Aspects of the euro’s future July 18 - 21 2013 Public debt and monetary policy Introductory statement by Francesco Papadia* 1 * With the assistance of Madalina Norocea
I. REGAINING CONTROL OF INTEREST RATES IN THE € -AREA II. THE RISKS OF NON STANDARD MEASURES FOR CENTRAL BANKS III. CONCLUSIONS 2
I. REGAINING CONTROL OF INTEREST RATES IN THE € -AREA 3
Central bank interest rate Savings Investments Wicksellian Taylor rule Interest rate ≈ Production Differential approaches channel Employment “Natural” interest rate 4 Transmission Mechanism- a Neo-Wicksellian approach
Central bank balance sheets 500 450 400 Index (Jan 2007=100) 350 300 250 200 150 100 50 0 Jan-07 Mar-07 Jun-07 Aug-07 Nov-07 Feb-08 Apr-08 Jul-08 Oct-08 Dec-08 Mar-09 Jun-09 Aug-09 Nov-09 Jan-10 Apr-10 Jul-10 Sep-10 Dec-10 Mar-11 May-11 Aug-11 Oct-11 Jan-12 Apr-12 Jun-12 Sep-12 Dec-12 Feb-13 May-13 Eurosystem Federal Reserve Bank of England Bank of Japan 5 Source: Central banks statements Non standard actions
Eurosystem Assets (lhs) and Liabilities (rhs) 3,000 3,000 2,500 2,500 2,000 2,000 EUR billion 1,500 1,500 1,000 1,000 500 500 0 0 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Apr-07 Nov-07 Apr-09 Nov-09 Mar-10 Nov-11 Mar-12 Oct-12 Jan-07 Aug-07 Feb-08 Jun-08 Sep-08 Jan-09 Aug-09 Jun-10 Sep-10 Jan-11 Apr-11 Aug-11 Jun-12 Jan-13 May-13 MLF+FTO USD repo Current accounts Deposit facility Net foreign assets MRO Absorbing operations Other autonomous factors (net) Domestic assets LTRO Government deposits Banknotes in circulation Policy portfolios 6 Source: European Central Bank weekly statements Repo based expansion in the € -area
Federal Reserve balance Assets (lhs) and Liabilities (rhs) 3,500 3,500 3,000 3,000 2,500 2,500 USD billion 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 0 Jan-07 May-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jan-07 Apr-07 Aug-07 Dec-07 Mar-08 Jul-08 Nov-08 Feb-09 Jun-09 Oct-09 Jan-10 May-10 Sep-10 Dec-10 Apr-11 Aug-11 Nov-11 Mar-12 Jul-12 Oct-12 Feb-13 Jun-13 Central bank liquidity swaps Lending to specific institutions Banknotes US Treasury general account US Treasury securities Repo&Loans Current accounts Term deposits Net foreign assets MBS Reverse repos Treasury supplementary account Federal agency debt securities Commercial paper funding facility Other liabilities and capital Term auction credit Other assets 7 Source: Federal Reserve H.4.1. release Outright based expansion in the US
Surplus liquidity 8 Source: European Central Bank Risk of endogenous tightening in the € -area?
Selected € -area government bond spreads against Germany (10 yr) 30 25 20 % 15 10 5 0 Jan-07 Sep-07 Jan-08 Sep-08 Jan-09 Sep-09 Jan-10 Sep-10 Jan-11 Sep-11 Jan-12 Sep-12 Jan-13 May-07 May-08 May-09 May-10 May-11 May-12 May-13 Greece Portugal Ireland Spain Italy France 9 Source: European Central Bank The magnetic power of Government bond yields
Covered bond asset swap spreads in selected jurisdictions 1200 MRO "Whatever it MRO cut takes" cut 1000 Asset Swap Spread (bp) 800 600 400 200 0 Oct-09 Jan-10 May-10 Aug-10 Nov-10 Feb-11 Jun-11 Sep-11 Dec-11 Apr-12 Jul-12 Oct-12 Jan-13 May-13 Germany Ireland Italy Portugal Spain 10 Note : The data represents the iBoxx EUR covered bond benchmark indices in the selected jurisdictions. Source: Markit. Regaining control of interest rates : lower MRO rates and OMT
II. THE RISKS OF NON STANDARD MEASURES FOR CENTRAL BANKS 11
Eurosystem “equity” buffers Amount in € billion End 2012 End 2011 End 2010 End 2009 Capital and reserves 86 82 80 73 Provisions 51 35 30 24 Revaluation accounts 407 394 332 220 Total buffers 544 511 442 317 (estimated) 12 Source: ECB and NCBs Annual Reports Financial risk
Inflation expectations (Professional forecasters) 3 2 1 % 0 -1 -2 1999 Q1 1999 Q3 2000 Q1 2000 Q3 2001 Q1 2001 Q3 2002 Q1 2002 Q3 2003 Q1 2003 Q3 2004 Q1 2004 Q3 2005 Q1 2005 Q3 2006 Q1 2006 Q3 2007 Q1 2007 Q3 2008 Q1 2008 Q3 2009 Q1 2009 Q3 2010 Q1 2010 Q3 2011 Q1 2011 Q3 2012 Q1 2012 Q3 2013 Q1 2013 Q3 Two years ahead Forecasting Error 2 yr (*) 13 Source: European Central Bank Short term inflation risk
Inflation developments within € -area countries 20 15 € 10 % 5 0 -5 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Max Euro area (changing composition) Min 14 Source : European Central Bank Short-term inflation risk
Other risks • Risk of fiscal dominance ... Government funding constraint • Risk of overburdening monetary policy ... “ unexpected abilities should not feed illusions that central banks can do more than they actually can.” • Long term inflation risk ... Inflation is not dead once and for all 15 Timing of the exit is critical
III. CONCLUSIONS • Central banks have been created to absorb risk during a crisis; • The risk-benefit balance. 16
RESERVE SLIDES 17
Money multiplier in Germany (1980-1999) and € -area (1999-2013) % 18
€ -area monetary base (lhs) vs HICP index (rhs) (1999-2013) EUR billion 19
Recommend
More recommend
