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Article
Publication date: 10 May 2021

Mariya Gubareva

The purpose of this paper is to present an empirical analysis of the European Central Bank (ECB) deposit rate dynamics during 2014–2020, attempting to answer how deep could be cut…

Abstract

Purpose

The purpose of this paper is to present an empirical analysis of the European Central Bank (ECB) deposit rate dynamics during 2014–2020, attempting to answer how deep could be cut further this rate without causing persistent yield curve inversions (YCI), i.e. lower yields for longer terms. It addresses the sustainability of the traditional banking and shows that inverted yield curves would require changing the banking-as-usual model to the government-guaranteed long-term-borrowing coupled with short-term-lending. This research poses the question of whether the banking sector should become a public utility.

Design/methodology/approach

The future scenarios of negative interest rate (NIR) behavior are modeled seeking to increase the understanding of NIR environment. Using an event-study design, empirical analyses of the ECB deposit rate cuts on the Euro Over-Night Index Average rates is performed at different maturities.

Findings

This study finds that, starting from the lower limit of 80 basis points below zero, the ECB deposit rate is likely to result in complete YCIs.

Social implications

This paper evidences that moving rates into a more negative territory is likely to be completely counterproductive for banking industry, implying that banking at such conditions would become heavily dependent on governmental support. The results shed light on the interdependence of the banking business, financial monetary policy and welfare of the society, providing policymakers with empirically defined milestones for policy implementations.

Originality/value

This paper clarifies the impact of the ECB deposit rate on the overall shape of yield curves. The novelty of this research resides in investigation of YCI by simulating NIR dynamics.

Abstract

Details

European Union and the Euro Revolution
Type: Book
ISBN: 978-1-84950-827-8

Book part
Publication date: 23 October 2017

Daniele Schilirò

This chapter analyzes the rules and institutions that have characterized the European Monetary Union (EMU) during its prolonged crisis, stressing the limits of the strategy…

Abstract

This chapter analyzes the rules and institutions that have characterized the European Monetary Union (EMU) during its prolonged crisis, stressing the limits of the strategy pursued by the European authorities. It also examines the issues of current account imbalances, economic growth and the problem of debt, and their interconnections. The main purpose of this chapter is to indicate feasible economic solutions and political arrangements in order to complete the institutional system of the EMU. This requires appropriate reforms of its institutional architecture. But such reforms demand changes in the treaties in order to make the Eurosystem more consistent and endowed of democratic legitimacy, so to have appropriate tools, resources and policies that can contribute to the stability, cohesion and development of the Eurozone.

Details

Economic Imbalances and Institutional Changes to the Euro and the European Union
Type: Book
ISBN: 978-1-78714-510-8

Keywords

Expert briefing
Publication date: 9 March 2017

Inflation rates are rising sharply across Central-Eastern Europe (CEE), mainly thanks to a recovery in commodity prices. A flurry of stronger-than-expected economic data is…

Expert briefing
Publication date: 17 January 2018

QE’s influence on Central Europe’s bond markets.

Expert briefing
Publication date: 28 March 2018

Monetary divergence

Details

DOI: 10.1108/OXAN-DB231763

ISSN: 2633-304X

Keywords

Geographic
Topical
Expert briefing
Publication date: 6 February 2019

Following the meal, the Fed said Powell did not discuss monetary policy "except to stress that the path of policy will depend entirely on incoming economic information and what…

Executive summary
Publication date: 6 March 2015

EURO-AREA: ECB policy will support markets and growth

Details

DOI: 10.1108/OXAN-ES198148

ISSN: 2633-304X

Keywords

Geographic
Topical
Expert briefing
Publication date: 22 August 2017

The dollar index has fallen by about 10% since early January, to its lowest since April 2016, under the strain of US President Donald Trump’s political woes and robust euro-area…

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