Luc Laeven, Angela Maddaloni, Caterina Mendicino, 12 April 2022

Monetary and macroprudential policies are key components of the central bank toolkit. This column argues that, when evaluating these policies, their trade-offs and interactions must be taken into account. Macroprudential policy may face a trade-off between credit growth and risk, whereas the trade-off in monetary policy concerns the intermediation capacity of banks and their risk taking. While monetary and macroprudential policies can both safeguard financial stability, the authors argue that the latter should be the first line of defence. These considerations have significant implications for central banks when deciding policy actions.    

Laurent Ferrara, Matteo Mogliani, Jean-Guillaume Sahuc, 07 April 2022

Following the Russian invasion of Ukraine on 24 February 2022, financial stress indicators suddenly increased. Using this high-frequency daily information conveyed by financial markets, this column presents a newly developed mixed-frequency quantile regression model in order to quantify macro risks in the euro area for the first quarter of 2022. The authors show that macro downside risks perceived by financial markets in the euro area are about three times higher than those for the US economy.

Stefano Micossi, 01 April 2022

There have been various proposals for how to manage the sovereign debt portfolio accumulated by the Eurosystem in its efforts to raise inflation and provide emergency support in response to the pandemic. This column argues that the euro area needs a new mechanism to free the Eurosystem of the encumbrance of its sovereign portfolio. Such a mechanism cannot be provided by the Eurosystem itself, since this would eventually be inconsistent with its mandate. Instead, the European Stability Mechanism could perform that task while respecting all relevant European law.

Roel Beetsma, Jacopo Cimadomo, Josha van Spronsen, 14 March 2022

The global crisis and Covid-19 pandemic highlighted the limitations of the European Economic and Monetary Union, particularly the lack of a fiscal union for cross-border risk sharing. This column proposes a central fiscal capacity for the euro area in which transfers to/from regions are driven by euro-area, country-specific, and region-specific shocks. The scheme can produce substantial stabilisation of regional growth with a limited need for the system as a whole to borrow in any given year. The success of the current Recovery and Resilience Facility will be an important litmus test for such a broader central fiscal capacity.

Klaus Adam, 25 February 2022

Inflation reduces economic welfare by distorting demand. But what is the inflation rate that minimises these distortions? Maybe it's a lot higher than our models assume, Klaus Adam tells Tim Phillips.

Read more about this research and download the free DP:
Adam, K, Gautier, E, Santoro, S and Weber, H. 2021. 'The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy'. CEPR

Barbara Baarsma, Roel Beetsma, 18 January 2022

An important vulnerability of the EU economy is high public debt levels. This column proposes revisions to the EU fiscal rules to stimulate debt reduction, which would create budgetary room for stabilisation and growth-promoting spending and also support growth convergence among member states. Climate investment should not interfere with the fiscal rules but be financed through an EU fund, in line with the idea of subsidiarity. It should co-exist with uniform pricing of all greenhouse gas emissions.

Kieran Mc Morrow , François Blondeau, Francesca D’Auria, Björn Döhring, Atanas Hristov, Christoph Maier, Anna Thum-Thysen, 10 December 2021

Strong policy actions have dampened the impact of Covid-19 on workers and businesses. Amid a rapid recovery, dents to potential output are set to remain limited and transitory. But many uncertainties persist and some economic scarring from the pandemic may only emerge over the coming years. This column summarises the insights from a recent conference on the implications of the Covid-19 recession for the EU’s growth potential. 

Ewa Stanisławska, Maritta Paloviita, 26 November 2021

The responsiveness of longer-term inflation expectations to shorter-term economic developments plays an important role in inflation dynamics. Using the new ECB Consumer Expectations Survey conducted in the middle of the Covid-19 pandemic, this column explores how consumers adjust their medium-term inflation views in response to changes in short-term inflation expectations and inflation perceptions. Covid-19 contributed to an increase in consumer inflation expectations, but greater trust in the ECB is associated with more muted responsiveness of inflation expectations.

Marco Buti, 18 November 2021

The global financial crisis was a particularly testing episode for the EU. Even more testing has been the impact of the Covid-19 pandemic that erupted in March 2020. In a new book, the Chief of Staff of the Commissioner for the economy and former Director General for Economic and Financial Affairs at the European Commission retraces the analytical underpinnings of the economic policy responses to the two crises. In this column, taken from the introduction to the book, he draws general lessons for the future of EU policymaking based on his personal involvement in crisis management and response.

Willi Koll, Andrew Watt, 10 September 2021

Inflation in the euro area has been well below the ECB’s target since 2013. This column proposes institutionalising nominal wage setting within the economic governance of the euro area to bring inflation on target. Such a policy would also address the built-in tendency for divergences in internal demand dynamics and competitiveness within the euro area. 

Lucrezia Reichlin, Giovanni Ricco, Matthieu Tarbé, 05 August 2021

Monetary policy has fiscal implications since its effect on interest rates, inflation and output relaxes or tightens the general government inter-temporal budget constraint. Inflation dynamics is the result of both monetary policy and the fiscal response to it via the adjustment of the primary deficit. This column discusses estimates of the fiscal responses to monetary policy in the euro area. It shows that the more modest impact of unconventional monetary policy easing on inflation, if compared with the impact of conventional easing, can be explained by a more modest increase in the primary deficit in the former case.

