Occasional papers published in 2006

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. 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.

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.