Christian Bordes

Is there a structural break in equilibrium velocity in the euro area

We investigate the stability of M3 income velocity in the euro area. We apply a set of breakpoint procedures to examine this issue and conclude that at least one structural change occurred around 2000-2001. We also find evidence of another structural break around 1992-1993. These two breaks seem to affect both the level and the slope of the income velocity of M3. We then estimate a model of equilibrium velocity that factors in the opportunity cost of M3, along the lines suggested by Orphanides and Porter (2000). Here again, we find some evidence of instability in equilibrium velocity. Given the importance of the assumption of stable velocity trends for both the derivation of the reference value and the two-pillar strategy of the Eurosystem, these findings question the relevance of some excess liquidity indicators directly computed from the reference value and may call for some adjustments in the conduct of the ECBs monetary policy.

The ECB Art of Central Banking and the Separation Principle

This paper examines the art of central banking as practised by the European Central Bank (ECB) through the prism of Goodfriends (2009) determination of the three policies that fall within the remit of a central bank: monetary policy, which consists in varying the size of the balance sheet, credit policy, which consists in modifying the credit structure, and interest rate policy, which consists in adjusting the interest rates of the marginal lending and deposit facilities. The theoretical literature emphasises the existence of a separation principle between the first policy, which seeks to ensure monetary stability and the other two policies, which are intended to ensure financial stability through the smooth functioning of the interbank money market. This paper shows in particular that a central bank not only has the capacity but indeed must strive to separate the conduct of its monetary policy, which must seek to ensure medium and long-term price stability, from that of its credit policy, which is driven by short-term imperatives and consists in supplying the banking system with liquidity in the event of temporary money demand shocks. During the first part of the crisis, the ECB acted in accordance with the separation principle. However, it became increasingly difficult to apply as interest rates approached the zero-lower-bound. In effect, the unconventional measures adopted by the ECB created interference between its monetary policy, its credit policy and its interest rate policy.

Price Stability and the Ecb's Monetary Policy Strategy

This paper focuses on the price stability objective within the framework of the single monetary policy strategy. It starts by reviewing what this objective, which is common to all central banks, means. Secondly, this paper will focus exclusively on the anchoring of short- to medium-term inflation expectations (Part 2). Several measures show that this anchoring is effective. Modern New Keynesian theory is an appropriate framework for analysing the impact that this anchoring of expectations has on the determination of the short- to medium-term inflation rate. From this point of view, observed inflation in the euro area seems to be in line with the theory and the ECBs action seems to be very effective. Thirdly, we will focus on the other aspect of monetary stability: the degree of price-level uncertainty and the anchoring of inflation expectations in the medium to long term. Even though this assessment is more difficult than it is in the short to medium term, since we only have a track record covering five years, various indicators from the theoretical analysis paint a fairly reassuring picture of the effectiveness of the device used by the ECB.

An Evaluation of the Performance of P-star as an Indicator of Monetary Conditions in the Perspective of EMU: The Case of France

The distinction between instruments, intermediate objectives, indicators and final objectives of monetary policy is widely used in academic works as well as by monetary authorities. Among these different concepts, the notion of monetary indicator is the most difficult to handle since it refers in practice to two different concepts (see Dewald, 1967; Davis, 1990). The first one means that the indicator is a scale which is used to measure the orientation of the policy implemented by the authorities (Brunner and Meltzer, 1967; 1969). The second one implies that the indicator provides information on the expansionary or restrictive character of the monetary effects, taken broadly. In order to avoid any confusion, it is better to refer to the first one strictly speaking as a monetary policy indicator and to the second one as an indicator of monetary conditions.

Time varying equity market beta as an index of financial openness

From the data consisting of over a century, there has been a significant relationship between capital account liberalization and increasing correlation among national stock markets of different countries (Quinn and Voth, 2008). In this research we propose a price based de facto measure of financial integration/openness that can be used to rank selected Asian economies solely on the basis of standardized co-movements of their equity markets in relation to the representative world markets. We call this new measure as time varying equity market beta (TVEMB). Significant degree of correlation with some major and complex indices and the ability to show dynamic de facto situations of financial openness, supported by several evidences, allow us to use TVEMB as an alternative measure in conjunction with other indicators of financial openness/integration.