Does money lead inflation in the euro area?

This paper investigates the properties of monetary and credit aggregates as indicators for future price developments in the euro area. The forecasting performance of models including indicators based on money and credit is assessed in a simulated out-of-sample forecasting exercise for forecast horizons varying from one quarter to three years ahead. The performance of these models is compared with that of models which include indicators based on financial markets, real activity, the labour market and various cost and price measures. The results support the idea that monetary and credit aggregates provide significant and independent information for future price developments in the euro area, especially at medium term horizons JEL Classification: E31, E40, C32

A micro simulation model of demographic development and households' economic behavior in Italy

The relationship between the demographic structure and the saving rate of a society is the reflection of the aggregation of the behaviour of heterogeneous households, differing from one another in the type of living arrangements and in the characteristics of their members. In order to contribute to the understanding of this relationship, we construct a dynamic micro model capable of simulating the demographic development of a population, including the creation, destruction, dimension and various other important characteristics of households and their members. The demographic model is then combined with a specification of the processes generating income, social security wealth, retirement and consumption behaviour of households, and applied to a data set derived from survey data on the Italian household sector. Simulations of the model are used to study the evolution of aggregate income, saving and asset accumulation over the period 1994-2100. If fertility and mortality assumptions of recent official projections are adopted and marriage and divorce rates maintained at current levels, the dramatic ageing of the population and the marked decline in the share of population living in traditional households would lead, other things being equal, to a substantial decline in the aggregate saving rate. However, the reduction in the number of children per household and, above all, the decline in the ratio of social security wealth of households to disposable income as the effects of the recently introduced reforms begin to be felt act as offsetting factors. As a result, the aggregate saving rate increases over the initial 30 years of the simulation and moderately decreases thereafter, stabilizing slightly above the original level. Implications of changes in a number of key assumptions regarding the demographic evolution, productivity growth and individual behavioural responses are also analyzed.demographic developments, family structure, consumption, saving, social security, micro simulation model

Contingent liquidity

After the crisis, bank regulators are considering mitigating liquidity risk by introducing quantity limits on liquidity and maturity mismatch. We argue that aggregate liquidity risk can be reduced with little deadweight loss by encouraging banks, through adequate regulatory relief, to satisfy part of their financing needs with a new class of securities. These would include a Roll-Over Option Facility (ROOF) that allows the issuer, for a price, to keep the funds if at maturity a readily observable variable correlated with systemic liquidity risk (e.g. the LIBOR-OIS spread) is above a trigger threshold. At roll-over the yield would reflect the current price of liquidity and credit risk, making ROOFs attractive to investors. The instrument could attenuate a liquidity crisis by reducing banks’ need to roll debt over or sell off assets, and diminish the probability of runs, if markets are convinced that banks can secure sufficient liquidity when needed thanks to the widespread use of this contingent claim.funding, liquidity, contingent claim, financial crisis

Definition of price stability, range and point inflation targets: the anchoring of long-term inflation expectations

JEL Classification: E52, E61, E31, E42, E43credibility, definition of price stability, inflation, inflation expectations, nominal anchor

Lessons learned from the financial crisis for financial stability and banking supervision

The financial crisis that began in 2007 has revealed a need for a new supervisory and regulatory approach aimed at strengthening the system and containing the risk of future financial and economic disruptions. Three ingredients are needed to ensure financial stability: robust analysis, better regulation, and international cooperation. First, financial stability analysis must be improved to take full account of the different sources of systemic risk. Data coverage of the balance sheets of both non-bank financial institutions and the non-financial sectors should be increased. Moreover, to address the problems raised by the interconnections among financial institutions more granular and timely information on their exposures is needed. There must be further integration of macro- and micro-information and an upgrading of financial stability models. The second ingredient is the design of robust regulatory measures. Under the auspices of the G20 and the Financial Stability Board, the Basel Committee on Banking Supervision recently put forward substantial proposals on capital and liquidity. They will result in more robust capital base, lower leverage, less cyclical capital rules and better control of liquidity risk. Finally, the third ingredient is strong international cooperation. Ensuring more effective exchanges of information among supervisors in different jurisdictions and successful common actions is key in preserving financial integration, while avoiding negative cross-border spill-overs. Better resolution regimes are part of the efforts to ensure that the crisis of one institution does not impair the ability of the financial markets to provide essential services to the economy.financial crisis, international cooperation, macroprudential analysis, procyclicality, prudential regulation, stress tests

