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. 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.

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.

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.

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.

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.

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.

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.

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.

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.