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The effectiveness of the monetary policies of the European Central Bank (ECB) and the Narodowy Bank Polski (NBP) is compared directly in terms of influencing the spread between the interbank overnight rate and the main rates of the central banks during periods of different economic conditions, i.e. the global financial crisis of 2008, the European sovereign debt crisis and the period of relative stability. Three categories of determinants of the Euro Overnight Index Average/Polish Overnight Index Average (EONIA/POLONIA) spreads are considered: (1) monetary policy instruments such as open market operations, standing facilities and minimum reserve requirements; (2) measures of liquidity conditions; and (3) market expectations and risk measures. Applying the ARFIMA-GARCH models, we show that the statistical and economic properties of the EONIA and POLONIA spreads are quite different. The EONIA spread has a long memory while the POLONIA spread is characterized by a short memory. This difference is important from the viewpoint of a stabilizing monetary policy. The impact of shocks on the future levels of the spread was stronger for the POLONIA spread, but it was short-lived in comparison with the EONIA spread. Most of the analysed variables significantly influenced the spreads during the financial crisis, while the biggest differences in the impact of determinants between the EONIA and POLONIA spreads occurred during the period of relative stability. Substantial differences also exist between the volatilities of both spreads. [ABSTRACT FROM AUTHOR]

This paper provides novel evidence on the role of the macroeconomic environment for households' choice between fixed-interest-rate and adjustable-interest-rate mortgages (ARMs) in the euro area. We find that relatively more ARMs are taken out when economic growth is strong, the interest rate spread is high, or unemployment shows low volatility. A simulation exercise shows that a reduction in mortgage rates as witnessed during the monetary easing in the course of the global financial crisis produces a substantial decline in debt burdens among mortgage-holding households, especially in countries where households have higher debt burdens and a larger share of ARMs. [ABSTRACT FROM AUTHOR]

A bulk of literature reports positive and significant link between inflation and relative price variability (RPV). Monetarists hold that this positive connection between the two variables exerts huge welfare consequences due to the fact that a high RPV increases output dispersion among firms. Some recent studies, however, show that the inflation–RPV nexus is neither linear nor stable over-time and thereby the inflation effects on output dispersion, appearing through this channel, should be minor. To address these ambiguities, this study directly tests the effect of inflation on output growth variability using a large panel of 25 developed and emerging European economies. Moreover, we also probe into the functional form of this nexus by employing a panel smooth transition regression model. Our results support a nonlinear relationship between the two variables and advance certain inflation thresholds below which inflation appeases the sectoral output growth variability and above this level it aggravates the later. [ABSTRACT FROM AUTHOR]

This paper implements a spatial vector autoregressive model that takes into account both the time and the spatial dimensions of economic shocks. We apply this framework to analyze the propagation through space and time of macroeconomic (inflation, output gap and interest rate) shocks in Europe. The empirical analysis identifies an economically and statistically significant spatial component in the transmission of macroeconomic shocks in Europe. [ABSTRACT FROM AUTHOR]

The crisis in the eurozone periphery has so far affected markets substantially more than the size of the countries in the region would suggest. Data on direct exposures and simple correlations also fail to explain the cross-border impact of the crisis. Following Segoviano (), this paper uses distress dependence analysis to measure market assessment of contagion risks from Greece and Ireland to the rest of Europe during the peaks of the crises in these countries. The results provide insights to possible contagion risks through cross-border negative feedback loops between sovereigns and banking sectors in Europe that help explain the severe impact of the crisis. [ABSTRACT FROM AUTHOR]

In this paper we analyze whether the ECB’s monetary policy has become more balanced towards the needs of the individual member states with the passage of time. We assume that the ECB’s monetary policy stance is in line with a Taylor rule and based on the overall situation in the Euro area, more specifically on the Euro area inflation rate and the overall business cycle position in the area. The question therefore boils down to investigating whether inflation and business cycles have converged since the start of the monetary union. We show that the ECB, if in existence in the 1990s, would have had an impossible task. This is because inflation and business cycles still strongly differed in that time, although convergence substantially increased in the run up to the monetary union. In this respect, the decade under EMU drastically differs from the preceding one. This being said, the evidence for a further improvement in the course of the first decade of the new millennium is mixed. This is because although inflation has further converged, business cycles have shown a tendency for increased divergence. If, however, we are willing to put weights on inflation and output gap divergence (as implied by the Taylor rule), we conclude that also in the course of the period under EMU in general the ECB’s monetary policy has become more in line with the needs of the individual members. Looking at individual countries, we show that during the first decade of its existence the ECB’s interest rate was most fitted to the needs of France and Italy, and least to the needs of Ireland and Greece (both too low) and Germany (too high). To a lesser extent there were also mismatches for Spain and Portugal (both too low). In the more recent period since 2005, the mismatch between the desired domestic interest rate and the desired ECB rate has come down for most countries (most noticeable Germany). For Belgium (for which a higher interest rate was more appropriate), on the other hand, the mismatch increased. These overall positive findings, however, offer no guarantee that the task of the ECB will become easier in the future. [ABSTRACT FROM AUTHOR]

We propose exploiting the term structure of relative interest rates to obtain estimates of changes in the timing of a currency crisis as perceived by market participants. Our indicator can be used to evaluate the relative probability of a crisis occurring in one week as compared to a crisis happening after one week but in less than a month. We give empirical evidence that the indicator performs well for two important currency crises in Eastern Europe: the crisis in the Czech Republic in 1997 and the Russian crisis in 1998. [ABSTRACT FROM AUTHOR]

According to Harvey (1988) , the forecasting ability of the term spread on economic growth is due to the fact that interest rates reflect investors' expectations about the future economic situation when deciding their plans for consumption and investment. Past literature has used ex post data on output or consumption growth as proxies for their expected value. In this paper, we employ a direct measure of economic agents' expectations, the Economic Sentiment Indicator elaborated by the European Commission, to test this hypothesis. Our results indicate that a linear combination of European yield spreads explains a surprising 93.7\% of the variability of the Economic Sentiment Indicator. This ability of yield spreads to capture economic agent expectations may be the actual reason for the predictive power of yield spreads about future business cycle. [ABSTRACT FROM AUTHOR]

Volatility spillover from the US and aggregate European bond markets into individual European bond markets using a GARCH volatility-spillover model is analysed. Strong statistical evidence of volatility spillover from the US and aggregate European bond markets is found. For EMU countries, the US volatility-spillover effects are rather weak (in economic terms) whereas the European volatility-spillover effects are strong. The bond markets of EMU countries have become much more integrated after the introduction of the euro, and in recent years they have become close to being perfectly integrated. The main driver of the integration appears to be convergence in interest rates. [ABSTRACT FROM AUTHOR]

Estimating interest rate reaction functions for the euro area is still hampered by the short time span since the conduct of a single monetary policy. This is why estimates of union-wide reaction functions are usually based on historical pre-EMU data. In this paper we circumvent the common use of aggregated data before 1999 by estimating interest rate reaction functions based on a panel including actual EMU Member States. We find that exploiting the cross-section dimension of a multi-country panel and accounting for cross-country heterogeneity in advance of the single monetary policy improves the ability of historical reaction functions to describe actual interest rate dynamics. We retrieve a panel reaction function which is employed for evaluating interest rate setting since 1999. [ABSTRACT FROM AUTHOR]