European Central Bank

This study demonstrates that the real interest rate and headline inflation significantly lead real output. Specifically, the level of the real long-term interest rate positively influences future output, while changes in this rate and the level of headline HICP inflation have a negative impact. This is shown for euro area real GDP growth two to eight quarters ahead, conditional on the leading content of six established output predictors that capture monetary policy transmission channels. The findings are robust when considering ex ante proxies for inflation expectations – autoregressive inflation forecasts and the Survey of Professional Forecasters’ inflation expectations – instead of relying on ex post actual GDP deflator inflation. This robustness remains when using instrumental variables estimation, accounting for nonlinearities, or employing a machine learning tool. Out-of-sample forecast performance underscores the advantage of averaging forecasts from the eight individual predictors, especially for longer ahead forecast horizons. A policy implication is that output forecasters should closely monitor inflation.

Do attacks against politicians exacerbate the political underrepresentation of marginalized groups? Existing research suggests that candidates and officeholders from underrepresented groups are more likely to become targets of political violence, but little is known about the consequences of indirect exposure to political violence for descriptive representation and political ambition. Focusing on the case of women in politics, we study how the prevalence of political violence affects both the descriptive representation and the political ambition of women in Germany – Europe's largest democracy. Combining an analysis of observational data measuring crimes against politicians with evidence from original and pre‐registered survey experiments, we first demonstrate that attacks on political elites are not associated with fewer female candidates on party lists for local elections. Examining political ambitions and underlying microfoundations with different samples of respondents varying in their likelihood of considering political candidacy, we provide survey‐experimental evidence that information about the prevalence of political crime does not reduce willingness to run for office or engage in politics among female respondents with high political interest but may do so among those with low political interest. Taken together, this study highlights the resilience of underrepresented groups in the face of increasing political violence. However, we also show that political violence may create a pipeline problem if it deters the wider population of women from even considering to run for office.

The paper analyses the potential impact on monetary policy transmission stemming from the adoption of a central bank digital currency (CBDC). Bank funding conditions and potential profitability effects are the main channels through which CBDC could have a bearing on monetary policy transmission via banks. As is the case for banknotes, the central bank balance sheet identity operates in effect as an aggregate consistency restriction that prevents CBDC from creating funding scarcity for the banking system as a whole. However, without policy neutralising actions, the new resulting bank funding mix might be less favourable for banks, thus potentially leading to suboptimal outcomes from a monetary policy perspective, such as restrictions in credit supply. Analysing the transmission channels through which banks obtain the necessary reserves suggests that a CBDC could have a material impact on bank lending conditions only if some relevant frictions, such as collateral constraints or liquidity shortages, materialise. Adverse funding conditions, such as those arising from lower bank liquidity or difficulty to access central bank funding or to tap the bond market, further paired with a large demand for CBDC, could affect bank lending conditions and the transmission of monetary policy. Importantly, even in this case, careful design, and implementation, as well as attentive communication can limit an unwarranted tightening coming from funding and liquidity tensions due to the rollout of CBDC. In addition, the central bank could take specific action to prevent or neutralise unwarranted impacts in order to maintain its desired monetary policy stance. In the longer term, a digital euro could support the digitalisation of the euro area banking sector, levelling the playing field for banks more exposed to competition from new players like big tech firms.

Financial losses can have persistent effects on the financial system. This article proposes an empirical measure for the duration of these effects, Spillover Persistence. I document that Spillover Persistence is strongly correlated with financial conditions; during banking crises, Spillover Persistence is higher, whereas in the run-up phase of stock market bubbles, it is lower. Lower Spillover Persistence also associates with a more fragile system, for example, a higher probability of future crises, consistent with the volatility paradox. The results emphasize the dynamics of loss spillovers as an important dimension of systemic risk and financial constraints as a key determinant of persistence.

Financial stability indicators can be grouped into financial stress indicators that reflect heightened spreads and market volatility, and financial vulnerability indicators that reflect credit and asset price imbalances. Based on a panel of euro area countries, we show that both types of indicators contain information about growth-at-risk in the short-term. However, only vulnerability indicators contain information about growth-at-risk in the medium-term. Among various vulnerability indicators suggested in the literature, the Systemic Risk Indicator (SRI) proposed by Lang et al. (Anticipating the bust: a new cyclical systemic risk indicator to assess the likelihood and severity of financial crises, 2019) outperforms in terms of in-sample explanatory power and out-of-sample predictive ability for medium-term growth-at-risk in euro area countries. Shocks to the SRI induce a rich term structure for growth-at-risk, which is different to the one induced by financial conditions.

We utilize a novel dataset that merges household administrative income and socio-demographic information from tax records with scanner data on CPG consumption. Our analysis reveals significant variation in household per-capita expenditures. However, we find only a modest economic relationship between CPG spending and income, even amidst substantial within-household income fluctuations during the Dutch "double-dip recession" from 2011 to 2018. This relationship remains small for households with low income and low liquidity and holds across both food and non-food expenditures.

This study highlights the superior performance of Bayesian Model Averaging (BMA) in credit risk modeling under IFRS 9, particularly during economic uncertainty, such as the COVID-19 pandemic. Using granular bank-level data from Malta, spanning 2017–2023, the analysis integrates macroeconomic scenarios and sector-specific transition matrices to assess credit risk dynamics. Key findings demonstrate BMA’s ability to outperform Single-Equation Models (SEM) in predictive accuracy, robustness, and adaptability. The results emphasize BMA’s resilience to structural economic changes, making it a critical tool for regulatory stress testing and provisioning in small open economies highly exposed to external shocks. This work underscores the importance of forward-looking, flexible frameworks for credit risk management and policy decisions.

