Economic research

One of the distinguishing features of central banks is that they have a long tradition of underpinning their policies with strong scientific foundations. In times of uncertainty and change, such as those currently being experienced, it is important that research pushes back frontiers by providing underpinnings for policies that have not been used before. The ECB continued to make considerable progress on this front in 2014.

5.1 The ECB’s research clusters

Economic research at the ECB is conducted within 11 bank-wide research groups covering different topics of policy relevance. In 2014 research focused on five major areas: (i) financial instability and macro-prudential policies; (ii) monetary transmission, with an emphasis on non-standard monetary policy measures;

(iii) the changing economic and financial structure since the crisis and its implications for growth; (iv) the interaction of monetary, fiscal and supervisory policies amid a changing EU institutional framework (notably the establishment of the SSM);

and (v) forecasting, scenario analysis and country surveillance tools.

Important findings emerged in particular from research on the effectiveness of non-standard measures in the euro area. For instance, evidence collected around the announcements on the Outright Monetary Transactions suggests that those announcements may have had a positive impact on GDP and credit in stressed countries. Changes in collateral eligibility rules – as introduced by the additional credit claims programme of February 2012 – in combination with the very long-term refinancing operations also appear to have supported the economy by reducing the yields on, and increasing the purchases of, the targeted assets (corporate loans).

Furthermore, an analysis of the possible effects of an asset purchase programme indicates that such a programme can be useful for managing risks to price stability also in circumstances in which there is no severe financial instability. Purchases of assets with higher yield premiums appear to be more effective in supporting the economy but also potentially riskier for the central bank.

A wide range of models and tools were developed in 2014 within the various

research areas mentioned above. One such tool assesses the risk of a de-anchoring of inflation expectations stemming from a spillover of short-term to long-term

expectations. Results for the euro area suggest that this risk increased significantly around January 2014 and remained high until the end of the year.

5.2 The Eurosystem/ESCB research networks

Eurosystem/ESCB research networks continued to make a significant contribution in 2014.⁴⁵ An important milestone was reached in June with the conclusion of the work of the Macro-prudential Research Network, which had been established in

45 See the ECB’s website for detailed information on each network.

2010 to develop better analytical underpinnings for the new area of macro-prudential policy.⁴⁶ One of the network’s key contributions has been the development of a series of macroeconomic models featuring financial instability, something that was virtually absent from the economic literature before the crisis. These developments provide the necessary tools for a meaningful analysis of macro-prudential policies, such as in the case of a new model that incorporates bank defaults and allows the assessment of both the benefits and the costs of capital adequacy regulation. The network also developed a coincident indicator of systemic financial instability, the now widely used composite indicator of systemic stress, and several early warning models for systemic banking crises, confirming the important role of credit growth and leverage. Finally, the network derived – in cooperation with payment systems experts – information on the unsecured money market from the TARGET2 system.

The data can be used to calculate indicators and assess developments relating to the euro money market, notably cross-border bank contagion risks and aspects of the systemic importance of banks. One finding was that the impact of bank risk and excess liquidity provided by the Eurosystem on interbank market activity depends crucially on the fiscal health of the country in which borrowing banks reside.

A second network – the Competitiveness Network – produced a new database based on non-financial corporations’ balance sheets. A major finding in this context is that, despite the drop in employment, the recent crisis may have had “cleansing effects”

on EU economies, as it appears to have accelerated resource reallocation towards the most productive firms, particularly in economies under stress. The crisis may also have caused the share of credit-constrained firms to increase at different rates across countries and along the percentiles of the productivity distribution, with the most productive firms not suffering from credit rationing.

A third network – the Household Finance and Consumption Network – focused on the analysis of data made available by the Eurosystem’s Household Finance and Consumption Survey. Research was conducted on euro area households’ financial fragility, the distributional effects of inflation and monetary policy, cross-country differences in household wealth distribution, and the recent evolution of wealth, income and debt service. A major finding is that, while the mortgage debt service/

income ratios of individual households generally declined after the crisis, the fall was counteracted by the rise in unemployment and resulting drop in income.

Finally, a previous ESCB network – the Wage Dynamics Network – was

re-established to conduct a third wave of the survey on firms’ price and wage policies.

This wave aimed to assess how firms have adjusted in response to the crisis and to enable an evaluation of the relevance of recent labour market reforms in shaping these adjustments. The survey data have been collected and country-specific studies are ongoing.

46 A complete summary of the network’s research output and conclusions can be found in its final report.

The ECB is involved in macro-prudential policy through its role in the European Systemic Risk Board and through the macro-prudential competencies of the Single Supervisory Mechanism (see Section 3 of Chapter 1).

5.3 Conferences and publications

The ECB continued to be active in the organisation of research events. In addition to a large number of invited speaker seminars, the ECB hosted and/

or co-organised several high-level conferences.

Important events included the ECB Forum on Central Banking in Sintra, the concluding conference of the Macro-prudential Research Network and the International Research Forum on Monetary Policy.

A large proportion of the ECB’s research output was published. In total, 131 new papers appeared in the ECB’s Working Paper Series in 2014, and 58 ECB contributions featured in international refereed journals.

ECB Working Papers in 2014

58 131

New papers featured in international refereed journals

Published

in the Working Paper Series

ECb Working Papers in 2014