Wednesday, September 19, 2007

Worthwhile Data and Reading on the Eurozone

by Claus Vistesen

cross-posted from Alpha Sources

This post which features in this blog's 'Eurozone Watch' category is going to be a little bit different than my traditional posts dealing with my own analysis of macroeconomic performance and ECB policy. You could say then that I am outsourcing the information and analysis flow this time around. Consequently, I want to draw your attention to the recent ECB Monthly Bulletin from September (PDF!). As always, the publication is a whopper with a lot of worthwhile data and analysis on the Eurozone economy, note especially the box on housing price developments in the CEE economies ...

In recent years many of the non-euro area EU countries in central and eastern Europe (EU9) have experienced rapid growth in residential property prices. The available data indicate that between 2004 and 2006 the average annual growth rate was over 30% in the Baltic countries, Bulgaria and Romania, and between 6% and 8% in Poland and Slovakia (see Chart A). Although the average figures mask some volatility in the growth rates over the years, and the available residential property price statistics are of mixed quality and are not fully comparable across countries,1 these strong growth rates prompt questions as to their drivers, sustainability and macroeconomic implications. Given the usual rigidity of housing supply, demand factors play a key role in determining house prices in the short to medium term. Among these factors, housing financing seems to be of particular importance for the EU9 economies. In most of these countries mortgage instruments have in recent years become more widely available at lower cost and longer maturities, and on more flexible terms (such as lower amortisation requirements and higher loan-to-value ratios). This is attributable to the deepening of and increasing competition in the mortgage loan markets, reflecting both the low initial level of financial development and integration into the EU (see Chart B). Moreover, in many countries low nominal and real interest rates have prevailed, owing to improved macroeconomic stability and lower risk premia.

The second piece of reading I want to emphasize is a recently published discussion paper from the German ZEW institute on ECB communication as a driver of inflation expectations; the paper is entitled Inflation Expectations of Experts and ECB Communication and is written by Karin Ullrich; I re-produce the abstract and conclusion below.

The communication policy of the European Central Bank attracts a lot of attention from financial markets. This paper analyses the informational content of the monthly introductory statements of the ECB president explaining interest rate
decisions with regard to inflation expectations of financial market experts for the euro area from February 1999 to June 2007. Estimations are conducted for the influence of ECB communication on expectations formation besides other macroeconomic variables. As the results indicate, the indicator measuring the informational content of ECB rhetoric contributes to the explanation of inflation expectations formation.


The conduct of monetary policy has seen a change towards increased transparency in the past years and in the course of this development, the communication strategy of central banks is attracting increasing attention. For the ECB in particular with its complex two pillar strategy and its definition of price stability, it is crucial that the public understands monetary policy decisions and strategy. The literature focuses to a large extent on the short-run effects of communication and comes to the conclusion that the interest rate decisions of the ECB are predictable to a large extent. Whereas the monetary policy of the ECB is well understood in this respect, the influence of communication on inflation expectations
is not equally well investigated. We contribute to the literature by investigating the influence of the informational content of the ECB Presidents’ statements on inflation expectations. To measure expectations, we use inflation expectations of financial market experts provided by the ZEW Financial Markets Test. Even if the qualitative answers of the survey have to be transformed into a quantitative time series of expectations, they provide a more direct measure of expectations than the extraction from interest rates. The informational content of ECB communication is not directly observable either. It is captured by a wording indicator and the question whether there is a significant influence on inflation expectations formation and whether there is a difference between the inflation rate and inflation expectations is analysed. As the estimations reveal, there is a significant influence of the wording indicator on inflation expectations whereas the impact on the gap between inflation expectations and realised inflation does not seem to lead to unambiguous conclusions. A possible interpretation is that the rhetoric of the ECB communicates risks to price stability in a credible way and that financial market experts react to the announcements by adjusting their inflation expectations. The influence arises because the indicator seems to summarise information that would otherwise be provided by different macroeconomic variables that are publicly available. The question whether the communication measure has an independent impact that goes beyond publicly available information contained in macroeconomic time series calls for further investigation.

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