Links between trust in the ECB and its interest rate policy

We analyse determinants of trust in the European Central Bank (ECB). Our main finding is that when households have pessimistic expectations, aggressive cuts in interest rates have an adverse effect on their trust in central bank. This result is in accordance with the ‘lack-of-confidence shock’ hypothesis developed by Schmitt-Grohé and Uribe (2012) and in contrast with the ‘fundamental shock’ hypothesis which implies positive effects of aggressive cuts for trust in the ECB. The result is robust to various changes in the modelling approach.     

The Performance of the European Central Bank

The European Monetary Union has been in operation since 1 January 1999. The paper offers an interim assessment of the operations of the European Central Bank (ECB) during this period. It describes how the ECB defined its monetary strategy and carried out its policy. The evaluation offered in the paper is largely positive, the principal objects of criticism being found to stem from the constitution which defines the position and principal objective of the ECB. This constitution embodies an extreme version of Central Bank independence and creates a 'democratic deficit' in consequence. Albeit the operating record is not without some blemishes, for example in regard to the ECB's communication policy. So far, the ECB has benefitted from a favourable macroeconomic conjuncture. This has changed and a more testing time may now be in store.     

The Monetary Policies of the European Central Bank and the Euro's (Mal-)Performance: A stability-oriented assessment

The stability-oriented macroeconomic framework established in the Treaties on European Union, especially the unparalleled status of independence and peculiar mandate of the European Central Bank (ECB), were promised virtually to guarantee price stability and a strong euro. Shattering these hopes and promises in a rather drastic way, the euro's external value has declined markedly while consumer price inflation has quadrupled since the new currency's inception. This paper assesses the ECB's role in relation to the euro's (mal-)performance. It challenges the truly odd conventional wisdom that, despite these dismal monetary developments, neither the Maastricht regime nor the ECB might possibly be at fault. Reviewing the ECB's interest rate policies and scrutinising its rationale, a conspicuous anti-growth bias is diagnosed that has produced rather perverse consequences.This stability-oriented assessment concludes that the ECB has been key to the 'euro puzzle', propagating euro weakness and pushing up inflation. Euroland's democratically elected representatives are therefore urged to reform Europe's key structural problem, namely, the ECB, an independent monetary policymaker whose unbounded discretion allows it to pursue ill-guided and thoroughly idiosyncratic policies without being held to account for the consequences.     

What is on the ECB’s mind? Monetary policy before and after the global financial crisis

This paper analyzes the monetary policy of the European Central Bank (ECB) both before and after the outbreak of the global financial crisis in 2008. In the literature, researchers typically select one Taylor rule-based model to analyze monetary policy of central banks and to derive determinants for the interest rate setting. However, uncertainty about the choice of this respective model is typically neglected. In contrast, we apply a Bayesian model averaging (BMA) approach to extend the Taylor rule to account for model uncertainty driven by heterogeneity in the ECB’s decision-making body, the Governing Council. Our results suggest the following: First, the ECB focuses on the inflation rate when setting interest rates. Second, economic activity indicators were in the focus of the ECB before the financial crisis. Third, over the last decade, the role of economic activity decreased, indicating that inflation is the main driver of monetary policy decisions in the post-crisis period. Fourth, when setting interest rates, central bankers appear to consider more than one model.     

Learning from Japan: The European Central Bank and the European Sovereign Debt Crisis

What shapes central banks’ learning from the policy experiments of their peers? Both economic ideas and organizational interests play important roles. Thus, New Keynesian ideas led central banks to interpret Japan's experience with quantitative easing (2001–2006) through the impact on risk spreads, although the Japanese central bank never intended such effects. In turn, scholars and policy-makers alike ignored one critical lesson: successful policy innovations depend on banks’ funding models. It is argued here that this was a crucial omission because the shift to market-based funding impairs the effectiveness of the traditional crisis toolkit. Central banks must intervene directly in asset markets of systemic importance for funding conditions, as the Bank of Japan did by buying government bonds. Hence, market-based finance engenders a trade-off between financial stability and institutional stability defined through central bank independence. During critical periods, central banks cannot preserve both. The ECB illustrates this trade-off well. Early in the crisis, it outsourced financial stability to a (largely) market-dependent banking system to protect its independence. With the introduction of Outright Monetary Transactions in September 2012, the Bank recognized that the market-based nature of European banking required outright purchases of sovereign bonds. This new instrument gave the ECB additional powers to shape national fiscal decisions in the name of an independence that no longer has theoretical justifications.     

The influence of media use on layperson monetary policy knowledge in Germany

We analyse German citizens’ knowledge about monetary policy and the European Central Bank (ECB), as well as the public's use of mass communication media to obtain information about the ECB. We find that a person's own desire to be informed about the ECB, together with the use of various media channels to keep informed, are decisive for both (1) own perception of knowledge about the ECB and (2) actual level of knowledge. The media‐related influence varies with a person's level of education and is stronger for subjective knowledge. Women are significantly less interested in or knowledgeable about both topics.     

