European Central Bank

Measuring market-based core inflation expectations

Retrieved on: 
Thursday, February 15, 2024

Abstract

Key Points: 
    • Abstract
      We build a novel term structure model for pricing synthetic euro area core inflation-linked
      swaps, a hypothetical swap contract indexed to core inflation.
    • The model provides estimates of market-based expectations for core inflation, as
      well as core inflation risk premia, at daily frequency, whereas core inflation expectations from
      surveys or macroeconomic projections are typically only available monthly or quarterly.
    • We
      find that core inflation-linked swap rates are generally less volatile than headline inflationlinked swap rates and that market participants expected core inflation to be substantially
      more persistent than headline inflation following the 2022 energy price spike.
    • In this paper, we aim to infer market-based core inflation expectations, which are otherwise
      not directly observable because no financial asset directly tied to core inflation exists.
    • We deem this second assumption reasonable because HICP inflation itself is a linear combination
      of core as well as energy and food inflation.
    • The level of 2 percent and relatively low volatility of
      long-term inflation expectations suggests that inflation expectations are firmly anchored at the
      ECB?s 2 percent inflation target.
    • This assumption appears reasonably uncontroversial,
      as core inflation is a sub-component of headline inflation, which the observable headline ILS
      rates are tied to.
    • Our estimates of core ILS rates reflect both market participants? genuine core
      inflation expectations and a core inflation risk premium, but our model explicitly allows for
      this decomposition.
    • The model-implied estimates of core ILS rates appear reasonable along several dimensions:
      (i) like realized core inflation is less volatile than headline inflation, the core ILS rates are less
      volatile than headline ILS rates, (ii) core ILS rates comove less with oil prices than headline
      ILS rates, (iii) the core inflation expectations, as reflected in core ILS rates, typically evolve
      similarly as the core inflation projections by Eurosystem staff, and (iv) consistent with market
      commentary at the time, core ILS rates suggest that market participants expected core inflation
      to be substantially more persistent than headline inflation following the 2022 energy price spike.
    • To the best of our knowledge, we are the first to price core ILS rates and decompose them into
      market-based expectations for and risks around the core inflation outlook.
    • Our approach to inferring core ILS
      rates from headline ILS rates, realized headline and core inflation as well as survey expectations
      for headline and core inflation is also related to Ang et al.
    • Relative
      to their study, we separately measure core inflation expectations and risk premia, we provide
      core inflation expectations at a higher-frequency, and we provide evidence on the causal effects

      ECB Working Paper Series No 2908

      6

      of monetary policy shocks on core inflation expectations and risk premia.

    • Specifically, we decompose the synthetic core ILS rates
      into average expected core inflation over the lifetime of the swap contract and a core inflation
      risk premium that compensates investors for core inflation risk.
    • In
      our model below, this term is constant over time and relatively small, so we will simply refer
      to the core inflation risk premium as the difference between the core ILS rate and the average
      expected core inflation over the lifetime of the swap contract.
    • 3.2

      Core ILS rates

      To have a joint model for headline and core ILS rates, we need one further assumption on the
      dynamics of realized core inflation.

    • The assumption that core inflation is driven by the same set of factors as headline inflation
      should be relatively uncontroversial: since headline inflation is a weighted average of core and
      food and energy inflation, it should reflect any factors driving core inflation.
    • If there are factors
      driving food and energy inflation, which do not show up in core inflation, then those factors
      should still show up in headline inflation.
    • In step two, to be able to infer the factor
      loadings of core inflation, we would regress realized core inflation onto the estimated latent
      factors to identify the additional parameters in equation (12).
    • Before the fourth
      quarter of 2016, the SPF did not ask respondents for their core inflation expectations, so we
      are not able to use survey-based information about core inflation before then.
    • Before
      2016, the fitted core inflation series is somewhat above the realized one, potentially reflecting
      that the model has limited information about core inflation over this early period due to the
      lack of information about core inflation from surveys.
    • This could have been the
      case if one of the factors moved core inflation and energy and food inflation in exactly offsetting
      direction, so the overall impact on headline inflation was exactly zero.
    • During 2021, for example, there were

