Occasional papers

Communication device to a broad audience

Our Occasional Paper Series (OPS) disseminates work carried out by, as a rule, ECB staff on subjects that relate to the main tasks and functions of the ECB and the ESCB. Occasional Papers (OPs) are addressed to a wide audience, including other policy-makers, financial analysts, academics, the media and the interested general public. Understanding the papers will normally require some prior knowledge of the topic.

No. 235
16 October 2019
Conditionality and design of IMF-supported programmes

Abstract

JEL Classification

F3 : International Economics→International Finance

F5 : International Economics→International Relations, National Security, and International Political Economy

Abstract

Conditionality is at the very heart of IMF lending and has been the subject of intense debates ever since the Fund’s inception. Its success is of crucial importance not only for countries’ chances of achieving the goals of IMF lending programmes, but also for the credibility of the Fund as a trusted adviser. This report provides information and a set of facts on the IMF arrangements approved after the global financial crisis, with a focus on ex post conditionality and on arrangements primarily financed through the General Resources Account (GRA). The analysis shows that between 2008 and 2018, the characteristics of IMF programmes evolved with the macroeconomic context; in particular, a tendency towards more structural conditionality and longer programme implementation horizons has emerged. In the aftermath of an IMF programme, all relevant macroeconomic variables tend to improve compared with the pre-programme period; in particular, external and fiscal positions improve considerably and growth typically rebounds, inflation declines and net private capital inflows stabilise or recover slightly. However, the improvement has generally fallen short of expectations, especially in terms of GDP growth and debt reduction. One area in which the effectiveness of IMF programmes has proven less than satisfactory is with serial borrowers, i.e. countries that fail to graduate from IMF financial assistance in due course. This highlights the importance of further analysing the factors behind the success of IMF programmes and points, inter alia, to the need to design and sequence the structural conditions attached to Fund loans more effectively

No. 234
30 September 2019
Early French and German central bank charts and regulations

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

N23 : Economic History→Financial Markets and Institutions→Europe: Pre-1913

Abstract

In some recent studies, the question of the origins of central banking has been revisited, suggesting that beyond Swedish and British central banking, a number of earlier European continental institutions would also have played an important role. However, it has often been difficult to access the charters and regulations of these early central banks – in particular in English. This paper contributes to closing this gap by introducing and providing translations of some charters and regulations of six pre 1800 central banks in France and Germany. The six early public banks displayed varying levels of success and duration, and qualify to a different degree as central banks. An overview table maps the articles of the early central banks’ charters and regulations into key central banking topics. The texts also provide evidence of the role of central banking legislation, and of the distinction between, on the one side, the statutes and charters of the banks, and on the other side the operational aspects which tend to be framed by separate rules and regulations. Finally, the texts provide evidence of the policy objectives of early central banks, including in particular those of a monetary nature. To put these documents into context, the objectives, balance sheet structure, achievements and closure of each central bank are briefly summarised.

No. 233
16 September 2019
Financial stability assessment for EU candidate countries and potential candidates

Abstract

JEL Classification

F31 : International Economics→International Finance→Foreign Exchange

F34 : International Economics→International Finance→International Lending and Debt Problems

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

G15 : Financial Economics→General Financial Markets→International Financial Markets

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper reviews and assesses financial stability challenges in countries preparing for EU membership, i.e. Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, Serbia and Turkey. The paper mainly focuses on the period since 2016 (unless the analysis requires a longer time span) and on the banking sectors that dominate financial systems in this group of countries. For the Western Balkans, the paper analyses recent trends in financial intermediation, as well as the two main challenges that have been identified in the past. Asset quality continues to improve, but the share of non-performing loans is still high in some countries, while regulatory, legal and tax impediments are still to be resolved in most cases. High unofficial euroisation is a source of indirect credit risk for countries with their own national legal tender, which calls for continued efforts to promote the use of domestic currencies in the financial system. At the same time, banking systems seem less prone to financial stress from maturity mismatches than certain EU peers. These risks are met with a solid shock-absorbing capacity in the Western Balkans, as exemplified by robust capital and liquidity buffers. Turkey experienced a period of heightened financial stress during 2018 and, while its banking system appears to have sufficient buffers to absorb shocks overall, significant forex borrowing of corporates and high rollover needs of banks in foreign exchange on the wholesale market constitute considerable financial stability risks.

