Central banks

US monetary policy is more powerful in low economic growth regimes

03/21/2024 European Central Bank Central banks

We use nonlinear empirical methods to uncover non-linearities in the propagation of monetary policy shocks. We find that the transmission on output, goods prices and asset prices is stronger in a low growth regime, contrary to the findings of Tenreyro and Thwaites (2016). The impact is stronger on private investment and durables and milder on the consumption of nondurable goods and services. In periods of low growth, a contractionary monetary policy implies lower expected Treasury rates and higher premia along the entire Treasury yield curve.

An update on the accuracy of recent Eurosystem/ECB staff projections for short-term inflation

03/21/2024 European Central Bank Central banks

This box looks at errors in Eurosystem and ECB staff inflation projections over the post-pandemic period, updating and extending earlier analysis published in 2022 and 2023. Projection errors have come down considerably since the end of 2022 and now stand close to pre-pandemic levels. The low predictability of energy commodity prices (which surprised markets on the downside in 2023) explains a significant share of the recent errors in HICP inflation projections.

How geopolitics is changing trade

03/21/2024 European Central Bank Central banks

Rising trade tensions and a spate of policies aiming to bring national security concerns to bear in trade relations have sparked growing concern about the potential implications of global trade fragmentation. Yet, empirical evidence that geopolitical concerns are already materially affecting trade patterns is scant. This box addresses the issue using a structural gravity model augmented with a geopolitical distance measure based on UN General Assembly voting to investigate the role played by geopolitical factors for trade in manufacturing goods over the period 2012-22.

Speculation in oil and gas prices in times of geopolitical risks

03/21/2024 European Central Bank Central banks

Recent volatility in oil and gas prices has rekindled interest in understanding how much fundamental factors – global supply and demand – and non-fundamental factors contribute to price movements. This box constructs indices of speculation based on futures positions. Overall, speculation has only a limited role in both oil and gas price dynamics, although the degree of speculation is somewhat higher in European gas markets than in US gas markets.

What were the drivers of euro area food price inflation over the last two years?

03/20/2024 European Central Bank Central banks

Food price inflation was one of the main contributors to the strong rise in euro area headline inflation in 2022 and to the period of disinflation that followed. An extraordinary surge in energy costs was the main factor behind higher consumer food inflation in 2021 and 2022. Increases in global food commodity prices and euro area farm gate prices also contributed significantly. In the high inflation environment, domestic factors – such as wage and profit developments – have gradually emerged as increasingly important factors in keeping food inflation elevated.

How have households adjusted their spending and saving behaviour to cope with high inflation?

03/20/2024 European Central Bank Central banks

This box investigates how households have responded to the 2021-23 inflationary episode using evidence from the ECB’s Consumer Expectations Survey. The findings suggest that households have primarily adjusted their consumption spending to cope with higher inflation. However, noteworthy adjustments were also observed through the saving and income margins. The decline in the saving rate in 2022 and 2023 was mainly attributed to increased spending on recreation and travel, mostly driven by high-income consumers.

The impact of recent shocks and ongoing structural changes on euro area productivity growth

03/19/2024 European Central Bank Central banks

Recent shocks such as the pandemic and the energy shock triggered by Russia’s unjustified war against Ukraine have interacted with other structural changes, including the green and digital transitions, leading to an uncertain impact on the medium-term productivity prospects of the euro area. This article summarises the key results of recent work on productivity by a group of experts from the European System of Central Banks (ESCB). The analysis builds on previous work undertaken in the context of the ECB monetary policy strategy review.

Shocked to the core: a new model to understand euro area inflation

03/19/2024 European Central Bank Central banks

The pandemic's disruption of global supply chains and the spike in natural gas prices following Russia’s invasion of Ukraine were significant drivers of surging inflation. Traditional inflation models often ignore such supply-side shocks, even though they can have a significant and persistent impact on core inflation in the euro area (as measured by rates of change in the Harmonised Index of Consumer Prices excluding the energy and food components).

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