robust results across the regression scenarios show that higher employment protection and minimum wages imply a higher youth unemployment rate, while active labour market policies (ALMPs) tend to reduce it. The results also indicate that the increasing share of services employment in total employment is helping to reduce unemployment among young persons. Furthermore, the increase in the youth inactivity rate, which is mainly due to the fact that there are more young people in education, is also linked to the overall decline in youth unemployment. Finally, as regards education, the results indicate that the number of years of education, the number of young people with vocational training and, to a lesser extent high scores in the PISA study, are associated with lower youth unemployment rates. The share of the young population not in school, however, is positively correlated with the unemployment rate. As youth unemployment is subject to certain country- specific features, each country should identify the relevant underlying sources of youth unemployment and react accordingly. Governments can make a positive contribution to the transition of young persons from education to labour market by a well-functioning education ...

No. 87
25 June 2008
Labour supply and employment in the euro area countries: developments and challenges

Abstract

JEL Classification

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

J1 : Labor and Demographic Economics→Demographic Economics

J2 : Labor and Demographic Economics→Demand and Supply of Labor

J6 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers

Abstract

The aim of this report is to describe and analyse the main developments in labour supply and its determinants in the euro area, review the links between labour supply and labour market institutions, assess how well labour supply reflects the demand for labour in the euro area and identify the future challenges for policy-makers.

No. 85
25 June 2008
Benchmarking the Lisbon Strategy

Abstract

JEL Classification

D02 : Microeconomics→General→Institutions: Design, Formation, and Operations

P11 : Economic Systems→Capitalist Systems→Planning, Coordination, and Reform

P16 : Economic Systems→Capitalist Systems→Political Economy

C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation

C61 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Optimization Techniques, Programming Models, Dynamic Analysis

Abstract

This paper reviews the governance framework of the Lisbon Strategy and discusses the specific option of increasing the role of benchmarking as a means of improving the implementation record of structural reforms in the European Union. Against this background, the paper puts forward a possible avenue for developing a strong form of quantitative benchmarking, namely ranking. The ranking methodology relies on the construction of a synthetic indicator using the "benefit of the doubt" approach, which acknowledges differences in emphasis among Member States with regard to structural reform priorities. The methodology is applied by using the structural indicators that have been commonly agreed by the governments of the Member States, but could also be used for ranking exercises on the basis of other indicators.

No. 88
17 June 2008
Real convergence, financial markets and the current account - emerging Europe versus emerging Asia

Abstract

JEL Classification

F15 : International Economics→Trade→Economic Integration

F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements

O16 : Economic Development, Technological Change, and Growth→Economic Development→Financial Markets, Saving and Capital Investment, Corporate Finance and Governance

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

O53 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Asia including Middle East

Abstract

Global financial integration has been associated with divergent patterns of real convergence and the current account in emerging markets. While countries in emerging Asia have been running sizeable current account surpluses, countries in emerging Europe have been facing large current account deficits. In this paper we test for the relevance of financial market characteristics in explaining this divergence in the catching-up process in Europe and Asia. We assume that the two regions constitute distinct convergence clubs, with the euro area and the United States respectively at their core. In line with the theoretical literature, we find that better developed and more integrated financial markets increase emerging markets' ability to borrow abroad. Moreover, the degree of financial integration within the convergence clubs - as opposed to the state of financial integration in the global economy - and the extent of reserve accumulation are significant factors in explaining the divergent patterns of real convergence and the current account in the regions under review.

No. 86
12 June 2008
Real convergence and the determinants of growth in EU candidate and potential candidate countries: a panel data approach

Abstract

JEL Classification

F15 : International Economics→Trade→Economic Integration

F43 : International Economics→Macroeconomic Aspects of International Trade and Finance→Economic Growth of Open Economies

O16 : Economic Development, Technological Change, and Growth→Economic Development→Financial Markets, Saving and Capital Investment, Corporate Finance and Governance

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

Abstract

The EU candidate and potential candidate countries have made considerable progress in economic transition and integration into the world economy within less than two decades. Nevertheless, gaps in terms of income per capita relative to the euro area remain large. This suggests that the challenges of real convergence will remain relevant for the region even in the medium and long term. This paper therefore focuses on real convergence and its determinants in the candidate and potential candidate countries. The analysis reveals that total factor productivity growth has been the main driver of convergence, followed by capital deepening, whereas labour has contributed only marginally to economic growth. There is evidence of conditional convergence in the transition countries of central, eastern and south-eastern Europe. More specifi cally, controlling for the quality of institutions, the extent of market reforms and macroeconomic policies, there is a significant and negative link between the initial level of GDP and subsequent growth. Labour productivity has improved in most countries, while employment and participation rates have been falling. Structural changes have resulted in, at least temporarily, increasing labour market mismatches. Investment rates have been rising rapidly in recent years, and foreign direct investment has been found to have a positive impact on total investment. Investment in human capital is still at a relatively low level compared with the euro area average. Thus, in order to sustain the positive developments observed in the past, further improvements are needed in terms of labour productivity and utilisation, as well as in terms of physical and human capital accumulation.

No. 84
8 May 2008
Short-term forecasting of GDP using large monthly datasets: a pseudo real-time forecast evaluation exercise

Abstract

JEL Classification

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods

Abstract

This paper evaluates different models for the short-term forecasting of real GDP growth in ten selected European countries and the euro area as a whole. Purely quarterly models are compared with models designed to exploit early releases of monthly indicators for the nowcast and forecast of quarterly GDP growth. Amongst the latter, we consider small bridge equations and forecast equations in which the bridging between monthly and quarterly data is achieved through a regression on factors extracted from large monthly datasets. The forecasting exercise is performed in a simulated real-time context, which takes account of publication lags in the individual series. In general, we find that models that exploit monthly information outperform models that use purely quarterly data and, amongst the former, factor models perform best.

No. 81
13 March 2008
Measuring financial integration in new EU Member States

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

F30 : International Economics→International Finance→General

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates

Abstract

The study considers three broad categories of financial integration measures: (i) price-based, which capture discrepancies in asset prices across different national markets; (ii) news-based, which analyse the impact that common factors have on the return process of an asset; (iii) quantity-based, which aim at quantifying the effects of frictions on the demand for and supply of securities. This paper finds that financial markets in the new EU Member States (plus Cyprus, Malta and Slovenia) are significantly less integrated than those of the euro area. Nevertheless, there is strong evidence that the process of integration is well under way and has accelerated since accession to the EU.

No. 83
12 March 2008
The predictability of monetary policy

Abstract

JEL Classification

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

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

Abstract

Current best practice in central banking views a high level of monetary policy predictability as desirable. A clear distinction, however, has to be made between short-term and longer-term predictability. While short-term predictability can be narrowly defined as the ability of the public to anticipate monetary policy decisions correctly over short horizons, the broader, ultimately more meaningful concept of longer-term predictability also encompasses the ability of the private sector to understand the monetary policy framework of a central bank, i.e. its objectives and systematic behaviour in reacting to different circumstances and contingencies. In this broader sense, longer-term predictability is also closely related to the credibility of the central bank. This paper reviews the main conceptual issues relating to predictability, both in its short and longer-term dimensions, and discusses how a transparent monetary policy strategy can be - and indeed has been - instrumental in achieving this purpose. This latter aspect is investigated in an overview of the empirical literature, highlighting how financial markets have been increasingly able to correctly anticipate monetary policy decisions for a number of large central banks, including the ECB. The paper also reviews several possible empirical proxies for the less-explored concept of longer-term predictability, which is inherently more difficult to measure.

No. 82
12 March 2008
The sustainability of China's exchange rate policy and capital account liberalisation

Abstract

JEL Classification

F10 : International Economics→Trade→General

F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements

F31 : International Economics→International Finance→Foreign Exchange

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

P48 : Economic Systems→Other Economic Systems→Political Economy, Legal Institutions, Property Rights, Natural Resources, Energy, Environment, Regional Studies

Abstract

This paper deals with two related issues: the sustainability of China's exchange rate regime and the opening up of its capital account. The exchange rate discussion deliberately passes over the issue of the “equilibrium” value of the renminbi and its alleged undervaluation - typically at the heart of the current policy debate - and focuses instead on the domestic costs of the current regime and the potential risks to domestic financial stability in the long run. The paper argues that the renminbi exchange rate should be increasingly determined by market forces and that administrative controls should be progressively relinquished. The exchange rate is obviously linked to well-functioning and efficient capital markets, which require no barriers to capital flows. Thus, exchange rate reform has to be correctly sequenced with reform of the capital account to avoid disruptive capital flows. The paper discusses China's twin surpluses of the current and capital accounts and attempts to identify the drivers of this “anomalous” external position. The pragmatic strategy pursued by the Chinese authorities in the aftermath of the Asian crisis encouraged FDI inflows and favoured the accumulation of a large stock of foreign exchange reserves. Combined with a relatively weak institutional setting, these factors have been important determinants of the pattern and composition of the country's capital flows and international investment position. Finally, the paper speculates on the outlook for Chinese capital flows should barriers to capital movements be lifted. It argues that whether China continues to supply capital to the rest of the world or eventually becomes a net borrower in international capital markets - as was the case for most of its recent history - will depend on the evolution of its institutions.

No. 80
30 January 2008
China's and India's roles in global trade and finance: twin titans for the new millennium?

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

F3 : International Economics→International Finance

C5 : Mathematical and Quantitative Methods→Econometric Modeling

Abstract

This paper analyses the integration of China and India into the global economy. To this end, it presents estimates from a gravity model to gauge the overall degree of their trade intensity and the depth of their bilateral trade linkages, as well as selected measures of revealed comparative advantage and economic distance. The paper also reviews the key characteristics of the two countries' domestic economies that are relevant to their global integration and analyses their financial linkages with the rest of the world. Four main findings stand out. First, considering trade in goods, the overall degree of China's trade intensity is higher than fundamentals would suggest, whereas the converse is true for India. Second, Chinese goods exports seem to compete increasingly with those of mature economies, while Indian exports remain more low-tech. Third, China's exports of services tend to complement its exports of goods, while India's exports are growing only in deregulated sectors, such as IT-related services. Last, China's and India's roles in the global financial system are still relatively limited and often complementary to their roles in global trade.

