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Central bank intervention in the form of quantitative easing (QE) during times of low interest rates is a controversial topic. The author introduces a novel approach to study the effectiveness of such unconventional measures. Using U.S. data on six key financial and macroeconomic variables between 1990 and 2015, the economy is estimated by artificial neural networks. Historical counterfactual analyses show that real effects are less pronounced than yield effects.
Disentangling the effects of the individual asset purchase programs, impulse response functions provide evidence for QE being less effective the more the crisis is overcome. The peak effects of all QE interventions during the Financial Crisis only amounts to 1.3 pp for GDP growth and 0.6 pp for inflation respectively. Hence, the time as well as the volume of the interventions should be deliberated.
This study analyses potential consequences of exiting the Targeted Long-Term Refinancing Operations (TLTRO) of the European Central Bank (ECB). Thanks to its asset purchase programs, the Eurosystem still holds plenty of reserves even with a full exit from the TLTROs. This explains why voluntary and mandatory repayments of TLTRO III borrowing went smoothly. Nevertheless, the more liquidity is drained from the banking system, the more important becomes interbank market borrowing and lending, ideally between euro area member states. Right now, the usual fault lines of the euro area show up. The German banking system has plenty of reserves while there are first signs of aggregate scarcity in the Italian banking system. This does not need to be a source of concern if the interbank market can be sufficiently reactivated. Moreover, the ECB has several tools to address possible future liquidity shortages.
This document was provided/prepared by the Economic Governance and EMU scrutiny Unit at the request of the ECON Committee.
The Eurosystem and the Deutsche Bundesbank will incur substantial losses in 2023 that are likely to persist for several years. Due to the massive purchases of securities in the last 10 years, especially of government bonds, the banks' excess reserves have risen sharply. The resulting high interest payments to the banks since the turnaround in monetary policy, with little income for the large-scale securities holdings, led to massive criticism. The banks were said to be making "unfair" profits as a result, while the fiscal authorities had to forego the previously customary transfers of central bank profits. Populist demands to limit bank profits by, for example, drastically increasing the minimum reserve ratios in the Eurosystem to reduce excess reserves are creating new severe problems and are neither justified nor helpful. Ultimately, the EU member states have benefited for a very long time from historically low interest rates because of the Eurosystem's extraordinary loose monetary policy and must now bear the flip side consequences of the massive expansion of central bank balance sheets during the necessary period of monetary policy normalisation.
We study the redistributive effects of inflation combining administrative bank data with an information provision experiment during an episode of historic inflation. On average, households are well-informed about prevailing inflation and are concerned about its impact on their wealth; yet, while many households know about inflation eroding nominal assets, most are unaware of nominal-debt erosion. Once they receive information on the debt-erosion channel, households update upwards their beliefs about nominal debt and their own real net wealth. These changes in beliefs causally affect actual consumption and hypothetical debt decisions. Our findings suggest that real wealth mediates the sensitivity of consumption to inflation once households are aware of the wealth effects of inflation.
In the euro area, monetary policy is conducted by a single central bank for 20 member countries. However, countries are heterogeneous in their economic development, including their inflation rates. This paper combines a New Keynesian model and a neural network to assess whether the European Central Bank (ECB) conducted monetary policy between 2002 and 2022 according to the weighted average of the inflation rates within the European Monetary Union (EMU) or reacted more strongly to the inflation rate developments of certain EMU countries.
The New Keynesian model first generates data which is used to train and evaluate several machine learning algorithms. They authors find that a neural network performs best out-of-sample. They use this algorithm to generally classify historical EMU data, and to determine the exact weight on the inflation rate of EMU members in each quarter of the past two decades. Their findings suggest disproportional emphasis of the ECB on the inflation rates of EMU members that exhibited high inflation rate volatility for the vast majority of the time frame considered (80%), with a median inflation weight of 67% on these countries. They show that these results stem from a tendency of the ECB to react more strongly to countries whose inflation rates exhibit greater deviations from their long-term trend.
There is much discussion today about a possible digital euro (PDE). Is this attention exaggerated? Are “central bank digital currencies” (CBDCs) “a solution in search of a problem”, as some have argued? This article summarizes the main facts about the PDE and concludes that, if the decision on adoption had to be taken today, the arguments against would outweigh those in favor. However, there may be future circumstances in which having a CBDC ready for use can indeed be useful. Therefore, preparing is a good thing, even if the odds of its usefulness in normal conditions are slim.