Central banks

Hidden weaknesses: the role of unrealized losses in monetary policy transmission

10/02/2025 European Central Bank Central banks

This paper investigates how unrealized losses on banks’ amortized cost securities affect monetary policy transmission to bank lending in the euro area. Leveraging the sharp increase in interest rates between 2022 and 2023 and using granular supervisory data on security holdings and loan-level credit register data, we show that a one percentage point increase in the share of unrealized losses on amortized cost securities amplifies the contractionary effect of monetary tightening on lending supply by approximately one percentage point.

Macroprudential policy, monetary policy and non-bank financial intermediation

10/02/2025 European Central Bank Central banks

This paper examines the interplay between macroprudential policy, monetary policy and the non-bank financial intermediation (NBFI) sector, drawing on recent research and zooming in particularly on evidence from the euro area2. It documents the growth in the NBFI sector over the past two decades and its particular role in financing the real economy, assesses systemic risks that can emanate from the sector, considers how it interacts with monetary policy, and discusses the implications for macroprudential regulation.

The impact of capital requirements on bank capital

10/01/2025 European Central Bank Central banks

This paper presents the first causal evidence on how banks adjust their voluntary capital buffers (the capital headroom above the required level) in response to changes in capital requirements. Using granular euro area data and exploiting the threshold-based assignment of Other Systemically Important Institution (O-SII) buffers within a regression discontinuity design, we study the liability side of banks’ balance sheets, complementing the asset-focused literature on lending and risk-taking.

Durability, essentiality, and the transmission of monetary policy to household consumption

10/01/2025 European Central Bank Central banks

In this paper, we examine how different household consumption items respond to monetary policy shocks in the euro area. Specifically, we classify household consumption along two key dimensions: durability and essentiality. Our findings reveal pronounced heterogeneity in responses across these dimensions. First, durable items are highly sensitive to monetary policy shocks, whereas non-durable items exhibit weaker responses. Second, non-essential items react more strongly than essential items.

Durability, essentiality, and the transmission of monetary policy to household consumption

10/01/2025 European Central Bank Central banks

In this paper, we examine how different household consumption items respond to monetary policy shocks in the euro area. Specifically, we classify household consumption along two key dimensions: durability and essentiality. Our findings reveal pronounced heterogeneity in responses across these dimensions. First, durable items are highly sensitive to monetary policy shocks, whereas non-durable items exhibit weaker responses. Second, non-essential items react more strongly than essential items.

FEDS Paper: Illiquid Homeownership and the Bank of Mom and Dad

09/30/2025 Federal Reserve Central banks

Eirik Eylands BrandsaasHousing is the largest asset in U.S. household portfolios, and first-time homebuyers increasingly rely on parental transfers. This paper quantifies the contribution of parental transfers to the homeownership rate of young households. I build and estimate a life-cycle overlapping generations model with housing, where adult children and parents interact without commitment. I find that parental transfers account for 13 percentage points (27%) of young households' homeownership.

FEDS Paper: “Harvest Now Decrypt Later”: Examining Post-Quantum Cryptography and the Data Privacy Risks for Distributed Ledger Networks

09/30/2025 Federal Reserve Central banks

Jillian Mascelli and Megan RoddenThis paper analyzes the risks posed by future-state quantum computers, specifically the “harvest now decrypt later” (HNDL) risk. We review foundational concepts of quantum computing to address the present and ongoing threat of HNDL to currently protected data. We use the Bitcoin network as an illustrative example to study the implications of HNDL for distributed ledger cryptocurrency networks that rely upon traditional cryptography.

Battle of the ages: distributional and aggregate effects of monetary policy in a model with age demographics

09/30/2025 European Central Bank Central banks

We develop a model in which agents face unemployment risk, but also age and eventually retire. We study the impact of different retirement schemes on life-cycle consumption and the monetary transmission mechanism. Agents save because of a fall in income upon retirement, changes along the life-cycle wage profile, and unemployment risk. Changes in retirement policies affect the distribution of available assets (bonds) among the middle aged and the young, which in turn can have a strong impact on the ability of the young to insure themselves against unemployment risk.

Foreign demand for safety and macroeconomic instability

09/30/2025 European Central Bank Central banks

Using novel data on sectoral safe asset positions in 21 advanced economies since 1980, we document the central role of the foreign sector in the market for safety and its macroeconomic implications. We show that safe asset holdings have expanded significantly relative to GDP, driven by rising net holdings of the foreign sector and accommodated by increased issuance from the financial and public sectors. Furthermore, fluctuations in safe assets are almost exclusively driven by the foreign and financial sectors, with close links between the two.

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