A Convergence Process in Household Credit in Central and Eastern Europe. ECRI Commentary No. 16, 30 October 2015

The liberalisation of Eastern Europe’s market during the 1990s and the 2004 EU enlargement have had a great impact on the economies of Central and Eastern Europe (CEE). Indeed, prior to these events, the financial system and household credit markets in CEE were underdeveloped. Nonetheless, it appeared to numerous economists that the development of the CEE financial system and credit markets was following an intensely positive trend, raising the question of sustainability. Many variables impact the level and growth rate of credit; several economists point out that a convergence process might be one of the most important. Using a descriptive statistics approach, it seems likely that a convergence process began during the 1990s, when the CEE countries opened their economies. However, it also seems that the main driver of this household credit convergence process is the GDP per capita convergence process. Indeed, credit to households and GDP per capita have followed broadly similar tendencies over the last 20 years and it has been shown in the literature that they appear to influence each other. The consistency of this potential convergence process is also confirmed by the breakdown of household credit by type and maturity. There is a tendency towards similar household credit markets in Europe. However, it seems that this potential convergence process was slowed down by the financial crisis. Fortunately, the crisis also stabilised the share of loans in foreign currency in CEE countries. This might add more stability to credit markets in Eastern Europe.

Monetary policy and risk taking. Bruegel Working Paper 2010/00, February 2010

We assess, through VAR evidence, the effects of monetary policy on banks’ risk exposure and find the presence of a risk-taking channel. A model combining fragile banks prone to risk mis-incentives and credit constrained firms, whose collateral fluctuations generate a balance sheet channel, is used to rationalize the evidence. A monetary expansion increases bank leverage. With two consequences: on the one side this exacerbates risk exposure; on the other, the risk spiral depresses output, therefore dampening the conventional amplification effect of the financial accelerator. Keywords: monetary policy, bank behavior, leverage, financial accelerator.

So far apart and yet so close: Should the ECB care about inflation differentials? Bruegel Policy Contribution, Issue 2014/10 September 2014

Inflation rates can differ across regions of monetary unions. We show that in the euro area, the US, Canada, Japan and Australia, inflation rates have been substantially and persistently different in different regions. Differences were particularly substantial in the euro area. Inflation differences can reflect normal adjustment processes such as price convergence or the Balassa-Samuelson effect, or can reflect the different cyclical position of regions. But they can also be the result of economic distortions resulting from segmented markets or unsustainable demand and credit developments fueled by low real interest rates. In normal times, the European Central Bank cannot influence such developments with its single interest rate instrument. However, unconventional policy measures can have different effects on different countries depending on the chosen instrument, and should be used to reduce fragmentation and ensure the proper transmission of monetary policy. The new macro prudential policy tools are unlikely to be practical in addressing inflation divergences. It is crucial to keep the average inflation rate close to two percent so that inflation differentials are possible without deflation in some parts of the euro area, which in turn might endanger area-wide financial stability and price stability.

Does Money Matter in the Euro area? Evidence from a new Divisia Index. Bruegel Working Paper 2014/12, 6 November 2014

The purpose of this paper is to examine the possible role of money shocks on output and prices in the euro area. Since no Divisia monetary aggregates are available for the euro area, we first create and make available a database on euro-area Divisia monetary aggregates. We plan to update the dataset in the future and keep it publicly available. Using different SVAR models, we find sensible and statistically significant responses to Divisia money shocks, while the responses to simple-sum measures of money and interest rates are not statistically significant, and sometimes even the point estimates are not sensible.

Simulation Results of AgriPoliS about Diminishing Capital Subsidies and Restrictions. Factor Markets Working Document No. 55, June 2013

This paper investigates the impacts of high interest rates for borrowed capital and credit restrictions on the structural development of four European regions. The method used is the model AgriPoliS which is a spatial-dynamic agent-based model. It is able to provide aggregated results at the regional level, but very individual results as well by considering farms as independent entities. Farms can choose between different investment options during the simulation. Several scenarios with different interest rates for borrowed capital on the one hand as well as with different levels of credit restrictions on the other hand are tested and compared. Results show that higher interest rates have less impact on declining production branches than on expanding ones. If they have the possibility farms invest in the most profitable production branch which relative profitability might have changed with high interest rates. Credit restrictions lead farms to choose smaller and cheaper investments than expensive and large ones. Results also show that income losses in both cases due to under-investment compared to the reference situation are partially compensated by lower rental prices. The impacts on structural change also differ depending on the region and the initial situation. In summary, credit subsidies or imperfections on credit markets might have indirect impacts on the type of dominant investment and therefore on the whole regional agricultural sector as well.

Le role des politiques monétaires et la convergence macroeconomique sur le développement des systèmes financiers dans les pays du sud de la Méditerranée. = The role of monetary policies and macroeconomic convergence in the development of financial systems in south Mediterranean countries. MEDPRO Technical Report No. 12/April 2012

This MEDPRO Technical Report shows that the monetary and exchange rate policies conducted by central banks in the South Mediterranean region display apparent homogeneity in their operational frameworks, albeit with some specificities and differing degrees of advancement. While central banks state that price stability is their ultimate objective, failures to control interest rates as operational objectives of monetary policy result in monetary authorities resorting to quantitative approaches to monetary policy, meaning that monetary aggregates and credit targets are being used as intermediate targets of monetary policy. An econometric exercise limited to Maghreb countries (Algeria, Morocco, and Tunisia) has been conducted to analyse the potential scenarios of convergence and monetary policy coordination. Given the high structural heterogeneity and the slow pace of real convergence due to weak commercial integration in the Maghreb, results nevertheless show alternative dynamics in the integration of effective nominal exchange rates, as well as a complete convergence dynamic in exchange rate policies. Partial convergence of monetary policies regarding the stabilisation of inflation rates remains an open option for a transitional phase where financial integration is low.

The Prize is more Peace: The EU should consolidate its enlargement process. CEPS Commentary, 8 November 2012

The sovereign debt crisis and the threat of financial collapse of some EU member states have triggered fierce debate about the economic, social and political finalité of the Union and curbed the appetite for further enlargement. The European Commission needs to find new ways to consolidate the enlargement agenda, gain full support of the member states for its implementation and assure a consistent application of the pre-accession requirements. Arguably, more time, more money and greater expertise are needed to pursue the vocation recognised by the Nobel Committee.