2012-09-24 generation essay writing concepts

7/29/2019 2012-09-24 Generation Essay Writing Concepts

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Explaining Your Monetary Policy Decisionbased on Economic and Monetary Analysis

SOME GUIDANCE

FOR WRITING YOUR ESSAY: i.e.,THE INTRODUCTORY STATEMENT TO THE

PRESS CONFERENCE

FP Mongelli24 September 2012

Thanks to Raffaella Traverso, Moritz Karber,Alessandro Cugnasca and Bjrn Fischer for assistance.


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What you have to do Imagine that you are in charge of securing price stability over the medium-term for the euro area.

Your objective is to write an essay i.e., an Introductory Statement to the Press Conference (IS) -

explaining the reasons for your policy decisions by referring to the underlying economic and monetary

analysis, as well as the unfolding of the crisis. This is not easy:

on one hand, you need to explain your inflation outlook as well as the various scenarios, risk factors

(downside and upside), and so on;

on the other hand, you need to have a view amongst others - on the factors that contributed to the crisis andits economic impact;

today, more than ever, Central Banks - and the ECB in particular - need to have a Weltanschauung but also

remain conscious of their mandate and limits.

The aim of this presentation is to give you some tips!1st, what is the medium-term (MT)?

It is a time frame between the short-term i.e., a period of one or at most two years - and the long-term which can last several more years say the completion of a business cycle:

According to JM Keynes: in the LT we all passed away. According to P. Krugman: only productivity

matters in the L-T.

Thus, for all practical purposes your time frame is of about 2-3 years.


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What you have to do2nd, your mandate is to maintain inflation close but below 2% over the medium term:

This is your price stability objective a year-on-year increase of HICPs


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What you have to do

4th, what is your geographic domain? It is the euro area as a whole: i.e., considering it as a single geographic entity Some comments on the concept of economic and financial integration, versus divergence. In fact, the analysis of heterogeneity and/or uneven transmission of monetary impulses

greatly matters for your Essay

5th, now imagine that you were the President of the ECB and thus the Chair of the GoverningCouncil all types of data, statistics, information, facts about the euro area economy would be

available to you as well as all other Governing Council members moreover, you would have at your disposal the best economic and monetary analysis

possible for the euro area, and also other regions. it is also important to note that this wealth of data and information is also available to all

beyond the Eurosystem, i.e., it is publicly available information


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What you have to do

6th

, Imagine that its the first Thursday of the month: the day of the voting Governing Council (GC). the GC has just met, and conducted the economic and monetary analysis plus the cross checking You need to explain your decision to a vast public ranging from the media, skilled ECB

watchers, other policy makers, and the public at large. Explain in the Essay the monetary policy decisions that you have taken concerning the standard

monetary measures (appropriate interest rate level) and non-standard measures (like unlimitedrefinancing against good collateral, purchase of specific assets, and so on);

Moreover, as soon as you have finished your statement, questions from the media attending thePress Conference start flocking: about 100-150 journalists. Intimidating.

Questions can range from something in your essay, or anything that you have publiclydiscussed over recent days/weeks, or anything said by some other Board/Governing Councilmembers, or anything even indirectly related to the decision(s) you took.

Be ready to explain how the voting went: colleagiality, unanimity, dissent, differences in views,and so on

7th , how can you organise both your analysis, Governing Council discussion, deliberation andexplanation to the above vast public? I s there an organising device? Yes, it is shown in the picture in the next slide: we call it a Monetary Policy Strategy. It shows what is frequently called as two-pillar analysis plus the cross checking.


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What you have to do

8th, now you have to explain your decision in an Essay of up to 2,000 words(roughly two-three A4pages). You have to be concise and convincing. Thus remember that you have to:

Explain also the pros and cons of your decisions,

Lay out the various risks you see (both bad risks and positive risks), and,

looking ahead, also present some possible scenarios

9th, your goal is to explain principally what has changed since your last Essay (the IS).

You meet with your peers at least once a month.

Meetings are about interpreting new data/information and whether it changes your pricestability scenarios.

an underlying consensus builds up over time and new evidence confirms it or requires someadaptations.

focus is on new data/information or developments that have occurred over recent weeks andthat require changes in your baseline scenario.

