Carlo Altavilla, Refet Gürkaynak, Roberto Motto, Giuseppe Ragusa, 03 August 2020

Mapping the impact of central bank policy communications onto yield curve changes  is important but challenging. This column studies policy communications of the ECB and maps these communications onto yield curve changes by studying the information flow on days when a monetary policy decision is communicated. Using the now publicly available Euro Area Monetary Policy Event-Study Database,it finds that different monetary policy measures affect different segments of the interest rate term structure, with policy rate changes mostly influencing the short end of the curve, quantitative easing measures more the long end, and forward guidance policies affecting intermediate maturities. 

Maritta Paloviita, Markus Haavio, Pirkka Jalasjoki, Juha Kilponen, Ilona Vänni, 28 July 2020

The introductory statements made by the ECB are some of the most important sources of insight into the central banks’ policy goals. This column presents a textual analysis which seeks to measure the tone of the statements, with the aim of estimating the Governing Council's ‘loss function’. The results suggest that the ECB has been either more averse to inflation above the 2% ceiling, or that the de facto inflation target has been considerably below this threshold. The results also suggest that an inflation aim of 2%, combined with asymmetry, is a plausible specification of the ECB's wider preferences.

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

Ignazio Angeloni, 26 May 2020

In 2012, at the peak of the euro crisis, the leaders of the EU launched the banking union, involving the transfer of large parts of the banking regulatory and supervisory framework from the national domain to the euro area. This column introduces a new report which takes stock of this reform so far and proposes policy measures to improve its performance. It identifies three strategic goals for regulatory and supervisory action aimed at reviving the banking union: reduce overbanking among weaker players; favour consolidation and enhance efficiency among the stronger ones; strengthen balance sheets further, while encouraging area-wide diversification. The proposed measures cover, among other areas, the crisis management mechanism, with a revamp of the instruments and functions of the Single Resolution Board; banking supervision, to enhance the ECB’s action in the micro and macroprudential fields; and the state-aid controls in the banking sector.

Jeffrey Chwieroth, Andrew Walter, 23 May 2020

Although necessary, many of the economic policy responses to the COVID-19 crisis may end up damaging political incumbents in the medium and long term. This column presents evidence suggesting that voters expect great things from their leaders in deep crises. Yet the potential for great disappointment arises from the inevitable perceived inequities that will follow from the coronavirus crisis bailouts. As the pandemic exacerbates existing divisions within societies, the political costs predicted implies that only a minority of the most skilled political leaders are likely to survive this crisis.

Marcus Hagedorn, Kurt Mitman, 15 May 2020

Heterogeneous-Agent New Keynesian models offer new perspectives on fiscal and monetary policy interaction in the euro area. The current question is whether ECB measures are predominantly motivated to ensure price stability (with fiscal consequences a side effect), or whether they are motivated by an overriding economic policy objective. This column presents evidence that, according to the HANK models, there is no distinct separation between fiscal and monetary policy. Fiscal policy is an important determinant of inflation at the zero lower bound, and properly designed asset purchases are an effective instrument to satisfy the price stability mandate.

Giancarlo Corsetti, Aitor Erce, Antonio Garcia Pascual, 14 May 2020

Prominent voices propose financing the European Recovery Fund using joint perpetual debt. This column argues that there are gains from using European borrowing and lending as two separate policy levers. In a world of ultra-accommodative monetary policy, financing the Fund issuing debt at shorter maturities and passing those low interest rates onto member states through loans with low margin and with very long maturities is financially cheaper. Supporting the recovery through this maturity transformation would reinforce debt sustainability across the EU.

Thorsten Beck, Deyan Radev, Isabel Schnabel, 12 May 2020

Bank resolution regimes designed to deal with idiosyncratic bank distress have been widely established or upgraded over the last decade. This column shows however, that more comprehensive resolution regimes may increase systemic risk in response to a system-wide shock. Hence, bank resolution regimes may benefit from a macroprudential design, including a strictly defined financial stability exemption for bail-in rules during periods of systemic distress.

Laurence Boone, Álvaro Santos Pereira, 27 April 2020

The crisis faced by Europe is extraordinary and requires extraordinary responses. It is also a unique opportunity for Europe, and in particular the EMU, to consolidate its economic and financial architecture and to promote Europe as the engine of “shared prosperity”. This column argues that a significantly reinforced and revamped ESM or a new financial instrument based on joint issuance are possible vehicles to translate words into action. 

Roberto Perotti, 21 April 2020

In response to the pandemic, several proposals have been advanced to mobilise large amounts at the European level, mostly to address the needs of periphery countries. This column argues that because these proposals do not take into account the preoccupations of core countries, the outcome is likely to be general disappointment and recriminations. It offers an alternative proposal, based on the notion that periphery countries are much better equipped to make it on their own than is commonly thought, with a little help from the ECB.

