The essential, the useless and the harmful (part 2)

By Eloi Laurent

How do we know what we can do without while continuing to live well? To clarify this sensitive issue, economic analysis offers a central criterion, that of the useful, which itself refers to two related notions: use and utility.

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The essential, the useless and the harmful (part 1)

Éloi Laurent

The Covid-19 crisis is still in its infancy, but it seems difficult to imagine that it will lead to a “return to normal” economically. In fact, confinement-fuelled reflections are already multiplying about the new world that could emerge from the unprecedented conjunction of a global pandemic, the freezing of half of humanity, and the brutal drying up of global flows and the economic activity. Among these reflections, many of which were initiated well before this crisis, the need to define what is really essential to human well-being stands out: what do we really need? What can we actually do without?

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What do the fiscal stimulus strategies in the United States and Europe reveal?

By Christophe Blot and Xavier Timbeau

In parallel with the decisions taken by the US Federal Reserve and the European Central Bank (ECB), governments are stepping up announcements of stimulus packages to try to cushion the economic impact of the Covid-19 health crisis, which has triggered a recession on an unprecedented scale and pace. The confinement of the population and the closure of non-essential businesses is leading to a reduction in hours worked and in consumption and investment, combining a supply shock and demand shock.

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The transmission of monetary policy: The constraints on real estate loans are significant!

By Fergus Cumming (Bank of England) and Paul Hubert (Sciences Po – OFCE, France)

Does the transmission of monetary policy depend on the state of consumers’ debt? In this post, we show that changes in interest rates have a greater impact when a large share of households face financial constraints, i.e. when households are close to their borrowing limits. We also find that the overall impact of monetary policy depends in part on the dynamics of real estate prices and may not be symmetrical for increases and decreases in interest rates.

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Time for Climate Justice

By Eloi Laurent

On September 18th 2019, 16 years old climate activist Greta Thunberg appeared before the United States House of Representatives. When asked to submit a formal version of her inaugural statement, she replied that she would be giving lawmakers a copy of the IPPC special report on the impacts of global warming of 1.5 °C, the so-called “SR 1.5“. “I am submitting this report as my testimony because I don’t want you to listen to me, I want you to listen to the scientists”, she said eloquently.

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Are our inequality indicators biased?

By Guillaume Allègre

The issue of inequality is once again at the heart of economists’ concerns. Trends in inequality and its causes and consequences are being amply discussed and debated. Strangely, there seems to be a relative consensus about how to measure it [1]. Economists working on inequality use in turn the Gini index of disposable income, the share of income held by the richest 10%, the inter-decile ratio, and so on. All these measures are relative in character: If the income of the population as a whole is multiplied by 10, the indicator doesn’t change. What counts is the income ratio between the better off and the less well off. But could inequality and the way it changes be measured differently?

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Negative interest rates: Challenge or opportunity for Europe’s banks?

By Whelsy Boungou

It has been five years since commercial banks, in particular those in the euro zone, have faced a new challenge, that of continuing to generate profit in an environment marked by negative interest rates.

At the onset of the 2007-2008 global financial crisis, several central banks implemented new “unconventional” monetary policies. These consisted mainly of massive asset purchase programmes (commonly known as Quantitative Easing, QE) and forward guidance on interest rates. They aimed to lift the economies out of crisis by promoting better economic growth while avoiding a low level of inflation (or even deflation). Since 2012, six central banks in Europe (Bulgaria, Denmark, Hungary, Sweden, Switzerland and the European Central Bank) and the Bank of Japan have gradually introduced negative interest rates on bank deposits and reserves, in addition to the unconventional measures already in force. For example, the ECB’s deposit facility rate now stands at -0.40% (see Figure 1). Indeed, as indicated by Benoît Cœuré [1], the implementation of negative rates aim to tax banks’ excess reserves to encourage them to use these to boost the credit supply.

However, the implementation of negative rates has raised at least two concerns about the potential effects on bank profitability and risk-taking. First, the introduction of negative rates could hinder the transmission of monetary policy if this reduces banks’ interest margins and thus bank profitability. In addition, the lowering of credit rates for new loans and the revaluation of outstanding loans (mainly at variable rates) reduces banks’ net interest margin when the deposit rate cannot fall below the Zero Lower Bound. Second, in response to the impact on margins, the banks could either reduce the share of nonperforming loans on their balance sheets or look for other assets that are more profitable than loans (“Search-for-yield”). In a recent article [2], we used panel data from 2442 banks from the 28 member countries of the European Union over the period 2011-2017 to analyse the effects of negative rates on bank behaviour with respect to profitability and risk-taking. Specifically, we asked ourselves three questions: (1) What is the impact of negative rates on banks’ profitability? (2) Would negative rates encourage banks to take more risks? (3) Would the pressure on net interest margins from negative rates encourage banks to take more risk?