10th

, unless there is a crisis like the ongoing financial crisis - or a substantial shock: Then you need to assess the severity of the shocks/events unfolding

Be ready to operate with standard monetary policy measures as well as non-traditional ones.

The significance of data and information that you have already looses partly in significance


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and why is it difficult?The exercise that you are about to engage in, is rendered more challenging by various difficulties:

1st, you will be deciding in real time You dont know precisely the current state of the economy right now. I.e., the data you are using has some lag with respect to what is happening now. an analogy would be that you know your body temperature of last week (and not today) and yet

you need to decide whether you stay home and take medicines (and/or go to the doctor)

You may have to undertake some guessing work and use projecting/forecasting. You can use leading indicators (surveys, electricity consumption, industrial production, and soon).

2nd, there is also what we call model uncertainty i.e. our analytical tools only provide an interpretation of reality while the economy may be changing over time An increase in oil prices today may be reverted soon or be the start of a trend

Similarly if you misjudge the pace of innovation, you may unduly keep monetary policy too tight.3rd, there is also the policy debate, interaction among policy makers and voting outcome

Most times Governing Council decisions are by consensus and for a long time this has been themain outcome

More recently some dissent has emerged: some public and some latent For the purpose of your essay we only look at consensual decisions: i.e., your team agrees on

one decision which it then explains.


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and why is it difficult?

4th, there is the sovereign debt crisis unfolding and the policy decision of the Governing Council havean impact on financial markets but also acquire a broader meaning aimed at fostering acompletion of EMUs architecture

As implementation takes time and financial markets often only adjust once success becomesclearly visible, governments must stand ready to activate the EFSF/ESM with strict and effectiveconditionality.

The adherence of governments to their commitments and the fulfilment by the EFSF/ESM oftheir role are necessary conditions.

5th there is dissent in the Council and there are public criticisms in the media, by various experts andpolicy-makers and so on.

6th the IS also sens signals and messages to other policy makers and the informed public.

The rest of this presentation is about some key elements for the Essay


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The Introductory Statement (IS) preceding the ECBsPress Conferences is a model essay

Introductory paragraph

Monetary policy decisions

Key monetary policy messages / intentions / signalsin recent times this section has

hosted also remarks concerning the sovereign crisis, the irreversibility of the euro, and

the integrity of the euro area (see examples in next 2 slides).

Economic analysis

Growth and employment developments

Price developments

Once a quarter, summary of staff projections

Monetary analysis

Money growth

Credit growth

Cross-checking / summing-up

Seehttp://www.ecb.europa.eu/press/pressconf/2011/html/index.en.html
http://www.ecb.europa.eu/press/pressconf/2011/html/index.en.htmlhttp://www.ecb.europa.eu/press/pressconf/2011/html/index.en.html


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The Introductory Statement of 2nd August contained thefollowing (edited) remarks:

The Governing Council discussed the policy options to address malfunctioning ineuro area bond markets.

Exceptionally high risk premia are observed in sovereign bond prices in severalcountries, and financial fragmentation hinders the effective working of monetarypolicy.

Risk premia resulting from fears of the reversibility of the euro are unacceptable.Theeuro is irreversible.

Policy-makers in the euro area need to push ahead with fiscal consolidation,structural reforms and European institution-building with great determination.

The Governing Council may undertake outright open market operations of a sizeadequate to reach its objective.

The concerns of private investors about seniority will be addressed, and so on.


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The Introductory Statement of 6th September containsfollowing edited remarks:

The Governing Council today decided on the modalities for undertaking OutrightMonetary Transactions (OMTs) in secondary markets for sovereign bonds in the euroarea.

we need to be in the position to safeguard the monetary policy transmissionmechanism in all countries of the euro area.

We aim to preserve the singleness of our monetary policy and to ensure the propertransmission of our policy stance to the real economy throughout the area.

OMTs will enable us to address severe distortions in government bond markets whichoriginate from, in particular, unfounded fears on the part of investors of the reversibilityof the euro.

Hence, under appropriate conditions, we will have a fully effective backstop to avoiddestructive scenarios with potentially severe challenges for price stability in the euroarea.

we act strictly within our mandate to maintain price stability over the medium term;we act independently in determining monetary policy; and the euro is irreversible.