      ECB Working Paper Series No 2908

      25

      Figure 7: Decomposition of synthetic core ILS rates
      2y core ILS

      5y core ILS

      5
      4

      5
      ILS

      premia

      exp

      4

      ILS

      premia

      exp

      3

      3

      2

      2

      1

      1

      0

      0

      -1

      -1

      -2
      2017 2018 2019 2020 2021 2022 2023

      -2
      2017 2018 2019 2020 2021 2022 2023

      10y core ILS

      5y5y core ILS

      5
      4

      5
      ILS

      premia

      exp

      4

      ILS

      premia

      exp

      3

      3

      2

      2

      1

      1

      0

      0

      -1

      -1

      -2
      2017 2018 2019 2020 2021 2022 2023

      -2
      2017 2018 2019 2020 2021 2022 2023

      Note: Synthetic core ILS rates decomposed into genuine core inflation expectations and core inflation risk
      premia.

    • ECB Working Paper Series No 2908

      26

      Figure 8: Decomposition of ILS rates
      2y ILS

      5y ILS

      5
      4

      5
      ILS

      premia

      exp

      4

      3

      3

      2

      2

      1

      1

      0

      0

      -1

      -1

      -2
      2006

      2010

      2014

      2018

      2022

      -2
      2006

      ILS

      2010

      10y ILS

      2018

      2022

      5
      ILS

      premia

      exp

      4

      3

      3

      2

      2

      1

      1

      0

      0

      -1

      -1

      -2
      2006

      2014

      exp

      5y5y ILS

      5
      4

      premia

      2010

      2014

      2018

      2022

      -2
      2006

      ILS

      2010

      premia

      2014

      2018

      exp

      2022

      Note: ILS rates decomposed into genuine core inflation expectations and core inflation risk premia.

    • We find that the headline inflation risk premium
      indeed does responds more strongly than the core inflation risk premium.
    • The key
      assumption underlying our approach is that traded headline ILS rates span core inflation, which

      ECB Working Paper Series No 2908

      35

      should be reasonably uncontroversial as core inflation is a sub-component of headline inflation.

    • We fit the model to euro area headline ILS rates, realized headline and core inflation, and
      both headline and core inflation expectations reported in the SPF.
    • Decomposing our core ILS rates into genuine core inflation expectations and core
      inflation risk premia shows that shorter maturities mainly reflect core inflation expectations,
      while the core inflation risk premium matters relatively more for longer maturities.
    • Our results suggest that a monetary policy tightening surprise significantly lowers
      near-term core inflation expectations, although less so than it lowers headline inflation expectations.

Generation Z may not need mortgages, here’s why

Retrieved on: 
Wednesday, February 14, 2024

The idea of getting a mortgage with just their own income is often unthinkable, and those who do own property often have an uncommonly early inheritance to thank.

Key Points: 
  • The idea of getting a mortgage with just their own income is often unthinkable, and those who do own property often have an uncommonly early inheritance to thank.
  • While housing crises rage across Europe, many members of Generation Z – those born after the year 2000 – may soon find that the shoe is on the other foot.
  • Generation Z therefore stands to benefit from Europe’s declining birth rate, one of the lowest in the world at 1.53 children per woman.

Mortgages: an increasingly unattractive prospect

  • If you meet these criteria, you are then locked into, on average, a 25-year commitment.
  • The prospect of getting one is especially unappealing at a time when rising mortgage rates are driving the cost of living up in Europe and beyond.

Home ownership in Europe today

  • The average mortgage duration is 25 years, meaning payments are typically completed by the age of 59, just before retirement age (65 in most EU member states).
  • This does vary widely across the continent, and there is little correlation between ownership rates and the number of active mortgages.
  • In contrast, this percentage is far lower in countries like Italy, where only 14.6% of homeowners have a mortgage.

Spain: a case in point

  • It is above average in life expectancy and rates of home ownership (especially among older generations): the average Spaniard first purchases property at age 41, and receives an inheritance at 51.
  • From 2021 to 2022 the number of homes inherited in Spain rose by 3.7%, with over 17,800 homes inherited per month within its borders.

Leaving the family home

  • However, the value of inheritances varies widely across different countries and wealth distributions, and it is difficult to make predictions for all of Europe.
  • There is also huge variation in factors such as the age of leaving the family home.
  • In Finland, on the other hand, people typically leave home at age 21.4, with similarly low figures across Scandinavia.
  • Spain’s staggering drop of 62.54% in new mortgages from 2007 to 2023 is reflected in data from across Europe.