No. 79
22 January 2008
The working of the eurosystem: monetary policy preparations and decision-making - selected issues

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

Abstract

The ECB's monetary policy has received considerable attention in recent years. This is less the case, however, for its regular monetary policy preparation and decision-making process. This paper reviews how the factors usually considered as critical for the success of a central banking system and the federal nature of the Eurosystem are intertwined with its overall design and the functioning of its committee architecture. In particular, it examines the procedures for preparing monetary policy decisions and the role of the decision-making bodies and the committees therein. We suggest that technical committees, involving all national central banks (NCBs), usefully contribute to the regular processing of a vast amount of economic, financial and monetary data, as well as to the consensus building at the level of the Governing Council. A federal organisational structure, including a two-tier committee structure with the Executive Board taking the lead in preparing the monetary policy decisions and the Governing Council in charge of the decisions with collective responsibility for them, as well as committee work at the various hierarchical levels, contributes to the efficiency of the ECB's monetary policy decision-making, and thereby facilitates the maintenance of price stability in the euro area. A fully-fledged committee structure has also contributed to the smooth integration of non-euro area Member States into the Eurosystem's monetary policy decision-making process.

No. 78
22 January 2008
A framework for assessing global imbalances

Abstract

JEL Classification

F2 : International Economics→International Factor Movements and International Business

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

Abstract

In this paper, we take a systematic look at global imbalances. First, we provide a definition of the phenomenon, and relate global imbalances to widening external positions of systemically important economies that reflect distortions or entail risks for the global economy. Second, we provide an operational content to this definition by measuring trends in external imbalances over the past decade and putting these in a historical perspective. We argue that three main features set today's situation apart from past episodes of growing external imbalances: (i) the emergence of new players, in particular emerging market economies such as China and India, which are quickly catching up with the advanced economies; (ii) an unprecedented wave of financial globalisation, with more integrated global financial markets and increasing opportunities for international portfolio diversification, also characterised by considerable asymmetries in the level of market completeness across countries; and (iii) the favourable global macroeconomic and financial environment, with record high global growth rates in recent years, low financial market volatility and easy global financing conditions over a long time period of time, running at least until the summer of 2007. Finally, we provide an analytical overview of the fundamental causes and drivers of global imbalances. The central argument is that the increase in imbalances has been driven by a unique combination of structural and cyclical determinants.

No. 77
19 December 2007
Oil market structure, network effects and the choice of currency for oil invoicing

Abstract

JEL Classification

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

O13 : Economic Development, Technological Change, and Growth→Economic Development→Agriculture, Natural Resources, Energy, Environment, Other Primary Products

Q41 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Demand and Supply, Prices

Abstract

A recurring theme in recent years in the debate on the international role of currencies has been the possiblity of pricing oil in euro. This paper contributes to these debates by providing a detailed review of the empirical evidence regarding the market for crude oil and current oil invoicing practices. It introduces a network effect model to identify the conditions under which a parallel invoicing in different currencies would be possible. The paper also includes a simulation designed to illustrate the dynamics of the currency choice of oil invoicing.

No. 76
18 December 2007
Prudential and oversight requirements for securities settlement

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper analyses the current national and international regulatory regimes relevant for European banks, CSDs and ICSDs, and compares them with the requirements in order to answer the following questions: Is there any overlap between the provisions of the CPSS-IOSCO Recommendations and the existing international and national requirements to which European SSSs and banks are subject? Are current provisions equivalent or more restrictive ("super-equivalent") for banks and CSDs? In what respect? Does the overlap between the CPSS-IOSCO Recommendations and existing regulation result in double requirements? This paper presents the results of this comparative analysis and attempts to answer such questions.

No. 74
30 October 2007
Analysis of revisions to general economic statistics

Abstract

JEL Classification

E01 : Macroeconomics and Monetary Economics→General→Measurement and Data on National Income and Product Accounts and Wealth, Environmental Accounts

E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth

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

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

Abstract

The preparations for the introduction of the euro in 1999 involved the need for a new set of statistics for the euro area. Since then, significant progress has been made with regard to the coverage, timeliness and accuracy of these statistics. The reliability of the first releases - i.e. their stability in the process of later revisions - is an important quality-related feature. New data releases for the euro area have generally shown a very small or no bias, i.e. data revisions have been very modest and comparable with those of, for example, the United States or Japan. Despite the relatively small size of revisions, however, their combination with the low growth of the euro area economy may have drawn attention to such revisions of economic data for the euro area. This paper quantifies the revisions to selected key indicators in the period from the start of Monetary Union in 1999 to July 2007 and compares them with the corresponding mediumterm averages (1999-2006). The analysis covers the euro area, its six largest member countries, the United Kingdom, the United States and Japan. For this purpose, available time series for the various periods involved are used, series that record all revisions to published statistical data releases. The analysis is carried out separately for GDP growth and its expenditure components, for employment, unemployment rates, compensation per employee, labour cost indicators, industrial production, retail trade turnover and consumer prices. Overall, the evidence presented in this paper suggests that euro area data releases have generally shown a very small or no bias and have been more stable than those for individual euro area countries. Furthermore, recent euro area data how levels of revisions similar to those of the past, or levels of revisions that stabilised after the implementation of harmonised statistical concepts had largely been completed.

No. 75
23 October 2007
The role of other financial intermediaries in monetary and credit developments in the euro area

Abstract

Abstract

Monetary growth has increased significantly in the euro area in recent years, raising concerns about the risks to price stability. Viewed from a sectoral perspective, this increase reflects to a large extent the deposit holdings of other financial intermediaries (OFIs). This paper presents analytical work on the role of OFIs in monetary and credit developments in the euro area. Although, at the moment, some shortcomings in the data available - such as the lack of long time series data - seriously limit the analysis of the role of OFIs in monetary and credit aggregates, it seems clear that OFIs have gained considerable importance in recent years, not only as a factor affecting monetary developments, but also for the functioning of the financial system. This gain in importance may be due to financial deregulation and liberalisation, as well as financial innovation. These developments are reflected in the integration and deepening of euro area financial markets, as well as in investors' attitude to risk.

No. 73
28 September 2007
Reserve accumulation: objective or by-product?

Abstract

JEL Classification

F31 : International Economics→International Finance→Foreign Exchange

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

Abstract

This paper examines whether the level of reserves in emerging market countries has become excessive. It presents a discussion of "adequacy" versus "excessive" levels of reserves, and presents calculations of reserve adequacy for a large number of emerging market countries. Two categories of countries can be distinguished: i) those whose reserves have grown on account of a need for self-insurance against financial crises, and which tend to be reasonably in line with adequacy measures (mainly Latin American countries and countries in central and eastern Europe), and ii) those whose reserve accumulation is nowadays primarily the result of rapid export-led growth supported by a lack of exchange rate flexibility. This is especially the case for several emerging Asian countries, whose reserve levels have grown far beyond what can reasonably considered adequate. Various opinions on Asian exchange rate and reserves policies are examined, and the costs and benefits of currency undervaluation are assessed. Attention is also paid to the composition of the reserves. The paper concludes by bringing together the various strands of the analysis and enumerating the main implications of largescale reserve accumulation for the international monetary system.

No. 72
24 September 2007
The role of financial markets and innovation in productivity and growth in Europe

Abstract

JEL Classification

G00 : Financial Economics→General→General

O16 : Economic Development, Technological Change, and Growth→Economic Development→Financial Markets, Saving and Capital Investment, Corporate Finance and Governance

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

Abstract

The extended period of limited growth experienced until recently in many European countries raises the issue as to which policies could be most effective in improving their economic performance. This paper argues that further financial sector reforms may be a valuable complement to ongoing efforts to reform labour and product markets. There is a long-standing view in the economic literature that well-functioning financial systems allow economies to exploit the benefits of innovation in terms of productivity and growth. Moreover, measured productivity differentials between Europe and the United States seem to originate particularly in the financial sector and from sectors that are particularly dependent on external financing. Building on and summarising the existing literature, this paper first introduces a number of concepts that are important for financial sector analyses and policies. Second, it presents a selection of indicators describing the efficiency and development of the European financial system from the perspective of a variety of dimensions. Third, an attempt is made to estimate the extent to which greater financial efficiency might improve the allocation of productive capital in Europe. While in the recent past the research and policy debate in Europe has focused on fostering financial integration, the present paper puts the main emphasis on financial development or modernisation in the context of the finance and growth literature. The results suggest that there are a number of ways in which the financial market framework conditions in Europe can be improved to increase the contribution of the financial system to innovation, productivity and growth. The most robust conclusions can be drawn for certain aspects of corporate governance, the efficiency of legal systems in resolving conflicts in financial transactions and some structural features of European bank sectors.

No. 70
24 August 2007
The search for Columbus' egg: finding a new formula to determine quotas at the IMF

Abstract

JEL Classification

E : Macroeconomics and Monetary Economics

Abstract

The present paper does not claim to solve the Columbus' egg conundrum. There even may not be a "silver bullet"

No. 68
24 August 2007
The securities custody industry

Abstract

JEL Classification

G15 : Financial Economics→General Financial Markets→International Financial Markets

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

L22 : Industrial Organization→Firm Objectives, Organization, and Behavior→Firm Organization and Market Structure

Abstract

Custody is, in essence, a service consisting in holding (and normally administering) securities on behalf of third parties. In step with the growth of sophisticated financial markets, custody has evolved into a complex industry no longer characterised by physical safekeeping but by a range of information and banking services. Given the multi-tier structure of the industry, custody services are provided by a variety of intermediaries. This paper describes the development of the custody industry and the structure of the custody services market. It also discusses the risks involved in custody and the challenges the industry is facing, particularly in the European context.

No. 71
22 August 2007
The economic impact of the Single Euro Payments Area

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

L11 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Production, Pricing, and Market Structure, Size Distribution of Firms

L22 : Industrial Organization→Firm Objectives, Organization, and Behavior→Firm Organization and Market Structure

Abstract

With the realisation of the Single Euro Payments Area (SEPA), there will be no difference in the euro area between national and cross-border retail payments. SEPA is aimed at fostering competition and innovation, and improving conditions for customers. This requires concerted efforts from various stakeholders, in particular the banking industry, to align national practices. The Eurosystem strongly supports the SEPA project. In its catalyst role, the European Central Bank (ECB) closely monitors and assesses the overall development of SEPA. Against this background, the ECB has carried out in cooperation with the banking industry a SEPA impact study with the aim of enriching its understanding of the potential economic consequences of SEPA. Based on the quantitative and qualitative expectations of major pan-European banks, the study finds that the overall financial impact for the banking industry varies according to different scenarios of the SEPA project. The coexistence of national and SEPA retail payment schemes is expected to lead to initial investments borne by the banks. In the longer term, banks expect to benefit from improved cost efficiency and economies of scale and scope. Furthermore, banks are expected to face downward pressure on their revenues as competition will increase across borders and as a result of new market entrants. The findings of the study confirm the view that a dual SEPA implementation phase should be as short as possible. In fact, a longer migration period would give rise to higher costs than a shorter period. It can furthermore be concluded that those institutions that embrace new technological developments, create new businesses and provide innovative services are likely to gain most from SEPA.

