Benoît Cœuré Member of the Executive Board Heterogeneity and the ECB s monetary policy Paris, 29 March 2019
Persistence of inflation differentials main pre-crisis concern Inflation dispersion in the euro area and the US (unweighted standard deviation) Euro area HICP inflation gaps (percentage points) EA (changing composition) United States (22 MSAs) 4.0 DE ES GR Financial crisis 1.5-1999 2003 2007 2011 2015-4.0 1999 2003 2007 2011 2015 Sources: ECB, Bureau of Labor Statistics and ECB calculations. Last observation: 2018Q4. Sources: ECB and ECB calculations. Notes: The inflation gap is computed as the difference between the euro area average and the respective country s HICP inflation. Last observation: 2018Q4. 2
Financial integration came to a halt with the crisis Quantity-based indicator of euro area financial integration (index) 0.9 0.8 0.7 0.6 0.4 0.3 0.2 0.1 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Sources: ECB and ECB calculations. Notes: The quantity-based composite indicator aggregates five indicators available from the first quarter of 1999. The indicator is bounded between zero (full fragmentation) and one (full integration). Increases in the indicator signal greater financial integration. For a detailed description and input data, see the ECB Financial Integration Report. Last observation: 2018Q3. 3
Cross-border risk-sharing lower in the euro area than in the US Consumption risk sharing in the euro area (percentages) Consumption risk sharing in the United States (percentages) 140 capital channel fiscal channel unsmoothed credit channel 100 capital channel fiscal channel unsmoothed credit channel 120 100 80 80 60 60 40 20 40 0 20-20 -40 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: ECB calculations. Notes: The contributions of the channels are calculated using a vector-autoregression (VAR) model whose parameters are estimated over a ten-year rolling window of annual data. Bars display the proportion of a one-standard-deviation shock to domestic GDP growth that is absorbed by each risk sharing channel. The shares are computed on the basis of the cumulative impact of the shock on the variables capturing each risk sharing channel over a ten-year horizon. Year-to-year variation in the shares reflects changes in the re-estimated model parameters. The remaining portion represents the share of the shock to country-specific real GDP growth that remains unsmoothed and is fully reflected in country-specific consumption growth. The individual bars can go below 0% and above 100% if one or more of the channels involved has a dis-smoothing effect on country-specific consumption growth. The shares in each bar total 100%. For further details see Cimadomo et al. (2018), Risk sharing in the euro area, ECB Economic Bulletin, 3/2018.
Shocks may cause persistent cross-country consumption differentials Dispersion of real private consumption in the euro area and the US (unweighted standard deviation) Euro area 11 United States 4.0 3.5 3.0 2.5 1.5 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Sources: ECB and ECB calculations. Last observation: 2018 for EA, 2016 for US. 5
Monetary policy reduced perilous fragmentation Composite indicator of the cost of borrowing for NFCs (percentages per annum) Loans to NFCs in selected euro area countries (annual percentage changes) 7 DE ES FR IT EA 25 DE ES FR IT EA 6 5 TLTROs, NIRP, APP 20 15 TLTROs, NIRP, APP 4 10 3 5 2 0 1-5 0-10 -1 2008 2010 2012 2014 2016 2018-15 2008 2010 2012 2014 2016 2018 Source: ECB. Notes: The indicator for the total cost of bank borrowing is calculated by aggregating short- and long- term rates using 24-months moving average of new business volumes. Latest observation: January 2019. Source: ECB. Notes: Loans are adjusted for sales, securitisation and cash pooling activities. Latest observation: January 2019. 6
Response to common shocks uneven in the euro area Effect of a common euro area business cycle shock (cumulative change in percentages) Phillips curve slope across selected euro area member states 2.5 Change in GDP one year after the shock median 1.5 1.5 - EA EE LV IE LT LU FI SI DE SK AT NL IT FR BE PT ES CY GR - EA DE ES FR IT Sources: ECB calculations. Notes: Bars on the left-hand side chart represent the cumulative change in the growth rate of GDP in response to a euro area business cycle shock, one year after the occurrence of the shock. To derive the responses to the shock, first a VAR (in log-levels, sample 1996Q1 to 2017Q4) is estimated with Bayesian methods and, then, the euro area business cycle shock is constructed as the linear combination of shocks that explain the bulk of the business cycle variation of GDP in the euro area. For technical details, see Giannone, Lenza and Reichlin (2019), Money, credit, monetary policy and the business cycle in the euro area: what changed with the crisis?, IJCB (forthcoming). The right-hand side chart shows the distribution of the slack parameter in different Phillips curve specifications using HICP excluding energy and food. Slack measures are standardized for comparability; assumption: constant parameters over the full sample. The box plot is constructed using the 90 and the 10 percentiles.
