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Ricardo Mestre
- 21 September 2021
- OCCASIONAL PAPER SERIES - No. 274Details
- Abstract
- This paper examines the importance of central bank communication in ensuring the effectiveness of monetary policy and in underpinning the credibility, accountability and legitimacy of independent central banks. It documents how communication has become a monetary policy tool in itself; one example of this being forward guidance, given its impact on inflation expectations, economic behaviour and inflation. The paper explains why and how consistent, clear and effective communication to expert and non-expert audiences is essential in an environment of an ever-increasing need by central banks to reach these audiences. Central banks must also meet the demand for more understandable information about policies and tools, while at the same time overcoming the challenge posed by the wider public’s rational inattention. Since the European Central Bank was established, the communications landscape has changed dramatically and continues to evolve. This paper outlines how better communication, including greater engagement with the wider public, could help boost people’s understanding of and trust in the Eurosystem.
- JEL Code
- E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
- 14 June 2011
- WORKING PAPER SERIES - No. 1356Details
- Abstract
- This paper explores the role of oil prices in the euro area economy since the 1970s by applying a VAR framework with time varying parameters and stochastic volatility in which oil supply and global demand shocks are identified. Our results show that both types of shock contributed substantially to the oil price surges during historical oil crises and likewise to those over the past decade. Counterfactual histories of the price and activity variables, moreover, reveal much larger adverse contributions of both shocks to HICP inflation and GDP in the first half of the sample than in the second, which suggests that changes related to these shocks have contributed to the Great Moderation. Impulse responses, moreover, show that a decline in the pass through of the two shocks has added to the moderating contribution over time, while variance decompositions indicate no change in the relative importance of the two shocks overtime.
- JEL Code
- E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
- 14 October 2010
- WORKING PAPER SERIES - No. 1254Details
- Abstract
- The purpose of this paper is to analyse whether fiscal policies can alleviate the effects of the zero lower bound (ZLB) on interest rates and if they should be coordinated internationally. The analysis is carried out using EAGLE, a DSGE model of the global economy. We consider that the fiscal shocks are temporary and that fiscal policy retains full credibility at all times. In this setup we find significant non-linearities in a ZLB situation that amplify the effects of fiscal shocks compared to the non-ZLB case. International coordination is helpful but does not play a major role in the results.
- JEL Code
- E40 : Macroeconomics and Monetary Economics→Money and Interest Rates→General
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
- 16 June 2010
- OCCASIONAL PAPER SERIES - No. 113Details
- Abstract
- This report aims to analyse euro area energy markets and the impact of energy price changes on the macroeconomy from a monetary policy perspective. The core task of the report is to analyse the impact of energy price developments on output and consumer prices. Nevertheless, understanding the link between energy price fluctuations, inflationary pressures and the role of monetary policy in reacting to such pressure requires a deeper look at the structure of the economy. Energy prices have presented a challenge for the Eurosystem, as the volatility of the energy component of consumer prices has been high since the creation of EMU. At the same time, a look back into the past may not necessarily be very informative for gauging the likely impact of energy price changes on overall inflation in the future. For instance, the reaction of HICP inflation to energy price fluctuations seems to have been more muted during the past decade than in earlier periods such as the 1970s.
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy - Network
- Eurosystem Monetary Transmission Network
- 28 October 2008
- WORKING PAPER SERIES - No. 950Details
- Abstract
- We evaluate residual projection strategies in the context of a large-scale macro model of the euro area and smaller benchmark time-series models. The exercises attempt to measure the accuracy of model-based forecasts simulated both out-of-sample and in-sample. Both exercises incorporate alternative residual-projection methods, to assess the importance of unaccounted-for breaks in forecast accuracy and off-model judgment. Conclusions reached are that simple mechanical residual adjustments have a significant impact of forecasting accuracy irrespective of the model in use, ostensibly due to the presence of breaks in trends in the data. The testing procedure and conclusions are applicable to a wide class of models and thus of general interest.
- JEL Code
- C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection
E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
- 20 February 2007
- WORKING PAPER SERIES - No. 721Details
- Abstract
- This paper contributes to the old theme of testing for rationality of inflation expectations in surveys, using two very different surveys in parallel. Focusing on the euro area and using two well-known surveys that include questions on inflation expectations, the Consensus Forecast survey and the European Commission Household survey, a battery of tests is applied to inflation forecasts. Tests are based on a preliminary discussion of the meaning of Rational Expectations in the macro-economic literature, and how this maps into specific econometric tests. Tests used are both standard ones already reported in the literature and less standard ones of potential interest within the framework discussed. Tests focus on in-sample properties of the forecasts, both in static and dynamic settings, and in out-ofsample tests to explore the performance of the forecasts in a simulated out-of-sample setting. As a general conclusion, both surveys are found to contain potentially useful information. Although the Consensus Forecasts survey is the best one in terms of quality of the forecasts, rationality in the European Commission Household survey, once measurement issues are taken into account, cannot be ruled out.
- JEL Code
- C40 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→General
C42 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Survey Methods
C50 : Mathematical and Quantitative Methods→Econometric Modeling→General
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
- 14 September 2005
- WORKING PAPER SERIES - No. 521Details
- Abstract
- This paper analyses the response of inflation in the euro area to five macroeconomic shocks through the use of results derived from Eurosystem large-scale macroeconomic models. The main finding is that only a fiscal shock, and to a lesser extent a TFP shock, generate marked inflation persistence. In contrast, an indirect tax and an oil price shock appear much less persistent and a social security shock generates less inflation persistence in the majority of the countries (although some weak persistence was observed at the euro area level). The paper also considers evidence on the sources of persistence, which indicates that it is crucially affected by the responsiveness of wages to employment, by the sluggishness in the adjustments of the demand components, and by the speed of adjustment of employment to output and wage changes.