No. 69
21 August 2007
Fiscal policy in Mediterranean countries: developments, structures and implications for monetary policy

Abstract

Abstract

Southern and eastern Mediterranean countries have many fiscal challenges in common with other emerging market and mature economies concerning deficit and debt reduction and the maintenance of fiscal discipline. However, most countries in the region also face some specific fiscal issues, such as relatively high public debt, dependence on some form or another of donor dependence or concessional financing, high budgetary exposure to fluctuations in hydrocarbon prices, high defence expenditure and weak tax bases. Against this background, this paper reviews fiscal developments and fiscal policy issues in the ten countries that are participants or observers in the EU's Barcelona process. The main focus is on the implications of these developments and issues for macroeconomic stability, given that countries in the region have made considerable progress in terms of macroeconomic stabilisation over the last two decades, which is reflected in particular in lower inflation rates. The analysis distinguishes between non-oil-producing and oil-producing countries in the region, as they exhibit different fiscal features and are confronted with different challenges. In the case of non-oil-producing countries, the key challenges stem from high deficits and debt levels, including implicit and contingent liabilities, notwithstanding some progress in fiscal consolidation in most of these countries over the last years. In the case of oil-producing countries, whose fiscal situation has significantly improved in recent years in the wake of high oil prices, the key challenges for fiscal management stem from the heavy reliance on an exhaustible source of revenues and a large exposure to fluctuations in international hydrocarbon prices. A shock originating from - or being transmitted via and exacerbated by - the fiscal sector appears to be the single most important macroeconomic risk in many countries.

No. 67
26 July 2007
Towards harmonised balance of payments and international investment position statistics - the experience of the European compilers

Abstract

JEL Classification

B41 : History of Economic Thought, Methodology, and Heterodox Approaches→Economic Methodology→Economic Methodology

C13 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Estimation: General

C18 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Methodological Issues: General

C80 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→General

C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access

E01 : Macroeconomics and Monetary Economics→General→Measurement and Data on National Income and Product Accounts and Wealth, Environmental Accounts

E59 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Other

F15 : International Economics→Trade→Economic Integration

F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements

F24 : International Economics→International Factor Movements and International Business→Remittances

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F49 : International Economics→Macroeconomic Aspects of International Trade and Finance→Other

Abstract

External statistics

No. 64
18 July 2007
The use of portfolio credit risk models in central banks

Abstract

JEL Classification

E : Macroeconomics and Monetary Economics

Abstract

This report summarises the findings of the task force. It is organised as follows. Section 2 starts with a discussion of the relevance of credit risk for central banks. It is followed by a short introduction to credit risk models, parameters and systems in Section 3, focusing on models used by members of the task force. Section 4 presents the results of the simulation exercise undertaken by the task force. The lessons from these simulations as well as other conclusions are discussed in Section 5.

No. 65
10 July 2007
The performance of credit rating systems in the assessment of collateral used in Eurosystem monetary policy operations

Abstract

JEL Classification

G20 : Financial Economics→Financial Institutions and Services→General

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

C49 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Other

Abstract

The aims of this paper are twofold: first, we attempt to express the threshold of a single "A" rating as issued by major international rating agencies in terms of annualised probabilities of default. We use data from Standard & Poor's and Moody's publicly available rating histories to construct confidence intervals for the level of probability of default to be associated with the single "A" rating. The focus on the single "A" rating level is not accidental, as this is the credit quality level at which the Eurosystem considers financial assets to be eligible collateral for its monetary policy operations. The second aim is to review various existing validation models for the probability of default which enable the analyst to check the ability of credit assessment systems to forecast future default events. Within this context the paper proposes a simple mechanism for the comparison of the performance of major rating agencies and that of other credit assessment systems, such as the internal ratings-based systems of commercial banks under the Basel II regime. This is done to provide a simple validation yardstick to help in the monitoring of the performance of the different credit assessment systems participating in the assessment of eligible collateral underlying Eurosystem monetary policy operations. Contrary to the widely used confidence interval approach, our proposal, based on an interpretation of p-values as frequencies, guarantees a convergence to an ex

ante fixed probability of default (PD) value. Given the general characteristics of the problem considered, we consider this simple mechanism to also be applicable in other contexts.

No. 66
6 July 2007
Structural reforms in EMU and the role of monetary policy: a survey of the literature

Abstract

Abstract

The need for structural reforms in the euro area has often been advocated. These reforms would improve the welfare of euro area citizens and also, as a welcome side-effect, facilitate the conduct of monetary policy. Against this background, a particularly relevant question that can be posed is whether monetary policy should help implement structural reforms. The objective of this paper is to provide a review of the existing literature on structural reforms in Economic and Monetary Union (EMU) and to discuss the possible ways in which monetary policy could support the structural reform process. In the context of EMU, the main conclusions that emerge are that the monetary policy for the euro area is not the appropriate tool for mitigating the potential and uncertain short-term costs of reforms or for providing incentives for structural reforms at the national level. However, credible monetary policy aimed at price stability can improve the functioning of the supply side of the economy and contribute to an environment which is conducive to welfare-enhancing structural changes. In addition, the ECB's contribution to the implementation of structural reforms takes the form of analysis, assessment and communication.

No. 63
28 June 2007
Corporate finance in the euro area - including background material

Abstract

JEL Classification

D92 : Microeconomics→Intertemporal Choice→Intertemporal Firm Choice, Investment, Capacity, and Financing

G30 : Financial Economics→Corporate Finance and Governance→General

G10 : Financial Economics→General Financial Markets→General

O16 : Economic Development, Technological Change, and Growth→Economic Development→Financial Markets, Saving and Capital Investment, Corporate Finance and Governance

K40 : Law and Economics→Legal Procedure, the Legal System, and Illegal Behavior→General

Abstract

This report analyses the financial position of non-financial enterprises in the euro area, in particular the amount of external financing, the choice between debt and equity and the composition and maturity structure of debt. It aims at identifying the main features of the euro area, as well as the peculiarities that depend on the country of origin and the sector of activity. Attention is also devoted to assessing whether a country's institutional features are correlated with different financial structures by firms. In light of the particular interest in the access of small and medium-sized enterprises (SMEs) to financing, the report also analyses how financing patterns differ across large, medium-sized and small enterprises. Finally, the report discusses the recent trends observed in the corporate finance landscape of the euro area over the past few years. Although it is still too early to pass final judgement, vast structural changes are underway that could have already influenced in a positive way in the availability of external funds for firms. All in all, a comprehensive understanding of corporate finance in the euro area is important from a monetary policy perspective, given its impact on the transmission mechanism and for productivity and economic growth. Moreover, such an understanding is also relevant from a financial stability perspective. A first assessment is now possible eight years into the third stage of Economic and Monetary Union (EMU), given that sufficient data have been accumulated during this period. This assessment is particularly important as the introduction of the single currency has had significant structural effects on the working of financial markets, increasing their size and liquidity, and fostering cross-border competition. The data available for this report generally cover the period 1995-2005, and the cut-off date for the statistics included is 10 March 2007.

No. 62
4 June 2007
Inflation-linked bonds from a Central Bank perspective

Abstract

JEL Classification

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

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G10 : Financial Economics→General Financial Markets→General

Abstract

Inflation-linked bond markets have experienced significant growth in recent years. This growth is somewhat surprising, for inflation-linked bonds cannot be considered a financial innovation and their development has taken place in a period of historically low global inflation and inflation expectations. In this context, the purpose of this paper is twofold. First, it provides a selective survey of the key arguments for and against the issuance of inflation-linked debt, and some of the factors that help to understand their recent growth. Second, it illustrates the use of these instruments to better monitor investors' inflation expectations and growth prospects from a central bank perspective.

No. 60
23 April 2007
Commodity price fluctuations and their impact on monetary and fiscal policies in Western and Central Africa

Abstract

Abstract

Commodity prices play an important role in economic developments in most of the 24 Western and Central African (WCA) countries covered in this paper. It is confirmed that in the light of rising commodity prices between 1999 and 2005, net oil exporters recorded strong growth rates while net oil-importing countries - albeit benefiting from increases in their major non-oil commodity export prices - displayed somewhat lower growth. For most WCA economies, inflation rates appear less affected by commodity price changes and more determined by exchange rate regimes as well as monetary and fiscal policies. While passthrough effects from international to domestic energy prices were significant, notably in oilimporting countries, second-round effects on overall prices seem limited. Governments of oil-rich countries reacted prudently to windfall revenues, partly running sizable fiscal surpluses. A favourable supply response to rising spending as well as sterilisation efforts and increasing

money demand also helped to dampen inflationary pressures. However, substantial excess reserves of commercial banks reflect challenges in financial sector developments and the effectiveness of monetary policy in

many WCA countries. Given currently widely used fixed exchange rate regimes, fiscal policy will continue to carry the main burden of macroeconomic adjustment and of sustaining non-inflationary growth, which remains the key policy challenge facing WCA authorities.

No. 61
18 April 2007
Determinants of growth in the central and eastern European EU member states - a production function approach

Abstract

Abstract

Overall, the prospects for a continued and reasonably fast real convergence process between the EU 8 countries and the euro area are good. However, the continuation of the rapid progress made by many EU 8 countries in the past cannot be taken for granted. In fact, in order to ensure that fast economic growth in the EU 8 countries remains sustainable, it is crucial for these economies to take appropriate policy action. First it is important to recall that sound macroeconomic policies including credible monetary policy and appropriate fiscal policy are essential to ensure the appropriate framework conditions for further growth and convergence. Second, they need to address structural labour market problems, in particular by reducing regional and skill mismatches. Third, they must make further efforts to improve the business environment, in order to ensure that the capital accumulation process continues and R&D investments increase. Many of the above-mentioned facets of growth-enhancing policy will also help to ensure a continued inflow of foreign direct investment (FDI), which in turn is expected to help accelerate the convergence process.

