Mirco Balatti, Juan Carluccio, Francesco Chiacchio, Nuno Coimbra, Susana Parraga, Daniele Siena, Sebastian Stumpner, Fabrizio Venditti, Tina Žumer, 11 October 2021

Since the start of the pandemic, inflation has re-entered mainstream discussion. This column reviews the analysis of globalisation and inflation conducted in the context of the ECB strategy review. Although global factors (mainly commodity prices) matter for inflation synchronisation, their role in lowering both inflation and its sensitivity to the business cycle in advanced economies has been limited since the late 1980s. Global shocks can exert temporary pressure on price dynamics, but the destiny of inflation remains in the hands of central banks.

Silvia Albrizio, Ivan Kataryniuk, Luis Molina Sánchez, Jan Schaefer, 29 September 2021

Swap and repo lines have become an integral part of the ECB’s toolkit. During the Global Crisis and the Covid-19 pandemic, the ECB announced more than 28 agreements to provide euro liquidity to foreign exchange markets, mainly within Europe. This column shows that the mere announcement instilled confidence in foreign exchange markets, reducing the premium paid by recipient country agents to borrow euros. Moreover, these lines not only prevent negative spillbacks to the euro area, but also push domestic bank equity prices in euro area countries highly exposed via banking linkages to targeted countries.

Timo Löyttyniemi, 08 July 2021

Financial stability is at the core of central banking. This column assesses the various risks to financial stability stemming from climate change, which arise from physical risks, transition risks, and the chosen transition path towards a net zero economy. Additional risks arise from the changes in government policies, risks in green investments, mispricing of assets, and potential changes in metrics. The channels for financial instability are, as usual, the sustainability of government debt, the vulnerability of banking, and the volatility and liquidity of securities markets. Awareness of these additional financial stability risks could increase financial stability.

Philipp F. M. Baumann, Enzo Rossi, Michael Schomaker, 02 July 2021

The notion than an independent central bank reduces a country’s inflation has been embraced by academics, central bankers, and politicians all over the world. This is somehow puzzling, giving the ambiguity reported in empirical studies. This column argues that overall there is only a weak causal link from independence to inflation, if at all. Even a strong inflation-boosting impact from introducing central bank independence cannot be ruled out. These results are obtained from a statistical approach that has not yet been used in analyses of macroeconomic processes, although it exhibits properties well-suited to this end.

Peter Bofinger, Martin Hellwig, Michael Hüther, Monika Schnitzer, Moritz Schularick, Guntram Wolff, 08 June 2020

Itai Agur, Anil Ari, Giovanni Dell'Ariccia, 19 May 2020

Various central banks are currently weighing up the introduction of central bank digital currency. This column proposes a framework that captures the key features and studies the implications of such a payment system. Central bank digital currency can be designed with attributes similar to cash or deposits. Currency that closely competes with deposits would likely depress bank credit, while cash-like currency could lead to the disappearance of cash. The optimal central bank digital currency design hence trades off bank intermediation against the social value of maintaining diverse payment instruments. The currency could be interest-bearing, which may help alleviate this trade-off.

Paul De Grauwe, Yuemei Ji, 05 May 2020

In times of crisis and extreme uncertainty, forward-looking policymaking becomes difficult. In the midst of the Covid-19 crisis, major central banks appear to be adopting policies based on current conditions, rather than forecasts. This column generalises this observation in a behavioural macroeconomic model which compares forward-looking and current-looking monetary policy. Although both approaches perform similarly in normal times, current-looking monetary policy performs better in crisis periods. When uncertainty is extreme, prudent central banks should be guided by what they observe, and not by unreliable forecasts.

Jesús Fernández-Villaverde, Daniel Sanches, Linda Schilling, Harald Uhlig, 25 April 2020

The possibility and logistics of developing a central bank digital currency for the general public has attracted significant attention. Such an initiative would require central banks to be involved in financial intermediation and maturity transformation. This column explores the implications of such a venture by central banks using a classic banking model. With sufficient competition, a central bank digital currency can be beneficial and achieve the optimal allocation of funds. However, it also risks giving central banks excessive monopoly power, which could result in inferior outcomes.

Francesco D'Acunto, Ulrike Malmendier, Michael Weber, 15 November 2019

Policymakers seek to manage inflation expectations, but we understand little about how households form and update their expectations of inflation. The column tests Lucas's conjecture that the price changes households observe, rather than all price changes, drive expectations. A measure of individual household consumption weighted by the frequency of purchase is a statistically and economically significant driver of households' expectations. This challenges the modelling assumptions that central bank policymakers currently make.

