Inflation persistence in Central and Eastern European countries. Bruegel Working Paper 2013/04, 22 July 2013

This paper studies inflation persistence with time-varying coefficient autoregressions for twelve central European countries,in comparison with the United States and the euro area. Inflation persistence tends to be higher in times of high inflation. Since the oil price shocks, inflation persistence has declined both in the US and euro-area. In most central and eastern European countries, for which our study covers 1993-2012, inflation persistence has also declined, with the main exceptions of the Czech Republic, Slovakia and Slovenia, where persistence seems to be rather stable.

Macroeconomic and Financial Crisis Management in the Southern and Eastern Mediterranean: Diagnosis and Prospects. CEPS Paperbacks. December 2013

The global financial crisis, which started in the summer of 2007 and deepened in the aftermath of the Lehman failure in September 2008, has led to a virtual collapse in economic activity and increased financial volatility worldwide. For the developing countries, the main channel of transmission has been a drop in external transactions, such as trade, financial and capital flows, and remittances. The emerging economies in the southern and eastern Mediterranean have also faced declining economic activity, although there seems to be considerable variation in the relative magnitude and timing. Most of these economies have shown a delayed but more lasting response to the crisis, driven mostly by their close trade and investment ties with the EU and the Gulf Cooperation Council (GCC) countries. This book explores the fiscal, monetary and financial effects of the crisis in the region and provides an in-depth analysis of the fiscal, monetary and banking policies in the post-crisis era, the viability of their exit strategies and the future of reforms in the region. These analyses not only provide a comprehensive comparison between the countries but also provide a solid basis for assessing future economic and financial developments and reforms in the region.

Europe's Ungainly Banking Revolution. CEPS Commentaries, 24 March 2014

In assessing the compromise agreement reached on March 20th on how to deal with banks in difficulty in the eurozone, Daniel Gros finds that the Single Resolution Fund represents an awkward step in the right direction in that it leaves as many problems unresolved as it addresses. But the end result is likely to be quite strong, because it establishes a key innovation: a common fund that effectively mutualises much of the risk resulting from bank failures.

Inflation-Targeting, Flexible Exchange Rates and Macroeconomic Performance since the Great Recession. CEPS Working Document No. 394, March 2014

Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? This paper answers this question in the affirmative. Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other monetary regimes, predominantly countries with fixed exchange rates. Part of this difference in growth performance reflects differences in export performance during the initial years of the crisis, which in turn can be explained by real exchange rate depreciations. However, IT seems also to confer other benefits on the countries above and beyond the effects from currency depreciation.

Did the German court do Europe a favor? Bruegel Working Paper 2014/09, July 2014

The European Central Bank’s Outright Monetary Transactions (OMT) programme was a politically-pragmatic tool to diffuse the euro-area crisis. But it did not deal with the fundamental incompleteness of the European monetary union. As such, it blurred the boundary between monetary and fiscal policy. The fuzziness of this boundary helped in the short-term but pushed political and economic risks to the future. Unless a credible commitment to enforcing losses on private creditors is instituted, these conundrums will persist. The German Federal Constitutional Court has helped by insisting that such a dialogue be conducted in order to achieve a more durable political and economic solution. A study of the European Union Court of Justice’s Pringle decision (Thomas Pringle v Government of Ireland, Ireland and The Attorney General, Case C-370/12, ECJ, 27 November 2012) suggests that the ECJ will also not rubber-stamp the OMT – and, if it does, the legal victory will not resolve the fundamental dilemmas.

Fighting Deflation: Would QE work in the euro area? CEPS Commentary, 9 October 2014

With inflation in the eurozone stubbornly remaining on a downward trajectory, pressure is growing on the ECB to do “something” to prevent outright deflation. But, given the financial structure of eurozone countries, would the preferred "something" – quantitative easing – actually do the trick?

The Ghost of Deflation Past. CEPS Hi-level Brief, 13 December 2013

This note takes a look at the development of monetary aggregates and debt in the G7 (US, UK, France, Germany, Italy, Canada and Japan), plus non-G7 euro-area countries, which have an important bearing on the future development of price levels. It also discusses the problem of restoring external competitiveness in the weaker euro-area countries without aggravating their debt burden. The key conclusions are i) monetary and debt developments in the G7 countries point to relatively sluggish growth but do not signal deflation risks and ii) the realignment of ‘internal real exchange rates’ in the euro area will most likely come through a rise in prices in Germany (and a few other stronger countries). The lessons learned in the early 1930s have made a come-back of deflation quite unlikely.

Larry Summers’ interest rate conundrum. CEPS Hi-level Brief, 16 January 2014

Larry Summers has attracted much attention recently for invoking old theories of secular stagnation to explain the persistence of low interest rates in the recent past. The German economist Carl Christian von Weizsäcker has pointed to a retirement savings glut as the cause for low rates. In the view of Thomas Mayer, however, as expressed in this High-Level Brief, these theses lack both theoretical and empirical support and he offers as an alternative explanation the fall-out from the recent credit boom-bust cycle.

Measuring the intermittent synchronicity of macroeconomic growth in Europe. ACES Cases No. 2010.1

Synchronization of growth rates are an important feature of international business cycles, particularly in relation to regional integration projects such as the single currency in Europe. Synchronization of growth rates clearly enhances the effectiveness of European Central Bank monetary policy, ensuring that policy changes are attuned to the dynamics of growth and business cycles in the majority of member states. In this paper a dissimilarity metric is constructed by measuring the topological differences between the GDP growth patterns in recurrence plots for individual countries. The results show that synchronization of growth rates were higher among the Euro area member states during the second half of the 1980s and from 1997 to roughly 2002. Apart from these two time periods, Euro area member states do not appear to be more synchronized than a group of major international countries, signifying that globalization was the major cause of international business cycle synchronization.