Impacts on Generation Z

  • Though they will face plenty of other problems, such as securing stable employment contracts, housing might not be the primary concern for much of Generation Z in the future.
  • This will benefit Millennials to a certain extent, but with fewer siblings, many wealthier members of Generation Z might not need to divide inheritances from parents who often own multiple properties.


Geoffrey Ditta no recibe salario, ni ejerce labores de consultoría, ni posee acciones, ni recibe financiación de ninguna compañía u organización que pueda obtener beneficio de este artículo, y ha declarado carecer de vínculos relevantes más allá del cargo académico citado.

Managing the transition to central bank digital currency

Retrieved on: 
Wednesday, February 14, 2024

Key Points: 

    Philip R. Lane: Euro area international financial flows: analytical insights and measurement challenges

    Retrieved on: 
    Tuesday, February 13, 2024

    We document how gas price fluctuations have a heterogeneous pass-through to euro area prices depending on the underlying shock driving them.

    Key Points: 
    • We document how gas price fluctuations have a heterogeneous pass-through to euro area prices depending on the underlying shock driving them.
    • Supply shocks, moreover, are found to pass through to all components of euro area inflation – producer prices, wages and core inflation, which has implications for monetary policy.

    Piero Cipollone: The euro at 25: what next for Economic and Monetary Union?

    Retrieved on: 
    Tuesday, February 13, 2024

    We document how gas price fluctuations have a heterogeneous pass-through to euro area prices depending on the underlying shock driving them.

    Key Points: 
    • We document how gas price fluctuations have a heterogeneous pass-through to euro area prices depending on the underlying shock driving them.
    • Supply shocks, moreover, are found to pass through to all components of euro area inflation – producer prices, wages and core inflation, which has implications for monetary policy.

    Gas price shocks and euro area inflation

    Retrieved on: 
    Tuesday, February 13, 2024
    Transfer, Person, Marques, OPEC, Interval (mathematics), Policy, NBER, Research Papers in Economics, The Economic Journal, Danmarks Nationalbank, Socialism, Energy transition, VIX, Canadian International Council, Paper, E30, Great, Macroeconomics, VAR, Central bank, Balke, Quarterly Journal, Q43, Census, Elasticity, USD, Projection, PMI, Social science, Hou, Bank of France, Topa, Fertilizer, Electricity, SSRN, University, A.5, Section 2, Natural gas, COVID-19, Swings, Overalls, Rotation, Journal of Monetary Economics, Harmonization, Title Transfer Facility, Pain, Ferrari, Uncertainty, Statistics, Medical classification, C50, Harper (publisher), Democracy, Shock, IMF, TTF, Fed, PPI, Power, European Central Bank, Monetary economics, Temperature, Section 3, E31, Nature, Food, Local, Joseph Schumpeter, Website, Energy economics, Speech, DeSantis, GDP, Rigidity, BVAR, Confidence interval, Money, Refinitiv, Bank, Baumeister, Pressure, Oil, Deutsche Bundesbank, International Energy Agency, Employment, Section 4, GIZ, C54, Sun, ECB, European Economic Association, Weather, A.9, Quarterly Journal of Economics, Exercise, HICP, Technical report, Attention, Literature, Journal of Applied Econometrics, Reproduction, International economics, Political economy, Absorption, Joseph Stiglitz, Unemployment, Journal, American Economic Review, Index, Section 5, Business, IP, Bachmann, Research, Federal Reserve Bank, Government, PDF, IWH, Complexity, Failure, Energy Information Administration, Explosive

    We document

    Key Points: 
      • We document
        how gas price fluctuations have a heterogeneous pass-through to euro area prices
        depending on the underlying shock driving them.
      • How do gas price shocks feed through to euro area
        inflation, and is the pass-through shock-dependent?
      • We analyse the importance of gas price shocks
        for euro area inflation in two steps.
      • We identify three structural shocks driving European gas prices,
        inspired by the literature on oil but tailored to the European gas market: (i) a gas supply
        shock, which reduces the supply of natural gas to the European market, increases the
        gas price and lowers gas inventories; (ii) an economic activity shock, which lifts demand
        for gas due to higher economic production, and finally (iii) a shock to gas inventories,
        when gas prices are driven by precautionary demand by gas companies.
      • First, all three identified shocks are
        important drivers of gas price dynamics, but they differ in how persistently they push

        ECB Working Paper Series No 2905

        2

        up gas prices.