At the conclusion of our analysis, we highlight the presence of a threshold effect when interest rates fall below the zero bar. As can be seen in Figure 2, a 1% reduction in the central bank deposit rate reduced banks’ net interest margins by 0.429% when rates are positive, and by 1.023% when they are negative. Thus, negative rates have a greater impact on banks’ net interest margins than do positive rates. This result points to the presence of a threshold effect at zero. In addition, in response to this negative effect on margins (and in order to offset losses), the banks responded by expanding their non-interest rate activities (account management fees, commissions, etc.). As a result, in the short and medium term there was no indication that the banks resorted to riskier positions. However, the issue of risk-taking may eventually arise if negative rates persist for a long time and the banks continue to suffer losses on net interest margins.

[1] Coeuré  B.  (2016). Assessing the implication of negative interest rates.  Speech at the Yale Financial Crisis Forum in New Haven. July 28, 2016.

[2] Boungou W. (2019). Negative Interest Rates, Bank Profitability and Risk-taking. Sciences Po OFCE Working Paper no. 10/2019.

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The impact on redistribution of the ECB’s monetary policy

By Jérôme Creel and Mehdi El Herradi

A few weeks before Christine Lagarde assumes the presidency of the European Central Bank (ECB), it may be useful to examine the balance sheet of her predecessors, not only on macroeconomic and financial matters but also with respect to inequality. In recent years, the problem of the redistributive effects of monetary policy has become an important issue, both academically and at the level of economic policy discussions.

Interest in this subject has grown in a context marked by the conjunction of two factors. First there has been a persistent level of inequality in wealth and income, which has been hard to reduce. Then there are the activities of the central banks in the advanced economies following the 2008 crisis to support growth, particularly through the implementation of so-called “unconventional” measures [1]. These measures, mainly manifested in quantitative easing (QE) programmes, are suspected to have increased the prices of financial assets and, as a result, favoured wealthier households. At the same time, the low interest rate policy could have resulted in a reduction in interest income on assets with fixed yields, most of which are held by low-income households. On the other hand, the real effects of monetary policy, particularly on changes in the unemployment rate, could help keep low-income households in employment. The ensuing debate, which initially broke out in the United States, also erupted at the level of the euro zone after the ECB launched its QE programme.

In a recent study focusing on 10 euro zone countries between 2000 and 2015, we analysed the impact of the ECB’s monetary policy measures – both conventional and unconventional – on income inequality. To do this, we drew on three key indicators: the Gini coefficient, both before and after redistribution, and an interdecile ratio (the ratio between the richest 20% and the poorest 20%).

Three main results emerge from our study. On the one hand, a restrictive monetary policy has a modest impact on income inequality, regardless of the indicator of inequality used. On the other hand, this effect is mainly due to the southern European countries, especially in the period of conventional monetary policy. Finally, we found that the redistributive effects of conventional and unconventional monetary policies do not differ significantly.

These results thus suggest that the monetary policies pursued by the ECB since the crisis have probably had an insignificant and possibly even favourable impact on income inequality. The forthcoming normalization of the euro zone’s monetary policy could, on the contrary, increase inequality. Although this increase may be limited, it is important that decision-makers anticipate it.


[1] For an analysis of the expected impact of the ECB’s unconventional policies, see Blot et al. (2015).

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The OFCE optimistic about growth – “As usual”?

By Magali Dauvin and Hervé Péléraux

In the spring of 2019, the OFCE forecast real GDP growth of 1.5% for 2019 and 1.4% for 2020 (i.e. cumulative growth of 2.9%). At the same time, the average forecast for the two years compiled by Consensus Forecasts[1] was 1.3% each year (i.e. 2.6% cumulative), with a standard deviation around the average of 0.2 points. This difference has led some observers to describe the OFCE forecasts as “optimistic as usual”, with the forecasts of the Consensus or institutes with less favourable projections being considered more “realistic” in the current economic cycle. Continue reading “The OFCE optimistic about growth – “As usual”?”

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Europe’s fiscal rules – up for debate

By Pierre Aldama and Jérôme Creel

At the euro zone summit in December 2018, the heads of state and government hit the brakes hard on the reform of fiscal governance: among the objectives assigned to the euro zone’s common budget that they are wishing for, the function of economic stabilization has disappeared. This is unfortunate, since this function is the weak point of the fiscal rules being pursued by the Member States. Continue reading “Europe’s fiscal rules – up for debate”

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