Les enjeux de la libéralisation des comptes de capital dans les pays du sud de la Méditerranée. = Challenges arising from Capital Account Liberalisation in the Countries of the South Mediterranean Region. MEDPRO Technical Report No. 11/March 2012

This MEDPRO Technical Report confirms the importance of commercial openness and macroeconomic performance (i.e. the control of inflation and stability of current account balance and exchange rate) on growth dynamics in the south Mediterranean countries. In particular, the positive impact of capital account liberalisation is conditioned by the imperative reinforcement of institutional quality, country risk reduction, and government stability. An examination of the Tunisian case shows that only sectors subject to tariff dismantlement within the framework of the Association Agreement with the EU appear to benefit from capital account liberalisation. Furthermore, the report shows that a scenario of capital account liberalisation requires the anticipation of monetary policy reaction functions. It follows that the mechanisms for interest rate adjustment, or inter alia, the interest rates’ reaction to price fluctuations, are weakly volatile. In turn, the analysis shows that an active control of inflation mismatches occurs essentially through exchange rate corrections, thus highlighting the greater interest central banks have in exchange rate stability over real stability. A capital account liberalisation scenario would hence impose a tightening of monetary policy.

Living (dangerously) without a fiscal union. Bruegel Working Paper 2015/03

The euro area’s political contract requires member nations to rely principally on their own resources when confronted with severe economic distress. Since monetary policy is the same for all, national fiscal austerity is the default response to counter national fiscal stress. Moreover, the monetary policy was itself stodgy in countering the crisis, and banking-sector problems were allowed to fester. And it was considered inappropriate to impose losses on private sector creditors. Thus, the nature of the incomplete monetary union and the self-imposed taboos led deep and persistent fiscal austerity to become the norm. As a consequence, growth was hurt, which undermined the primary objective of lowering the debt burden. To prevent a meltdown, distressed nations were given official loans to repay private creditors. But the stress and instability continued and soon it became necessary to ease the repayment terms on official loans. When even that proved insufficient, the German-inspired fiscal austerity was combined with the deep pockets of the European Central Bank. The ECB’s safety net for insolvent or near-insolvent banks and sovereigns, in effect, substituted for the absent fiscal union and drew the central bank into the political process.

Comparing fiscal multipliers across models and countries in Europe. National Bank of Belgium Working Paper No. 278, March 2015

This paper employs fifteen dynamic macroeconomic models maintained within the European System of Central Banks to assess the size of fiscal multipliers in European countries. Using a set of common simulations, we consider transitory and permanent shocks to government expenditures and different taxes. We investigate how the baseline multipliers change when monetary policy is transitorily constrained by the zero nominal interest rate bound, certain crisis-related structural features of the economy such as the share of liquidity-constrained households change, and the endogenous fiscal rule that ensures fiscal sustainability in the long run is specified in terms of labour income taxes instead of lump-sum taxes.

Building a Capital Markets Union….or designing a financial system for the euro area? CEPS Commentary, 2 June 2015

In this CEPS Commentary, economists Anton Brender, Florence Pisani and Daniel Gros challenge the foundation on which the European Commission launched a key debate earlier this year on the development of the EU’s financial system, with publication of its Green Paper "Building a Capital Markets Union". While acknowledging that a single capital market could be useful in the European Union, they argue that it is extremely dangerous to conduct one and the same monetary policy in an area with broadly varying financial practices and structures – as the first 15 years of the euro area's history have vividly shown. They conclude that financial integration of the countries in EMU must receive top priority in a process that the rest of the European Union may then subsequently join.

Countries under Adjustment Programmes: What role for the ECB? CEPS Special Report No. 124, December 2015

Providing ‘technical assistance/advice’ on programmes for countries under financial stress is well within the mandate of the European Central Bank (ECB). Being fully part of the Troika, however, is a different role. Formally the ECB does not participate in the ‘decision-making’ on programmes (decisions are taken by the Finance Ministers – and the IMF). However, the ECB is part of the ‘decision-shaping’ process. These two roles have often been confused. The ECB should interpret its formal role in future ESM (European Stability Mechanism) programmes as narrowly as possible. Providing advice but avoid taking part in the operational work of programme surveillance. The ECB should de facto leave the Troika. At any rate, future incidents like the Italian or Spanish letters will be superseded by the OMTs (outright monetary transactions) and an Irish-type situation would be shaped by the legal framework of the Bank Recovery and Resolution Directive (BRRD) and the potential funding from the Single Resolution Fund (SRF). An additional issue for the ECB is internal coherence: Its six-member Executive Board manages the participation in the Troika, monetary policy is decided by the Governing Council and banking supervision is under the Supervisory Board, separated in principle by Chinese walls from the (rest of the) ECB.

Did quantitative easing affect interest rates outside the US? New evidence based on interest rate differentials. CEPS Working Document No. 416/January 2016

This paper explores the effects of non-standard monetary policies on international yield relationships. Based on a descriptive analysis of international long-term yields, we find evidence that long-term rates followed a global downward trend prior to as well as during the financial crisis. Comparing interest rate developments in the US and the eurozone, it is difficult to detect a distinct impact of the first round of the Fed’s quantitative easing programme (QE1) on US interest rates for which the global environment – the global downward trend in interest rates – does not account. Motivated by these findings, we analyse the impact of the Fed’s QE1 programme on the stability of the US-euro long-term interest rate relationship by using a CVAR (cointegrated vector autoregressive) model and, in particular, recursive estimation methods. Using data gathered between 2002 and 2014, we find limited evidence that QE1 caused the break-up or destabilised the transatlantic interest rate relationship. Taking global interest rate developments into account, we thus find no significant evidence that QE had any independent, distinct impact on US interest rates.