THE ROLE OF MONEY IN MONETARY POLICY MAKING

Abstract: In this paper, the conceptual and empirical bases for the role of monetary aggregates in monetary policy making are reviewed. It is argued that money can act as a useful information variable in a world in which a number of indicators are imperfectly observed. In this context, the paper discusses the role of a reference value (or benchmark) for money growth in episodes of heightened financial uncertainty. A reference value for money growth can also act as an anchor for expectations and policy decisions to prevent divergent dynamics, such as the spiraling of the economy into a liquidity trap, which can occur under simple interest rate rules for policy conduct. The paper concludes that using information included in monetary aggregates in monetary policy decisions can provide an important safeguard against major policy mistakes in the presence of model uncertainty. JEL classification: E5, E58, E52, E41

A micro simulation model of demographic development and households\u27 economic behavior

The relationship between the demographic structure and the saving rate of a society is the reflection of the aggregation of the behavior of heterogeneous households, differing from each other in the type of living arrangements and in the characteristics of its members. In order to contribute to the understanding of this relationship, we construct a dynamic micro model capable of simulating the demographic development of a population, including the creation, destruction, dimension and other important characteristics of households and its members. The demographic model is then combined with a specification of the processes generating income, retirement and consumption behavior of households, and applied to a data set derived from survey data on the Italian household sector. Simulations of the model permit to study the evolution of aggregate income, saving and asset accumulation over the period 1994–2100. If fertility and mortality assumptions of recent official projections are adopted and marriage and divorce rates maintained at current levels, the dramatic aging of the population and the marked decline in the share of population living in traditional households would lead, other things equal, to a substantial decline in the aggregate saving rate. However, the reduction in the number of children per household and, especially, the decline in the ratio of social security wealth of households to disposable income, as the effects of a recently introduced reform begin to be felt, act as offsetting factors. As a result, the aggregate saving rate declines only slightly over the initial 30 years of the simulation, moderately increasing thereafter. Implications of changes in a number of key assumptions regarding the demographic evolution, productivity growth and individual behavioral responses, are also analyzed. The micro model is finally used to study the implications of the new Italian contribution-based social security system from an intergenerational perspective. It is found that the system tends propagate—rather than dampen—disturbances to the population, generating persistent generational imbalances throughout its history

A micro simulation model of demographic development and households\u27 economic behavior

The relationship between the demographic structure and the saving rate of a society is the reflection of the aggregation of the behavior of heterogeneous households, differing from each other in the type of living arrangements and in the characteristics of its members. In order to contribute to the understanding of this relationship, we construct a dynamic micro model capable of simulating the demographic development of a population, including the creation, destruction, dimension and other important characteristics of households and its members. The demographic model is then combined with a specification of the processes generating income, retirement and consumption behavior of households, and applied to a data set derived from survey data on the Italian household sector. Simulations of the model permit to study the evolution of aggregate income, saving and asset accumulation over the period 1994–2100. If fertility and mortality assumptions of recent official projections are adopted and marriage and divorce rates maintained at current levels, the dramatic aging of the population and the marked decline in the share of population living in traditional households would lead, other things equal, to a substantial decline in the aggregate saving rate. However, the reduction in the number of children per household and, especially, the decline in the ratio of social security wealth of households to disposable income, as the effects of a recently introduced reform begin to be felt, act as offsetting factors. As a result, the aggregate saving rate declines only slightly over the initial 30 years of the simulation, moderately increasing thereafter. Implications of changes in a number of key assumptions regarding the demographic evolution, productivity growth and individual behavioral responses, are also analyzed. The micro model is finally used to study the implications of the new Italian contribution-based social security system from an intergenerational perspective. It is found that the system tends propagate—rather than dampen—disturbances to the population, generating persistent generational imbalances throughout its history