What matters when? The impact of ECB communication on financial market expectations

This article analyses financial markets’ reaction to European Central Bank's (ECB) communication. We apply a novel indicator that quantifies the contents of the ECB's introductory statements and allows disentangling ECB statements on prices, the real and the monetary sector. We provide evidence that it matters what issue the ECB is speaking about: especially, the ECB's statements on price developments represent important news to financial markets. It also matters when the ECB affects markets: communication drives maturities above 4 months.     

中国参与解决欧债危机的战略性探析

中欧在解决欧债危机问题上的战略选择关系到欧洲一体化进程、中欧关系走势和国际政治经济秩序建设。本文概述了在应对欧债危机问题上欧盟所采取的策略、中国在参与解决欧债危机问题上所采取的积极态度和行动，分析了在中国参与解决欧债危机问题上，欧洲缺乏对华政治信任的主要原因，并对中欧建立政治互信，共同应对欧债危机的战略意义进行了探索。     

Are monetary policy shocks causal to bank health? Evidence from the euro area

Despite considerable efforts of the European Central Bank (ECB) to support bank intermediation after the 2008 financial crisis, the recovery of euro area banks remained incomplete. Although many studies indicate that central banks can influence the stock prices of firms through their policy actions and communication, a knowledge gap exists as to whether the ECB's monetary policy can influence bank health. Through a high-frequency identification approach, this study reveals that the causal effect of conventional monetary policy action and communication by the ECB on bank stock prices differed over time, whereas its influence on bank financing costs was robust. This study provides new evidence showing that information effects related to policy easing surprises in the aftermath of the 2008 financial crisis hampered the ECB efforts to improve bank health and that its Odyssean communication signals (related to forward-looking announcements of policy easing) supported bank health during this phase. Local projections suggest that the response of banks to monetary policy shocks displayed some persistence, where ECB policy surprises and communications that shifted up (down) the yield curve were normally positive (negative) for bank health. The findings solicit a new perspective when assessing the influence of the ECB's monetary policy measures on euro area banks.     

欧债危机的现状评估、政策选择与演进前景

文章首先评估了欧债危机的发展现状,包括欧洲危机的演进历程、潜在冲击以及对欧洲银行业造成的挑战;其次剖析了当前应对欧债危机的各种政策选择,包括利用EFSF/ESM机制、IMF的参与、发行欧洲债券以及由ECB担任最后贷款人,并分析了各种政策选择面临的制约因素;最后展望了欧债危机的三种可能前景:财政一体化、欧元区解体以及维持现状,并指出财政一体化前景的概率最高。     

Doing Away with the Sovereign: Neoliberalism and the Promotion of Market Discipline in European Economic Governance

ABSTRACT

This article proposes a critical reading of market discipline and its limitations as a mechanism in European economic governance. Consistent with neoliberal beliefs about market-based governance, the Economic and Monetary Union (EMU) is premised on the functioning of the government bond market as a fiscal-policy discipliner. However, the operation of market discipline requires that neither governments nor their private creditors can rely on an authority to bail them out. It, therefore, precludes the kinds of intervention by Eurozone’s supranational institutions witnessed during the euro crisis. In the post-crisis context, efforts to strengthen market discipline continue to be frustrated by the growing reliance of financial institutions on government bond markets as well as the European Central Bank’s (ECB) active participation in those markets. Having undermined the credibility of the market as an autonomous and apolitical mechanism of discipline, European economic governance struggles to come to terms with the rise of a supranational ‘economic sovereign’ in the Eurozone.     

Modelling industrial new orders

This article models industrial new orders across the European Union (EU) countries for various breakdowns. A common modelling framework exploits soft (business opinion surveys) as well as hard data (industrial turnover). The estimates show for about 200 cases that the model determinants significantly help in explaining new orders' monthly growth rates. An alternative estimation method, different model specifications and out-of-sample and real-time forecasting all show that the model results are robust. We present real-time outcomes of a European Central Bank (ECB) indicator on industrial new orders at an aggregated euro area level. This indicator is largely based on national new orders data and on estimates yielded by the model for those countries that no longer report new orders at the national level. Finally, we demonstrate the leading content of the ECB indicator on euro area new orders for industrial production.     

Transparency and trust: the case of the European Central Bank

We examine how the transparency of the European Central Bank’s monetary policy affects the amount of trust that the citizens of the European Union have in this institution. We use nearly half a million individual responses from the European Commission’s Eurobarometer survey from 2000 to 2011 and estimate probit regressions with sample selection. We find that transparency exerts a non-linear effect on trust. Transparency increases trust, but only up to a certain point; too much transparency harms trust. This result is robust to controlling for a number of macroeconomic conditions, financial stability transparency measures, and economic and socio-demographic characteristics of respondents, including examining respondents in European Union countries that do not use the euro and addressing clustering issues.     

