Occasional papers published in 2016

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. 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.

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.