- JEL Code
- C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy - Network
- Eurosystem inflation persistence network
- 1 May 2001
- WORKING PAPER SERIES - No. 65Details
- Abstract
- This paper addresses the issue of measuring the NAIRU for the euro area and assessing the robustness and precision of the obtained estimates. The empirical framework adopted is based on systems combining an Okun-type relationship between cyclical unemployment and the output gap with a Phillips curve and stochastic laws of motion for the NAIRU and potential output. Such systems have been estimated using Kalman-filter techniques. The aim of this approach is double: on the one hand, recent advances in the mentioned techniques are exploited, also with the aim of assessing the degree of uncertainty around the derived measures; on the other hand, the robustness of the approach is tested by looking at alternative versions of the systems themselves. The results obtained point to an estimate of the area-wide NAIRU that is robust to changes in the underlying models. This robustness is shown to hold both in terms of the mean - i.e., the shape of the resulting NAIRU - and the variance of the process. The latter is derived through bootstrap exercises using the models alone or pooled together. The evidence found suggests that the increase in the aggregate NAIRU that took place in the early part of the sample period has come to a halt and may be about to be reversed. The estimated final level for the NAIRU is around 10 per cent. Furthermore, the bootstrap exercises point to confidence bands close to 1 per cent around the estimated value.
- JEL Code
- C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General
C15 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Statistical Simulation Methods: General
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
- 1 April 2001
- WORKING PAPER SERIES - No. 61Details
- Abstract
- Diffusion indexes based on dynamic factors have recently been advocated by Stock and Watson (1998), and further used to perform forecasting tests by the same authors on US data. This technique is explored for the euro area using a multi-country data set and a broad array of variables, in order to test the inflation forecasting performance of extracted factors at the aggregate euro area level. First, a description of factors extracted from different data sets is performed using a number of different approaches. Conclusions reached are that nominal phenomena in the original variables might be well captured in-sample using the factor approach. Out-of-sample tests have more ambiguous interpretation, as factors seem to be good leading indicators of inflation, but the comparative advantage of the factors is less clear. Nevertheless, alternative indicators such as unemployment or money growth do not outperform them
- JEL Code
- C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
- 1 April 2001
- WORKING PAPER SERIES - No. 60Details
- Abstract
- This paper applies the 'diffusion indices' approach proposed by Stock and Watson [1998] to the euro area. Following their methodology a set of factors are extracted from a balanced and unbalanced panel dataset comprising nominal variables for 11 countries of the euro area. The estimated factors appear to be fairly stable over time. It is also shown that the first factor is cointegrated with area wide HICP and private consumption deflator supporting the idea that it represents 'a common trend of inflation' for the euro area. The other factors, which are stationary instead, seem to capture dispersion of inflation across countries. There is moreover evidence of unilateral causality from the first factor with respect to HICP, suggesting that this factor could be valuably employed in forecasting euro area inflation
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
- 1 January 2001
- WORKING PAPER SERIES - No. 42Details
- Abstract
- This paper presents a quarterly estimated structural macroeconomic model for the euro area, denoted area-wide model (AWM). This model has been developed with four uses in mind: the assessment of economic conditions in the area, macroeconomic forecasting, policy analysis and deepening understanding of the functioning of euro area economy. Five key features of the model are highlighted. First, it treats the euro area as a single economy. Second, it is a medium sized model which, while detailed enough for most purposes, is nonetheless sufficiently small to be manageable in the context of forecasting and simulation exercises. Third, the model is designed to have a long run equilibrium consistent with classical economic theory, while its short run dynamics are demand driven. Fourth, the current version of the AWM is mostly backward-looking, i.e. expectations are reflected via the inclusion of lagged variables. Finally, the AWM uses quarterly data, allowing for a richer treatment of the dynamics, and is mostly estimated on the basis of historical data (rather than calibrated). The paper comprises the following elements. First, a general overview of the structure of the model and of its long-run and short-run properties is provided, with particular emphasis on how the model reaches its steady state. This is followed by a review of the key behavioural equations, showing e.g. the extent to which the standard behavioural equations are capable of fitting the historical euro area data which has been constructed. Finally results from two illustrative simulations are provided, i.e. a fiscal expenditure shock and a change in interest rates. Appended to the main text are the full list of econometric results, the detailed description of the database and the results of stochastic long run simulations. In addition, a companion file comprising all of the quarterly time series underlying the AWM is made available
- JEL Code
- C3 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables
C5 : Mathematical and Quantitative Methods→Econometric Modeling
E2 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
Annexes - 1 March 2000
- WORKING PAPER SERIES - No. 17Details
- Abstract
- The paper focuses on the measurement of the NAIRU (Non-Accelerating-Inflation-Rate-of-Unemployment) for the euro area and assesses the usefulness of different methodologies developed in the literature to estimate this unobservable variable at the aggregate level. After reviewing the theoretical framework underlying the most common estimation approaches, it presents several estimates of the area-wide NAIRU based on a number of direct (or statistical) techniques. The latter range from simple univariate filtering approaches to more complex multivariate methods based on Phillips curve relationships. The different estimates of the aggregate NAIRU appear to be consistent and robust with respect to alternative specifications, methodologies and choice of the inflation indicator. They also show significant inflation forecasting ability and are able to produce sensible measures of the output gap, therefore providing some ground to argue that unemployment and the unemployment gap may be a useful variable to analyse short-term economic developments at the euro area level.
- JEL Code
- E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
C14 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Semiparametric and Nonparametric Methods: General
C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes