Unconventional monetary policy and inflation expectations in the Euro area. CEPS Working Document No 2020/01, January 2020

With the ECB's policy rate having reached the zero lower bound, traditional monetary policy tools became ineffective and the ECB was forced to adopt a set of unconventional monetary policy (UMP) measures. This paper examines the effects of the ECB's UMP on inflation expectations in the Euro area as inflation expectations play a key role for achieving the inflation target of below, but close to 2%. Quantifying the impact of UMP is not straightforward, as standard empirical tools such as VAR cannot be applied. Hence, we use the Qual VAR approach pioneered by Dueker (2005) to overcome this problem. We indeed find that UMP leads to a rise in inflation expectations in the short run but that this effect appears to evaporate in the medium term. Our results put some doubt on the common claim that UMP has consistently contributed to a re-anchoring and a stabilisation of inflation expectations at the zero lower bound. Nevertheless, they indicate a rise in mediumterm real GDP growth triggered by UMP

International Effects of Euro Area versus US Policy Uncertainty: A FAVAR Approach

Building on the growing evidence on the importance of large data sets for empirical macroeconomic modeling, we estimate a large-scale FAVAR model for 18 OECD member countries. We quantify the global effects of economic policy uncertainty shocks and check whether the signs, the magnitude, and the persistence profile are consistent with the literature on the real and financial sector effects of uncertainty. In that respect, we compare the impacts of a US and a Euro area uncertainty shock. According to our results, an increase in uncertainty has a strong negative impact on economic activity, consumer prices, equity prices and interest rates. Uncertainty shocks cause deeper recessions in Continental Europe (except Germany) than in Anglo- Saxon countries. This pattern is compatible with the view that continental Europe still suffers from institutions which prevent flexible markets. And US uncertainty shocks have a bigger impact than their European counterparts. Uncertainty does not only impact that country where the shock originates but also has large cross-border effects. In that respect, Switzerland turns out to be the most affected non-Euro area European country. We also find a high degree of synchronization among the responses of national variables to a (foreign) uncertainty shock, indicating evidence of an international business cycle. With respect to the responses of national long-term interest rates to an uncertainty shock, our results reveal a strong “North-South” divide within EMU with rates decreasing less significantly in the South. Another important result is that uncertainty shocks emerging in one region quickly raise uncertainty outside the region of origin which appears to be an important transmission channel of uncertainty

Measuring fiscal spillovers in EMU and beyond: A Global VAR approach

We identifiy and measure fiscal spillovers in the EU countries using a global vector autoregression (GVAR) model. We find moderate spillover effects of fiscal policy shocks originating in Germany and France and significant variation regarding magnitude of the spillovers among destination countries and country clusters. Furthermore, we find some evidence that spillovers generated by German or French fiscal spillovers are stronger for EMU than non-EMU countries in Europe

Measuring fiscal spillovers in EMU and beyond: A Global VAR approach. CEPS Working Paper No. 428 / December 2016

This paper identifies and measures fiscal spillovers in the EU countries empirically using a global vector autoregression (GVAR) model. Our aim is to look at the sign and the absolute values of fiscal spillovers in a country-wise perspective and at the time profile (impulse response) of the impacts of fiscal shocks. We find moderate spillover effects of fiscal policy shocks originating in Germany and France. However, there is significant variation regarding magnitude of the spillovers among destination countries and country clusters. Furthermore, we find some evidence that spillovers generated by German or French fiscal spillovers are stronger for EMU than non-EMU countries in Europe. JEL codes: C50, E61, F15, F42, H60 Keywords: EMU versus “Rest of Europe”, fiscal policy coordination, fiscal spillovers, GVAR analysis, regional shocks, impulse response analysis, trade weight

International effects of euro area versus US policy uncertainty: A FAVAR approach

