Enrico Perotti, 25 March 2020

Enrico Perotti tells Tim Phillips that while regulatory reform means that banks are unlikely to be at risk, the same is not true for the shadow banking sector. Does this threaten financial stability, and what should policymakers do about it?

Lorenzo Codogno, Paul van den Noord, 25 March 2020

The COVID-19 outbreak that is hitting the euro area economy needs to be met by a powerful policy response beyond the emergency measures already in place. This column uses an empirically calibrated model to show that the creation of a safe asset and fiscal capacity at the centre – on which the debate has been ongoing for a long while – would be a powerful means to mitigate the economic impact of the crisis.

Ignazio Angeloni, 24 March 2020

Banks are the key to providing financial oxygen to the economy, but the coronavirus pandemic is raising the risk that banks in the euro area will cease to function. This column argues that the return to normality we all crave requires, among other things, that banks be saved, and that this will not happen unless regulation is adapted and more public support is provided.

Enrico Perotti, Oscar Soons, 18 February 2020

A monetary union among diverse economies enhances trade and financial integration, but also has redistributive effects. The column argues that the euro led to implicit devaluations and revaluations, boosting the productive incentives and fiscal capacity of strong members at the cost of others. The euro was thus a transfer union from the start, with implicit flows from the periphery to the core. 

Antonio Conti, Elisa Guglielminetti, Marianna Riggi, 13 February 2020

The weak relationship between wage dynamics and unemployment in the euro area since the Global Crisis is widely perceived as one of the main causes of the ‘twin puzzle’ of missing disinflation between 2009 and 2011, and missing inflation thereafter. This column attributes the weak response of nominal wage growth to employment dynamics since 2008 to the countercyclical behaviour of labour productivity, which is driven, in turn, by the exceptionally high persistence of the downturn and the subsequent recovery.

Michael Ehrmann, Marek Jarociński, Christiane Nickel, Chiara Osbat, Andrej Sokol, 05 February 2020

Inflation in advanced economies fell by less than expected in the wake of the financial crisis, while more recently, measures of slack and underlying inflation in the euro area have seen a disconnect. These and other inflation developments since the Global Crisis have surprised policymakers, practitioners, and academics alike. This column outlines the evidence presented at a recent ECB conference which aimed at enhancing collective understanding of the drivers and dynamics of inflation. 

Laurence Ball, Sandeep Mazumder, 04 February 2020

Inflation did not fall as much as the textbook Phillips curve would predict during Europe’s recessions of 2008 and 2011, and it has not risen as much as the theory would predict during recovery. This column argues that adapting the Phillips curve to use a weighted median of industry inflation rates results in a much better fit with observed inflation. Adding the effect of headline inflation shocks improves the fit further.

Mariarosaria Comunale, Francesco Paolo Mongelli, 27 January 2020

Over the past 30 years, euro area countries have undergone significant changes and endured diverse shocks. This column assembles a large set of variables covering the years 1990-2016 and investigates possible links to fluctuations and differences in growth rates. The findings suggest a significant positive role for institutional integration in supporting long-run growth, particularly for periphery countries. Competitiveness and monetary policy also matter for sustained growth in the long run, while higher sovereign stress, equity price cycles, loans to non-financial corporations and debt over GDP have either mixed or negative effects in core and periphery countries.

Orkun Saka, 06 January 2020

European banks have been criticised for holding too much domestic government debt during the recent euro area crisis, intensifying the doom loop between sovereign and bank credit risks. This column deviates from previous research that focused on 'bad' reasons for holding sovereign debt, and points to a 'good' reason: an informational advantage that particular banks have regarding sovereigns. This seems to have had a role in the fragmentation of European government bond markets. 

Florian Heider, Farzad Saidi, Glenn Schepens, 17 December 2019

In recent years, several central banks have steered policy rates into negative territory for the first time in their history. The novel nature of negative rates raises several questions about how monetary policy operates in such non-standard territory. This column summarises recent research that focuses on the impact of negative policy rates on bank credit supply and bank risk-taking in the euro area. The findings point to a crucial role for bank deposits in the transmission mechanism of negative rates.

Christiane Nickel, Elena Bobeica, Gerrit Koester, Eliza Lis, Mario Porqueddu, Cecilia Sarchi, 25 November 2019

Wage growth in the euro area over 2013 to 2017 was subdued despite notable improvements in the labour market, leading some to claim a breakdown of the output–inflation relationship. This column presents comparative analyses of wage developments in the euro area, showing that the Phillips curve is alive and well and can be used to explain much of the weakness in wage growth during 2013-2017. Other factors also found to have played a role include compositional effects, the possible non-linear reaction of wage growth to cyclical improvements, and structural and institutional factors. 

