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Overall, the likelihood of euro area wage-setting schemes triggering second-round effects based on inflation indexation is relatively limited, particularly with regard to energy inflation. Recent hikes in energy inflation can be expected to lead to some automatic wage increases, mainly in minimum wages in some countries, affecting only a small share of private sector employees.
However, a broadly based and automatic pass-through to wage growth through wage indexation mechanisms seems rather unlikely. During the pandemic labour supply has fallen sharply. It has partially recovered, although it remains substantially below pre-pandemic levels. While labour force was initially affected in a similar way across the largest euro area countries, there was also some heterogeneity across countries and demographic groups. When taking the pre-pandemic trends into account, workers with a low and medium level of education as well as older workers explain the largest part of the current gap to the pre-pandemic trends.
A full recovery of labour force participation to the rising pre-pandemic trend will likely be gradual. The predictive power of equilibrium exchange rate models. Abstract This article reviews three popular equilibrium exchange rate models, the purchasing power parity PPP , behavioural equilibrium exchange rate BEER and macroeconomic balance MB models.
The aim is to address two questions: whether such models help in forecasting real and nominal exchange rates and which macroeconomic fundamentals contain such predictive power. The evidence suggests that real exchange rates adjust over time to their estimated real exchange rate equilibria only in the cases of the PPP and BEER models.
Exploring this empirical regularity, it is possible to draw three important lessons. The first is that such equilibrium adjustment helps to forecast real exchange rates.
The second lesson is that this real equilibrium adjustment process helps in forecasting nominal exchange rates, as most of the adjustment toward equilibrium is achieved by currency movements and not by relative price changes.
The third is that most of the forecasting power comes from the exploitation of the mean-reverting properties of real exchange rates rather than an understanding of the relationship between exchange rates and economic fundamentals.
Abstract The growth of euro area labour productivity, measured by real GDP per hour worked, increased at the onset of the coronavirus COVID pandemic before declining during the subsequent economic recovery. This contradicts the general notion of productivity being procyclical and reflects the unique nature of this crisis. This box discusses the recent patterns in labour productivity and considers the extent to which some of these developments might fade or consolidate after the crisis.
Scarring effects of the pandemic on the global economy — reviewing recent evidence. Julia Doleschel Ana-Simona Manu. Abstract This box reviews recent data for evidence of scarring effects stemming from the coronavirus COVID shock on the global economy excluding the euro area. Taking a production function approach perspective, it analyses recent data relevant for determining the evolution of potential output and compares them with developments in the aftermath of the Great Recession.
The stylised facts suggest that the level of global potential output has declined during the pandemic, albeit less than during the Great Recession. This decline can mostly be attributed to temporary factors, although more lasting damage may occur if people remain out of work for longer, loose their skills or become long-term unemployed.
Key factors behind productivity trends in euro area countries. Abstract Productivity plays a key role in the economic resilience and social welfare of countries. Central bankers are also interested in higher productivity growth because it would contribute to increasing the natural rate of interest and, therefore, the effectiveness of monetary policy, its room for manoeuvre and its transmission to the economy.
With this monetary policy perspective in mind, this article aims to show key productivity trends and drivers over the past few decades in the euro area. The article is complemented by Box 4 in this issue of the Economic Bulletin, which presents preliminary evidence on the impact of the coronavirus COVID pandemic, and of policy responses to it, on productivity in the euro area. The recovery of housing demand through the lens of the Consumer Expectations Survey.
The European Central Bank was established in The governing council of the ECB is the group that decides on changes to monetary policy. The council consists of the six members of the executive board of the ECB, plus the governors of all the national central banks from the 19 euro area countries.
As a central bank, the ECB does not like surprises. Therefore, whenever it plans on making a change to interest rates, it will generally give the market ample notice of an impending move through comments to the press.
The governing council meets twice a month, but policy decisions are generally only made at meetings where there is an accompanying press conference , and those are held every six weeks. The ECB's mandate is for price stability and sustainable growth. However, unlike the Federal Reserve in the U. As an export-dependent economy, the ECB also has a vested interest in preventing against excess strength in its currency because this poses a risk to its export market.
The primary responsibility of the ECB, linked to its main goal of price stability, is formulating monetary policy. This involves making decisions about monetary objectives, key interest rates, the supply of reserves in the Euro-system and establishing guidelines for implementing those decisions. Monetary policy decision meetings are held every six weeks, and the ECB is transparent about the reasoning behind its decisions.
It holds a press conference after each such meeting, and later publishes the minutes of the meeting. The Euro-system comprises the ECB and the national member states' central banks. The Euro-system is responsible for the practical implementation of ECB policy such as implementing policy, actually holding and managing foreign reserves, operating in the foreign exchange market , and ensuring the payments system runs smoothly.
We supervise euro area banks so you can rest assured that they can weather a rainy day. Consistent and standardised supervision throughout the euro area helps keep your money safe by making banks more robust. We invest in new technologies to make the banknotes you use more secure and resistant to wear and tear. We coordinate their production and issuance with the countries that use the euro. We manage and support the network behind the scenes — the market infrastructure — which helps money to flow smoothly and efficiently, within countries and across borders.
We identify and give recommendations for reducing risks that could throw the financial system out of balance, such as stock market turmoil or a sharp fall in house prices. This helps people like you, as well as businesses, to plan and invest for the future with confidence. Learn how Europe has grown closer with the introduction of the common currency and the creation of joint banking supervision. The most important decisions, including setting the interest rates and deciding which other monetary policy tools to use, are taken by the Governing Council.
It combines both historic and modern elements, making it a unique urban landmark. To read more about what we do, check out our explainers. They explain key topics to help you understand central banking better. What does the ECB do? What is inflation?
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