No. 59
5 April 2007
The ECB survey of professional forecasters (SPF) - A review after eight years' experience

Abstract

JEL Classification

C83 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Survey Methods, Sampling Methods

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General

Abstract

Eight years have passed since the European Central Bank (ECB) launched its Survey of Professional Forecasters (SPF). The SPF asks a panel of approximately 75 forecasters located in the European Union (EU) for their short- to longer-term expectations for macroeconomic variables such as euro area inflation, growth and unemployment. This paper provides an initial assessment of the information content of this survey. First, we consider shorter-term (i.e., one- and two-year ahead rolling horizon) forecasts. The analysis suggests that, over the sample period, in common with other private and institutional forecasters, the SPF systematically under-forecast inflation but that there is less evidence of such systematic errors for GDP and unemployment forecasts. However, these findings, which generally hold regardless of whether one considers the aggregate SPF panel or individual responses, should be interpreted with caution given the relatively short sample period available for the analysis. Second, we consider SPF respondents

No. 58
30 March 2007
Long-term growth prospects for the Russian economy

Abstract

JEL Classification

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

O51 : Economic Development, Technological Change, and Growth→Economywide Country Studies→U.S., Canada

O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development

O14 : Economic Development, Technological Change, and Growth→Economic Development→Industrialization, Manufacturing and Service Industries, Choice of Technology

Abstract

This paper provides an assessment of Russia's long-term growth prospects. In particular, it addresses the question of the medium- and long-term sustainability of the country's currently high growth rates. Starting from the notion that Russia's fast economic expansion in recent years has benefited from a number of singular factors such as the unprecedented rise in oil prices, the paper presents new evidence on Russia's oil price dependency using a Vector Error Correction Model (VECM) framework. The findings indicate that the positive impact of rising oil prices on Russia's GDP growth has increased in recent years, but tends to be buffered by an appreciation of the real effective exchange rate which is stimulating imports. Additionally, there is empirical confirmation that growth in the service sector - a symptom usually associated with the Dutch disease phenomenon - is mainly a result of the transition process. Finally, the paper provides an overview of the relevant factors that are likely to affect Russia's growth performance in the future.

No. 57
28 March 2007
Understanding price developments and consumer price indices in south-eastern Europe

Abstract

JEL Classification

E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

O57 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Comparative Studies of Countries

P22 : Economic Systems→Socialist Systems and Transitional Economies→Prices

Abstract

The primary goal of monetary policy in most economies of the world is to achieve and maintain price stability. This paper evaluates price developments and consumer price indices in south-eastern European countries, i.e. countries that have either recently joined the EU or are candidate or potential candidate countries. It is motivated by the fact that, in transition countries, inflation has generally been higher and more volatile than in advanced economies. The analysis reveals that the subindex housing/energy appears to be the main driving force behind overall inflation in the region. In most of the countries under review, administered prices prove to be an important factor in consumer price developments, with their weights increasing over time. Inflation volatility in south-eastern Europe is significantly higher than in the euro area. While this is partly due to a higher level of inflation, it also reflects a more pronounced share for the most volatile sub-indices as well as the marked impact of administered prices on the overall price index, a phenomenon which has also been seen in the central and eastern European countries. While in most south-eastern European countries no HICP has been calculated yet, there is little evidence suggesting that the future use of the HICP will result in a systematic change in inflation patterns in the respective countries. However, as deviations have been observed in a few countries for certain periods, without further information on the structure of the respective national CPI and the HICP such differences cannot be fully excluded.

No. 56
28 March 2007
Assessing fiscal soundness: theory and practice

Abstract

Abstract

This paper presents a survey of methods for assessing fiscal soundness, i.e. the capability of governments to honour their obligations in the short run and in the long run. The need for a comprehensive monitoring of fiscal soundness derives from the risks to economic stability that arise from the actual or expected difficulty a government may have in honouring its

obligations. For the long run, methods derived from the government's intertemporal budget constraint make it possible to assess the size of a necessary adjustment to achieve sustainability of the debt burden. Uncertainty regarding shocks to the fiscal situation or the behaviour of financial market participants calls for the monitoring of financial flows and government obligations in the short run. Vigilance needs to be all the higher, the greater the uncertainty regarding long-term sustainability.

No. 55
1 March 2007
Globalisation and euro area trade - interactions and challenges

Abstract

JEL Classification

F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts

Abstract

As a major player in world trade, the euro area is strongly influenced by globalisation, but is far from being a passive spectator. The paper analyses how the euro area's trade specialization has changed in response to stronger international competition and the emergence of new global players, evaluating results and possible challenges ahead. The message remains mixed. On the positive side, the export specialisation of the euro area is increasing in some medium-high or high-tech sectors where productivity growth is strong and demand robust, such as pharmaceuticals, also by a more intensive recourse to importing intermediate goods from low-cost countries. On the other hand, in comparison to other industrialised economies, the euro area has been somewhat slower in moving towards research-intensive goods and away from labour-intensive sectors. While this could reflect data classification issues, it may also be a sign of structural rigidities in the euro area, which hinder adjustment processes.

No. 54
17 November 2006
Quantitative quality indicators for statistics: an application to euro area balance of payment

Abstract

Abstract

Quality is a subjective notion and encompasses all aspects of how well a product meets users’ needs. It is inherently a multi-faceted concept that cannot be easily defined; any chosen definition is likely to change over time as new aspects gain importance following the evolving users’ needs. The purpose of this paper is threefold; (1) to present a number of quantitative quality indicators, (2) to apply them to measure the quality of balance of payments (b.o.p.) data at the euro area level, and (3) to identify various aspects of data quality that may be enhanced, together with their interrelations with other quality dimensions. The indicators used are compatible with the IMF Data Quality Assessment Framework (DQAF), as defined for b.o.p. statistics, focusing mainly on revisions and consistency. The results obtained from such quantitative indicators may help compilers to set priorities in order to improve the quality of the euro area data still further in dimensions such as accuracy, reliability and serviceability. Additionally, this assessment may help users to understand better the quality of the data, to anticipate the possible size and direction of the forthcoming revisions, and to evaluate the impact of using different datasets in their analysis.

No. 52
26 October 2006
Cross-border labour mobility within an enlarged EU

Abstract

Abstract

This paper examines the potential for increased cross-border labour mobility within the EU-25 and considers the costs and benefits of any increase in labour mobility to both sending and receiving countries in the medium to long run. Evidence from previous EU enlargement experiences, academic studies, the existence of barriers to mobility within the EU and the economic determinants of migration all indicate a moderate potential for increased migrant flows. The magnitude of cross-border labour flow in the medium to long run will most likely be largely a function of the demand for migrants and the speed at which the EU-8 catches up economically with the EU-15. In addition, faster population ageing in the EU-8 tends towards dampening migration flow from the new Member States in the medium term. In terms of costs and benefits, for the EU-8 countries labour migration, especially in the short run, may present a number of challenges. Emigration may tend to weigh disproportionally on the pool of young and educated workers, aggravating labour market bottlenecks. For the EU-25 as a whole, cross-border labour mobility is likely to offer a number of advantages, by allowing a more efficient matching of workers' skills with job vacancies and facilitating the general upskilling of European workforces. The current restrictions on labour mobility from the EU-8 countries to the other EU member countries stand in contrast with one of the central principles of the EU - the free movement of labour. Furthermore, these restrictions hamper an important adjustment mechanism within EMU. Delaying the removal of these barriers may be costly for the EU-25 at a time when leaders are concerned about Europe's international competitiveness. Finally, it would not be beneficial for Europe to loose a significant part of the most agile and talented individuals from the new Member States to more traditional migration centres.

No. 53
20 October 2006
Labour productivity developments in the euro area

Abstract

JEL Classification

J24 : Labor and Demographic Economics→Demand and Supply of Labor→Human Capital, Skills, Occupational Choice, Labor Productivity

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

Abstract

This paper provides a description and a discussion of some important aspects relating to recent productivity developments in the euro area. Following decades of stronger gains in the euro area than in the US, labour productivity growth has fallen behind that in the US in recent years. This reflects a decline in average labour productivity growth observed in the euro area since the mid-1990s, which stands in sharp contrast with opposite developments in the US. The decline in labour productivity growth experienced in the euro area since the mid-1990s resulted from both lower capital deepening and lower total factor productivity growth. From a sectoral perspective, industries not producing or using intensively information and communication technology (ICT) would appear mostly responsible for the decline in average labour productivity growth since the mid-1990s. These developments were broadly experienced by most euro area countries. A comparison with developments in the US suggests that the euro area economy seems to have benefited much less from increased production and use of ICT technologies, in particular in the services sector. Diverging trends in labour productivity growth between the euro area and the US in recent years mainly reflect developments in a number of specific ICT-using services such as retail, wholesale and some financial services where strong gains were registered in the US. The evidence presented in this paper suggests that, in order to support economic growth in the euro area, emphasis should be given to both policy measures that directly address the determinants of productivity and, given the interactions among the various factors of growth, to policies that raise labour utilisation.

No. 51
28 August 2006
Macroeconomic implications of demographic developments in the euro area

Abstract

JEL Classification

J11 : Labor and Demographic Economics→Demographic Economics→Demographic Trends, Macroeconomic Effects, and Forecasts

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

Abstract

This paper examines the macroeconomic consequences of future demographic trends for economic growth, financial markets and public finances. It shows that in the absence of reforms and responses by economic agents, the currently projected demographic trends imply a decline in average real GDP growth and a severe burden in terms of pay-as-you-go pension and health care systems. Population ageing will change the financial landscape, with a potentially larger role for financial intermediaries and asset prices. All this points to a need to closely monitor demographic change also from a monetary policy perspective. While population projections are surrounded by considerable

uncertainty and the effects of demographic change tend to be drawn out, the magnitude of the potential effects calls for an early recognition of this issue. This paper provides some input to the examination of possible policy issues.

No. 50
11 August 2006
Implications for liquidity from innovation and transparency in the European corporate bond market

Abstract

JEL Classification

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

G15 : Financial Economics→General Financial Markets→International Financial Markets

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

Abstract

This paper offers a new framework for the assessment of financial market liquidity and identifies two types: search liquidity and systemic liquidity. Search liquidity, i.e. liquidity in "normal" times, is driven by search costs required for a trader to find a willing buyer for an asset he/she is trying to sell or vice versa. Search liquidity is asset specific. Systemic liquidity, i.e. liquidity in "stressed" times, is driven by the homogeneity of investors: the degree to which one's decision to sell is related to the decision to sell made by other market players at the same time. Systemic liquidity is specific to market participants' behaviour. This framework proves fairly powerful in identifying the role of credit derivatives and transparency for liquidity of corporate bond markets. We have applied it to the illiquid segments of the European credit market and found that credit derivatives are likely to improve search liquidity as well as systemic liquidity. However, it is possible that in their popular use today, credit derivatives reinforce a concentration of positions that can worsen systemic liquidity. We also found that post-trade transparency has surprisingly little bearing on liquidity in that where it improves liquidity it is merely acting as a proxy for pre-trade transparency or transparency of holdings. We conclude that if liquidity is the objective, pre-trade transparency, as well as some delayed transparency on net exposures and concentrations, is likely to be more supportive of both search and systemic liquidity than post-trade transparency.