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but the IS is also a highly policy-intense and politically dense

statement

the IS often contains fiscal and structural policy messages

You need to instil confidence but also be realistic

Yet, the desire of the organisers of the Generation uro Students Award is not to receive a

copy and paste with some editing exercise from the IS.

This happened to some extent in the pilot exercise and the first edition.

Hence, while it is OK to seek inspirations from the Introductory Statement to the PressConference (IS) and also some ECB Monthly Bulletin articles or text, you should attempt toprovide your own thoughts

In the rest of this presentation we show some examples of recent time series thathave a bearing on your essay and present the main features of the economic and

monetary analysis


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Here are key interest rate facts:what decision do you recommend next?

It currently stands at 0.75% It is reviewed monthly but only changed occasionally (35 changes since 1999) It is changed in discrete steps of 25, 50 and rarely 75 basis points

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

deposit rate

EONIA

main refinancing rate/minimum bid rate

marginal lending rate


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Example: HICP Inflation and pipeline pressuresHICP inflation: overall and exclusion-based measures (annual growth rates)

Source: Eurostat.

Latest observation: August 2012 for headline HICP.

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

HICP

HICP excluding unprocessed food and energy

HICP excluding food and energy


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Example: Long-term inflation expectations from surveys

and break-even inflation rates (role of credibility)

Sources: ECB and Reuters.Latest observation: BEIR and I/L swaps 17 September 2012 and 2012Q3 SPF July 2012.

1.0

1.2

1.4

1.6

1.8

2.0

2.22.4

2.6

2.8

3.0

1.0

1.2

1.4

1.6

1.8

2.0

2.22.4

2.6

2.8

3.0

Jan-0

8

Apr-08

Jul-08

Oct-08

Jan-0

9

Apr-09

Jul-09

Oct-09

Jan-1

0

Apr-10

Jul-10

Oct-10

Jan-1

1

Apr-11

Jul-11

Oct-11

Jan-1

2

Apr-12

Jul-12

5-year forward 5 years ahead BEIR

5-year I/L swap rate 5 years ahead

ECB Survey of Professional Forecasters (long-term)


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The two-pillar approach

The two Pillar Approach shown in the previous picture consists of two complementaryperspectives:

Theeconomic analysis (EA) that is aimed at assessing short to medium-term risks toprice stability. Its focus is on real activity and financial conditions in the economy.

Themonetary analysis (MA) focuses on a longer-term horizon, exploiting the long-runlink between money and prices.

MA also serves as a means of cross-checking, from a medium to long-termperspective, the short to medium-term indications from the economic analysis.

This dual approach secures robustness and works as an insurance mechanism

It allows a close mapping between the Monetary Policy Strategy and the Communicationpolicy.


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Economic analysis (I)

The Economic Analysis takes account of the fact that price developments over the short andmedium term are influenced largely by the interplay of supply and demand in the goods,services and factor markets (see next picture)

To conduct the economic analysis, the ECB regularly reviews amongst others varioushardcore macro indicators such as:

developments in overall output, demand and labour market conditions, a broad range of price and cost indicators, fiscal policy, and the balance of payments for the euro area.


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Economic analysis (I I)

Asset prices and financial yields

Financial variables are analysed to derive information about the expectations of financialmarkets, including expected future price developments.

Using a variety of techniques, financial prices permit to extract the markets implicitexpectations about future developments.

Macroeconomic projections

Projections, a synonym of forecasts, are produced under the responsibility of the ECBand the Eurosystem staff using analytical tools and empirical models.

The projections help to structure and synthesise a large amount of economic data. Theyensure consistency across different sources of economic evidence.

Permit to sharpen the assessment of economic prospects and the short to medium-termfluctuations of inflation around its trend.


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Examples of economic analysis

Changes in inflation (year-on-year)

Latest observation: August 2012.

