Blog Post

Central bank rates deep in shadow

Measuring the impact of monetary policy on the economy at the zero lower bound is difficult. After 2008, central banks cut policy rates close to zero and implemented various unconventional measures, such as large-scale asset purchases in the United States, United Kingdom and Japan, or long-maturity lending to banks in the euro area.

By: Date: December 5, 2014 Topic: European Macroeconomics & Governance

Measuring the impact of monetary policy on the economy at the zero lower bound is difficult. After 2008, central banks cut policy rates close to zero and implemented various unconventional measures, such as large-scale asset purchases in the United States, United Kingdom and Japan, or long-maturity lending to banks in the euro area. More recently, the European Central Bank cut deposit rates below zero and started the purchase of asset backed securities and covered bank bonds. Such unconventional measures are not reflected in key policy rates, which are stuck near zero.

At the zero lower bound other monetary indicators are needed. As I argued in a recent working paper, a properly measured indicator of money (the so-called Divisia-money) is one such indicator. Another indicator is a so-called estimated shadow interest rate. Such rates are estimated for the US, UK and euro area by Jing Cynthia Wu and Fan Dora Xia, who utilised information from the term structure of interest rates in an unobserved components model. Their shadow rate estimates are virtually the same as the policy rates when policy rates were well above zero, but their shadow rate estimates turned negative for certain periods when the policy rates were very close to zero. Money and shadow rates are interlinked: in my working paper I found that a fall in the shadow rate increases Divisia-money growth and in turn an increase in Divisia-money growth increases GDP growth.

In a post seven months ago, Ashoka Mody plotted shadow rate estimates for the US and the euro-area and argued that the ECB must and can act. Since the ECB has announced a number of monetary policy measures since then, let’s look at more recent shadow rate developments.

Policy rates and estimated shadow rates (%)

Sources: Jing Cynthia Wu’s website for shadow rates, ECB, Bank of England and Federal Reserve Board for policy rates.

The figure suggests that the ECB achieved a much less accommodative monetary stance than the Federal Reserve and the Bank of England. The recent measures (negative deposit rate, new long term refinancing operations and some asset purchases) pushed the estimated shadow rate below zero, yet it is still much higher than the approximately minus 3 percent shadow rates estimated for the US and UK for 2013-14, even though quantitative easing has ended there.

Since both the current inflation (0.3% in November 2014) and expected inflation (see Silvia Merler’s post on this) in the euro area is well below the inflation in the US and UK and well below 2%, there is indeed a strong case for the ECB to act. Ashoka Mody is right that the ECB is again well behind the curve.

A sizeable quantitative easing programme can have an impact in the euro area too, as we argued in a policy contribution I wrote with Grégory Claeys, Silvia Merler and Guntram B. Wolff in May this year. A good starter would be the purchase of European debt, which currently has an eligible pool of around €490 billion of EFSF, ESM, EU and EIB bonds.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article More by this author

Blog Post

Latest data shows developing trends in the European Central Bank’s refinancing operations

The stock of liquidity supplied through the ECB’s open market operations has remained relatively stable, though there is a clearer change in the country composition.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: December 12, 2017
Read about event More on this topic

Upcoming Event

Dec
13
11:00

Better policies for people on the move

This event will feature the launch of a new Bruegel study on the impact and integration of migrants in the European Union.

Speakers: Manu Bhardwaj, Elizabeth Collett, Zsolt Darvas, Eva Degler, Maria Demertzis, Arjen Leerkes, Rainer Münz, Matthias Oel, Alessandra Venturini and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Blog Post

The DSGE Model Quarrel (Again)

Dynamic Stochastic General Equilibrium models have come under fire since the financial crisis. A recent paper by Christiano, Eichenbaum and Trabandt – who provide a defense for DSGE – has generated yet another wave of reactions in the economic blogosphere. We review the most recent contributions on this topic.

By: Silvia Merler Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 11, 2017
Read article More on this topic More by this author

Blog Post

Sovereign Concentration Charges are the Key to Completing Europe’s Banking Union

The past crisis revealed that most euro-area banks have disproportionate sovereign exposure in their home country. Charging banks for sovereign concentration is one solution to this issue, and would help advance the discussion on banking union.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: December 7, 2017
Read about event More on this topic

Past Event

Past Event

Health care and macro-economics in Europe

What are the strengths and challenges of health care systems in each EU country? What are the common policy priorities and opportunities for EU value added?What role do healthcare systems play in public finances and macroeconomic developments? What are the economic values of investing in healthcare?

Speakers: Zsolt Darvas, Caroline Costongs, Per Eckefeldt, Sylvain Giraud, Petra Laux and Xavier Prats Monné Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 7, 2017
Read article More on this topic

Blog Post

Promoting intra-regional trade in the south of the Mediterranean

Regional integration is still a sure way for economies in development to achieve economic growth on the global market. The south of the Mediterranean has still a low level of intra-regional trade integration, dominated by some overlapping trade agreements and political instability. The EU has the opportunity to play a decisive role, promoting and coordinating the process.

By: Filippo Biondi and Maria Demertzis Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Blog Post

The eurozone medley: a collection of recent papers on the future of euro-area governance

Our scholars Grégory Claeys, André Sapir, Dirk Schoenmaker, Nicolas Veron and Guntram B. Wolff, explore the next steps needed to create a more functional and coherent economic governance framework.

By: Bruegel Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Blog Post

How the EU has become an immigration area

Natural change of EU28 population (the balance of live births and deaths) has fallen from high positive values in the 1960s to essentially zero recently, while the previous close-to-zero net immigration has turned positive and, since the early 1990s, become a more important source of population growth than natural increase

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More by this author

Blog Post

The European Union with the Community of Latin America and the Caribbean: where do we stand?

Latin American and Caribbean countries have deep historical, political, cultural, and economic ties with Europe, and cooperation between the two regions has been intensifying recently. Here we report some of the main trends in trade, foreign direct investment, and agreements between the European Union and The Community of Latin American and Caribbean States, the European Union’s official counterpart in the bi-regional strategic partnership that commenced in 1999.

By: Francesco Chiacchio Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 5, 2017
Read article More by this author

Opinion

EU should pay member states to get rid of coal

The European Union should act to ensure the continued transformation of its energy system, and encourage member states to overcome their dependence on coal for supplying electricity. Helping coal-mining regions with the transition should require €150 million per year – a mere 0.1% of the total EU budget – and the EU would not even need to establish a new fund to support it.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: December 5, 2017
Read article More on this topic More by this author

Opinion

The European Commission should drop its ill-designed idea of a finance minister

Beyond the opposing ideas of Jean-Claude Juncker and Wolfgang Schäuble for future euro-area governance, Guntram Wolff explores how alternatives such as a reformed Eurogroup might yield more effective fiscal policy-making.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 4, 2017
Read about event More on this topic

Past Event

Past Event

Flexicurity and labour market reforms in Europe

This event will discuss the potential of the flexicurity model as employment strategy and the way it could be implemented in European countries to be successful.

Speakers: Grégory Claeys, Philip Collins, Werner Eichhorst, Antoine Foucher, Maria Jepsen and Marco Leonardi Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 4, 2017
Load more posts