Niels Thygesen, Roel Beetsma, Massimo Bordignon, Xavier Debrun, Mateusz Szczurek, Martin Larch, Matthias Busse, Mateja Gabrijelcic, Laszlo Jankovics, Janis Malzubris, 16 June 2021

In its latest assessment of the euro area fiscal stance, the European Fiscal Board concludes that national policy plans for 2022 amount to an appropriate fiscal stance for the euro area as a whole. This column discusses how, against the backdrop of a strong economic rebound this year and next and the unwinding of emergency measures, the underlying fiscal deficit of the euro area should halve between 2021 and 2022, while nevertheless remaining well above pre-crisis levels. With significant fiscal support still in the pipeline, more targeted measures should avoid excess economic scarring and encourage sustainable growth while facilitating the green and digital transitions. 

Miguel Ampudia, Thorsten Beck, Alexander Popov, 11 June 2021

The trade-off between stability and growth has long been a subject of policy debate and informs views on the extent to which the supervision of banks should be centralised. This column presents analysis of the ECB’s Single Supervisory Mechanism, using the announcement of the mechanism and its implementation as a quasi-natural experiment. It finds that centralised bank supervision is associated with a decline in lending to firms, which is accompanied by a shift away from intangible investment and towards more cash holdings and higher investment in easily collateralisable physical assets.

Philipp Hartmann, Stefano Borgioli, Alina Kempf, Philippe Molitor, Francesco Paolo Mongelli, 28 May 2021

The coronavirus health crisis also had a strong impact on financial systems. This column discusses its effects on euro area financial integration and financial structure. It illustrates how decisive monetary, fiscal and prudential policy responses first contained and then reversed the initial sharp fragmentation in asset prices across member countries. Overall cross-border asset holdings, however, still have to recover. The emerging alignment between common monetary and fiscal measures through the adoption of the three European safety nets and the Next Generation EU recovery programme seem to have been a game-changer in this regard. The resilience of financial re-integration to potential future shocks to the Economic and Monetary Union, however, should be monitored going forward. The different phases of the pandemic also went along with sizeable shifts between different corporate financing tools and different financial intermediaries. 

Robin Döttling, Lev Ratnovski, 19 March 2021

Technological progress increases the importance of corporate intangible assets such as research and development knowledge, organisational structure, and brand equity. Using US data covering 1990 to 2017, this column shows that the stock prices and investment of firms with more intangible assets respond less to monetary policy shocks. Similarly, intangible investment responds less to monetary policy compared to tangible investment. The key channel explaining these effects is a weaker credit channel of monetary policy, as firms with intangible assets use less debt.

George Alogoskoufis, 23 February 2021

Greece experienced a deep recession in 2020, and pandemic relief measures have led to further increases in its exorbitantly high public debt. This column outlines three potential methods for dealing with increasing debt after the crisis: (1) increases in taxation/reductions of government spending, (2) debt restructuring and (partial) debt write-offs, or (3) a policy of ‘gradual adjustment’ in which economic growth helps the debt burden shrink relative to GDP over time. The precise policy mix will involve significant coordination among euro area countries, but Greece must also implement domestic reforms to facilitate a dynamic and sustainable recovery. 

Vincent Aussilloux, Adam Baïz, Matthieu Garrigue, Philippe Martin, Dimitris Mavridis, 19 February 2021

The Covid-19 crisis has presented policymakers across the euro area with an unprecedented challenge, not least of all because the shock has come to both the supply side and the demand side of the economy. This column presents a preliminary analysis of different nations’ responses so far, focusing on which measures have been deployed to address each side of the economic shock and where a ‘mixed approach’ has been taken to work in tandem. At a time where coordinated action may be needed, there is a concerning level of inconsistency in strategy. 

Stefano Corradin, Marie Hoerova, Glenn Schepens, 12 February 2021

Euro area money markets have gone through substantial changes and turbulent periods over the past 15 years. These have included the global and euro area sovereign debt crises, new liquidity and leverage requirements, and the expansion of the Eurosystem balance sheet through asset purchase programmes. This column discusses the interaction between money markets, new Basel III regulations, and central bank policies. The analysis shows that money market conditions worsen when financial stress increases, or if central bank asset purchases induce scarcity effects. It outlines implications of changing money market conditions for monetary policy implementation and transmission.

Ioana Duca-Radu, Geoff Kenny, Andreas Reuter, 09 February 2021

When interest rates cannot go any lower, the economy can be stabilised if consumers expect the rate of inflation to increase. Yet, the evidence for this stabilising effect has been very mixed. This column presents new evidence from a monthly survey of over 25,000 individual consumers across the euro area, showing that consumers are indeed more ready to spend if they expect inflation to be higher in the future. While generalised in the population, the stabilising effect is stronger when nominal interest rates ­are constrained at the lower bound.

Giancarlo Corsetti, Keith Kuester, Gernot Müller, Sebastian Schmidt, 27 January 2021

Recent evidence suggests flexible exchange rates do not always insulate economies from external shocks. This column provides novel evidence on how shocks that originate in the euro area spill over to its neighbour countries. In response to euro area shocks economic activity in the neighbour countries contracts as much as in the euro area – not only in countries that peg their currency to the euro, but also in those with a flexible exchange rate. It shows that a standard open economy model predicts this lack of insulation for floating exchange rates, provided the central bank targets CPI inflation. 

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