Financial institutions

Recent changes in consumers’ medium-term inflation expectations – a detailed look

02/24/2023 European Central Bank Central banks

In this article we exploit the richness and flexible design of the CES to explore in detail recent changes in consumers’ medium-term inflation expectations. The data suggest that over the course of 2022 these expectations became less well anchored around the ECB’s 2% inflation target. By taking the necessary actions and actively communicating how monetary policy is contributing to stabilising future inflation, the ECB can help strengthen public trust and prevent recent price and cost shocks from having longer-lasting inflationary effects.

Recent changes in consumers’ medium-term inflation expectations – a detailed look

02/24/2023 European Central Bank Central banks

The safe asset potential of EU-issued bonds

01/16/2023 European Central Bank Central banks

A safe asset is of high credit quality, retains its value in bad times and is traded in liquid markets. We show that bonds issued by the European Union (EU) are widely considered to be of high credit quality, and that their yield spread over German Bunds remained contained during the 2020 COVID-19 pandemic recession. Recent issuances under the EU’s SURE and NGEU initiatives helped improve EU bonds' market liquidity from previously low levels, also reducing liquidity risk premia. Eurosystem purchases and holdings of EU bonds did not impair market liquidity.

Model-based regulation: lending in times of Covid

12/20/2022 European Central Bank Central banks

When the coronavirus (COVID-19) pandemic struck, it was vital for many firms to retain access to funding from banks. In order to calculate their capital requirements, banks measure borrowers’ credit risk using either “their own”, internal ratings-based (IRB) models, or a standardised approach. This analysis examines whether model-based bank regulation constrained lending during the COVID-19 crisis. Results show that banks using their own models extended less credit than banks using a standardised approach.

Financial stability and macroprudential regulation under diagnostic expectations

11/23/2022 European Central Bank Central banks

Recent empirical findings (Bordalo et al., 2018, 2019; Greenwood et al., 2022) have vindicated the view thatsystemic risk in financial markets is also influenced by cognitive misperceptions about future economicdevelopments in addition to being influenced by financial frictions. Most of the literature on macroprudentialregulation, nonetheless, has omitted those misperceptions and instead has derived policy implicationsassuming rational expectations.

Cold hard (digital) cash: the economics of central bank digital currency

10/31/2022 European Central Bank Central banks

Central banks around the world are exploring the case for central bank digital currency (CBDC) – essentially a digital version of cash. In this article, we provide an overview of the economics of CBDC (Ahnert et al., 2022a). First, we outline the economic forces that shape the rise of digital money and motivate the current debate. We then look at the implications for monetary policy and financial stability before discussing policy issues and challenges. Finally, we highlight several areas where our understanding of digital money could be improved by further research.

Green QE and carbon pricing: looking at potential tools to fight climate change

09/28/2022 European Central Bank Central banks

While there is broad consensus that carbon pricing is an effective instrument for combatting climate change, the potential contribution of central banks is still debated. Central banks around the world have adopted different strategies to consider climate change in their monetary policy frameworks. This article focuses on green quantitative easing (QE). Compared with a carbon tax, we find that green QE would contribute only moderately to reducing global temperatures, while partially crowding out green private investment.

Striking a bargain: narrative identification of wage bargaining shocks

07/27/2022 European Central Bank Central banks

Labour market developments are important drivers of the business cycle and are therefore closely watched by monetary policymakers. One process with significant macroeconomic ramifications are wage negotiations, where workers and employers bargain over the surplus income generated by an employment relationship. Bargaining power determines how this surplus is split between negotiating parties. However, it is unobserved, and can be driven by a number of factors.

Systemic risk and policy interventions: monetary and macroprudential policy

06/24/2022 European Central Bank Central banks

Throughout the world, the global financial crisis fostered the design and adoption of macroprudential policies to safeguard the financial system. This raises important questions for monetary policy, which, by contrast, primarily focuses on maintaining price stability. What, if any, is the relationship between (conventional) monetary policy and macroprudential policy? In particular, how does the effectiveness of macroprudential policies influence the conduct of monetary policy? This article reviews recent theoretical and empirical research addressing these questions.

Europe's growing league of small corporate bond issuers: new players, different game dynamics

06/15/2022 European Central Bank Central banks

While historically only very large firms issued in the European corporate bond market, recent years have seen the entry of many new players: small, private, and unrated issuers. Firm-level data show these new players face different game dynamics. They are disconnected from aggregate market movements and still depend heavily on banks. This means hey could potentially affect financial stability and be less responsive to policy interventions.

Financial institutions

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