No. 49
3 August 2006
Credit risk mitigation in central bank operations and its effects on financial markets: the case of the Eurosystem

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

This paper reviews the role and effects of the collateral framework which central banks, and in particular the Eurosystem, use in conducting temporary monetary policy operations. First, the paper explains the design of such a framework from the perspective of risk mitigation, which is the purpose of collateralisation. The paper argues that, by means of appropriate risk mitigation measures, the residual risk on any potentially eligible asset can be equalised and brought down to the level consistent with the risk tolerance of the central bank. Once this result has been achieved, eligibility decisions should be based on an economic cost-benefit analysis. Second, the paper looks at the effects of the collateral framework on financial markets, and in particular on spreads between eligible and ineligible assets.

No. 48
4 July 2006
Macroeconomic and financial stability challenges for acceding and candidate countries

Abstract

JEL Classification

E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation

O16 : Economic Development, Technological Change, and Growth→Economic Development→Financial Markets, Saving and Capital Investment, Corporate Finance and Governance

P27 : Economic Systems→Socialist Systems and Transitional Economies→Performance and Prospects

Abstract

This paper - based on a report by a Task Force established by the International Relations Committee (IRC) of the European System of Central Banks (ESCB) - reviews macroeconomic and financial stability challenges for acceding (Bulgaria and Romania) and candidate countries (Croatia and Turkey). In an environment characterised by strong growth and capital inflows, the main macroeconomic challenges relate to the recent pick-up of inflation and the large and widening current account deficits. Moreover, rapid credit growth has been a recent feature of financial development in all countries and thus constitutes the main financial stability challenge. In general, monetary authorities have responded to these challenges by tightening monetary conditions and prudential standards, with concrete measures also reflecting the different monetary and exchange rate regimes in the region. The paper also highlights four specific features of fiancial development in the countries under review, namely the dominance of banks in financial intermediation, the strong participation of foreign-owned banks, the widespread use of foreign currencies and the strengthening of supervisory frameworks.

No. 47
28 June 2006
The reform and implementation of the Stability and Growth Pact

Abstract

JEL Classification

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

H6 : Public Economics→National Budget, Deficit, and Debt

Abstract

Fiscal rules are instrumental for restraining deficit and spending biases in euro area Member States that could threaten the smooth functioning of Economic and Monetary Union (EMU). Ideally, fiscal rules should combine characteristics such as sufficient flexibility to allow for appropriate policy choices with the necessary simplicity and enforceability to actually discipline government behaviour. The Maastricht Treaty and the Stability and Growth Pact established such a rules-based framework for fiscal polices in EMU. However, the implementation of the Pact was less than fully satisfactory. One year ago, the Pact was reviewed and a reformed version adopted which emphasises more flexible rules and procedures, including more explicit room for judgement and discretion than in its original form. While its proponents argued that these revisions would strengthen commitment and implementation of the rules, others emphasised the risk of weakening the EU fiscal framework. A year on from the SGP reform, this paper takes stock of how the EU fiscal rules have evolved and how they have been implemented from the Maastricht Treaty to the present day, including initial experiences with the implementation of the reformed Pact. The first indications are of a smoother and consistent implementation, but with consolidation requirements that are rather lenient while fiscal targets and projections point to only slow and back-loaded progress towards sound public finances in many countries. The assessment of the implementation of the revised rules is therefore mixed. It is of the essence that the provisions of the revised SGP be rigorously implemented in order to ensure fiscal sustainability.

No. 46
1 June 2006
Inflation persistence and price-setting behaviour in the euro area: a summary of the IPN evidence

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

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

Abstract

This paper provides a summary of current knowledge on inflation persistence and price stickiness in the euro area, based on research findings that have been produced in the context of the Inflation Persistence Network. The main findings are: i) Under the current monetary policy regime, the estimated degree of inflation persistence in the euro area is moderate; ii) Retail prices in the euro area are more sticky than in the US; iii) There is significant sectoral heterogeneity in the degree of price stickiness; iv) Price decreases are not uncommon. The paper also investigates some of the policy implications of these findings.

No. 45
22 May 2006
Output growth differentials across the euro area countries: some stylised facts

Abstract

JEL Classification

C10 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→General

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

O40 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→General

Abstract

The aim of this study is to investigate the extent to which the dispersion of real GDP growth rates has changed over the past few years and whether the synchronisation of business cycles has increased among the euro area countries. The study is divided into two main parts. The first focuses on the dispersion of real GDP growth rates across the euro area countries, while the second studies the synchronisation of business cycles within the euro area. The study shows first that dispersion of real GDP growth rates across the euro area countries in both unweighted and weighted terms has no apparent upward or downward trend during the period 1970-2004 as a whole. Second, since the beginning of the 1990s, the dispersion of real GDP growth rates across the euro area countries has largely reflected lasting trend growth differences, and less so cyclical differences, with some countries persistently

exhibiting output growth either above or below the euro area average. Among other things, this might be due to different trends in demographics, as well as to differences in structural reforms undertaken in the past. Thirdly, the degree of synchronisation of business cycles across the euro area countries seems to have increased since the beginning of the 1990s. This

finding holds for various measures of synchronisation applied to overall activity and to the cyclical component, for annual and quarterly data, as well as for various country groupings. In particular, the degree of correlation currently appears to be at a historical high. In addition to these main findings, certain other stylised facts on dispersion and

synchronisation are presented.

No. 44
10 April 2006
Competition, productivity and prices in the euro area services sector

Abstract

JEL Classification

E : Macroeconomics and Monetary Economics

Abstract

This paper analyses the degree of competition in the euro area services sector and its effects on labour productivity and relative prices in that sector over the period 1980-2003. The importance of the euro area services sector has significantly increased over time; it now accounts for around 70% of the euro area's total nominal value added and employment. Labour productivity growth across the euro area services industries appears to be characterised by a high degree of diversity and the level of services inflation is on average higher than aggregate inflation. Investigating several proxies of market competition for the non-financial business services, the paper finds that limited competition in services tends to hamper labour productivity growth in the services sector. Moreover, results tend to suggest that measures aimed at increasing services market competition may have a dampening impact on relative price changes in some services sectors and thus temporarily on aggregate inflation.

No. 43
8 March 2006
The accumulation of foreign reserves

Abstract

JEL Classification

E : Macroeconomics and Monetary Economics

Abstract

In a number of countries, especially emerging market economies, the public sector has in recent years been accumulating sizeable cross-border financial assets, mainly in the form of official foreign exchange reserves. World reserves have risen from USD 1.2 trillion in January 1995 to above USD 4 trillion in September 2005, growing particularly rapidly since 2002. This paper investigates the features, drivers, risks and costs of such recent reserve accumulation, as well as the other uses that certain countries have been making of their accumulated foreign assets. The main trends in central bank reserve management are also reviewed. Finally, the paper provides some evidence for the impact of reserve accumulation on yields and asset prices.

No. 42
22 December 2005
The New Basel Capital Framework and its implementation in the European Union

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

Following the adoption by the Basel Committee of new capital rules for banks, aprocess is now taking place in the EU to transpose the rules into Community law and, ultimately, into national legislation. This paper gives an overview of the main issues that relate to the EU implementation, mainly from theperspectives of financial stability and financial integration. Although the EU rules are to a large extent based on the texts of the Basel Committee, modifications have been introduced to account for the specific legal and institutional setting, as well as for some features of the European financial system. The paper gives an overview of these modifications and deals in greater detail with a number of selected topics: the monitoring of procyclicality, the role of the consolidating supervisor and the treatment of real estate lending and covered bonds. The paper concludes with an outlook for the future.

No. 41
19 December 2005
Trends and patterns in working time across euro area countries 1970-2004: causes and consequences

Abstract

JEL Classification

J3 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs

J22 : Labor and Demographic Economics→Demand and Supply of Labor→Time Allocation and Labor Supply

J24 : Labor and Demographic Economics→Demand and Supply of Labor→Human Capital, Skills, Occupational Choice, Labor Productivity

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

D02 : Microeconomics→General→Institutions: Design, Formation, and Operations

Abstract

This paper analyses trends in working time in the euro area, in comparison with the US, over the period 1970 to 2004 and examines the causes and consequences of the observed changes. Between 1970 and 2004, a downward trend in average annual hours worked per worker can be observed for the euro area as a whole, all individual euro area countries and the United States. In contrast to the US, the euro area and a number of euro area countries also experienced a significant decline in annual hours worked per capita ("labour utilisation") over the last three decades. Data reveal important disparities across countries - both in trends and levels. While some countries managed to reverse their downward trends in labour utilisation in the 1980s and 1990s, the level of average hours worked per capita in 2004 remained significantly below their 1970 levels for all euro area countries for which data are available. From a policy perspective, falling annual average hours worked per worker or per capita are not a problem per se, if they reflect preferences. For example, increasing shares of voluntary part-time employment across many euro area countries, whilst increasing European employment rates, have contributed to the downward trend in average annual hours per worker. However, to the extent that low working hours are due to institutional features which create disincentives to work, such as high tax wedges and high unemployment benefits, or enforced reductions in working hours, these factors should be addressed.

No. 40
2 December 2005
What does European institutional integration tell us about trade integration?

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

F15 : International Economics→Trade→Economic Integration

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

Abstract

The start of the European Economic and Monetary Union (EMU) has spurred a new interest in the debate on the effects of monetary unions on regional economic integration. This literature either investigates past episodes of monetary unions or attempts to gauge any effect with a few years of EMU data. This paper takes instead a more general perspective: it investigates the link between economic integration and the overall institutional process of regional integration in Europe - of which monetary integration was only one step - over the last 50 years. We look mainly at two dimensions: European institutional integration - whose main steps were the customs union in 1968, the single market in 1993 and the single currency in 1999 - and intra-European trade. We pay special attention to the successive EU enlargements which took place in 1973, 1981, 1986, and 1995. Different facets of openness and trade linkages are presented. After looking at some descriptive links between institutional and trade integration, the paper uses some causality tests to assess the direction of causality and magnitude of impact. The evidence provided is consistent with the idea that the interaction between regional institutional and trade integration before monetary union matters. Such interaction runs in both directions, although the link from institutional to trade integration dominates. Many open questions remain, however.

