🇪🇺 ECB & Eurozone Central Bank Monitor

Monetary policy asymmetrically affects the response of firms’ employment to an output shock and plays a role in cushioning employment adjustment over the business cycle. Combining annual firm-level data until 2020 with quarterly firm-level data until 2023 and high-frequency monetary policy surprises, we show that for a given change in output, monetary policy influences the extent to which firms hold on to labour, or “labour hoard”. Furthermore, this effect is asymmetric: a restrictive monetary policy reduces labour hoarding behaviour by 2 to 3 times more than an accommodative policy increases

We examine recent changes in stock market participation using newly available survey data from eleven euro area countries over the period 2020–2024. The evidence points to substantial turnover, with around 10% of non-stockholders entering the market each year, and more than 20% of stockholders exiting. New entrants tend to have lower education, income, financial literacy, and risk tolerance than established investors, indicating a shift in the composition of market participants. We also highlight the growing importance of cryptocurrency investments among retail investors. Overall, these findin

We propose a new model in which relationship-specific effects or shocks are identified in a bipartite network under mild covariance restrictions, generalizing the influential Abowd et al. (1999) framework. For example, separate demand shocks are identified for each bank from which a firm borrows. We show how previous approaches break down when confronted with such heterogeneity, while our novel identification strategy yields a simple estimator that is consistent and asymptotically normal, under weaker network density assumptions than previous approaches. The methodology performs well in empiri

This paper studies the employment effects of carbon pricing under the European Union’s Emissions Trading System (EU-ETS). I refer to standard methods from the literature to define and measure the environmental properties of jobs along two dimensions: how “green” a job is, and how polluting it is. I then leverage a series of shocks to EU-ETS prices to estimate their dynamic impacts on employment. The panel local projections estimates reveal that an exogenous 1% increase in EU-ETS prices leads to a roughly 0.2% decline in employment after one and a half years. Impacts on employment in more pollu

This paper develops a sequential deep learning algorithm for solving dynamic stochastic general equilibrium (DSGE) models. The algorithm trains a deep neural network to approximate the model’s policy functions across four progressive phases: steady-state anchoring, exploration around the steady state, simulation on the ergodic set, and Monte Carlo integration of stochastic expectations. Training requires no pre-computed starting approximation: the network initialises from the analytically known steady state and constructs its training data endogenously, resolving the circularity between the tr

Artificial intelligence (AI) is rapidly transforming financial decision-making. To explore the implications for financial stability we ran simulation-based experiments on two different AI architectures. We found that Q-learning algorithms, a form of reinforcement learning, achieved a high degree of coordination, but were prone to bank run-like dynamics. In contrast, large language models , which rely on contextual reasoning, were less prone to such runs but generated heterogeneous and unpredictable behaviour. This suggests that AI architecture is itself a source of financial instability: algor

This paper is the first to simultaneously examine firms’ market-based and bank-based external finance premia and investigate the behavior of corporate bond markets in the United States and the euro area, with a focus on country- and state-level heterogeneity in monetary unions. Using a unique micro-level dataset, we show that market finance premia, measured with corporate bond spreads, are remarkably similar in both the euro area and the US in terms of how little they depend on the issuer’s state or country of origin. In neither monetary union is the transmission of monetary policy to corporat

We study how private equity (PE) buyouts propagate through supply chains using unique firm-to-firm transactions data from Belgium. In normal times, suppliers of PE-backed firms outperform their peers by 5%–10% in employment and sales growth, primarily due to increased input demand from PE-backed customers rather than knowledge spillovers or other mechanisms. In economic downturns, however, this outperformance is attenuated and suppliers compress markups by around 8% as PE investors intensify bargaining pressure and reconfigure supply chains to extract cost savings. Beyond the direct effects on

We empirically analyse the role of judgement in assigning overall scores by the euro area supervisors as part of the yearly Supervisory Review and Evaluation Process (SREP), which evaluates banks’ risks and sets supervisory actions. We also analyse its role in shaping the drivers of the Pillar 2 capital requirement (P2R) that banks must fulfil. We find that supervisors actively adjust the weight of the components of the overall score to reflect qualitative information, thereby smoothing fluctuations in the final assessment. The analysis reveals a common supervisory judgement channel, which cou

We examine whether banks incorporate firm-level biodiversity risk into their lending decisions. Using a large sample of syndicated loans matched to firm-level biodiversity risk measures, we document that borrowers with higher biodiversity risk face significantly higher loan spreads. Evidence on loan volumes is weaker, suggesting that banks primarily adjust along the pricing margin rather than restricting credit supply. To capture biodiversity risk exposure, we develop a novel text-based indicator derived from corporate disclosures that incorporates the contextual content of environmental risk.

