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Monetary policy and financial stability

In-Depth Analysis 25-05-2023

Monetary policy tightening has led to a sharp steepening of the yield curve and this has had a negative impact on banks that were not well-positioned to cope with this shock. This paper reviews current banking tensions and argues that they are unlikely to have a major impact on the ECB’s monetary policy decisions in the current cycle.

Since 2008, and as the result of central banks reaching the zero-lower bound, fiscal policy has come back as a potential, possibly primary, tool to stabilize business cycles. We present evidence that European countries have historically relied on automatic stabilisers for counter-cyclical policies, while discretionary fiscal policy has been pro-cyclical (unlike in the US). Pro-cyclical fiscal policies became so strong in the years 2010-14 that they completely eliminated the benefits of automatic ...

Automatic stabilisers refer to items on government budgets that operate in ways that smooth the economic cycle. These are found to have played this role to a considerable extent – possibly halving the amplitude of the cycle – in the first two decades of the single currency in Europe. However, discretionary fiscal policies have frequently overruled the working of the automatic stabilisers, thus muting their smoothing impact, both in good and in bad times. A supranational buffer fund, to which Member ...

This report provides a country-specific stocktaking of automatic stabilisers in the Eurozone and analyses the effect of automatic stabilisers in preventing pro-cyclical fiscal policies in good and bad times. The report shows that the size of automatic stabilisers varies greatly across Euro-area Member States. While automatic stabilisers have played an important role in the early phase of the financial and economic crisis in 2008/2009, their countercyclical effect was partly offset in some Member ...

The July 2013 Council recommendations for the euro area recognise a number of fiscal and macrostructural challenges, but they do not go far enough in exploiting the policy options rendered possible by the European economic governance framework. There are particular problems with the Council's suggestions for the euro area as whole, because these suggestions are not (or are not adequately) reflected by the country-specific recommendations. A major drawback is that the Council recommendations do not ...

This briefing considers the options facing the European Union to reform its fiscal framework. The first option is to take steps that complement market discipline of individuals Member States. In order for market discipline to play this positive role, three conditions need to be met: 1) markets need to have accurate information on Member State finances; 2) market valuation of a given state also has to be an accurate valuation of the sustainability of that state’s finances; and 3) populations need ...