Gavin Goy, Jan Willem van den End, 20 April 2020

The lockdown of economies during the COVID-19 crisis creates conditions in which private sector demand may fall unboundedly while precautionary savings increase. This column argues that the crisis will push down the equilibrium real interest rate further, which has been trending down since the 1980s. However, higher government spending to combat the crisis could counter this trend. The overall effect on the equilibrium interest rate will depend partly on the extent to which the increasing public debt can provide the private sector with a safe asset for holding precautionary savings.

Vesa Vihriälä, 15 April 2020

The high level of public debt in the euro area and doubts over debt sustainability in some member states mean that the fiscal expansion necessary to counter the Covid crisis will be challenging. This column argues for debt relief by the ECB that would allow all member states to finance the necessary fiscal measures in a normal fashion. While effectively forgiving past debt would create expectations that the same could happen again in the future, this moral hazard should be weighed against what is likely to happen without such relief. 

Robert McCauley, Catherine R. Schenk, 12 April 2020

A major source of vulnerability during global financial crises, both in the past and at present, is the severe shortage of US dollar funding around the world. This necessitates extensive central bank cooperation, in the form of central bank swap lines and other innovative solutions, to relieve the strain on dollar liquidity. This column evaluates the close cooperation between the Fed, BIS and other central banks in response to a strained eurodollar market in the 1960s, and compares this to other episodes in the 1990s, 2008 and 2020. The wide system of swaps that existed in the past amounted to a global financial net aimed at managing dollar liquidity and stabilising exchange rates.

Stephanie Ettmeier, Chi Hyun Kim, Alexander Kriwoluzky, 09 April 2020

The ongoing COVID-19 pandemic in Europe is severe and spreads economic uncertainty. This column explores the evolution of financial market participants’ expectations during the COVID-19 pandemic, estimating yield curves of bonds in France, Germany, Italy, and Spain. The authors carry out an event study to investigate the potential impact of European fiscal and monetary policy measures on these yields. The results suggest that policy measures must be large and coordinated on the European level, and that fiscal and monetary policy must act jointly to fight the pandemic’s negative economic consequences

Aitor Erce, Antonio Garcia Pascual, Ramon Marimon, 06 April 2020

Member states are currently debating how to finance the fight against COVID-19. As time is pressing, practical and readily implementable solutions are needed now. Using the ESM to provide the funds needed is a reasonable and workable way forward. Italy, Spain and other states would benefit from using the ESM access to AAA funding to reinforce their debt dynamics: a combination of loan size, maturity and interest rates would strengthen debt sustainability. This column shows the stabilisation power of an ESM-ECB intervention, using existing instruments and the just announced ESM Rapid Financing Instrument, showing the case of Italy as an example. Combining ECB support with ESM funds would deliver a more resilient euro area, better placed to engage in a post-virus economic recovery. The announced EIB guarantees and the SURE unemployment re-insurance will also help countries. However, these measures are not a supplement, but a complement, to the already feasible ESM financing discussed.

Lucrezia Reichlin, Dirk Schoenmaker, 26 March 2020

Fiscal and monetary policy coordination is not working in the euro area. This column argues that in order to rebalance the weight of both during major crises, the asymmetry between decision making at the ECB (by majority voting) and the ESM (by unanimity or qualified majority) must be harmonised. This is urgent since the ESM is the only instrument available to provide the common fiscal capacity needed to fight the COVID-19 pandemic.

Arnoud Boot, Elena Carletti, Rainer Haselmann, Hans‐Helmut Kotz, Jan Pieter Krahnen, Loriana Pelizzon, Stephen Schaefer, Marti Subrahmanyam, 24 March 2020

Francesco Giavazzi, Guido Tabellini, 24 March 2020

This war-like shock will require very large fiscal support. Its financing cost should be distributed over several generations. This can be achieved by issuing irredeemable or very long maturity Eurobonds. They should be backed by the ECB to keep the financing burden low. This column argues that no institutional or legal constraints prevent this policy response. Prompt action is critical since allowing one crisis to morph into many could disrupt the European project, with far-reaching and unpredictable political implications. 

Agnès Bénassy-Quéré, Ramon Marimon, Jean Pisani-Ferry, Lucrezia Reichlin, Dirk Schoenmaker, Beatrice Weder di Mauro, 11 March 2020

The unfolding coronavirus epidemic represents a severe economic stress test for Europe as well as a test of European unity. This column discusses how the crisis might unfold and the appropriate policy response. It advocates a comprehensive emergency package through which the EU would take responsibility for a meaningful share of the overall emergency effort.

Gabriele Cozzi, Matthieu Darracq Pariès, Peter Karadi, Jenny Körner, Christoffer Kok, Falk Mazelis, Kalin Nikolov, Elena Rancoita, Alejandro Van der Ghote, Julien Weber, 03 March 2020

Following the financial crisis, central banks and regulatory authorities assumed new powers to set macroprudential bank capital requirements. This column describes a number of macro models used by the ECB to measure the real impact of capital requirements and their interactions with monetary policy. It warns that a weaker banking system amplifies the impact of monetary policy and contributes to economic instability. Banks’ capital buffers are best augmented during times of affluence, when looser monetary policy can mitigate the costs of increasing capital requirements.

Pages

Events

CEPR Policy Research