Christophe Blot

Assessing the Link between Price and Financial Stability

This paper aims at investigating first the (possibly time-varying) empirical relationship between the level and conditional variances of price and financial stability, and second, the effects of macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J Schwartz’s conventional wisdom that price stability would yield financial stability. Using simple correlations, VAR and Dynamic Conditional Correlations, we reject the hypothesis that price stability is positively correlated to financial stability. We then discuss the empirical appropriateness of the leaning against the wind monetary policy approach.

Sustainability of Public Debt: A Dangerous Obsession?

Public debt sustainability has become a major concern since 2010. The Great Recession has indeed pushed public debt to historically high levels in peacetime. Doubts have been raised about the risk of insolvency for some governments in the euro area (notably Greece, Portugal, Ireland, Italy and Spain) triggering a rise in sovereign debt yields. Relying on indicators to gauge the ability of governments to meet their obligations is therefore crucial. Currently, the most widely used indicators to assess public debt sustainability are based on the intertemporal budget constraint of the government. The debt-dynamic relation provides an accounting view of sustainability, which is discussed in the first part of this chapter. It is emphasised that the construction of these indicators of sustainability critically hinges on hypotheses regarding the interest rate and the long-term growth. However, there is considerable uncertainty on these variables, as is stressed in the second part. On the one hand, interest rate on debt may be highly volatile in the short run, and governments may face a liquidity squeeze. During panics, it is hard to disentangle liquidity problems from solvency problems. On the other hand, a choice must be made about the GDP growth rate. It may be low in the short run in times of crisis, reducing sustainability, while it is subject to more uncertainty in the long run, depending on present and future policy changes. Moreover, it raises endogeneity issues, which are discussed in the third part. Consolidation is one option, but it may worsen debt sustainability if fiscal multipliers are high and if hysteresis effects of consolidation are significant. Assessing fiscal sustainability is therefore a tricky issue as the indicators used to assess it are fragile. Hence, policy-makers should not give too much importance to them. The fact remains that most European countries have to cope with high public debt and the risk of “unsustainability”. This may require alternative policy options. Monetary policy can play a role, and coordination between monetary policy and fiscal policy should be enhanced.

Euro Area Inflation and ECB Policy in a Global Environment

This paper contributes to the literature investigating the role of global factors in determining Euro area inflation, using a wide list of potential candidates to measure global factors. We show that roughly 50 percent of inflation is explained by global factors; and that the ECB has an impact on the domestic part of inflation. This calls for adjusting the definition of the ECB target to the domestic-driven indicator of inflation which we develop.

Zone euro : le calice de l’austérité jusqu’à la lie: Perspectives 2013-2014 pour l’économie européenne

Le recul de l’activite observee dans la zone euro depuis le quatrieme trimestre 2011 s’est amplifie en fin d’annee 2012 malgre le retour annonce de la confiance. Depuis l’ete 2012, la ratification du TSCG (Traite sur la stabilite, la coordination et la gouvernance) ainsi que l’annonce par la BCE de l’OMT (Outright monetary transactions ou aussi Operations monetaires sur titres) avaient ecarte les risques d’un eclatement de la zone euro contribuant a la baisse des primes de risques sur les marches obligataires publics. Cet espoir fut cependant insuffisant pour compenser le fort impact recessif de la consolidation budgetaire. Les demandes interne et externe, du fait des fortes interdependances entres les pays de la zone euro, ont par consequent continue a flechir. Le vote des budgets pour l’annee 2013 annonce d’ores et deja la poursuite de ce scenario. Bien qu’en leger recul, l’impulsion budgetaire serait de -1,1 point de PIB. 2013 sera par consequent une nouvelle annee de recession dans la zone euro, le PIB reculerait de 0,4 %. En 2014, le rythme de consolidation marquera encore le pas dans la mesure ou certains pays auront atteint la cible de 3 % pour le deficit budgetaire (Allemagne, Autriche, Belgique, Finlande) ou en seront assez proches (Pays-Bas). La croissance serait alors positive (0,9 %) mais insuffisante pour permettre une decrue du chomage. Les risques resteront orientes a la baisse en raison des pressions deflationnistes qui vont s’intensifier. La deflation est deja enclenchee en Espagne et en Grece et pourrait se generaliser a tous les pays ou le taux de chomage se maintient a des niveaux tres eleves, d’autant plus qu’a ce mecanisme s’ajoutent de nombreuses reformes ou mesures visant a reduire le cout du travail. La concurrence entre pays de la zone euro pour gagner des parts de marche devrait s’intensifier ce qui amplifiera les pressions deflationnistes sans reussir a generer l’effet positif escompte sur la croissance de l’ensemble de la zone euro.