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012


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Changes in real GDP (percentage changes)

Latest observation: 2012Q2

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

99Q1

99Q3

00Q1

00Q3

01Q1

01Q3

02Q1

02Q3

03Q1

03Q3

04Q1

04Q3

05Q1

05Q3

06Q1

06Q3

07Q1

07Q3

08Q1

08Q3

09Q1

09Q3

10Q1

10Q3

11Q1

11Q3

12Q1

12Q3

Quarterly growth (rhr) YoY growth (lhs)


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Changes in unemployment

Latest observation: J uly 2012

-2.0

-1.00.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

7.0

7.58.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

1999 2001 2003 2005 2007 2009 2011

Annual change (millions) (RHS) Unemployment rate (%) (LHS)


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Staff projections

Latest figures released in early September 2012

Next release at the December 2012Press Conference (thus every 3 months)

Important to check how the numbers have changed compared with the last release

How do HICP projections compare with the definition of price stability?

2011 2012 2013

GDP

September 2012 MPE 1.5 -0.6 - -0.2 -0.4 - 1.4

June 2012 BMPE 1.5 -0.5 - 0.3 0.0 - 2.0

HICP

September 2012 MPE 2.7 2.4 - 2.6 1.3 - 2.5

June 2012 BMPE 2.7 2.3 - 2.5 1.0 - 2.2


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A remark: what type of data should you look at?

You will quickly notice an enormous number of data series and charts like the one below

Look in fact at the relevance of seasonality: e.g., in euro area industrial production

By necessity, the data we look at are not pure but they are filtered somehow: here is one useful

example, while another example of filtering comes along with the monetary analysis.

60

70

80

90

100

110

120

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


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Monetary Analysis

The ECB is almost unique among the leading central banks in assigning a high importanceto monetary aggregates.

Why does the ECB do that? Reason 1: in the medium to long run monetary growth and inflation are closely

related.

Reason 2: the analysis of credit and liquidity conditions enables the ECB to seebeyond the transient impact of the various shocks.

Which monetary aggregates? M1 has been defined as currency in circulation plus overnight deposits. M2 comprises M1 plus deposits with an agreed maturity of up to and including two

years and deposits redeemable at notice of up to and including three months.

M3 comprises M2 plus repurchase agreements, money market fund shares and unitsas well as debt securities with a maturity of up to and including two years.


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Monetary Analysis

Beyond assessing the growth of the broad monetary aggregate M3, diverse othermonetary and financial variables are also informative, including:

developments in the components of M3 (e.g. cash in circulation and time deposits)as they can offer an insight into the overall changes in M3; and

narrower aggregates such as M1 may contain some information about real activity.

Similarly, changes in credit extended to the private sector can also be informative aboutfinancial conditions and, through the monetary financial institutions (MFI) balancesheet, can provide additional information about money.

Moreover, the analysis of money and credit may provide early information ondeveloping financial instability. This is of relevance for SMP because over time the

emergence of financial imbalances or asset price bubbles could have a destabilisingeffect on activity and, ultimately, prices.


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A remark: what type of data should you look at? Monetary

Analysis, annualised quarter-on-quarter changes, deviationsfrom mean

+M3 =Low

frequency

component

Business cycle

frequency

component

High

frequency

component

+

e.g. inflation

(expectations)

e.g. economic

activity

e.g. bank

behaviour

-8

-4

0

4

8

1974 1981 1988 1995 2002 2009

-8

-4

0

4

8

-6

-3

0

3

6

1974 1981 1988 1995 2002 2009

-6

-3

0

3

6

-6

-3

0

3

6

1974 1981 1988 1995 2002 2009

-6

-3

0

3

6

-6

-3

0

3

6

1974 1981 1988 1995 2002 2009

-6

-3

0

3

6

+M3 =Low

frequency

component

Business cycle

frequency

component

High

frequency

component

+

e.g. inflation

(expectations)

e.g. economic

activity

e.g. bank

behaviour

-8

-4

0

4

8

1974 1981 1988 1995 2002 2009

-8

-4

0

4

8

-6

-3

0

3

6

1974 1981 1988 1995 2002 2009

-6

-3

0

3

6

-6

-3

0

3

6

1974 1981 1988 1995 2002 2009

-6

-3

0

3

6

-6

-3

0

3

6

1974 1981 1988 1995 2002 2009

-6

-3

0

3

6


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Example of monetary analysis

Actual current changes in M3(annual percentage changes, adjusted for seasonal and calendar effects)


-2

0

2

4

6

8

10

12

14

-2

0

2

4

6

8

10

12

14

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


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Example of monetary analysis

Loans to households and non-financial corporations (annual % changes; seasonally adj.)