The Repo Auctions of the European Central Bank and the Vanishing Quota Puzzle*

Until June 2000 the European Central Bank (ECB) used fixed rate tenders for its weekly repo auctions. A switch to variable rate tenders became necessary due to massive overbidding by banks. In this paper we introduce a stylized game among banks to investigate this overbidding phenomenon. Our results confirm the weakness of the fixed rate tender format and indicate that the ECB's liquidity management has significantly improved since the switch to the variable rate system. Yet recent episodes of rate cut expectations suggest that the ECB's practice of setting a minimum bid rate should be abandoned in favor of a more symmetric interest rate target.     

Volatility spillovers of unconventional monetary policy to emerging market economies

Emerging market economies (EMEs) have experienced waves of market volatility since the global financial crisis, with some commentators ascribing this at least partly related to monetary policy decisions in advanced economies. This paper examines volatility spillovers from changes in the size of the balance sheets of the Federal Reserve (FED) and European Central Bank (ECB) to EMEs from 2003 to 2018. We find that volatility spillovers to EME currency markets are greater in magnitude from the FED, while EME stock and bond markets are also vulnerable to volatility spillovers in a similar magnitude from both the ECB and the FED. We find only limited evidence of volatility transmission to the real economy of EMEs following the monetary policy actions of the FED and ECB. Finally, we show that the proportion of the volatility in EMEs that is accounted for by changes in FED and ECB balance sheets shifts over time. Our paper has important policy implications for EMEs, notably in respect of volatility transmission channels.     

European policy and markets: Did policy initiatives stem the sovereign debt crisis in the euro area?

We investigate how European policy initiatives influenced market assessments of sovereign default risk and banking sector fragility during the sovereign debt crisis in four adversely affected countries — Portugal, Ireland, Spain and Italy. We focus on three broad groups of policies: (a) ECB policy actions (monetary and financial support), (b) EU programs (financial and fiscal rules as well as financial support in crisis countries), and (c) domestic austerity programs. We measure immediate market impact effects: what policies changed risk perceptions, using CDS spreads on sovereign bonds and banks in this assessment. We employ dynamic panel and event study methodologies in the empirical work. We find that a number of programs initially stabilized sovereign and bank bond markets (e.g. Outright Monetary Transactions program), although announcement and implementation impacts on markets differed in some cases (e.g. second Covered Market Bond Program). Actions designed to shore up sovereign markets often lowered risk assessments in bank bond markets and policies designed to ensure safety and soundness of the European banking system in some cases significantly impacted sovereign debt markets. Finally, a number of policies designed to stabilize markets had surprisingly little immediate impact on either sovereign or bank bond market risk assessments.     

Riding out of a financial crisis: The joint effect of trust and corporate ownership

We study how generalized trust shapes the ability of firms with different ownership forms to obtain trade financing and perform during a financial crisis. Exploiting geographic variations in trust across Italian regions and the occurrence of the 2008-09 financial crisis in a difference-in-differences setting, we show that generalized trust makes family firms less able to obtain trade financing during the crisis. This finding maps into performance results: trust alleviates the negative effect of a crisis for non-family firms, while it aggravates the negative effect for family firms. This latter result depends crucially on a firm's corporate governance: trust does not harm family firms whose board is open to non-family directors. Collectively, our findings illustrate how culture interacts with corporate attributes in shaping a firm's prospects.     

Do the ECB's introductory statements help predict monetary policy? Evidence from a tone analysis

In this paper, we examine whether a tone shock derived from European Central Bank communication helps predict ECB monetary policy decisions. To this purpose, we first use a bag-of-words approach and several dictionaries on the ECB's Introductory Statements to derive a measure of tone. Next, we orthogonalise the tone measure on the latest data available to market participants to compute the tone shock. Finally, we relate the tone shock to future ECB monetary policy decisions. We find that the tone shock is significantly and positively related to future ECB monetary policy decisions, even when controlling for market expectations of monetary policy and the Governing Council's inter-meeting communication. Further extensions show that the predictive ability of the tone shock is robust to (i) the normalization of the tone measure, (ii) alternative market expectations of monetary policy, and (iii) the horizon of macroeconomic variables used in the Taylor-type monetary policy rule. These findings highlight an additional channel through which ECB communication improves monetary policy predictability, suggesting that the ECB may have private information that it communicates through its Introductory Statements.     

National representation in supranational institutions: The case of the European Central Bank

Supranational institutions face an important trade-off when hiring personnel. On the one hand, hiring decisions are based, as in most organizations, on a candidate’s professional qualifications. On the other hand, supranational institutions often aim for broad national representation. Reviewing evidence from the European Central Bank, we show that nationality is indeed relevant for both hiring and decision-making. Specifically, we find a disproportionately narrow spread of national representation in the top management of the ECB. Further, there is evidence for the existence of national networks between adjacent management layers. Finally, monetary policy decisions seem to be linked to national representation in the core business areas of the ECB. Examining a sample of 27 European countries over the period from 1999 to 2008, we estimate Taylor rules for alternative sets of euro area aggregates derived from different weighting schemes of national macroeconomic data. Our results indicate that weights based on national representation in the mid-level management of the ECB’s core business areas best describe the central bank’s interest-rate setting behavior.