Many forecast surveys ask their participants for fixed‐event forecasts. As fixed‐event forecasts have seasonal properties, users often employ an ad hoc approach to approximate fixed‐horizon forecasts based on these fixed‐event forecasts. We derive an optimal approximation for fixed‐horizon forecasts by minimizing the mean‐squared approximation error. Like the ad hoc approach, our approximation employs a weighted average of the fixed‐event forecasts. The optimal weights tend to differ substantially from those of the ad hoc approach. In empirical applications, the gains from using optimal instead of ad hoc weights turn out to be sizeable. The approximation approach proposed can also be useful in other applications.

We develop a model that features costly market segmentation and financial repression to link domestic and external sovereign debt with default. In a financially repressed economy, a government that exploits its market power in the domestic economy can also increase its external debt capacity, owing to a novel, additional endogenous cost of default. A government forfeits the gains from trading in segmented debt markets when it defaults. Among other empirical regularities, our model can account for the heterogeneity in sovereign debt levels of nonadvanced economies, based on their level of financial development.

The creation of the Single Supervisory Mechanism (‘SSM’) will undoubtedly soon be regarded as one of the milestones of European integration; and, not only because of the novelties it is bringing about in terms of legal construction—with the largely unprecedented situation in which a Union institution, within the framework of its prerogatives iure imperii, is obliged to also apply certain provisions of national law-but also because of the high level of cooperation between [competent] authorities at Union and national level, which is at its very foundation.

Using randomized control trials (RCTs) applied over time in different countries, we study whether the economic environment affects how agents learn from new information. We show that as inflation rose in advanced economies, both households and firms became more attentive and informed about publicly available news about inflation, leading them to respond less to exogenously provided information about inflation and monetary policy. We also study the effects of RCTs in countries where inflation has been consistently high (Uruguay) and low (New Zealand) as well as what happens when the same agents are repeatedly provided information in both low‐ and high‐inflation environments (Italy). Our results broadly support models in which inattention is an endogenous outcome that depends on the economic environment.

We analyze the disclosures of sustainable investing by Dutch pension funds in their annual reports by introducing a novel textual analysis approach using state-of-the-art natural language processing techniques to measure the awareness and implementation of sustainable investing. We find that a pension fund's size increases both the awareness and implementation of sustainable investing. Moreover, we analyze the role of signing a sustainable investment initiative. Although signing this initiative increases the specificity of pension fund statements about sustainable investing, we do not find an effect on the implementation of sustainable investing.

We study euro area investors' portfolio adjustment since the Brexit referendum in terms of securities issued in the UK or denominated in pound sterling, in the context of heightened policy uncertainty surrounding the exit process of the UK from the EU. Our sector‐level analysis ‘looks‐through’ holdings of investment fund shares to gauge euro area sectors' full exposures. Our key finding is the absence of a negative ‘Brexit‐effect’, rendering UK‐issued and pound‐denominated securities less attractive. Instead, we observe that all euro area sectors increased their absolute and relative exposures to UK‐issued and pound‐denominated debt securities since the Brexit referendum, as well as to listed shares issued by UK nonfinancial corporations, while the exposures to shares issued by UK banks declined. These findings should be seen against the backdrop of low yields on euro area debt securities and a strong recovery in UK share prices since the Brexit referendum.

This paper investigates how the sector-specific source or the changing sectoral composition of labor productivity has contributed to $\beta$-convergence, using a newly constructed eight-sector database. Compared with the literature decomposing convergence, it employs a large and diverse sample of countries. The main findings are twofold. First, both sector-specific and sectoral reallocation have become important drivers of $\beta$-convergence in labor productivity. Second, looking across the sectors, agricultural productivity growth has been a significant contributor to $\beta$-convergence, whereas most other sectors have not contributed to overall convergence. Our result is in line with the literature that illustrates that the increase in agricultural productivity has a larger poverty-reduction effect than increases in other sectors.

We construct currency portfolios based on the premise that exchange rates gradually converge toward their equilibrium levels, yielding three key findings. First, this convergence can be leveraged to build profitable portfolios. Second, the slow rate of convergence over shorter horizons aligns with the sustained profitability of carry trade strategies, where investors borrow in low-yield currencies and invest in high-yield ones. Third, incorporating the predictive insights of equilibrium exchange rates can boost the performance of carry trade strategies.

As countries and firms increasingly seek ways to strengthen the resilience of their supply chains, this paper studies the global economic costs of a decoupling of global supply chains along geopolitical lines as well as in strategic sectors. We explore not only the long‐run effects but also the short‐run costs stemming from rigid wages and low substitutability across factors of production and input goods. We find that, in terms of welfare losses, the costs of decoupling are roughly five times higher in the short‐run compared with the long‐run, while country losses are heterogeneous. A reshaping of global supply chains increases the level of consumer prices in most countries, as well as producer prices, especially for trade‐intensive manufacturing sectors. Global supply chain decoupling entails also a reallocation of labour across skill levels. Finally, global trade would decrease substantially, driven by lower trade in intermediate inputs and a higher reliance of countries on domestic production.

We analyze the effect of green patents on G7 stock market returns. First, we build a small IS-LM model to identify the relevant channels, augmented with open-economy channels and the Green Tobin’s q (Faria et al., 2022). The model highlights that the intertemporal impacts of greening on stock returns are ambiguous. We then turn to an estimated global vector autoregressive model to more rigorously analyze the effect of monetary and green patenting shocks across the G7. Both shocks influence green patents through real and financial markets. As regards green patent shocks, results suggest that a tension exists over time between promoting pollution reduction and energy efficiency and the profitability of (green and brown) companies in the aggregate. We perform a variety of robustness exercises around our main results. Our results provide something of a challenge to the literature and call for more research effort to understand the various channels that might explain this dynamic—and in turn whether any particular policy recommendations follow.