No. 39
28 October 2005
Labour productivity in the Nordic EU countries: a comparative overview and explanatory factors 1980-2004

Abstract

Abstract

This paper analyses the differences in hourly labour productivity growth rates and levels between the Nordic EU countries (Denmark, Finland and Sweden) and four larger euro area countries (Germany, France, Italy and Spain). Additional information for the euro area as a

whole, the UK and the US is also provided. Given that the economic and social models developed in the Nordic EU countries are in many ways closer to those of the larger euro area countries than that of the US, the

experience of these countries is particularly interesting. Since the mid-1990s, the Nordic EU countries, particularly Sweden and Finland, have experienced stronger labour productivity growth than the larger euro countries. Like in the US, innovation and technological changes have played a major role

in explaining the higher labour productivity growth in the Nordic EU countries compared with the larger euro area economies. Information and Communication Technology

(ICT) diffusion is a key element to explain these differences. A number of institutional indicators, relating to market regulation, human capital, R&D nvestments and venture capital, show that the Nordic EU economies are better positioned than some of the larger euro area countries to exploit the opportunities provided by ICT in terms of productivity growth. However, remaining labour market rigidities may not allow the Nordic EU countries to fully enjoy the benefits of ICT diffusion in terms of increased employment.

No. 38
20 October 2005
Economic reactions to public finance consolidation: a survey of the literature

Abstract

JEL Classification

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy

H62 : Public Economics→National Budget, Deficit, and Debt→Deficit, Surplus

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

Abstract

The paper reviews the theoretical and empirical literature that has investigated the conditions under which a contradictionary fiscal policy is effective in reducing debt and deficit, but does not have a negative effect on growth. The issue is central to macroeconomics and policy making, given that many countries are currently facing increasing fiscal imbalances, with additional pressure coming in the medium term from population ageing. The paper concludes that the theoretical impact of fiscal policy on aggregate demand and economic activity depends largely on the conceptual framework considered and its assumptions about the world. Empirical studies based on macro-econometric model simulations find evidence that fiscal consolidations lead initially to production losses, while they can result in a higher output in the medium term. Empirical studies focusing on episodes of changes in fiscal policies provide in turn evidence that under certain circumstances austerity measures may have an expansionary impact on the economy.

No. 37
4 October 2005
Financing conditions in the euro area

Abstract

JEL Classification

G20 : Financial Economics→Financial Institutions and Services→General

G30 : Financial Economics→Corporate Finance and Governance→General

E40 : Macroeconomics and Monetary Economics→Money and Interest Rates→General

Abstract

For central banks, the monitoring of financing conditions plays a pivotal role in assessing the actual transmission of monetary policy impulses to borrowers. This paper presents in detail some of the indicators and data used by the ECB to assess financing conditions in the euro area. It also shows how these indicators have been used to provide a broad assessment of developments in financing conditions in the euro area in recent years. The ECB's analysis of financing conditions is dynamic and seeks to reflect underlying changes in the euro area's financial structure.

No. 35
20 September 2005
The institutional framework for financial market policy in the USA seen from an EU perspective

Abstract

JEL Classification

F3 : International Economics→International Finance

H4 : Public Economics→Publicly Provided Goods

Abstract

The paper takes a closer look at the institutional set-up of financial markets in the United States of America and investigates whether the US can serve as a model for the EU. The overall conclusion is that the US institutional set-up as a whole does not seem to be a suitable benchmark for the EU as it is the outcome of specific historical, political and economic circumstances, which differ substantially from those in the EU. Nevertheless, there are features which could provide inspiration for further debate on the EU institutional framework, such as the prominent role of federal regulatory agencies (including the central bank and its role as "umbrella supervisor" over financial holding companies), the capacity of the Office of the Comptroller of the Currency (OCC) as a federal institution to remove barriers to cross-border activities, and the elements of choice for the supervised entities in the regulatory system, which allow for some regulatory competition.

No. 36
15 September 2005
Economic and monetary integration of New Member States - helping to chart the route

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

F13 : International Economics→Trade→Trade Policy, International Trade Organizations

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

Abstract

This paper examines diverse aspects of the monetary integration of the ten new Member States (NMS) which joined the EU on 1 May 2004 into the euro area. Most NMS have undergone a rapid and deep transformation in

all areas with considerable progress in their processes of reform and convergence, and more is underway. While trade integration with the other 15 EU Member States (EU15) has progressed quickly, convergence in output specialisation to EU standards has been slow, especially if measured in real terms. This may influence negatively the pace of real convergence. Most NMS lag significantly behind in building up and deepening their financial systems. There is also evidence that exchange rate flexibility may still be serving as a useful shock absorber for some NMS, and so far the evidence indicates that real exchange rates have moved, broadly speaking, in line with long term fundamental equilibria. On the positive side, many NMS are quite advanced relative to the euro area in the process of labour market and institutional reform (their labour market structures are more flexible than those of the euro area countries). There is also some evidence that a few NMS have a significant degree of business-cycle synchronisation with the euro area: hence, they may become less likely to be affected by different economic shocks. This, however, is not true for all NMS. The monetary policy institutions of the NMS have also converged to some degree: goals and

institutional settings of central banks are now much more similar than before. A case-by-case approach to adopting the euro, based on country-specific conditions, seems natural due to the differences between the countries.

No. 34
26 August 2005
Hedge funds and their implications for financial stability

Abstract

JEL Classification

G15 : Financial Economics→General Financial Markets→International Financial Markets

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

G24 : Financial Economics→Financial Institutions and Services→Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies

Abstract

The paper provides an overview of the hedge fund industry, mainly from a financial stability and European angle. It is primarily based on an extensive analysis of information from the TASS database. On the positive side of the financial stability assessment, hedge funds have a role as providers of diversification and liquidity, and they contribute to the integration and completeness of financial markets. Possible negative effects occur through their impact on financial markets (e.g. via crowded trades) and financial institutions (e.g. via prime brokerage). Several initiatives have been launched to address these concerns and most of them follow indirect regulation via banks. If any direct regulation were to be considered, it would probably have to be implemented in a coordinated manner at the international level. At the EU level there is currently no common regulatory regime, although some Member States have adopted national legislation.

No. 33
7 July 2005
Integration of securities market infrastructure in the euro area

Abstract

JEL Classification

L1 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance

Abstract

This paper investigates the state and process of integration of the European securities market infrastructure. The integration of financial infrastructures is one of the basic policy goals and key responsibilities of the Eurosystem. The paper finds that, despite the single currency, the euro area securities infrastructure remains highly fragmented and insufficiently integrated. There are still a high number of providers for trading, clearing and settlement, and they are not efficiently connected to one another. The paper also finds that the degree of consolidation varies among different integrated groups of market infrastructure. Economies of scale and scope and positive network externalities inherent in the securities services industry mean that substantial cost savings and increased efficiency can be expected from further integration. The most relevant factors underlying the less advanced areas of integration are likely to be not only persistent cross-border differences in tax regimes, procedures and laws, but also vested interests among users, owners and managers. Current work at the Eurosystem level can be expected to be helpful in promoting further integration.

No. 32
1 July 2005
Managing financial crises in emerging market economies - experience with the involvement of private sector creditors

Abstract

JEL Classification

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F34 : International Economics→International Finance→International Lending and Debt Problems

Abstract

Financial crises in emerging market economies are often accompanied by difficulties of the sovereign to honour its contractual obligations. The official sector may reduce the likelihood of a disorderly outcome by extending financial assistance but there are limits to official sector involvement, not least because the potential volume of IMF lending is small compared to private capital flows and because a large "bail out" by the official sector would lead to moral hazard. For both these reasons - limited official funds and moral hazard - private sector creditors need to share some of the financial burden and thereby actively get involved in the management of financial crises in emerging market economies. The purpose of this report is to review the instruments that may promote such private creditor involvement as well as to provide a stock-taking of past experience and identify areas of possible improvement to the framework for crisis resolution.

No. 31
30 June 2005
Regional monetary integration in the member states of the Gulf Cooperation Council

Abstract

JEL Classification

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

Abstract

The Gulf Cooperation Council (GCC) plans to introduce a single currency by 2010 in its six member states, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. This paper focuses on selected macroeconomic and institutional issues and key policy choices which are likely to arise during the process of monetary integration. The main findings are that (i) a supranational GCC monetary institution is required to conduct a single monetary and exchange rate policy geared to economic, monetary and financial conditions in the monetary union as a whole; (ii) GCC member states have already achieved a remarkable degree of monetary convergence, but fiscal convergence remains a challenge and needs to be supported by an appropriate fiscal policy framework; and (iii) there is currently a high degree of structural convergence, although this is expected to diminish in view of the process of diversification in GCC economies, which calls for adequate policy responses.

No. 29
22 June 2005
Wealth and asset price effects on economic activity

Abstract

JEL Classification

D1 : Microeconomics→Household Behavior and Family Economics

D3 : Microeconomics→Distribution

D9 : Microeconomics→Intertemporal Choice

G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions

Abstract

Do asset prices affect real activity? This question has taken on a new importance in recent years, as asset values first surged at the end of 1990s and, thereafter, dramatically retreated. This report reviews the available theoretical and empirical evidence regarding asset price and wealth effects in Europe and some other major economies. The main focus of this report is on consumption effects via the wealth channel, reflecting the bulk of literature on the effects of asset prices. However, asset price effects on investment via the Tobin

No. 30
9 June 2005
Competitiveness and the export performance of the euro area

Abstract

JEL Classification

E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles

Abstract

Chapter 1 provides an overview and assessment of the price competitiveness and export performance of the euro area and the larger euro area countries, as well as an evaluation of how standard equations have been able to explain actual export developments. Chapter 2 carries out a constant market share analysis for the euro area and thereby sheds light on the reasons for movements in aggregate export market shares by looking at the sectoral and geographical composition of euro area exports. Chapter 3 looks at the evolution of the technological competitiveness of the euro area and major competitors

No. 26
28 April 2005
Analysing banking sector conditions - How to use macro-prudential indicators

Abstract

JEL Classification

C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

This paper presents the methodological and statistical framework for macro-prudential analysis of the financial condition of the EU banking sector that has been adopted by the European System of Central Banks (ESCB). The framework is also a central component of broader financial stability assessments carried out by the ECB in co-operation with national authorities. The framework has three main building blocks, which draw on a large number of macro-prudential indicators. The first block is designed for assessing the financial condition of the banking sector. The second building block provides a framework for analysing potential sources of risk and vulnerability to which banks are exposed and an assessment of the importance of related exposures. The final part of the analysis deals with the resilience of banks vis-

No. 28
11 April 2005
Regulatory reforms in selected EU network industries

Abstract

JEL Classification

E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General

L33 : Industrial Organization→Nonprofit Organizations and Public Enterprise→Comparison of Public and Private Enterprises and Nonprofit Institutions, Privatization, Contracting Out

L51 : Industrial Organization→Regulation and Industrial Policy→Economics of Regulation

L93 : Industrial Organization→Industry Studies: Transportation and Utilities→Air Transportation

L94 : Industrial Organization→Industry Studies: Transportation and Utilities→Electric Utilities

L95 : Industrial Organization→Industry Studies: Transportation and Utilities→Gas Utilities, Pipelines, Water Utilities

L96 : Industrial Organization→Industry Studies: Transportation and Utilities→Telecommunications

Abstract

In the course of the 1990s, the EU has embarked on an ambitious regulatory reform programme for a number of European network industries, such as telecommunications, energy and transport. This paper analyses the potential benefits of successful reforms in these sectors with a focus on the price effects of regulatory reforms. Following a review of the existing empirical literature in this field, the paper discusses the evolution of the current regulatory framework for network industries in the EU. An empirical analysis of the main determinants of recent price developments in these industries provides evidence that regulatory reform measures had a substantial downward impact on prices in the four sectors under review.

