Are the exchange rates between certain currencies more closely connected than those of other currencies? Answers to this question can be provided by econometric methods. A new study shows how machine learning can deliver useful insights into this issue.

The global financial crisis was a lesson that it is not enough to merely monitor the stability of individual banks – the stability of the banking sector as a whole is also a crucial factor, which is precisely what the countercyclical capital buffer (CCyB), a key instrument under the Basel III regime, is there to help safeguard. However, recent research indicates that adhering too strictly to the reference indicator envisaged under the Basel III framework might lead to a situation in which supervisors activate the CCyB either too late or not at all ahead of a future financial crisis.

Whenever financial markets react to ECB Governing Council meetings, the explanation seems obvious: the Governing Council surprised markets, for instance, by changing its policy rate or by hinting at a future rate change. Any market reaction would thus stem from unexpected announcements about monetary policy. The response of different asset prices such as bond yields and stock prices, however, often contradicts this simple explanation. A new study indicates that these seemingly puzzling reactions are driven by information about the economic outlook that the ECB reveals via its announcements.

Regulatory requirements for banks are often criticised as having an adverse impact on lending and hence, indirectly, on the real economy. A new research paper uses a theoretical partial equilibrium model to study the direct effects a liquidity coverage ratio could have on banks’ loan supply.

Tax reform designed to improve the conditions for macroeconomic growth without weighing on government budgets has been the topic of recent debate in Europe. One proposal on the table suggests reducing taxes on wages whilst at the same time raising those on land and property. A new study uses a modern DSGE model to examine how, within this model framework, such a shift would impact on the aggregate economy and to what extent property owners and tenants would be affected.