No. 232
3 September 2019
Understanding low wage growth in the euro area and European countries

Abstract

JEL Classification

J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

Abstract

Despite notable improvements in the labour market since 2013, wage growth in the euro area was subdued and substantially overpredicted in 2013-17. This paper summarises the findings of an ESCB expert group on the reasons for low wage growth and provides comparable analyses on wage developments in the euro area as a whole and in individual EU countries. The paper finds that cyclical drivers, as captured by a standard Phillips curve, seem to explain much of the weakness in wage growth during this period, but not all of it. Going beyond the drivers included in standard Phillips curves, other factors are also found to have played a role, such as compositional effects, the possible non-linear reaction of wage growth to cyclical improvements, and structural and institutional factors. In order to increase the robustness of wage forecasts, the paper also proposes ready-to-use tools for cross-checking euro area wage growth forecasts based on wage Phillips curves. These are derived based on a comprehensive real-time forecast evaluation exercise

No. 231
30 August 2019
Taking stock of the functioning of the EU fiscal rules and options for reform

Abstract

JEL Classification

H11 : Public Economics→Structure and Scope of Government→Structure, Scope, and Performance of Government

H50 : Public Economics→National Government Expenditures and Related Policies→General

H6 : Public Economics→National Budget, Deficit, and Debt

Abstract

This paper reviews developments in fiscal rules in the European Union (EU) from the entering into force of the Treaty on European Union (the “Maastricht Treaty”), which laid the foundations for the euro, until today. It seems safe to say that fiscal positions in the EU and the euro area are now more favourable than they would have been in the absence of the Maastricht Treaty and the Stability and Growth Pact (SGP). However, the aggregate picture masks significant cross-country heterogeneity, with less progress where it would be needed most. Furthermore, the design of the rules has not always followed economic logic and has often been the product of political constraints, giving rise to some flaws in the framework from the outset. Repeated attempts to adjust the fiscal framework to a multitude of circumstances over the past 25 years have made it overly complex and incoherent. The paper concludes that, in its current shape, the SGP is an insufficient disciplining device in economic good times, with the consequence that there are no fiscal buffers, particularly in high-debt countries, to support growth in economic troughs. This, together with the absence of a central fiscal stabilisation instrument, puts the burden of stabilisation mostly on the single monetary policy. The paper also reviews reform options on how to render the fiscal framework more effective in bringing about sounder public finances and avoiding the procyclicality observed over the past two decades.

No. 230
29 August 2019
In search for stability in crypto-assets: are stablecoins the solution?

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

L17 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Open Source Products and Markets

O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes

Abstract

Stablecoins claim to stabilise the value of major currencies in the volatile crypto-asset market. This paper describes the often complex functioning of different types of stablecoins and proposes a taxonomy of stablecoin initiatives. To this end it relies on a novel framework for their classification, based on the key dimensions that matter for crypto-assets, namely: (i) accountability of issuer, (ii) decentralisation of responsibilities, and (iii) what underpins the value of the asset. The analysis of different types of stablecoins shows a trade-off between the novelty of the stabilisation mechanism used in an initiative (from mirroring the traditional electronic money approach to the alleged introduction of an “algorithmic central bank”) and its capacity to maintain a stable market value. While relatively less innovative stablecoins could provide a solution to users seeking a stable store of value, especially if legitimised by the adherence to standards that are typical of payment services, the jury is still out on the potential future role of more innovative stablecoins outside their core user base.

No. 229
23 August 2019
Are instant payments becoming the new normal? A comparative study

Abstract

JEL Classification

E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

As a result of technological advancements, instant delivery of digital services has become the norm in today’s society. Yet, until recently, this trend did not extend to retail payment services, which normally took one or up to a few working days from the end user's perspective. Following Europe’s recent launch of its own SEPA-wide instant payment platform, now is the time to ask the question: will instant payment services become “the new normal” and what would this new normal look like? This paper assesses the overall prospects of instant payments in the euro area. It identifies structural drivers and blockers to the adoption of instant payments based on the analysis of country cases where instant payments became operational in the last few years.

No. 228
12 August 2019
Role of cross currency swap markets in funding and investment decisions

Abstract

JEL Classification

D53 : Microeconomics→General Equilibrium and Disequilibrium→Financial Markets

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions

G15 : Financial Economics→General Financial Markets→International Financial Markets

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

Abstract

A US dollar funding premium in the EUR/USD cross currency swap market has been in existence since 2008. Whilst there are many reasons behind this dislocation, since 2014 the divergence in monetary policy between the euro area and the United States has played a growing role. This paper aims at exploring and gaining more insight into the role the Eurosystem’s Expanded Asset purchase Programme (APP) has had in guiding investment and funding decisions and its influence on the cross currency basis. The downward pressure on yields, exerted by the APP, has made euro assets less attractive and has led investors to search for yield abroad. At the same time, the decline in yields and tighter credit spreads have attracted US corporate issuers to the euro market in search of cheaper funding costs. These cross-border flows from issuers and investors have played a strong role in driving the US dollar funding premium. The purpose of this study is to gauge whether these changing trends in cross-border flows have implications for the implementation of the Eurosystem’s APP. Beyond the structural increase in the US dollar funding premium described above, a cyclical component has led to an amplification of the premium over balance sheet reporting dates, due to new bank regulations. This paper also analyses the behaviour of euro area banks in cross currency swap markets over balance sheet reporting dates, using the money market statistical reporting (MMSR) dataset in order to discern whether the increase in the US dollar funding premium at these specific points in time has an adverse impact on the transmission of monetary policy.