No. 27
1 April 2005
The EU budget - how much scope for institutional reform?

Abstract

JEL Classification

D78 : Microeconomics→Analysis of Collective Decision-Making→Positive Analysis of Policy Formulation and Implementation

H77 : Public Economics→State and Local Government, Intergovernmental Relations→Intergovernmental Relations, Federalism, Secession

H87 : Public Economics→Miscellaneous Issues→International Fiscal Issues, International Public Goods

Abstract

This paper reviews current discussions on reforming the European Union (EU) budgetary procedure and assesses the main reform proposals that have been suggested thus far. It argues that prospects for reforms are presently hampered by the complex interplay between supranational and intergovernmental decision modes and the requirement of any budgetary procedure to strike a balance between efficiency and legitimacy. The paper reviews the main criticisms of the present budgetary procedure and the related reform proposals, which are assessed on the basis of relevant theoretical literature as well as brief comparisons with the federal budget of the United States. The paper argues that the current EU budgetary procedure maximises efficiency and legitimacy, given the present state of political integration in the EU. Significant modifications to the budgetary procedure would depart from that equilibrium.

No. 25
1 March 2005
Government debt management in the euro area - recent theoretical developments and changes in practices

Abstract

JEL Classification

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy

Abstract

This paper reviews recent developments in the management of government debt in the euro area, covering both theoretical and practical aspects. It focuses on key aspects of debt management; the objectives of debt management, its organisation, the maturity of debt, inflation-indexation, currency-denomination, the ownership of debt, and debt issuing and trading practices. Main adjustments include an increase in autonomy of debt management agencies, and a convergence in debt maturities and in debt issuing strategies. Issuance of inflation-indexed bonds and the use of interest rate swaps have increased strongly. While the share of government debt denominated in non-domestic currencies is falling, foreign ownership of euro area government debt is increasing markedly. The observed changes in recent years in part reflect the introduction of the euro and the related integration of European capital markets.

No. 24
25 February 2005
Wage diversity in the euro area - an overview of labour cost differentials across industries

Abstract

JEL Classification

J31 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→Wage Level and Structure, Wage Differentials

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

J41 : Labor and Demographic Economics→Particular Labor Markets→Labor Contracts

Abstract

This paper provides an overview of the magnitude of sectoral wage differentials in the euro area as a whole. Even when adjusting for structural sectoral features such as the skill structure or the proportion of part-timers, average wage levels in services are substantially lower than in manufacturing. The paper also studies how the euro area wage structure compares with that of the United States and the United Kingdom. It discusses some possible determinants of intersectoral wage differentials in the euro area and their likely implications from a policy perspective. A number of worker characteristics (e.g. age, skills, the proportion of temporary or self-employed) are highly correlated with the structure of wage differentials. At the same time, wage differentials are also highly correlated with sector-specific features such as average firm size or capital intensity. Finally, the paper presents some stylised facts on how the euro area wage structure has evolved since the early 1980s.

No. 23
11 February 2005
The bank lending survey for the euro area

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

This occasional paper explains why the bank lending survey was developed by the ECB and describes its main features. It discusses the importance of credit developments for both the economy and the functioning of monetary policy, and further clarifies why the survey was introduced. Furthermore, the paper demonstrates that the value added of implementing a bank lending survey for the euro area lies in particular in the way it provides greater insight into developments in credit standards, non-interest rate credit conditions and terms, the risk perception of banks and the willingness of banks to lend. Credit standards are the internal guidelines or criteria of a bank which reflect the bank

No. 22
28 January 2005
Assessing potential output growth in the euro area - a growth accounting perspective, January 2005

Abstract

JEL Classification

E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

Abstract

For monetary policy purposes it is useful to apply a concept of potential output growth that looks through the fluctuations inherent in most model based estimates. Growth accounting can be a useful tool in this respect, given its focus on average developments in real GDP growth and supply side factors over medium to longer-term horizons. This paper describes the assumptions and measurement issues underlying the growth accounting framework and applies it to euro area data for the period 1980 to 2003. It shows that growth in measured total factor productivity has been the single most important contributor to real GDP growth over this period. However, the contribution to growth from this factor declined between the 1980s and the 1990s, while that from labour increased. Looking forward, the projected demographic developments imply a reduction in average real GDP growth in the coming decades unless compensation is achieved from other supply-side factors.

No. 21
26 November 2004
Governance of securities clearing and settlement systems

Abstract

JEL Classification

G29 : Financial Economics→Financial Institutions and Services→Other

G34 : Financial Economics→Corporate Finance and Governance→Mergers, Acquisitions, Restructuring, Corporate Governance

L49 : Industrial Organization→Antitrust Issues and Policies→Other

K2 : Law and Economics→Regulation and Business Law

Abstract

In the context of securities clearing and settlement systems, the nature of governance arrangements acquires a dimension that goes beyond their traditional function in corporate law. They constitute a tool for regulators and central banks to achieve their respective policy goals relating to market operation, market integrity, and systemic stability. In the light of the analysis of this paper, and pending a further evolution in the regulation of securities clearing and settlement in the Community, the following conclusions can be drawn. Whatever the model of corporate governance used in a jurisdiction, securities clearing and settlement systems should adopt and ensure effective implementation of the highest corporate governance standards or best practices adopted or recommended for companies in the jurisdiction in which it operates as such standards or practices evolve over time. Generally, this would imply that securities clearing and settlement systems at minimum should adopt and implement the best practices recommended for listed companies.

No. 20
6 August 2004
The supervision of mixed financial services groups in Europe

Abstract

JEL Classification

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

Over time, the banking, insurance and securities sectors have become increasingly interlinked and one way through which this occurs is via financial conglomerates. Such groups, in particular those that combine banking and insurance, have over time become more important in Europe. They require an appropriate regulatory and supervisory set-up to deal with the specific risks they raise. In the EU, this regulatory set-up was introduced with the Financial Conglomerates Directive (2002) and which Member States are now implementing into national law. The Directive introduces a regime of supplementary supervision, in addition to the one that already exists for the regulated entities of the conglomerate. The Directive covers areas such a capital requirements, intra-group transactions, large exposures, organisational requirements and information exchange between authorities. The paper further compares the regime in the US and the EU. It concludes with issues that might require attention from authorities in the future.

No. 19
31 July 2004
Sectoral specialisation in the EU: a macroeconomic perspective

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity

E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

Abstract

This paper analyses trends in sectoral specialisation in the EU and concludes the following: 1) The European production structure appears more homogenous than that of the US. 2) While sectoral specialisation has shown a slight increase in some smaller euro area countries towards the end-1990s, it is too early to detect any potential impact of EMU. 3) Despite some changes in sectoral composition, the business cycles of euro area countries became more synchronised over the 1990s, which may be seen as reassuring from the point of view of the single monetary policy. 4) Sectoral re-allocation accounts for as much as 50% of the increase in labour productivity growth in business sector services in the euro area. 5) The slowdown of European labour productivity growth relative to the US since the mid-1990s is explained by a stronger performance in the US wholesale and retail trade, financial intermediation and high-tech manufacturing sectors.

No. 18
30 July 2004
The international role of the euro: evidence from bonds issued by non-euro area residents

Abstract

Abstract

This paper analyses the main features of the market for euro-denominated bonds issued by non-euro area residents on the basis of a new database. It shows that large private corporations from mature economies have contributed significantly to the internationalisation of the euro since 1999, more than sovereigns in transition and emerging economies, whose part was initially expected to be stronger. It confirms that the euro

No. 17
26 July 2004
Corporate "excesses" and financial market dynamics

Abstract

Abstract

The recent corporate failures in the US and in Europe have considerably damaged investors

No. 16
22 June 2004
Market dynamics associated with credit ratings: a literature review

Abstract

JEL Classification

G10 : Financial Economics→General Financial Markets→General

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

G29 : Financial Economics→Financial Institutions and Services→Other

Abstract

This paper investigates the potential impact of the growing influence of the opinions of credit rating agencies (CRAs) on market dynamics. This impact can be seen as a consequence of the information content of the ratings themselves or indirectly as a consequence of the "hardwiring" of ratings into regulatory rules, management mandates, bond covenants, etc. Rating agencies who strive to provide credit assessments that remain broadly stable through the course of the business cycle have been themselves affected as the growing reliance on rating mean that they are increasingly expected to satisfy a widening range of constituencies with different and sometimes conflicting interests. They have responded to this challenge largely by adding more products to their traditional product palette but also through modifications in the rating process. It is however too early to say whether these changes mean a fundamental shift in their approach to credit risk measurement.

No. 15
25 May 2004
Quality adjustment of European price statistics and the role for hedonics

Abstract

JEL Classification

C10 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→General

C18 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Methodological Issues: General

C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

Abstract

In this paper we review the well-known problem of how to measure price developments when the quality of the underlying goods and services is changing over time. The importance of appropriate methods to take account of quality change is highlighted from the perspective of monetary policy. In particular, we highlight the need for credible and transparent price indicators. In this context, we review the hedonic approach to calculating quality-adjusted price indices and assess the available information on their effects as well as their potential for improving credibility and comparability. Current practices as regards quality adjustment in the European Union (EU) are also discussed, with particular emphasis on the Harmonised Index of Consumer Prices (HICP). Overall, we give a qualified endorsement of hedonics for specific product categories and make some suggestions about how the work on quality adjustment in the EU can be further developed, focusing in particular on the role of hedonics.

