Central banks

Firm ownership and the macroeconomics of incentive leakages

02/20/2025 European Central Bank Central banks

Questions about market power have become salient in macroeconomics. We consider the role of institutional structures in addressing these within a dynamic general equilibrium framework. Standard models account for monopoly profits as a lump-sum transfer to the representative agent. We label this an "incentive leakage," and show this to be a general characteristic of firm-optimal arrangements. We show that shareholder-operated or worker-operated firms that eliminate leakage can generate within-firm incentives that effectively reduce monopoly distortion in equilibrium.

Fiscal and macroprudential policies during an energy crisis

02/19/2025 European Central Bank Central banks

We construct a New-Keynesian E-DSGE model with energy disaggregation and financial intermediaries to show how energy-related fiscal and macroprudential policies interact in affecting the euro area macroeconomy and carbon emissions. When a shock to the price of fossil resources propagates through the energy and banking sector, it leads to a surge in inflation while lowering output and carbon emissions, absent policy interventions.

Bank transparency and market efficiency

02/18/2025 European Central Bank Central banks

This paper explores the impact of bank transparency on market efficiency by comparing banks that disclose supervisory capital requirements to those that remain opaque. Due to the informational content of supervisory capital requirements for the market this opacity might hinder market efficiency. The paper estimates an average 11.5% reduction in funding costs for transparent versus opaque banks. However, there is some heterogeneity in those effects. Transparency helps the market to sort across safer and riskier banks.

Green and brown returns in a production economy

02/18/2025 European Central Bank Central banks

Does it pay to invest in green companies? In countries where a market for carbon is functioning, such as those within the European Union, our findings suggest that it should be beneficial. Using a sample of green and brown European firms, we initially demonstrate that green companies have outperformed brown ones in recent times. Subsequently, we develop a production economy model in which brown firms acquire permits to emit carbon into the atmosphere. We find that the presence of a well-functioning carbon market could account for the green equity premium observed in our data.

Investment funds and euro disaster risk

02/16/2025 European Central Bank Central banks

We document that compared to all other investor groups investment funds exhibit a distinctly procyclical behavior when financial-market beliefs about the probability of a euro-related, institutional rare disaster spike. In response to such euro disaster risk shocks, investment funds shed periphery but do not adjust core sovereign debt holdings. The periphery debt shed by investment funds is picked up by investors domiciled in the issuing country, namely banks in the short term and insurance corporations and households in the medium term.

The taming of the skew: asymmetric inflation risk and monetary policy

02/16/2025 European Central Bank Central banks

We document that inflation risk in the U.S. varies significantly over time and is often asymmetric. To analyze the macroeconomic effects of these asymmetric risks within a tractable framework, we construct the beliefs representation of a general equilibrium model with skewed distribution of markup shocks. Optimal policy requires shifting agents’ expectations counter to the direction of inflation risks.

IFDP Paper: Estimating the Volume of Counterfeit U.S. Currency in Circulation

02/14/2025 Federal Reserve Central banks

Ruth JudsonThe incidence of currency counterfeiting and the possible total stock of counterfeits in circulation are popular topics of speculation and discussion in the press and are of substantial practical interest to the Federal Reserve, the U.S. Treasury and the United States Secret Service (USSS), who are jointly responsible for U.S. banknote design, including security features, and production.

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