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    21 December 2018
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    Over the past four years, the US Federal Reserve has reduced the surplus central bank reserves that it had built up under its quantitative easing programme. Over the same period, the Basel 3 banking regulations have, however, significantly increased banks’ demand for central bank liquidity. Before Basel 3, all reserves in excess of “required reserves”, in the monetary policy sense of the term, were, justifiably, treated as excess reserves. Since the new liquidity rules have come into force, only those reserves in excess of the regulatory constraint may be so treated. Although US banks have so far limited the initial effects of the reduction in reserves on their liquidity ratios, notably at the cost of increased dependence on the Federal Home Loan Banks, it would appear that the first signs of tension in liquidity are beginning to show.
    03 December 2018
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    The adoption of IFRS 9 on 1 January 2018 has changed the impairment model for financial assets, which is now based on the recognition of expected credit losses. A more granular analysis of the quality of performing assets, specifically the introduction of an intermediate category, has resulted in significant additional provisioning, curtailing bank equity. Given the already high level of provisions and the mediocre quality of their lending books (although this has since improved), the cost of transition to IFRS 9 raised further questions for southern European banks. Our analysis shows that the costs can be covered, but that they will be proportionately higher for Italian banks than for their Spanish and Portuguese peers. Such differentials suggest that a discrepancy exists between the processes of cleaning up of bank balance sheets.
    30 October 2018
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    The debate on risk sharing in the eurozone has intensified significantly in recent years. It is an acknowledgment that the eurozone “house” needs to be made more solid but also reflects the concern about limited policy leeway to address future economic downturns. Risk sharing can be public or private sector based and, within each channel, either domestic or cross-border. Public cross-border risk sharing will have an important role to play in strengthening the functioning of the eurozone. However, the challenge is considerable because it raises questions of pre-commitment, conditionality, moral hazard and governance. Finally, risk sharing needs to be considered together with risk prevention, risk management and boosting resilience.
    11 September 2018
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    Mauricio Macri’s government has pulled Argentina’s economy out of isolation. His policies enabled it to swing back into growth in 2017 and to consolidate the central bank’s foreign reserves thanks to the inflow of portfolio investment. Yet these policies also widened the current account deficit, increased the USD-denominated public debt and indirectly generated inflationary pressures. The Argentine government has had to call on the IMF to stabilise the exchange rate. The stabilisation policy will plunge the economy back into stagnation, with an economic cost for the local population due to a very restrictive monetary policy and more demanding fiscal consolidation efforts than the government initially envisioned in late 2017. Considering Argentina’s high foreign currency debt burden, the government faces a classic dilemma of needing to stabilise both the public debt and the external debt.
    05 July 2018
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    Major supply-side constraints and hiring difficulties emerged in late 2017. Though normal during phases of accelerating growth, they nonetheless caught our attention because other indicators are not showing the same degree of pressure. The output gap is a key cyclical indicator. As estimated today, it had not completely closed in 2017, and the low level of core inflation suggests it might have been even more negative. These trends raise the question of France’s position within the economic cycle. Based on our analysis, the French economy has moved out of the recovery phase and growth has peaked, although it is not showing the signs of overheating that typically mark the end-of-cycle period. The economy seems to be in the intermediary growth phase, during which the economy slows but continues to grow at a faster pace than the potential growth rate.
    03 April 2018
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    Participants at the Paris Climate Conference COP21 agreed that global warming should be limited to 2°C. This would be the case if carbon concentrations could be stabilised at below 450 parts per million (ppm). However, simulations with climate models show that even at this level the risk of overshooting the 2°C limit is not negligible. From an economic point of view, it would be optimal to take early measures to reduce tail risks. To overcome public reluctance to make small sacrifices now to avoid substantial future damages, climate policies should be appropriately framed.
    None of the legislative proposals to reform the US mortgage market has yet come into force. Most of them start from the same position: although government guarantees are essential in ensuring a liquid and stable mortgage market, the Federal government should not be the sole party exposed to payment default risk, especially as this is transmitted through two agencies, Fannie Mae and Freddie Mac, that are in financial difficulties. In the absence of legislation, the regulator of the two agencies has sketched out the foundations of a reform, by developing a program to transfer “non-extreme” credit risk to the market.
    12 March 2018
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    At a given moment during the month of February, the S&P500 was down 10% from its historical high. Using the commonly used definition, this meant it was in correction territory. This was considered by some as a healthy correction whereas others argued it might very well mark the beginning of an era of structurally higher volatility. Econometric research and model-based simulations show that the economic impact of equity market corrections is rather small. The stylised facts however show the key role of the reciprocal influence between equity markets and growth expectations. In this respect, particular attention should be devoted to the evolution of the corporate bond spread.
    Results for 2017 from major Spanish banks have been encouraging. Since 2013, the Spanish banking system has accounted relatively stable revenues, mainly driven by net interest income and net fee and commission income. The active management of non-performing loans and the strengthening of foreign activities have contributed to the recovery of profitability. The Spanish banking system might continue to benefit from its previous efforts to restructure and consolidate. Still, significant disparities between individual banks subsist whereas solvency ratios remain under pressure.
    06 February 2018
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    Numerous conditions have come together in 2018 to make it the year for jumpstarting European construction. Key political players have high ambitions, as a buoyant economic environment allows them to look further ahead than usual. This article addresses a series of issues to make it easier to understand the debates and the upcoming decisions.
    Capital Markets Union (CMU) aims to draw the best from the various financing channels, by expanding opportunities for saving and the availability of long-term financing, and to improve financial integration in the European Union. To this end, the European Commission has drawn up a lengthy but coherent list of actions, some of which have already been completed. Although the introduction of a more favourable legislative framework is essential, Capital Markets Union is a long-term process, whose success will depend above all on the behaviour of economic agents.
    30 November 2017
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    In May 2017, Donald Trump triggered a renegotiation of the North American Free Trade Agreement (NAFTA). Some proposals, 23 years after NAFTA came into force, aiming to introduce a chapter on the digital economy and strengthen the agreement’s current arrangements, have been generally welcomed. Others, such as a tightening of rules of origin and changes to trade remedies, have prompted concern.
    19 September 2017
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    Since the second half of the 1980s, France’s unemployment rate has never fallen below 8% for very long. This observation, more than the surge in unemployment during the crisis, serves as the starting point for the overhaul of France’s labour code. Labour market reform should have a positive impact in the medium term. In the short term, however, the question is harder to answer: economic literature indicates that the starting point matters most when evaluating the short-term impact of structural reforms.
    This article analyses the recent economic performances of the eastern countries of the European Union, specifically focusing on the so called Visegrad-6 group, comprising Poland, Hungary, the Czech Republic, Slovakia, Bulgaria and Romania. Long considered as the EU’s “junior partners”, their very strong macroeconomic performances in recent years suggest that they will soon catch up with their western EU counterparts. Are we about to witness the culmination of more than 10 years of convergence? Only if we ignore the structural challenges these economies are still facing.
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