Central banks

The impact of regional institutional quality on economic growth and resilience in the EU

03/31/2025 European Central Bank Central banks

This paper investigates the impact of regional institutional quality on economic growth and economic resilience. Using data collected by the Quality of Government Institute, we conduct a two-way fixed effect panel regression model for around 200 European regions during the period 2010 to 2021. Our findings establish a positive relationship between institutional quality and medium-term GDP growth. This effect is more pronounced in regions with low-income per capita, highlighting the importance of asymmetries across European regions.

Private safe-asset supply and financial instability

03/26/2025 European Central Bank Central banks

This paper analyzes the private production of safe assets and its implications forfinancial stability. Financial intermediaries (FIs) originate loans, exert hidden effort toimprove loan quality, and create safe assets by issuing debt backed by the safe paymentsfrom (i) their own loans and (ii) a diversified pool of loans from all intermediaries. Ishow that the interaction between effort and diversification decisions determines theaggregate level of safe assets produced by FIs.

Effects of monetary policy on labour income: the role of the employer

03/26/2025 European Central Bank Central banks

This article investigates how firms transmit monetary policy shocks to individual labour market outcomes at both the intensive and extensive margins. Using matched employer-employee administrative data from Germany, we study the effects of monetary policy shocks on individual employment and of labour income conditioning on characteristics of workers and firms. First, we find that the employment of workers at young firms is especially sensitive to monetary policy shocks.

Creditworthy: do climate change risks matter for sovereign credit ratings?

03/25/2025 European Central Bank Central banks

Do sovereign credit ratings take into account physical and transition climate risks? This paper empirically addresses this question using a panel dataset that includes a large sample of countries over two decades. The analysis reveals that higher temperature anomalies and more frequent natural disasters—key indicators of physical risk—are associated with lower credit ratings. In contrast, transition risk factors do not appear to be systematically integrated into credit ratings throughout the entire sample period.

Critical input disruptions – mapping out the road to EU resilience

02/24/2025 European Central Bank Central banks

We study how disruptions to the supply of foreign critical inputs (FCIs) might affect value added at different levels of aggregation. FCIs are inputs primarily sourced from extra-EU countries with highly concentrated supply, or consisting in advanced technology products, or which are key to the green transition. Using firm-level customs and balance sheet data for Belgium, Spain, France, Italy and Slovenia, our framework allows us to assess how much – and how differently – geoeconomic fragmentation might affect European economies.

How tightening mortgage credit raises rents and increases inequality in the housing market

01/16/2025 European Central Bank Central banks

Housing affordability is at the centre of the political debate in many euro area countries. With steadily increasing rents and house prices still high relative to historical standards, many young households, particularly in large cities, are devoting an ever larger share of their income to housing expenses, and are finding it increasingly hard to access their desired size and quality of housing.

The “doom loop” and default incentives

12/16/2024 European Central Bank Central banks

The “doom loop” or “sovereign-bank nexus” has been a key factor in the European debt crisis, driven by feedback between fiscal sustainability risks and financial stability. This Research Bulletin revisits the doom loop, examining strategic default incentives and the unintended effects of policy interventions. While limiting banks’ exposure to sovereign debt can break the doom loop, it may increase default risks by weakening governments’ repayment incentives.

The macroeconomic effects of liquidity supply during financial crises

11/28/2024 European Central Bank Central banks

Negative economic shocks can cause waves of investor pessimism about the resilience of banks, which, in turn, generate additional adverse macroeconomic effects. This is commonly cited as an explanation for the economic havoc wrought by the global financial crisis of 2007-08. We introduce the notion of pessimism in a real business cycle model, which is a standard framework for business cycle analysis. The possibility of waves of pessimism generates countercyclical demand from banks for liquid assets (e.g., bank reserves).

Banks lose – someone gains: Households’ unequal exposure to financial distress

10/30/2024 European Central Bank Central banks

Is the burden of distress in the banking sector shared equally among households, or is it distributed unevenly? Following the global financial crisis, the economic consequences of severe disruptions to the banking sector and the unequal impact of recessions have become a key concern of macroeconomic policy. This article examines how temporary banking sector losses affect households differently according to their income levels. The analysis reveals that low-income households bear most of the burden, while high-income households tend to be less adversely affected.

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