Building on the growing evidence on the importance of large data sets for empirical macroeconomic modeling, we estimate a large-scale FAVAR model for 18 OECD member countries. We quantify the global effects of economic policy uncertainty shocks and check whether the signs, the magnitude, and the persistence profile are consistent with the literature on the real and financial sector effects of uncertainty. In that respect, we compare the impacts of a US and a Euro area uncertainty shock. According to our results, an increase in uncertainty has a strong negative impact on economic activity, consumer prices, equity prices, and interest rates. Uncertainty shocks cause deeper recessions in Continental Europe (except Germany) than in Anglo-Saxon countries. This pattern is compatible with the view that continental Europe still suffers from institutions which prevent flexible markets. And US uncertainty shocks have a bigger impact than their European counterparts. Uncertainty does not only impact that country where the shock originates but also has large cross-border effects. In that respect, Switzerland turns out to be the most affected non-Euro area European country. We also find a high degree of synchronization among the responses of national variables to a (foreign) uncertainty shock, indicating evidence of an international business cycle. With respect to the responses of national long-term interest rates to an uncertainty shock, our results reveal a strong "North-South" divide within EMU with rates decreasing less significantly in the South. Another important result is that uncertainty shocks emerging in one region quickly raise uncertainty outside the region of origin which appears to be an important transmission channel of uncertainty.Aufgrund zunehmender Hinweise über die Bedeutung großer Datensätze für die empirische makroökonomische Modellierung schätzen wir ein FAVAR-Modell für 18 OECD-Mitgliedsländer. Wir quantifizieren die globalen Auswirkungen von wirtschaftspolitischen Unsicherheitsschocks und prüfen die Auswirkungen auf realwirtschaftliche Größen und Finanzindikatoren. In dieser Hinsicht vergleichen wir die Auswirkungen eines Unsicherheitsschocks in den USA und der Eurozone. Unseren Ergebnissen zufolge hat eine zunehmende Unsicherheit einen stark negativen Einfluss auf die Wirtschaftstätigkeit, die Verbraucherpreise, die Aktienkurse und die Zinssätze. Unsicherheitsschocks führen zu stärkeren Rezessionen in Kontinentaleuropa (mit Ausnahme Deutschland) als in angelsächsischen Ländern. Dieses Muster ist mit der Ansicht vereinbar, dass in Kontinentaleuropa immer noch Institutionen wirken, die die Flexibilität der Märkte verhindern. US-Unsicherheitsschocks haben einen größeren Einfluss als ihre europäischen Pendants. Unsicherheit wirkt nicht nur auf das Land, von dem der Shock ausgeht, sondern hat auch grenzüberschreitende Auswirkungen. In dieser Hinsicht erweist sich die Schweiz als das am stärksten betroffene Land in Europa außerhalb der Eurozone. Wir finden auch ein hohes Maß an Synchronisierung zwischen den Reaktionen ("Antworten") der nationalen Variablen auf einen (ausländischen) Unsicherheitsschock, was auf einen internationalen Konjunkturzyklus hinweist. Hinsichtlich der Reaktion der nationalen langfristigen Zinssätze auf einen Unsicherheitsschock zeigen unsere Ergebnisse eine starke "Nord-Süd"-Teilung innerhalb der WWU, wobei die Zinsraten im Süden nicht signifikant abnehmen. Ein weiteres wichtiges Ergebnis ist, dass Unsicherheitsschocks, die in einer Region einsetzen, umgehend die Unsicherheit außerhalb der Herkunftsregion erhöhen. Dies weist auf einen wichtigen Übertragungskanal hin

Measuring fiscal spillovers in EMU and beyond: A global VAR approach

This paper identifies and measures fiscal spillovers in the EU countries empirically, using a structurally stable global vector autoregression (GVAR) model. For our purposes, the individual EU countries, as well as the most important international trading partners, are modelled with a special focus on the effects of either single-country or coordinated fiscal shocks such as increases in fiscal spending. Our aim is to look at the sign and the absolute values of fiscal spillovers in a country-wise perspective and at the time profile (impulse response) of the impacts of fiscal shocks. For this purpose, we differentiate between the spillovers of fiscal shocks in specific EMU member countries and the spillovers of 'regional' shocks, i.e. area-wide shocks to fiscal policy. Fiscal policy is measured by government expenditure, government revenues or the government budget balance, all as percentages of GDP. Special attention is paid to the question of whether or not spillovers are stronger within the EMU group than within the "Rest of Europe" due to tighter financial or trade links

Fast non-recursive extraction of individual harmonics using artificial neural networks