Lack of convergence source of concern Real GDP per capita (index, 1995Q1 = 100) EA DE IT US 150 Financial crisis 140 130 120 110 100 1995 1998 2001 2004 2007 2010 2013 2016 Sources: National accounts and ECB calculations. Last observation: 2018Q4. 8
Quality of institutions underpin growth and living standards GDP per capita relative to EU28 in 2017 and Worldwide Governance Indicator rank in 2008 (index EU28=100; ranking) Worldwide Governance Indicator rank (2008) 90 80 70 60 BG HR RO LV PT PL HU GR joined euro area before 2002 joined euro area after 2002 non-euro area country EE SK LT CY CZ SI ES MT IT FI UK FR EU28 DK SE BE DE NL AT IE 50 40 60 80 100 120 140 GDP per capita relative to EU28 (2017) Sources: Eurostat and World Bank. Notes: The Worldwide Governance Indicator is the composite rank of average positions in six broad institutional dimensions. Luxembourg is excluded because GDP per capita computations are distorted by e.g. the high number of cross-border workers. 9
Monetary policy actions succeeded in insulating inflation expectations Dependence of long-term SPF inflation expectations on current HICP inflation (percentage points; median and 16/84 percentiles) Euro area inflation and inflation expectations (percentages per annum) 0.3 Time-varying parameter estimates - median APP announcement 5 HICP inflation Upper-bound of definition of price stability Long-term inflation expectations SPF (5y ahead) 5-year forward 5 years ahead BEIR (seas. adj.) 5-year forward 5 years ahead ILS Longer-term inflation expectations Consensus (6y-10y ahead) 0.2 4 0.1 3 2-0.1 1-0.2 0-0.3 2005 2007 2009 2011 2013 2015 2017 2019-1 1990 1994 1998 2002 2006 2010 2014 2018 Source: ECB calculations. Notes: Time-varying estimates of the pass-through from changes in current inflation over the previous two quarters to changes in long-term inflation expectations over the previous two quarters. The model is estimated with Bayesian techniques and allows for stochastic volatility. Latest observation: 2019Q1. Sources: ECB, Thomson Reuters, Consensus Economics and ECB calculations. Latest observation: 2019Q1. 10
Market-based measures of inflation expectations more volatile Option implied risk-neutral distribution of average inflation over the next 5 years (percentages) Inflation-linked swap forward rates in the US and euro area (percentages per annum) 100 Below 0% Between 0% and 1.5% Between 1.5% and % Between % and 2.5% Above 2.5% 4.0 EA 5-year rate 5 years ahead US 5-year rate 5 years ahead 90 3.5 80 70 3.0 60 2.5 50 40 1.5 30 20 10 0 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 Sources: Bloomberg, Thomson Reuters and ECB calculations. Notes: Probabilities implied by five-year zero-coupon inflation options, smoothed over five business days. Risk-neutral probabilities may differ significantly from physical, or true, probabilities. Latest observation: 19 March 2019. Sources: Thomson Reuters, ECB calculations. Latest observation: 27 March 2019. 11
Monetary policy dominant driver of current expansion Decomposition of euro area 5y5y ILS rate into inflation expectation and risk premia (percentages per annum) Contributors to different euro area economic recovery episodes (percentage points) 3.0 Fitted EA 5y5y ILS rate Expected inflation Inflation risk premium 0.3 Monetary policy External demand Real GDP growth Oil price Other 2.5 0.2 1.5 0.1-2005 2007 2009 2011 2013 2015 2017-0.1 2003Q2-2006Q4 2009Q3-2011Q3 2013Q2-2016Q4 Sources: Thomson Reuters and ECB calculations. Notes: The decomposition of the 5y5y ILS rate is derived on the basis of an affine term structure model fitted to the euro area zero-coupon inflation linked swap curve. Latest observation: 25 March 2019. Source: ECB calculations. Notes: Real GDP growth refers to average quarter-on-quarter growth rates over respective recovery episodes and across models, in deviation from sample mean. Estimates are based on NiGEM, CMR and BVAR, except external demand for which BVAR estimates are not available. 12
Thank you 13