This paper studies the impact on cashflows and financial decisions of firms affected by wildfires, focusing on the wildfires that occurred in Portugal in 2017. Using establishment-level data from the hotel industry combined with geospatial information on wildfire proximity and land use, we employ a difference-in-differences approach to study both directly and indirectly affected firms. Our findings reveal that firms with direct damages from the wildfires recorded, on average, a 43% drop in revenues in 2018, while indirectly affected firms with a high share of burned area within a 1 km radius s

Using U.S. and Euro area data, we document that (i) the pass-through of energy prices to inflation is state-dependent - stronger when supply chain uncertainty is elevated – and (ii) in such states, energy prices become more informative about logistical conditions. We develop a model in which firms combine energy and a specialized input transported through a capacity-constrained transportation network. When congestion binds, energy remains available in local markets at a premium, whereas the specialized input is subject to delivery delays. Because energy prices reflect both raw energy shocks an

We revisit the debate on the effectiveness of central bank communication on exchange rates, contrasting a skeptical view, which holds that communication neither moves exchange rates nor influences them in the desired direction, with an optimistic view that it does. Using nearly 100 official ECB statements on exchange rates made during its monetary policy press conferences since 2002, we show that the ECB tends to mention the exchange rate when the real effective exchange rate deviates from its equilibrium value, whereas journalists’ questions are mainly responsive to the nominal exchange rate.

Transitioning to a sustainable economy and reducing air pollution hinge on appropriate economic incentives and financing conditions. The auto loan market offers a prime setting, as lenders’ credit terms can either discourage or incentivize the purchase of high-pollution vehicles. Using loan-level data, we examine how captive and independent banks adjust lending conditions in response to information and regulatory shocks affecting diesel vehicles. Exploiting the 2015 diesel emissions scandal and the introduction of local circulation restrictions, we show that lending responses differ systematic

This paper examines the impact of natural gas market shocks on gas market dynamics, inflation expectations and realized inflation in the Euro Area using a BVAR model. Our contribution lies in a novel identification strategy that distinguishes between various types of shocks of unprecedented detail, leverages weekly rather than monthly data, and extends the analysis to both market-based headline and core inflation expectations. We find that, although conceptually distinct, pipeline and liquefied natural gas (LNG) supply shocks have comparable effects on realized variables such as gas prices and

Free movement of labour across borders can influence business cycle dynamics in the affected countries. This paper studies the macroeconomic implications of temporary migration using a two-country dynamic stochastic general equilibrium model calibrated to represent the “old” EU Member States (EU15) and the “new” Member States (NMS12). The model introduces fully endogenous temporary migration and combines it with search-and-matching frictions in labour markets. Workers migrate temporarily in response to differences in labour market conditions and wages, allowing productivity shocks to affect lo

Does artificial intelligence (AI) pose a threat to financial stability? We study AI investor behavior, specifically Q-learning and large language model (LLM) investors, in a mutual fund redemption problem with economic and strategic uncertainty. Different AI architectures generate systematically different outcomes. Q-learning investors coordinate well but under default risk exhibit excessive redemption that amplifies fragility. LLM investors internalize equilibrium structure but display belief heterogeneity, weakening coordination and predictability. Our findings show that AI architecture is a

We study how physical climate risk shapes bank lending activity and credit quality by combining high-resolution Copernicus flood geospatial maps with loan-level AnaCredit data. We exploit four major European floods (2021–2024) in a spatial regression discontinuity design comparing firms located just inside versus just outside flood boundaries (within 300–500 meters). We find that immediately after floods there is an increase by about 3.5 to 5% in lending, driven by liquidity demand, followed by a contraction of similar magnitude in the subsequent quarter. Interest rates follow a similar patter

Using who-to-whom data for the last quarter of 2024, I build networks of financial interconnections in the euro area countries. After representing them in chord diagrams, I consider centrality metrics and find that banks dominate, with four exceptions: Cyprus, Ireland, Luxembourg and Malta. In these countries, other financial institutions and investment funds are at the core, with limited links to domestic sectors and strong ones with the rest of the world. A comparison across countries reveals substantial homogeneity between networks in the sixteen euro area countries and large differences wi

Investment in cybersecurity in an interconnected banking system has public-good proper- ties: positive externalities can generate systemic underinvestment. Using confidential supervi- sory data from the European Central Bank, we first identify “laggard” European banks that underinvest relative to their cyber-risk profiles, and then examine how supervisory scrutiny af- fects their incentives to invest. We exploit the 2024 ECB Cyber Resilience Stress Test (CyRST) as a quasi-natural experiment. In a difference-in-differences design, we find that following the CyRST announcement, laggard banks increased

This paper provides novel evidence on how income inequality shapes the heterogeneity of US monetary policy spillovers to GDP across foreign economies. Using state-dependent local projections and exploiting variation in disposable income inequality across 87 countries over 1966-2020, we show that household heterogeneity influences how foreign GDP responds to a US monetary tightening. GDP contracts up to one and a half times more when inequality is above average. However, while higher inequality amplifies negative spillovers in advanced economies, it mitigates them in emerging markets. To ration