A collaborative work between Northumbria University and University of Peradeniya (Sri Lanka). It presents a novel technique based on Artificial Neural Networks for fast extraction of individual harmonic components. The technique was tested on a real-time hardware platform and results obtained showed that it is significantly faster and less computationally complex than other techniques. The paper complements other publications by the author (see paper 1) on the important area of “Power Quality” of electric power networks. It involves the application of advanced techniques in artificial intelligence to solve power systems problems

Measuring fiscal spillovers in EMU and beyond: A global VAR approach

This paper identifies and measures fiscal spillovers in the EU countries empirically using a global vector autoregression (GVAR) model. Our aim is to look at the sign and the absolute values of fiscal spillovers in a country-wise perspective and at the time profile (impulse response) of the impacts of fiscal shocks. We find moderate spillover effects of fiscal policy shocks originating in Germany and France. However, there is significant variation regarding magnitude of the spillovers among destination countries and country clusters. Furthermore, we find some evidence that spillovers generated by German or French fiscal spillovers are stronger for EMU than non-EMU countries in Europe.Dieser Beitrag identifiziert und quantifiziert fiskalpolitisch induzierte Übertragungseffekte ("Spillover effects") innerhalb der EU unter Verwendung eines Globalen Vektorautogressiven Modells ("GVAR"). Der Schätzansatz basiert auf einer länderspezifischen Modellierung der EU-Mitgliedsstaaten und wichtiger internationaler Handelspartner unter Nutzung der Kointegrationstechnik. Darüber hinaus werden die Effekte länderspezifischer und regionaler Schocks auf nationale makroökonomische Variablen miteinander verglichen. Unser Fokus liegt dabei auf dem Vorzeichen und der absoluten Höhe der fiskalpolitischen "Spillovers" und auf dem dynamischen Zeitprofil ("impulse response") des Einflusses fiskalpolitischer Schocks. Wir finden moderate Übertragungseffekte fiskalpolitischer Schocks, die von Deutschland und Frankreich ausgehen. Gleichzeitig gibt es eine signifikante Variation des Ausmaßes der "Spillovers" in Abhängigkeit vom gewählten Bestimmungsland und der betrachteten Länder-Cluster. Alles in allem liefern wir eine robuste empirische Grundlage für die Diskussion um fiskalpolitische Koordinierung in der EWU

Did quantitative easing affect interest rates outside the US? New evidence based on interest tate differentials

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 have followed a global downward trend prior to as well as during the financial crisis. Comparing interest rate developments in the United States and the Eurozone, it appears difficult to find a distinct impact of the Fed's QE1 on US interest rates for which the global environment - the global downward trend in interest rates - does not account. Motivated by these results, we analyze the impact of the Fed's QE1 program on the stability of the US-Euro long-term interest rate relationship by using a CVAR and, in particular, recursive estimation methods. Using data between 2002 and 2014, we find limited evidence that QE1 caused a breakup or a destabilization of the transatlantic interest rate relationship. Taking global interest rate developments into account, we thus find no significant evidence that QE had an independent, distinct impact on US interest rates.Der vorliegende Artikel untersucht die Auswirkungen unkonventioneller geldpolitischer Maßnahmen auf internationale Zinsbeziehungen. Aufbauend auf einer deskriptiven Analyse ergeben sich Hinweise, dass die weltweite Entwicklung der Langfristzinsen vor und während der Finanzkrise von einem globalen Abwärtstrend geprägt war. Unter Berücksichtigung dieser trendmäßigen Zinsreduktionen lässt sich im Rahmen eines Vergleichs der europäischen und amerikanischen Zinsentwicklungen kein separater Effekt des 'Quantitative Easings' der Federal Reserve auf den amerikanischen Zins erkennen. Ausgehend von diesem Ergebnis werden empirisch im Rahmen eines kointegrierten vektorautoregressiven Models ('CVAR') die Auswirkungen des 'QE1'- Programms auf die Stabilität der Beziehung zwischen europäischem und amerikanischem Langfristzins untersucht. Die Ergebnisse der Analyse generieren nur geringe Hinweise, dass 'QE1' zu einer Destabilisierung bzw. einem Zerfall der transatlantischen Zinsbeziehung geführt hat. In dieser Hinsicht ergeben sich keine signifikanten Hinweise darauf, dass das 'Quantitative Easing' der Federal Reserve einen unabhängigen bzw. separaten Einfluss auf den amerikanischen Langfristzins hatte