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Recent Working Papers

Non-Standard Monetary Policy And Financial Stability
Developing An Appropriate Macro-Financial Policy Mix

Reichlin, L., Pill, H.
Date Published: November 2016

Abstract:
What are the potential risks of central bank balance sheet policies for financial stability? The answer to this question depends on the type of balance sheet policies and on the type of financial stability risk. Allowing central bank intermediation to substitute for private intermediation when markets seize up tends to bolster financial stability. Such interventions can be characterised as ‘circuit breakers’ that halt a potentially vicious downward spiral of market dislocation and loss of market participants’ confidence. By contrast, central bank asset purchases aimed at reducing returns on safe assets and pushing private investors further along the risk and maturity spectra than they would otherwise choose to go may serve to generate financial stability risks. This is the case if the primary concern for stability is the squeeze on banks' profitability generated by a flat yield curve. On the other hand a flat curve decreases the incentive for financial institutions to engage in maturity transformation thereby decreasing a different source of financial stability concerns. Banks as a consequence become safer but less profitable.


The National Segmentation of Euro Area Bank Balance Sheets During The Financial Crisis
Reichlin, L., Giannone, G., Lenza, M., Pill, H., Colangelo, A.
Date Published: October 2016

Abstract:
This paper analyses bank balance sheet data in conjunction with macroeconomic and other financial variables. Our aim is to understand the nature of the instability in financial intermediation in the euro area during the recent financial crises. We define “large changes” as significant departures in the actual evolution of balance sheet variables during the crisis from their historical association with the business and financial cycles. In the course of the global 2008-09 financial crisis, such “large changes” were features of the behaviour of cross-border inter-bank flows, both within the euro area and between the euro area and the rest of the world. By contrast, retail assets and liabilities, as well as interbank flows among banks of the same country, did not significantly deviate from historical regularities. Since the euro area sovereign crisis of 2011-12, “large changes” have been more pervasive. In particular, a significant home bias in the sovereign bond market has emerged.


Reinforcing the Eurozone and Protecting an Open Society
Monitoring the Eurozone 2

Corsetti, G., Feld, L., Koijen, R., Reichlin, L., Reis, R., Rey, H., Weder di Mauro, B.
Date Published: May 2016


The National Segmentation Of Euro Area Bank Balance Sheets During The Crisis
Reichlin, L., Colangelo, A., Giannone, D., Lenza, H., Pill, H.
Date Published: February 2016

Abstract:
This paper analyses balance sheet data for the aggregate euro area banking sector, in conjunction with macroeconomic variables. Our aim is to understand the nature of the instability in financial intermediation over the recent crises. We define “large changes” as significant departures of actual balance sheet variables’ dynamics during the crisis from their historical association with the business cycle. In the course of the global 2008-09 financial crisis, “large changes” were related to cross-border inter-bank flows, both within the euro area and between the euro area and the rest of the world; retail assets and liabilities and also interbank flows among banks from the same country were remarkably stable in their relation with the business-cycle. Since the euro area sovereign crisis, “large changes” have been more pervasive reflecting, in particular, the emergence of a home bias also in the sovereign bond market.


Exploiting the Monthly Data Flow in Structural Forecasting
Federal Reserve Bank of New York Staff Reports

Reichlin, L., Giannone, D., Monti, F.
Date Published: December 2015

Abstract:
This paper develops a framework that allows us to combine the tools provided by structural
models for economic interpretation and policy analysis with those of reduced-form models
designed for nowcasting. We show how to map a quarterly dynamic stochastic general
equilibrium (DSGE) model into a higher frequency (monthly) version that maintains the same
economic restrictions. Moreover, we show how to augment the monthly DSGE with auxiliary
data that can enhance the analysis and the predictive accuracy in now-casting and forecasting.
Our empirical results show that both the monthly version of the DSGE and the auxiliary variables offer help in real time for identifying the drivers of the dynamics of the economy.




The Legacy Debt and the Joint Path of Public Deficit and Debt in the Euro Area
Fellowship Initiative 2014-2015, Discussion Paper 010, September 2015

Reichlin, L., Caruso, A., Ricco, G.
Date Published: September 2015

Abstract:
This paper studies the joint dynamics of public debt and public deficit in the euro area for the period 1981-2013 and computes projections up to 2020. We show that, since 2009, public debt and public deficit have been negatively related. On the basis of a counter-factual simulation that conditions on past correlations with a large number of macroeconomic indicators and the observed GDP path since 2008 we find that the negative relation is anomalous with respect to previous historical experience. In contrast, private savings and private debt since 2008 have behaved in line with past experience. We define and estimate the “legacy debt” of the 2008 crisis and show that, if GDP and inflation will
behave according to the International Monetary Fund (IMF) projection, by 2020 it will still account for 15% of total public debt.


Greece: Seeking a Way Forward
White paper - London, June 2015

Reichlin, L., Papaioannou, E., Portes, R.
Date Published: 19/06/2015


A New Start for the Eurozone: Dealing With Debt
Monitoring the Eurozone 1

Reichlin, L., Corsetti, G, Feld, L P., Lane, P R., Rey, H., Vayanos, D., Weder di Mauro, B.
Date Published: March 2015


Exceptional Policies For Exceptional Times:
The ECB's Response To The Rolling Crises Of The Euro Area, And How It Has Brought Us Towards A New Grand Bargain

Reichlin, L., Pill, H.
Date Published: 01/10/2014

Abstract:
This paper provides an appraisal of European Central Bank (ECB) policy from the beginning of the financial crisis to the summer of 2014. It argues that, as the crisis unfolded, ECB policy can be characterized as an attempt at finding a middle way between “monetary dominance” embedded in the Treaty and “fiscal dominance”. This middle course was pragmatic response to the challenges being faced but it failed to offer a stable solution to the underlying solvency issues, while permitting (or even creating) a damaging set of dislocations, notably a fragmentation of Euro financial markets, with damaging consequences on the real economy. We argue that since Draghi’s pledge to do “whatever it takes” to sustain the euro in July 2012, the ECB has attempted to construct a new institutional framework. We conclude that, although there are promising developments in some areas such as banking union, without a “new bargain” on how to deal with the debt overhang which is the legacy of the crisis, the euro area is under threat


Exploiting the monthly data-flow in structural forecasting
Reichlin, L., Giannone, D., Monti, F.
Date Published: 12/09/2014

Abstract:
This paper shows how and when it is possible to obtain a mapping from a quarterly DSGE model to a monthly specification that maintains the same economic restrictions and has real

coefficients. We use this technique to derive the monthly counterpart of the Gali et al (2011)model. We then augment it with auxiliary macro indicators which, because of their timeliness, can be used to obtain a now-cast of the structural model. We show empirical results for the quarterly growth rate of GDP, the monthly unemployment rate and the welfare relevant output gap defined in Gali, Smets and Wouters (2011). Results show that the augmented monthly model does best for now-casting.


Money, credit, monetary policy and the business cycle in the euro area: what has changed since the crisis?
Reichlin, L., Giannone, D., Lenza, M.
Date Published: 18/06/2014

Abstract:
This paper provides VAR based evidence of the response of a large set of euro area macroeco- nomic and financial variables to cyclical and monetary policy shocks. It then uses the model to analyze the stability of financial intermediation after the 2008 crisis. Our key finding is that the cyclical dynamics of short-term interest rates, deposits and loans is not significantly different from that identified in the pre-crisis sample while long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low.


 
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bank balance sheets (2)
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forecasting (2)
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