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Policy Contribution

Low long-term rates: bond bubble or symptom of secular stagnation?

Yields on European sovereign bonds have reached historically low levels in 2016. This secular decline in long-term sovereign yields is not limited to the euro area. Why are interest rates currently so low? Are low long-term trates justified by fundamental factors or is it an artificial phenomenon?

By: Date: September 26, 2016 Topic: European Macroeconomics & Governance

Yields on European sovereign bonds have reached historically low levels in 2016. The goals of this paper are to understand why interest rates are currently so low and to determine if this level is justified by fundamental factors, or if rates are artificially low because of unconventional monetary policies.

The decline in yields over the last 30 years is the result of various factors: the fall in inflation, lower risk premia in European countries, and most importantly the fall in the real interest rate driven by a secular decline in the ‘neutral’ rate.

Consequently, central banks are not fully responsible for the actual level of long-term real rates, because they adopt, to fulfil their price stability mandates, the necessary policies to influence market rates in order to make them consistent with neutral rates, over which they have little influence.

Low rates are the symptoms of our diseases, not their cause. It is therefore crucial to tackle the structural causes behind the fall in long-term rates, but also to find solutions for the harmful consequences that lower equilibrium rates could have for the conduct of monetary policy.

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Blog Post

Green bonds: who is to certify ‘sustainability’?

Poland’s issue of a green bond earlier this month was the country’s second financing of this type, and the first ever repeat issue by a sovereign. It has revived the debate as to whether there should be a single regulatory standard to certify the environmental quality of financial assets. This will be a key issue for the EU’s sustainable finance strategy which is due to be released shortly.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: February 19, 2018
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Blog Post

Venezuela’s hyperinflation

The International Monetary Fund forecasts Venezuelan inflation spiralling to 13,000 percent this year. As President Maduro is expected to introduce the “petro” cryptocurrency next week, we review economists’ recent (and less recent) opinions on the current crisis.

By: Silvia Merler Topic: Global Economics & Governance Date: February 19, 2018
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Blog Post

The exchange rate and inflation in the euro-area: words following facts

The reduced references in the speeches of the President and Vice-president of the ECB to exchange rate changes in assessing inflation developments correspond to a decreased pass-through from the exchange rate to inflation. So, as it should be, words have followed facts

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: February 16, 2018
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Policy Contribution

Tales from a crisis: diverging narratives of the euro area

Who gets the blame for the crisis? How did narratives of the crisis develop since 2007? The authors of this paper tried to identify the key crisis-related topics in articles from four opinion-forming newspapers in the largest euro-area countries.

By: Henrik Müller, Giuseppe Porcaro and Gerret von Nordheim Topic: European Macroeconomics & Governance Date: February 15, 2018
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Blog Post

The stock market slide

The stock market dropped last week, leading to questions and debates as to the underlying reasons. We review economists’ views on the issue.

By: Silvia Merler Topic: Finance & Financial Regulation Date: February 12, 2018
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Working Paper

Will macroprudential policy counteract monetary policy’s effects on financial stability?

How does monetary policy impact upon macroprudential regulation? What are the effects on financial stability? This working paper models monetary policy’s transmission to bank risk taking, and its interaction with a regulator’s optimization problem.

By: Itai Agur and Maria Demertzis Topic: Finance & Financial Regulation Date: January 24, 2018
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Blog Post

Macroprudential policy: The Maginot line of financial stability

The ability of macroprudential policies to assure financial stability and thus leave central banks free to assign the interest rate tool exclusively to price stability is unproven. As the Maginot line did not protect France from a German invasion in WWII, so macroprudential policy may not be sufficient to counter financial instability. Central banks should prepare to deal with dilemmas in the use of the interest rate.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: January 17, 2018
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Policy Contribution

European Parliament

Bank liquidation in the European Union: clarification needed

Critical functions and public interest. What role do they play in Member States’ decision to grant liquidation aid? The author of this paper looks at how resolution and liquidation differ substantially when it comes to the scope of legislation applicable to the use of public funds and how the diversity in national insolvency regimes is a source of uncertainty about the outcome of liquidation procedures.

By: Silvia Merler Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: January 10, 2018
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Opinion

Opportunities and risks in Europe in 2018

The new year could very well see the positive story of 2017 continue in Europe – but a number of looming policy and political problems cannot be ignored.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 30, 2017
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Opinion

Chinese banks’ improved asset quality cannot hide other phantoms

The recent improvement in asset quality cannot mask other growing concerns in China’s banking sector. Beyond liquidity concerns, other structural issues such as low profitability and insufficient generation of organic capital, are emerging.

By: Alicia García-Herrero and Gary Ng Topic: Finance & Financial Regulation, Global Economics & Governance Date: December 20, 2017
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External Publication

European Parliament

Critical functions and public interest in banking services: Need for clarification?

What is the role that the concepts of critical functions and public interest play in Member States’ decision to grant liquidation aid? Silvia Merler looks at the recent liquidation of two Italian banks to show how resolution and liquidation differ substantially when it comes to the scope of legislation applicable to the use of public funds.

By: Silvia Merler Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: December 18, 2017
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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
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