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News - Media Releases 2019

20/11/2019

Second edition of Research Bulletin launched at annual workshop

The Central Bank of Malta recently held its Annual Research workshop for 2019 where a number of presentations of research work by foreign guests and the Bank's staff were delivered during the workshop, and the Bank published its Research Bulletin for 2019.

The increasing share of services in the Maltese economy and reform of the government's energy policy have meant that import prices have a lower impact on domestic price developments than in the past, according to the Central Bank of Malta.

Principal research economist Noel Rapa explained the reduction in the impact of import prices when making a presentation during the Bank's fourth annual research workshop organised recently. Last year, the first Research Bulletin was launched at the workshop, a format which was repeated this year.

Mr Rapa's presentation explained changes to the model used by the Bank to assess economic relationships in the Maltese economy. The  model - called STREAM - is able to analyse, among other scenarios, what could happen in the event of a theoretical rise of 10% in oil prices, and it found that the impact would be half that found in the previous estimation of the model three years ago.

The Bank's Deputy Governor Sandro Demarco said in his speech that the Bank's research indicates that while Malta's price dynamics have become less dependent on foreign prices, they have become increasingly sensitive to developments in the domestic labour market, especially in view of the growing importance of services in domestic consumption.

This is the third time that STREAM has been re-estimated, ensuring that the model keeps incorporating the more recent developments in the Maltese economy. It currently uses 257 equations that take into account 319 variables.

STREAM is not the only model used by the Bank which is regularly updated. Another principal research economist, William Gatt Fenech, explained how another model - MEDSEA, first developed in 2016 - was being further developed to capture links between house prices, credit and consumption. This structural model will be used to study the role that macroprudential policy tools, such as maximum loan-to-value ratio and bank capital requirements, play in taming financial cycles.

Economic models were also the theme chosen by one of the guest speakers at the workshop, which was attended by both Bank employees and external stakeholders. Banca D'Italia's deputy head of the Economic Outlook and Monetary Policy Directorate Stefano Neri explained that economic models had failed to predict the financial crisis a decade ago. Although they have since been reviewed and updated, they need to be further reviewed with a view to incorporating the long-term impact of adverse demographic developments.

The other guest speaker, the head of the Innovation and Digital Economy Unit at the Bank for International Settlements Leonardo Gambacorta took a different tack and spoke about operational and cyber risks for the financial sector at the international level. After a large increase following the great financial crisis, operational losses declined recently. While it is estimated that the time between the occurrence of the loss and its recognition exceeds on average one year and three months, it varies greatly across jurisdictions. Internal fraud events and negligence failures are less likely to be discovered or take more time to be discovered than other events, especially for smaller banks, he noted.

He also spoke about cyber losses, and said that all other things being equal, the financial sector was less affected than other sectors as it tends to invest more in protecting itself against such risks.

The Central Bank's chief economist Aaron Grech reported that the output of the Bank's research department had virtually trebled since 2013, though Mr Demarco stressed the importance of research to capture trends: "Due to the rapid pace of change of the Maltese economy, policymakers require new datasets and new analytical tools to be able to adequately monitor developments."

"At the same time the development of new models and new datasets takes considerable time and resources, which sometimes may be at odds with the short time span available for policymakers to take their decisions. This is why it is fundamentally important that economic research is forward looking and proactive, to ensure that it remains relevant to policymakers," he said in his closing remarks.

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