      • The effect on euro area HICP of a shock to gas supply is more
        persistent and somewhat higher than when gas prices are driven by economic activity
        shocks.
      • A final key finding is that the pass-through of gas market shocks to euro area inflation
        appears non-linear.
      • The unprecedented volatility of gas prices
        contributed to the inflation problem in the euro area, with the gas price shocks feeding
        through producer prices, wages and persistently lifting core inflation.
      • More expensive
        energy contributed substantially to the rise in inflation in Europe during 2022.2

        Figure 1: Gas price and euro area Harmonized Index of Consumer Prices.

      • How do gas price shocks feed through to euro area
        inflation, and is the pass-through shock-dependent?
      • For instance, about 75% of gas imports to the euro area arrives
        through pipelines, making gas imports difficult to substitute and gas markets subject to
        3

        See for example the evidence by Rubaszek and Uddin (2020) for the US economy.

      • We analyse the importance of gas price shocks for
        euro area inflation in two steps.
      • We identify three structural shocks driving European gas prices,
        inspired by the literature on oil but tailored to the European gas market: (i) a gas supply
        shock, which reduces the supply of natural gas to the European market, increases the
        gas price and lowers gas inventories; (ii) an economic activity shock, which lifts demand
        for gas due to higher economic production, and finally (iii) a shock to gas inventories,
        when gas prices are driven by precautionary demand by gas companies.
      • First, all three identified shocks are
        important drivers of gas price dynamics, but they differ in how persistently they push
        up gas prices.
      • But when gas prices are driven by
        inventory demand shocks, the price effect typically dies out within one quarter.
      • A final key finding is that the pass-through of gas market shocks to euro area inflation appears non-linear.
      • The unprecedented volatility of gas prices
        contributed to the inflation problem in the euro area, with the gas price shocks feeding
        through producer prices, wages and persistently lifting core inflation.
      • (2022) and Alessandri and Gazzani (2023) identify gas supply shocks using VAR models,
        finding that gas price shocks lead to persistent increases in headline inflation.14 Ba?bura
        et al.
      • (2023) find positive effects of gas price shocks on core inflation in a BVAR for
        the euro area that includes one type of gas shock along a longer list of macroeconomic
        shocks.
      • 3.1

        Data

        For the gas market BVAR model, we use gas quantities, gas prices, gas inventories and
        euro area industrial production, as displayed in Figure 2.

      • (2015) to optimize

        ECB Working Paper Series No 2905

        13

        the posterior distribution.16 The vector Y includes the European gas quantity proxy, gas
        inventories, the European gas price benchmark and euro area industrial production.

      • As demand for gas increases, the gas price also rises
        while inventories fall as agents use gas in storage to partially satisfy higher demand.
      • Shocks to gas
        quantities driven by gas supply or inventory shocks tend to revert to pre-shock levels after
        around five to seven months, while economic activity shocks lead to a more long-lived
        increase in gas demand.19 Dynamics in gas inventories are more similar across shocks.
      • 3.4

        Historical events in the European gas market

        Before analysing the transmission of the different types of gas shocks to euro area prices,
        we show how the model interprets the unprecedented gas price rise in 2022 in terms of
        driving factors, and compare it with previous historical episodes of heightened gas price
        volatility as a way of validating the model.

      • Inventory shocks play a
        slightly smaller role, accounting for 17% of gas quantity and 23% of gas price fluctuations
        while the residual component (i.e.
      • 4

        Pass-through of gas price shocks to consumer prices

        The pass-through of gas price shocks to inflation is likely to be multi-faceted.

      • We first consider four outcome variables y: the European gas price, euro area HICP,
        core HICP and energy HICP.
      • Third, depending on the driving factor, gas price increases can pass through to core
        inflation in the euro area.
      • The results underline that gas price shocks can have important implications for inflation in the euro area ? depending on the driving factor of higher gas prices.
      • Casoli, C., Manera, M., and Valenti, D. ?Energy shocks in the euro area: disentangling
        the pass-through from oil and gas prices to inflation?.

