The ECB just announced decisions came quite close to what markets expected and so, have been rewarded by mild reactions. An increase in the EUR/USD rate; a slight improvement in stock prices and a slight increase in yields. all in all, a mild positive markets assessment 1/
PEPP will end in March but can "be resumed, if necessary" (a significant safeguard against virus flares); the reinvestment period for PEEP was extended to the end of 2024 instead of 2023. 2/
The only divergence with expectations was about the offset increase in APP. Purchases will start at monthly €40 bn in Q2 2022 (as foreseen) but they will decrease to 30bn in Q3 and back to 20bn from October onwards. Markets were expecting 40bn for the rest of the year 3/
Reinvestment of APP purchases is promised an "extended period of time" after rates lift-off. It was reaffirmed that APP can end only "shortly before" rates increase. Rates stayed the same and the forward guidance 3 criteria ensure that will last for quite some time 4/4
Another 2 important points in the press release concern the use of flexibility in the reinvestment of PEEP maturing bonds (not a great margin, though) in case of "stressed conditions" or "fragmentation related to the pandemic" 5/5
According to the ECB site, the Dec (and June) staff projections are prepared in a more bottom-up way that starts with the national CBs projections.That may (or not ) have influenced what seems to me exaggerated inflation forecasts for 22 (3.2%!?) 23 and 24 below 2% (1.8%) 6/6
ecb.europa.eu/pub/pdf/other/… “The projections published in June and December are prepared by Eurosystem experts from both the euro area national central banks (NCBs) and the ECB. The projections published in March and September are mainly the outcome of the ECB staff projection” 7/7
With 3 months interval: Sept inflation projections for 21,22,23: 2.2% 1.7% 1.5% . Dec (mostly NCBs) inflation projections:
2.6% 3.2%(!?) 1.8% and 1.8% for 2024. Despite stating that inflation “should fall slightly below 2% by the end of 2022” at ecb.europa.eu/pub/projection… 8/8

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More from @VMRConstancio

15 Dec
The FED decided as expected but with a statement that looks less hawkish than many in the market were foreseeing. Mishkin already criticised them. They acknowledge that on the inflation part of the mandate they are over target but they remain below for the maximum employment part
the more normal unemployment rate U3 is low (4.2) but that is because the participation rate in the active population came down and there are still several million persons that are not employed now but were in Feb 2020. U6 is at 8%. They are respecting the dual mandate! 2/
They sound more fearful of the virus than many others. On the other hand, they (correctly in my view) continue to expect a visible lowering of inflation (PCE). from 5.3% this year to 2.6% in 22, and 2.3 % 2.1% in the next 2 years. Supply shocks, in the end, will abate 3/
Read 6 tweets
14 Dec
It is a big week for CBs, especially the ECB, as FED decisions seem by now predictable (accelerating tapering). The ECB is also expected to announce tapering of PEPP, partially offset by an increase in APP. Hopefully, the decisions will avoid any bond market backlash.1/12
While we wait, I want to address regulatory issues related to crypto. Any such discussion needs to distinguish between stablecoins, crypto assets (not currencies) and DeFi products, despite the blurred borders that some analysts still see.2/
None of those products is yet clearly regulated in the US or the EU. The EU adopted a sort of umbrella Regulation (MiCAR) that is conceptually confusing and incomplete, leaving details to be defined by the Commission agencies. Stablecoins or DeFin are not properly addressed.3/
Read 13 tweets
2 Nov
Finally: “In a highly anticipated report, the Treasury Department, Federal Reserve and other regulators urged lawmakers to let them police stablecoin issuers like banks with robust capital requirements and constant supervision” Bloomberg: bloomberg.com/news/articles/… 1/
This development reflects the theory and historical experience with bank’s regulation.What specifically defines a bank is the deposit contract that promises to redeem the same amount of money at par.The banks hold assets or credits on the other side of their balance-sheet 2/
Sometimes, those assets go sour and the bank may lose the capacity to honour its deposit liabilities and provide the money due to depositors. In the times of free banking, this happened often and banks would go bankrupt. This changed in the turn to the XXth century 3/
Read 17 tweets
29 Oct
The ECB just published a relevant working paper about which inflation expectations indicators are the best to help forecast inflation ecb.europa.eu/pub/pdf/scpwps…
J, Rudd, in a FED WP asked “Why Do…Inflation Expectations Matter for Inflation?”, federalreserve.gov/econres/feds/f… 1/18
Rudd points that the role of inflation expectations as a cause of inflation has been accepted as “an established truth” since Phelps (1967) & Friedman (1968) introduced them with “a priori assumptions”. Since then, there was hardly a debate on why that causality should work 2/
Expectations became almost everything. From the classic 2003 book by Woodford “Interest and Prices”: “..successful monetary policy is not so much a matter of effective control of..interest rates as it is of shaping market expectations..” “…very little else matters” 3/
Read 18 tweets
20 Sep
Two interesting webinars on public debt by @ojblanchard1 & @B_Eichengreen . At the Paris school of Economics @ojblanchard1 presented a compressed and updated his AEA 2019 paper. He also announced an imminent new book with all the nuts & bolts of the deficits and debt issues. 1/
He thinks that r<g will dominate for 10 years or more. Market-based expectations so far agree with him. He defends regular stochastic DSAs instead of any quantitative rule for fiscal policy, conceding that if there must be one he favours a rule for the primary balance (s) /2n
In a regime of low r,he portrays this choice: continue with fairly high deficits and increase r & r*; or reduce deficits and keep very low r & r*. It is, I think, a pertinent choice with low r and in an obvious non-Ricardian world. He favours the first option for several years 3/
Read 8 tweets
31 May
Great news. Agent-based models with stock-flow relationships, coming of age in forecasting and beating both mainstream accepted VAR and DSGE models at @RebuildMacro site, rebuildingmacroeconomics.ac.uk/research-prize… 1/4
See a very good slide presentation of the model at from 7m to 35m. 2/4
The model was originally developed for Austria (after years of work) but then also calibrated for the Euro Area. See the out-of-sample forecasting performance up to 3 years, compared with a VAR. Notice the model improved forecast for longer periods and also for the EA
3/4
Read 4 tweets

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