Michael Ehrmann, Gaetano Gaballo, Peter Hoffmann, Georg Strasser, 01 August 2019

Forward guidance – communication by a central bank about the likely future path of interest rates – usually reduces uncertainty. This column argues that how this is done in practice matters, however, because forward guidance with a short time horizon can raise uncertainty. This occurs if the forward guidance impairs the aggregation of private information in financial markets, thus making market prices less informative.

Emanuele Borgonovo, Stefano Caselli, Alessandra Cillo, Donato Masciandaro, Giovanni Rabitti, 12 March 2019

Alongside liquidity and store of value, is privacy an important attribute of money? Using laboratory experiments, the column shows that privacy matters, and increases the overall appeal of money. The experiments suggest that future competition between alternative currencies will depend on how the three properties are mixed.

Carlo Altavilla, Wolfgang Lemke, Roberto Motto, Natacha Valla, 28 February 2019

The ECB Conference on Monetary Policy took place in Frankfurt from 29 to 30 October 2018. This column describes presentations on topics including the interaction of monetary policy and financial markets, the relevance of banks and credit flows for monetary policy transmission, and the current challenges for monetary policy frameworks and strategies. The conference provided a forum for academic research and the practice of central banking to meet. 

The Editors, 26 February 2019

Philip Lane, a CEPR Research Fellow, will soon become the ECB's chief economist. Read this selection of his columns to find out his opinions on the euro area, financial stability, and monetary policy.

Olivier Coibion, Yuriy Gorodnichenko, Michael Weber, 22 February 2019

Monetary policy increasingly relies on communication, but most households are unaware of inflation targets or monetary policy announcements. This column uses large-scale randomised controlled trial of US households to study how different forms of communication influence the inflation expectations of individuals. Reading the Federal Open Market Committee statement has about the same average effect on expectations as being told about the Federal Reserve’s inflation target. Reading a news article about the same statement cuts the effect by half. 

Wei Cui, Vincent Sterk, 09 January 2019

The effects of quantitative easing are poorly understood, in part because standard models of monetary policy predict that it doesn't work. This column uses a model in which households can be unequal and hold assets with different degrees of liquidity to show that quantitative easing can provide a powerful stimulus to the macroeconomy, and that it avoided a large decline in output and inflation during 2009. Nevertheless, side-effects on inequality mean that social welfare tends to be lower under quantitative easing than under conventional policy.

Pierre Siklos, Samantha St. Amand, Joanna Wajda, 16 December 2018

There is an ongoing debate regarding how far central bankers, as unelected technocrats, should go outside of their remit when communicating in public fora. This column uses a machine-learning algorithm to assess the topics of speeches by officials at the US Federal Reserve and Bank of Canada over the last two decades. It concludes that the topics of central bankers’ speeches have not significantly widened in scope relative to their mandate documents.

Anna Cieslak, Andreas Schrimpf, 22 October 2018

Central bank communication affects asset prices and therefore the broader economy, but the channels through which this happens are not clear. The column proposes a novel approach to distinguishing the types of news. In more than half of communication events, the non-monetary component dominates the market reaction to central bank communication.

Davide Debortoli, Jinill Kim, Jesper Lindé, Ricardo Nunes, 17 September 2018

Previous studies have suggested that for central banks, a focus on inflation stabilisation is enough to stabilise other macroeconomic variables, and that focusing on economic activity can even be harmful. Using a model similar to those in use at central banks, this column studies the welfare implications of increasing the weight on economic activity in the central bank’s objective. The results suggest that stabilising measures of economic activity should be one of the primary objectives of central banks, as important as or even more important than stabilising inflation around its target. 

Thomas Lustenberger, Enzo Rossi, 04 March 2018

Most central banks communicate more openly with the markets than they did 20 years ago. The column argues that more speeches, more forward guidance, and more transparency has often worsened the accuracy of private-sector forecasts. Too much communication may be the problem, creating a cacophony of policy voices.

Giancarlo Corsetti, 22 January 2018

How can an economy be stabilised when there are high levels of public debt? In this video, Giancarlo Corsetti explains how central banks should have speculation under control. This video was recorded at the European Economic Association Congress held in Mannheim in August 2015.

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