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In most countries in the European Union (EU) and in the rest of the world, debt is treated more favourably from a tax perspective than equity, with interest payments on loans generally being tax deductible. In contrast, costs relating to equity financing, such as dividends, are mostly non-tax deductible. This unequal treatment of debt and equity leads to a bias towards debt in businesses' investment decisions and can lead to high levels of indebtedness in the EU corporate sector. On 11 May 2022, ...

After a series of unprecedented interest rate hikes on both sides of the Atlantic, inflation in the euro area and the United States is cooling down from a 40-year high. However, uncertainty about the inflation and growth outlook remains high, as the European Central Bank and the Federal Reserve are considering their next moves. Five papers were prepared by the ECON Committee’s Monetary Expert Panel, making a comparative assessment of inflation dynamics and monetary policy stances in the two monetary ...

Two sides of the same sparkly coin?

Analyse approfondie 01-06-2023

Restrictive monetary policy dampens inflation effectively, but it also raises stress in financial markets. This happens through revaluations of financial assets on banks’ balance sheets and through dampened economic activity. Moreover, apart from the positive effect of exiting negative interest rates, banks’ net interest margin is generally negatively affected by interest rate hikes. With most of the disinflationary impact of higher interest rates yet to materialise, monetary policy should allow ...

The interest rate cost of EU borrowing for non-repayable support, which lies with the EU budget, could be twice as high as what was initially estimated at the start of the EU’s 2021-2027 budget cycle. This Bruegel paper finds that the European Commission’s issuance strategy can still be improved to reduce EU borrowing costs at the margin. It should also continue to work on building market infrastructures for EU bonds. Moreover if EU countries want to reap the full benefits of EU borrowing, some political ...

Now is the time for quantitative tightening

Analyse approfondie 16-03-2023

Even if QT is as inefficient as QE at affecting inflation, now is the time to cut the size of central banks’ balance sheets. The stabilising effects of large balance sheets are eroded as the financial markets adapt to excess reserves. If QT proves to be financially destabilising, it can be temporarily interrupted, possibly even reversed. This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the ...

This paper points to new multifaceted and often interconnected sources of risks (including high-impact tail risks) and the challenges posed to supervisory actions. It also makes the important case that traditional risk management tools might face limitations in the current situation. We discuss both geopolitical and related risks as well as other risks in the context of rising interest rates and a volatile macroeconomic environment. The challenge for banks will be to be prepared for such extreme ...

Inflation pressures have triggered a largely synchronised tightening of monetary policy around the world. The sharp appreciation of the US dollar is adding to the challenges that policymakers confront. The paper sets out to identify the channels through which US tightening spills over to the rest of the world, with a particular focus on the euro area. It also examines the risks that stem from uncoordinated monetary tightening and discusses how different forms of global cooperation can help mitigate ...

Although macroeconomic effects of asset purchases are intensively discussed, the literature addressing “tapering” is rather thin. Using a broad definition of tapering the study considers three tapering scenarios within a Dynamic Stochastic Equilibrium Model: A reduction of net purchases in the expansionary stage, the announcements of an earlier exit, and a faster than expected exit. In all three cases the effects on long-term yields are positive and negative on output growth and inflation. Quantitatively ...

In advance of the decision of the European Central Bank (ECB), expected on 8 December 2016, regarding the Asset Purchase Programme (APP, often referred as Quantitative Easing – QE) this note provides an insight to possible policy options for the ECB. It also looks at the ECB’s options to address the scarcity of eligible assets; if not addressed, scarcity of eligible assets could put at risk the proper functioning of the APP.

Chacun croit savoir ce qu'est un taux d'intérêt. Cette étude montre que les choses ne sont pas si simples, en théorie pas plus qu'en pratique. Elle met en lumière les différences qui existent entre l'intérêt, la rente et le profit, entre les taux nominaux et réels, entre les taux longs et courts, ainsi que l'interaction de ces grandeurs. Elle analyse notamment la manière dont les variations des taux à court terme se répercutent sur les marchés financiers, de même que les effets du niveau des taux ...