Declan Costello, Annika Eriksgård Melander, Martin Hallet, 22 November 2019

Over the past ten years there has been a substantial rise in income per capita differences between Germany and France.However, it is not a given that the German economy will continue to outperform the French one, and indeed the picture has changed during 2019. This column argues that structural divergences between member states in the euro area contributed to nominal and real divergences, and suggests what can be done to foster convergence between the two countries. 

Carlo Altavilla, Lorenzo Burlon, Mariassunta Giannetti, Sarah Holton, 08 November 2019

Economists and policymakers continue to question the effectiveness of monetary policy when an economy faces near-zero or sub-zero interest rates. Sceptics argue that central banks cannot stimulate lending, and may indeed decrease the loan supply, by setting negative interest rates. This column shows that negative rates do not impede the transmission of monetary policy from banks to deposit holders because firms do not withdraw cash in response to negative rates the way households might. In fact, sub-zero rates may even stimulate the economy by encouraging firms to invest.

Laurence Boone, Marco Buti, 18 October 2019

After years of solid growth, worldwide economic activity has slowed down sharply in 2019 while global trade has stalled. At October’s annual meeting of the IMF, policymakers have the difficult task of addressing the immediate policy challenges to support economic growth while also preparing our economies for the future. This column argues that while monetary policy is widely recognised as facing increasing constraints, fiscal policy and structural reforms need to play a stronger role. In particular, fiscal policy could become more supportive, notably in the euro area. Undertaking the right type of public investment now – in infrastructure, education or to mitigate climate change – would both stimulate our economies and contribute to making them stronger and more sustainable. 

Thomas Hasenzagl, Filippo Pellegrino, Lucrezia Reichlin, Giovanni Ricco, 16 October 2019

What is happening to inflation and output in the euro area? The ECB has apparently lost the ability to raise inflation and price expectations have been sliding since the last recession. Much of the policy debate has focused on the flattening of the Phillips curve. Yet, as this column shows, estimations of the joint output-inflation process point to a decline of both output potential and trend inflation as the most relevant elements of the puzzle. 

Thorsten Beck, 04 October 2019

Carlo Altavilla, Luca Brugnolini, Refet Gürkaynak, Roberto Motto, Giuseppe Ragusa, 03 October 2019

High frequency data are an essential input to study the effects of monetary policy communication. This column introduces a new database, the Euro Area Monetary Policy Event-Study Database, which makes available intraday asset price changes around ECB policy announcements for a wide range of assets. The high resolution of the intraday data allows for the measurement of asset price changes separately for the press release and press conference windows.

Spyros Alogoskoufis, Sam Langfield, 03 October 2019

At a leaders’ summit in June 2012, euro area governments recognised the imperative of breaking the doom loop resulting from sovereigns being exposed to bank risk and vice versa. But bank regulation still treats sovereign debt as risk-free and does not penalise concentrated portfolios. This column, part of the Vox debate on euro area reform, asks whether banks would reduce portfolio concentration in response to reforms, and whether they would reduce exposures to sovereign credit risk. Simulations show that the answer is never an unambiguous and simultaneous ‘yes’ to both questions under reforms envisaged by the Basel Committee on Banking Supervision.

Miguel Ampudia, Thorsten Beck, Andreas Beyer, Jean-Edouard Colliard, Agnese Leonello, Angela Maddaloni, David Marques-Ibanez, 20 September 2019

The decade since the Global Crisis has seen notable changes in the architecture of supervision, with separation of responsibility for monetary and financial stability having been reversed in many countries on the one hand, and a move towards more cross-border cooperation between supervisors on the other. This column discusses these two trends in Europe, where responsibility for supervision of the largest banks is housed in the same authority with responsibility for monetary policy, the ECB. It argues that the Single Supervisory Mechanism is a good reflection of the subtle economics of supervisory architecture and the many trade-offs that have to be taken into account.

Marcin Bielecki, Michał Brzoza-Brzezina, Marcin Kolasa, Krzysztof Makarski, 18 September 2019

The boom-bust cycle in the euro area periphery has almost toppled the euro. This column suggests that region-specific macroprudential policy could have substantially smoothed the credit cycle in the periphery and reduced the build-up of external imbalances. In contrast, common monetary policy could have stabilised output in both the periphery and the core slightly better, but it would have been incapable of significantly influencing either housing markets or the periphery’s trade balance. The column also offers policy guidelines in case internal imbalances should arise again in the euro area. 

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