Stephan Haroutunian, Sebastian Hauptmeier, Nadine Leiner-Killinger, Philip Muggenthaler, 13 May 2022

The economic landscape has changed dramatically since the European fiscal rules were designed some 30 years ago. This column contributes to the debate on reform by proposing a two-tier fiscal framework combining an expenditure rule that accounts for the ECB’s inflation objective with a lower speed of adjustment under the Stability and Growth Pact’s debt rule. Counter-cyclicality may be improved by automatic modulation of adjustment requirements, creating fiscal space when domestic inflation is low and constraining more when inflation is above target. The link to the debt anchor ensures a gradual phasing-in of debt reduction in the aftermath of COVID-19.

Lucrezia Reichlin, Giovanni Ricco, Anshumaan Tuteja, 14 April 2022

The ECB has to decide not only on the timing and speed of exit from monetary easing, but also on the sequence. This column uses an empirical model to show that a short-term interest rate tightening in the euro area has undesired effects on output, inflation, and stock market prices if it is coupled with a widening of sovereign spreads. To be effective, the combination of monetary policy instruments as well as the sequence of the use of the tools in the announced tightening cycle must ensure both an increase in the position of the ‘risk-free’ yield curve and control of sovereign spreads. 

Jean-Francois Jamet, Arnaud Mehl, Cyril Max Neumann, Fabio Panetta, 13 April 2022

Central banks around the world are exploring the possibility of issuing retail central bank digital currencies. This column takes stock of advances in research on their possible implications for financial stability and monetary policy depending on their design. It also identifies avenues for further research that could usefully inform future policy decisions on such currencies.

Veronica Guerrieri, 12 April 2022

In January 2023, the suspension of the EU's Stability and Growth Pact will expire. That means painful fiscal adjustments in countries struggling with the impact of Covid-19. A new proposal has a two-part solution to this problem.

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.    

Michael Ehrmann, Sarah Holton, Danielle Kedan, Gillian Phelan, 17 January 2022

Central bank communication, like monetary policy itself, has evolved significantly since the global financial crisis. This column reports on a survey among former ECB policymakers on the ECB’s monetary policy communication, which provides broad support for recent innovations in communication practices and suggests that communication with expert audiences is generally adequate. Nevertheless, it highlights some room for improvement along several dimensions, in particular related to communication with the wider public.

Leonardo D'Amico, Francesco Giavazzi, Veronica Guerrieri, Guido Lorenzoni, Charles-Henri Weymuller, 15 January 2022

In January 2023, the escape clause triggered to suspend the rules of the Stability and Growth Pact will expire, possibly forcing painful fiscal adjustments in countries that are already struggling with the impact of the pandemic. In this second column in a two-part series, the authors focus on the debt management aspect of their proposal to strengthen the European fiscal framework. They argue for moving a portion of national debts under the umbrella of a European Debt Management Agency, with the aim of reducing debt costs for the whole Union and helping the operations of the ECB in debt markets.

Jasper McMahon, Lucrezia Reichlin, Giovanni Ricco, 22 December 2021

The Federal Reserve has recently changed monetary stance and signalled a faster than anticipated pace of monetary tightening, while the ECB is more dovish. This column applies a statistical model to recent data on oil prices, inflation, expectations, labour markets and output, and finds that the model’s forecasts support the difference in stance of the two central banks. Based on an assessment of cyclical inflation being mostly driven by transitory energy price disturbances and a very small Phillips curve contribution in both jurisdictions, it predicts that in a year from now euro area HICP inflation will still be below the 2% target, at 1.75%, while in the US CPI inflation will be above, at 2.75%. 

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. 

Lucrezia Reichlin, Klaus Adam, Warwick J. McKibbin, Michael McMahon, Ricardo Reis, Giovanni Ricco, Beatrice Weder di Mauro, 03 December 2021

Michael Ehrmann, Alena Wabitsch, 29 November 2021

Monetary policy issues are discussed on social media by experts and also increasingly by non-experts, presenting a challenge to central banks using social media to communicate with their target audiences. This column analyses ECB-related tweets and finds that more subjective views and tweets expressed in stronger language are more likely to get retweeted, thereby shaping the tone of the virtual discussions. Both experts and non-experts are responsive to ECB communication – in most cases, information is simply relayed on Twitter, but there are also instances of controversial discussions being triggered. 

Johannes Breckenfelder, Victoria Ivashina, 27 November 2021

The onset of COVID-19 led to heightened uncertainty and a ‘dash-for-cash’, particularly in the mutual fund sector which faced fire sale pressure. Typically, banks trading securities absorb such pressure and support market liquidity, but regulation may limit their ability to do so. This column analyses the role of bank leverage constraints as an amplifier of bond market illiquidity. It concludes that leverage ratio regulation can have negative side effects by increasing bond market illiquidity in times of economic distress, suggesting that the optimal leverage ratio is procyclical.

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.

Margherita Bottero, Camelia Minoiu, José-Luis Peydró, Andrea Polo, Andrea Presbitero, Enrico Sette, 16 November 2021

Negative interest rates are a major innovation in monetary policy. This column uses data on bank-firm lending relationships and firms’ employment and investment decisions to show that after the introduction of negative interest rate policy by the ECB: (1) more exposed banks show a relatively higher increase in the supply of corporate loans; (2) this expansion of credit by more exposed banks is concentrated among low-capital banks, which rebalance their assets by increasing their share of loans to smaller and ex ante riskier firms; and (3) the increase in credit supply by more liquid banks is associated with sizeable firm-level real effects.

Thorsten Beck, 30 October 2021

Massimo Ferrari, Arnaud Mehl, Fabio Panetta, Ine Van Robays, 19 October 2021

Central banks around the world are weighing the pros and cons of issuing their own digital currency. This column identifies open research questions around the international macro-financial dimension of central bank digital currencies, including what is different about them, and what the implications for international central bank cooperation are. Addressing these questions would not only push the frontier of knowledge, it would also provide the conceptual backbone and evidence that could usefully inform future policy decisions on CBDCs. 

Lucile Crumpton, Ethan Ilzetzki, 14 October 2021

In July, the ECB issued its first Strategic Review since 2003. The latest CfM-CEPR survey investigates one component of the announced policy shift: the new definition of price stability. Most members of the panel of experts on the European economy support the ECB explicitly allowing inflation to exceed its target for extended periods to make up for below-target inflation in the past. This 60% majority has divided views on the optimal alternative policies, with the largest share supporting average inflation targeting and some members supporting nominal GDP targeting or hybrid policies. 40% of the panel would prefer to maintain the current policy of traditional inflation targeting.  

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.

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. 



CEPR Policy Research