    Demographics, labor market power and the spatial equilibrium

    Retrieved on: 
    Tuesday, February 13, 2024

    Abstract

    Key Points: 
      • Abstract
        This paper studies how demographics affect aggregate labor market power, the urban wage
        premium and the spatial concentration of population.
      • I develop a quantitative spatial model
        in which labor market competitiveness depends on the demographic composition of the local
        workforce.
      • If these factors differ across workers, labor market power has a role to
        play in explaining wage inequality.
      • This paper contributes to the literature on differences in labor market power by analyzing a
        new dimension of heterogeneity: demographics.
      • Since older workers are less mobile in terms of
        switching workplaces, firms have more labor market power over older workers.
      • I start by estimating labor market power by measuring the sensitivity of worker turnover to
        the wage paid.
      • I find a strong
        role of demographics in determining the degree of labor market power enjoyed by firms.
      • Next, I provide evidence of the importance of differences in labor market power for spatial
        wage inequality.
      • To explore the consequences of labor market sorting, I build a spatial general equilibrium
        model in which labor market competitiveness depends on the demographic composition of the

        ECB Working Paper Series No 2906

        2

        local workforce.

      • If these factors differ across workers, labor market power has a role to
        play in explaining wage inequality.
      • In
        the model, geographic sorting by age matters and leads to higher labor market power in rural
        areas, which implies an urban wage premium that is 4% larger than with uniform labor supply
        elasticities.
      • I follow Manning (2013) and estimate labor market power by measuring the sensitivity of worker
        turnover to the wage paid.
      • Bachmann et al., 2021; Ahlfeldt et al., 2022a; Berger et al.,
        2022) that nest a monopsonistic labor market in a spatial general equilibrium model (Redding
        and Rossi-Hansberg, 2017).
      • As firms have more labor market power
        over older workers, they face an upward-sloping labor supply curve that is less elastic in regions
        with an older workforce.
      • Firms choose in which labor market to operate in the sense that there is free
        entry at fixed costs into all locations.
      • How are differences in labor market competitiveness across space sustained in spatial equilibrium?
      • I use the model to quantify the importance of heterogeneity
        in labor market power for the urban wage premium and the spatial concentration of population.
      • My work is complementary to but quite different
        from this paper since I argue that population aging increases labor market power rather than
        product market power.
      • By analyzing the effects of a changing age composition of the workforce in the context
        of labor market power, I relate to literature on the labor market effects of population aging.
      • ECB Working Paper Series No 2906

        7

        after controlling for age, differences in labor market power between East and West Germany
        vanish.

      • They conclude that higher
        concentration is associated with higher labor market power (as in the model of Jarosch et al.,
        forthcoming).
      • I offer an alternative explanation why labor market power differs across regions:
        Since denser regions have a younger workforce, workers are more mobile in terms of switching
        jobs which implies lower labor market power of firms.
      • In this case, I infer a
        high labor supply elasticity and low labor market power of firms.
      • I contribute to this growing debate by
        quantifying differences in labor market power across worker groups and their effects on regional
        inequality.
      • While the model shows how demographics affect labor market power, the urban wage premium and agglomeration, one fundamental question remains open for future research: What
        are the policy implications of (differences in) labor market power?

    Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund Declares its Quarterly Distribution of $0.20 Per Share

    Retrieved on: 
    Monday, February 12, 2024

    Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund (the "Fund") (NYSE: MFD) has declared the Fund's regularly scheduled quarterly distribution of $0.20 per share.

    Key Points: 
    • Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund (the "Fund") (NYSE: MFD) has declared the Fund's regularly scheduled quarterly distribution of $0.20 per share.
    • FTA and its affiliate First Trust Portfolios L.P. ("FTP"), a FINRA registered broker-dealer, are privately-held companies that provide a variety of investment services.
    • FTP is also a distributor of mutual fund shares and exchange-traded fund creation units.
    • The Fund principally invests in a global portfolio of infrastructure stocks in a range of currencies and senior secured loans.

    Piero Cipollone: Modernising finance: the role of central bank money

    Retrieved on: 
    Saturday, February 10, 2024

    The paper demonstrates how agreement-level data can be used to study drivers of aggregate negotiated wage growth, as well as monitor the breadth of wage increases and account for time-varying factors such as one-off payments, when assessing wage pressures.

    Key Points: 
    • The paper demonstrates how agreement-level data can be used to study drivers of aggregate negotiated wage growth, as well as monitor the breadth of wage increases and account for time-varying factors such as one-off payments, when assessing wage pressures.
    • Lastly, the paper shows that the new indicators can provide reliable signals about current and future developments of wage pressures in the euro area while also serving as important cross-checking tools for negotiated wage growth forecasts.