No. 14
5 May 2004
Measuring financial integration in the euro area

Abstract

JEL Classification

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

G15 : Financial Economics→General Financial Markets→International Financial Markets

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

Abstract

In this paper, we present a set of specific measures to quantify the state and evolution of financial integration in the euro area. Five key markets are considered, namely the money, corporate bond, government bond, credit and equity markets. Building upon the law of one price, we developed two types of indicators that can be broadly categorised as price-based and news-based measures. We complemented these measures by a number of quantity-based indicators, mainly related to the evolution of the home bias. Results indicate that the unsecured money market is fully integrated, while integration is reasonably high in the government and corporate bond market, as well as in the equity markets. The credit market is among the least integrated, especially in the short-term segment.

No. 13
29 April 2004
Fair value accounting and financial stability

Abstract

JEL Classification

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

M41 : Business Administration and Business Economics, Marketing, Accounting→Accounting and Auditing→Accounting

Abstract

Accounting standard setters are considering the wider use of fair value accounting. This paper focuses on the financial stability implications of a move in the banking sector from the current accounting framework to full fair value accounting. A simulation exercise is performed on how various external shocks affect the balance sheet of an average European bank under the two frameworks. The paper further investigates the impact of the alternative framework on the main balance sheet items, and the interaction with banks

No. 12
26 April 2004
Understanding the impact of the external dimension on the euro area: trade, capital flows and other international macroeconomic linkages

Abstract

JEL Classification

E : Macroeconomics and Monetary Economics

F : International Economics

Abstract

Overall, the paper underlines the difficulties in spelling out the transmission and the final effects of external shocks on the euro area, and highlights the complexity of the various direct and indirect mechanisms. We describe the main channels by which potential spillovers from external economic shocks may affect the euro area. Although the evidence is unclear on the extent to which the synchronisation of international cycles may have changed, the conclusion of the paper is that the

No. 11
29 February 2004
Official dollarisation/euroisation: motives, features and policy implications of current cases

Abstract

Abstract

Official and unilateral dollarisation/euroisation has become a common policy advice for emerging market economies. Against this background, the paper provides a comprehensive review of all the main cases of dollarisation/euroisation, analysing motives, features and policy implications of this exchange rate regime. The main results are that policies fostering integration with the anchor country, in particular fiscal transfers, tourism and offshore finance, have been crucial in supporting the exchange rate regime. To this end, most dollarised/euroised countries have exploited advantages that are largely prior to the choice of exchange rate regime, namely their small size, geographic proximity to the anchor country, and politically dependent status. Thus, recommending dollarisation/euroisation irrespective of countries’ ex ante degree of integration with the potential anchor country seems to bear considerable risks, as dollarisation/euroisation does not seem to be a straightforward substitute for integration.

No. 10
29 February 2004
The acceding countries’ strategies towards ERM II and the adoption of the euro: an analytical review

Abstract

Abstract

This paper reviews the strategies announced by the ten countries joining the European Union in May 2004 with regard to their intentions for participation in ERM II and the adoption of the euro. The paper examines the economic rationale of the monetary integration strategies declared by most acceding countries with a view to identifying also their potential risks. It does so by making use of several different approaches, including a short review of nominal convergence and a more extensive discussion from an optimum currency area perspective. An important part of the analysis is devoted to the implications of real convergence – i.e. catching-up growth in income and adjustment of the real economic structures towards those prevailing in the euro area – on the patterns of economic dynamics in acceding countries. Other aspects covered are the risks for external competitiveness in the convergence process and the appropriate pace of fiscal consolidation.

No. 9
13 February 2004
Fiscal adjustment between 1991 and 2002: stylised facts and policy implications

Abstract

JEL Classification

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy

H62 : Public Economics→National Budget, Deficit, and Debt→Deficit, Surplus

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

Abstract

This paper aims to assess whether the implementation of the European Union (EU) framework of fiscal rules has been successful in promoting budgetary consolidation in EU Member States. The paper focuses on the period 1991-2002. It reviews the patterns of budgetary adjustment adopted in the 1990s in the Member States by analysing the size and composition of budget measures, while also taking into account the initial state of public finances. Moreover, the paper looks at the behaviour of fiscal policy over the business cycle, examining the link between budgetary consolidation and the cyclicality of public finances. As a closely related issue, the paper points out conditions under which the negative effects of fiscal contractions on economic activity might possibly be minimised. It then looks at the experience of fiscal consolidation in the various countries and assesses whether countries have implemented adequate budgetary adjustments. Stylised facts show that Member States implemented major budgetary adjustments in the 1990s marking clear structural breaks in the policy regimes compared with the previous decade. However, most progress was made via revenue-based adjustment, including temporary measures, with insufficient emphasis put on primary expenditure restraint. In recent years,

No. 8
28 September 2003
An introduction to the ECB's survey of professional forecasters

Abstract

JEL Classification

C8 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

Abstract

This paper provides a detailed overview of the ECB

No. 7
28 December 2002
Economic relations with regions neighbouring the euro area in the "euro time zone"

Abstract

Abstract

This paper reviews the economic, monetary and financial relations between the EU and the euro area and a set of countries in a broad set of neighbouring regions. The 80 or so countries are mostly classified as transition, emerging or developing economies and belong to four main regions: the Western Balkans; the European part of the Commonwealth of Independent States; the Middle East and Northern Africa; and Sub-Saharan Africa. In many respects, these countries are diverse; however, some common features can also be identified. One of these common features is the fact that the euro area is their largest trading partner and the largest originator of international bank credit, foreign direct investment and official development assistance; meanwhile, from a euro area perspective, while these countries account for a somewhat smaller share of external trade, they are important as providers of energy, other raw materials and agricultural products.

No. 6
28 December 2002
Banking integration in the euro area

Abstract

Abstract

This paper provides an assessment of the degree of integration in banking services in the euro area. It diverges from the typical analysis on integration in the financial sector by focusing on the main financial products and services provided by banks to corporate and personal clients rather than on financial markets. As the “law-of-one-price” concept is often not applicable to banking products and services, a wide range of quantitative and qualitative indicators of integration is used in the analysis. Indicators of integration are reviewed for three product areas: wholesale (unsecured interbank loans and deposits, repo market) capital market-related (corporate finance services, asset management and trading) and retail (directed to households and small firms). The main conclusions are that while the market on wholesale banking services is strongly integrated and integration is advancing at a fast pace in capital market-related activities, market segmentation is still significant at the retail level.

No. 5
28 September 2002
The evolution of clearing and central counterparty services for exchange-traded derivatives in the United States and Europe: a comparison

Abstract

Abstract

This paper is organised as follows. Section 1 explains why issues concerning central counterparty clearing houses are of direct concern to central banks and why a comparison of the European and the US situation is of interest. Section 2 provides a comparative overview of the organisation of derivatives exchanges in the United States and in Europe. Section 3 focuses on the organisation of clearing, covering a broad range of aspects. Section 4 analyses operational developments in international risk management practices and arrangements. Section 5 discusses various forms of structural consolidation in the clearing and settlement infrastructure by highlighting the different approaches taken in the United States and in Europe. Section 6 is devoted to the roles of central banks and financial market regulators regarding clearing and to the challenges they face as a result of current innovations in clearing arrangements. Finally, Section 7 summarises some of the main findings.

No. 4
28 July 2002
Labour force developments in the euro area since the 1980s

Abstract

Abstract

This paper aims, first, at assessing the relative importance of working age population and participation rates to explain labour force developments in the euro area between 1983 and 2000. It also compares participation rates in the euro area vis-à-vis the US, considering age and gender groups. It shows that the effect of population growth on labour force developments is losing importance relative to the effects of changes in the participation rate. Indeed, in the last few years, the effects of changes in the participation rate have exceeded those of the increase in working age population. This trend is expected to continue in the coming years. As regards the comparison of the euro area with the US, it shows a continuing large difference in women’s participation rate and among the youngest and oldest men’s age groups in the US versus the euro area, giving room for future positive contributions coming from participation in the euro area.

No. 3
28 May 2002
Estimating the trend of M3 income velocity underlying the reference value for monetary growth

Abstract

Abstract

This paper documents the analytical work that was carried out for the 2001 review of the assumption for the trend in M3 income velocity used to calculate the reference value for M3 growth. We analyse the medium-term trend in velocity using univariate time series tools and different money demand models. In addition, some cross-checking is carried out to address data compilation issues related to the accession of Greece in 2001 and to different weighting schemes used to aggregate historical euro area data. It is found that the trend decline in M3 income velocity over the medium term is within a range of 1/2% to 1% per year.

No. 2
28 February 2002
The effective exchange rates of the euro

Abstract

JEL Classification

F31 : International Economics→International Finance→Foreign Exchange

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

Abstract

This paper details the methodological framework underlying the construction of the effective exchange rate (EER) indicators of the euro. This framework yields two sets of indicators - (i) one nominal and several real EER indices against a narrow reference group of euro area trading partners based on different price and cost deflators; and (ii) a nominal and a real EER index against a broad reference group of countries based on consumer prices. The narrow group consists of 12 industrial and newly industrialised euro area partner countries, while the broad group is made up of 38 trading partners including emerging market economies and economies in transition. In addition the paper computes national competitiveness indicators for the individual euro area participating countries. Finally, recent developments in the international price and cost competitiveness of the euro area as well as of euro area countries are briefly discussed on the basis of the constructed indices.

No. 1
28 July 2000
The impact of the euro on money and bond markets

Abstract

JEL Classification

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

G15 : Financial Economics→General Financial Markets→International Financial Markets

O16 : Economic Development, Technological Change, and Growth→Economic Development→Financial Markets, Saving and Capital Investment, Corporate Finance and Governance

Abstract

The paper provides an analysis of the euro area money and bond markets and their infrastructure since the introduction of the euro. Significant development in terms of integration took place in both markets in general to a various degree for the different segments. However, there remain room for further integration after the first year of Stage III of EMU notably regarding the bond market which lags behind in terms of liquidity, market completeness and overall size compared to the US corporate bond market. Analysis of the barriers to integration, which do not seem to be specific to these markets but apply more generally to euro securities infrastructure, identifies fields where further action is required. This covers (i) the lack of availability of cross-border settlement on a DVP basis, (ii) the lack of standardised legal documentation for repos, (iii) the lack of common practices concerning settlement procedures, (iv) the lack or harmonisation of collateralisation processes between national central banks and interbank operations, (v) the heterogeneity in fiscal and accounting procedures and, (vi) the need for a clearing house.

Disclaimer: Please keep in mind that OPs are published in the name of the author(s). Their views do not necessarily reflect those of the ECB.