No. 227
17 July 2019
Macroprudential policy at the ECB: Institutional framework, strategy, analytical tools and policies

Abstract

JEL Classification

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

G20 : Financial Economics→Financial Institutions and Services→General

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

K23 : Law and Economics→Regulation and Business Law→Regulated Industries and Administrative Law

Abstract

This occasional paper describes how the financial stability and macroprudential policy functions are organised at the ECB. Financial stability has been a key policy function of the ECB since its inception. Macroprudential policy tasks were later conferred on the ECB by the Single Supervisory Mechanism (SSM) Regulation. The paper describes the ECB’s macroprudential governance framework in the new institutional set-up. After reviewing the concept and origins of systemic risk, it reflects on the emergence of macroprudential policy in the aftermath of the financial crisis, its objectives and instruments, as well as specific aspects of this policy area in a monetary union such as the euro area. The ECB’s responsibilities required new tools to be developed to measure systemic risk at financial institution, country and system-wide level. The paper discusses selected analytical tools supporting financial stability surveillance and assessment work, as well as macroprudential policy analysis at the ECB. The tools are grouped into three broad areas: (i) methods to gauge the state of financial instability or prospects of near-term systemic stress, (ii) measures to capture the build-up of systemic risk focused on country-level financial cycle measurement and early warning methods, and (iii) the ECB stress testing framework for macroprudential purposes.

No. 226
2 July 2019
Macroprudential stress test of the euro area banking system

Abstract

JEL Classification

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

No. 225
19 June 2019
Firm heterogeneity and trade in EU countries: a cross-country analysis

Abstract

JEL Classification

F14 : International Economics→Trade→Empirical Studies of Trade

L25 : Industrial Organization→Firm Objectives, Organization, and Behavior→Firm Performance: Size, Diversification, and Scope

Abstract

Firms are heterogeneous, even within narrowly defined sectors. This paper surveys the relevant theoretical and empirical literature on firm heterogeneity and external trade. By innovatively exploiting rich cross-country micro-aggregated data sourced from the ECB Competitiveness Research Network (CompNet), this study then investigates the main implications of firm heterogeneity for trade of EU countries, showing a set of stylised facts. On the one hand, exporting firms are larger, more productive and pay higher wages than non-exporting firms. Only these firms are able to bear export costs, related to various factors, such as tariff and non-tariff trade barriers, the quality of the legal system or access to finance. Hence, only few enterprises actually export, and the intensity of aggregate export concentration within few large firms varies across countries and sectors. On the other hand, opening to trade boosts individual firms’ productivity growth, via a number of channels, and also enhances allocative efficiency across firms, in turn increasing aggregate productivity growth. One of the main standard determinants of export growth, namely changes in the real effective exchange rate, impacts aggregate performance differently across countries and sectors, depending on sectoral composition and on firm characteristics within a given sector

No. 224
13 June 2019
Economic structures 20 years into the euro

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E60 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

F10 : International Economics→Trade→General

J11 : Labor and Demographic Economics→Demographic Economics→Demographic Trends, Macroeconomic Effects, and Forecasts

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

Abstract

Well-functioning economic structures are key for resilient and prospering euro area economies. The global financial and sovereign debt crises exposed the limited resilience of the euro area’s economic structures. Economic growth was masking underlying weaknesses in several euro area countries. With the inception of the crises, significant efforts have been undertaken by Member States individually and collectively to strengthen resilience of economic structures and the smooth functioning of the euro area. National fiscal policies were consolidated to keep the increase in government debt contained and structural reform momentum increased notably in the second decade, particularly in those countries most hit by the crisis. The strengthened national economic structures were supported by a reformed EU crisis and economic governance framework. However, overall economic structures in euro area countries are still not fully commensurate with the requirements of a monetary union. Moreover, remaining challenges, such as population ageing, low productivity and the implications of digitalisation, will need to be addressed to increase economic resilience and long-term growth.

No. 223
17 May 2019
Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes

Abstract

This paper summarises the outcomes of the analysis of the ECB Crypto-Assets Task Force. First, it proposes a characterisation of crypto-assets in the absence of a common definition and as a basis for the consistent analysis of this phenomenon. Second, it analyses recent developments in the crypto-assets market and unfolding links with financial markets and the economy. Finally, it assesses the potential impact of crypto-assets on monetary policy, payments and market infrastructures, and financial stability. The analysis shows that, in the current market, crypto-assets’ risks or potential implications are limited and/or manageable on the basis of the existing regulatory and oversight frameworks. However, this assessment is subject to change and should not prevent the ECB from continuing to monitor crypto-assets, raise awareness and develop preparedness.