-5

0

5

10

15

20

-5

0

5

10

15

20

2 00 0 2 00 1 2 00 2 2 00 3 2 004 2 00 5 2 00 6 2 007 2 00 8 20 09 2 010 2 01 1 20 12

Households Non-financial corporations


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Cross-checking

Are the messages from the economic analysis and

the monetary analysis consistent?

Sept 2012: To sum up, the economic analysis

indicates that price developments should remain in

line with price stability over the medium term. A

cross-check with the signals from the monetary

analysis confirms this picture.

October 2010: A cross-check of the outcome of

our economic analysis with that of the monetary

analysis confirms that inflationary pressures over

the medium term remain contained, as suggested

by weak money and credit growth.


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The importance of expectations for the economy

Many points in the Introductory Statement refer to expectations and

are forward-looking in nature, e.g.:

Statistical releases and survey evidence generally confirm our

expectation of a moderation in the second half of this year inthe euro area and elsewhere.

The global recovery is expected to go on.

This is due to the fact that monetary policy takes quite some time to

have an effect on the economy (via thetransmission mechanism).


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The importance of expectations Of course, we cannot be certain about the future. The Introductory Statement often contains statements like:

The risks to this economic outlook are slightly tilted to the downside

with uncertainty still prevailing

Risks to the outlook for price developments are slightly tilted to the upside For monetary policy decision-making the red distribution of probabilities is

preferable: it entails less uncertainty.

probability /likelihood

inflationModalview

less uncertainty

more uncertainty

probability /likelihood

inflation

Modal

view

downside

risks


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Example: Distribution of Euro Area Barometer2012 HICP Forecasts

Here a distribution hovering around 2% is best: like J an & Feb 2012

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.504.00

4.50

5.00

1.5 1.8 2.0 2.3 2.5 2.8 3.0

ECB Jan 12 EZB Feb12 EZB Mar 12EZB Apr 12 EZB May 12 EZB Jun 12EZB Jul 12 EZB Aug 12 EZB Sep 12

Apr12, Jul12, Aug12: 2.3%

May12, Jun12, Sep12: 2.4%

Mar: 2.1%

Jan: 1.8%

Feb: 2.0%

Source: EZB.

Latest observation: September 2012


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To sum-up: Careful consideration is needed

The Governing Council but also all other central banks - lookand debate a very large amount of data information and analysis

The discussion and deliberation plays an important role.

Everything is considered very carefully: in fact, in the presence of

doubts modern central bankers prefer to be cautious and move little

steps at a time. 25-50 basis points at a time.

They also need to be forward-looking

Unfortunately, there is no easy procedure that generates a correct

monetary policy decision: in fact it may take some time months

or even years to gauge the correctness of a MP decision today

Thus, do your best and remember that you have to upload your

essay to the competition website by 8 p.m. CET

Thank you for participating and dedicating your time to

broaden economic awareness


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The latest data releases

Eurostat: Latest news releaseshttp://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/

ECB

Statistics, latest datahttp://www.ecb.europa.eu/stats/html/index.en.html

Monthly Bulletinhttp://www.ecb.europa.eu/pub/mb/html/index.en.html

Monetary developmentshttp://www.ecb.europa.eu/press/pr/stats/md/html/index.en.html

Bank lending survey

http://www.ecb.europa.eu/stats/money/surveys/lend/html/index.en.html

Newspaper and analysts reports: its important to get a feeling for the news component in the

releases
http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/http://www.ecb.europa.eu/stats/html/index.en.htmlhttp://www.ecb.europa.eu/pub/mb/html/index.en.htmlhttp://www.ecb.europa.eu/press/pr/stats/md/html/index.en.htmlhttp://www.ecb.europa.eu/stats/money/surveys/lend/html/index.en.htmlhttp://www.ecb.europa.eu/stats/money/surveys/lend/html/index.en.htmlhttp://www.ecb.europa.eu/press/pr/stats/md/html/index.en.htmlhttp://www.ecb.europa.eu/pub/mb/html/index.en.htmlhttp://www.ecb.europa.eu/stats/html/index.en.htmlhttp://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/

2012-09-24 generation essay writing concepts

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