No. 222
3 May 2019
Monetary policy, credit institutions and the bank lending channel in the euro area

Abstract

JEL Classification

E4 : Macroeconomics and Monetary Economics→Money and Interest Rates

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

G20 : Financial Economics→Financial Institutions and Services→General

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

As the euro area has a predominantly bank-based financial system, changes in the composition and strength of banks’ balance sheets can have very sizeable implications for the transmission of monetary policy. This paper provides an overview of developments in banks’ balance sheets, profitability and risk-bearing capacity and analyses their relevance for monetary policy. We show that, while the transmission of standard policy interest rate cuts to firms and households was diminished during the crisis, in a context of financial market stress and weak bank balance sheets, unconventional monetary policy measures have helped to restore monetary policy transmission and pass-through to interest rates. We also document the extent to which these non-standard measures were successful in stimulating lending and which bank business models were more strongly affected. Finally, we show that the estimated impact of recent monetary policy measures on bank profitability does not appear to be particularly strong when all the effects on the macroeconomy and asset quality are taken into account

No. 221
30 April 2019
The impact of global value chains on the euro area economy

Abstract

JEL Classification

F6 : International Economics→Economic Impacts of Globalization

F10 : International Economics→Trade→General

F14 : International Economics→Trade→Empirical Studies of Trade

F16 : International Economics→Trade→Trade and Labor Market Interactions

E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles

Abstract

The studies summarised in this paper focus on the economic implications of euro area firms’ participation in global value chains (GVCs). They show how, and to what extent, a large set of economic variables and inter-linkages have been affected by international production sharing. The core conclusion is that GVC participation has major implications for the euro area economy. Consequently, there is a case for making adjustments to standard macroeconomic analysis and forecasting for the euro area, taking due account of data availability and constraints.

No. 220
19 March 2019
The impact of lending standards on default rates of residential real estate loans

Abstract

JEL Classification

C25 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Discrete Regression and Qualitative Choice Models, Discrete Regressors, Proportions

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

This paper analyses the impact of lending standards for residential real estate (RRE) loans on default rates, using a novel loan-level dataset from the European DataWarehouse (EDW) that covers eight euro area countries. To the best of the authors’ knowledge, this paper is the first to use, for this purpose, a consistent set of loan-level data on loans originated in multiple euro area countries. Previous literature has used either national loan-level data, which does not allow for cross-country comparisons, or aggregate cross-country data. The dataset is first explored through an extensive descriptive analysis and this is followed by static probit regressions. The findings confirm the key influence of lending standards – in particular, loan-to-value and loan-to-income ratios at origination, original loan maturity and borrower employment status – on loan default rates. The impact of other variables, such as interest rate fixation and payment type, varies depending on the country of loan origination. These results are particularly relevant for microprudential supervisors in their ongoing assessment of banks’ credit policies. The highlighted country specificities should be taken into account in macroprudential policymaking.

No. 219
14 February 2019
Anticipating the bust: a new cyclical systemic risk indicator to assess the likelihood and severity of financial crises

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling

Abstract

This paper presents a tractable, transparent and broad-based domestic cyclical systemic risk indicator (d-SRI) that captures risks stemming from domestic credit, real estate markets, asset prices, and external imbalances. The d-SRI increases on average several years before the onset of systemic financial crises, and its early warning properties for euro area countries are superior to those of the total credit-to-GDP gap. In addition, the level of the d-SRI around the start of financial crises is highly correlated with measures of subsequent crisis severity, such as GDP declines. Model estimates suggest that the d-SRI has significant predictive power for large declines in real GDP growth three to four years down the line, as it precedes shifts in the entire distribution of future real GDP growth and especially of its left tail. The d-SRI therefore provides useful information about both the probability and the likely cost of systemic financial crises many years in advance. Given its timely signals, the d-SRI is a useful analytical tool for macroprudential policymakers.

No. 218
1 February 2019
Availability of high-quality liquid assets and monetary policy operations: an analysis for the euro area

Abstract

JEL Classification

D41 : Microeconomics→Market Structure and Pricing→Perfect Competition

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G1 : Financial Economics→General Financial Markets

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper provides an overview of supply and demand factors influencing the availability of euro-denominated debt instruments that qualify as high-quality liquid assets (HQLA) in the euro area. The paper estimates the supply of HQLA issued by the public and private sectors as well as the aggregated impact of Eurosystem monetary policy operations on the amount and composition of HQLA held by banks and other economic agents. An assessment of the main demand factors is also presented. Finally, the paper provides some insights into the interaction with and implications for the Eurosystem monetary policy implementation framework in the longer run.

Disclaimer: Please keep in mind that OPs are published in the name of the author(s). Their views do not necessarily reflect those of the ECB.

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