Financial institutions

FEDS Paper: Cyclical Fluctuations, Financial Frictions, and Productivity Differences across Firms

06/26/2026 Federal Reserve Central banks

Luca Guerrieri, Jinill Kim, and Arsenii MishinWithin narrowly defined industries, the most productive firms produce far more than the least productive from the same inputs, and this dispersion widens in downturns. We build a tractable representative-agent model in which financial frictions—adverse selection and moral hazard—make firms sort endogenously into lenders, strategic defaulters, and producers.

Tracking euro area labour market developments through restructuring announcements

06/25/2026 European Central Bank Central banks

This box examines whether large-scale restructuring announcements recorded in the European Restructuring Monitor (ERM) compiled by Eurofound contain economically meaningful signals of euro area labour market dynamics. We construct a net job changes indicator, demonstrating that its lagged values contain information on episodes of below-average employment performance ahead of official data releases.

How US financial markets react to geopolitical shocks hitting oil supply

06/25/2026 European Central Bank Central banks

This box assesses how energy supply disruptions associated with geopolitical shocks are transmitted to US financial markets, leveraging on the indicator developed by Iacoviello and Tong (2026). Whereas negative geopolitical events typically reduce output, they are ambiguous with respect to inflation. However, those that also constrain global oil supply are inflationary and lead to deeper recessions. In these cases, stock prices fall more persistently, the dollar appreciates markedly, and risk metrics such as corporate bond spreads increase and remain elevated.

What has kept goods inflation low? The role of the import exposure to China

06/25/2026 European Central Bank Central banks

This box analyses the impact of prices of imports from China on euro area goods inflation. Inflation for China-exposed goods has been persistently lower than total goods inflation, with model-based estimates suggesting that shocks which bring down the prices of imports from China by 10% in exposed sectors reduce inflation by 0.1-0.7 percentage points in key categories such as furniture and appliances.

The narrowing of the euro area current account balance in 2025

06/25/2026 European Central Bank Central banks

This box examines the narrowing of the euro area current account surplus from 2.7% of GDP in 2024 to 1.7% in 2025. The decline was driven mainly by services trade and income flows and particularly by developments vis-à-vis the United States and China. For the United States, this reflected the role of US multinational enterprises, whose euro area affiliates supported goods exports but generated larger services and income deficits. Imports from China grew, especially in machinery and manufactured goods.

FEDS Paper: Sequence-Space Jacobians of Life-Cycle Models

06/24/2026 Federal Reserve Central banks

Bence Bardóczy, Akshay Shanker, and Mateo Velásquez-GiraldoThe sequence-space Jacobian (SSJ) method of Auclert et al. (2021a) has made heterogeneous-agent models far easier to solve, fueling an explosion of applications. But even SSJ strains against capacity constraints when state spaces grow very large, as in economies with overlapping generations of heterogeneous agents (HA-OLG).

FEDS Paper: An Evaluation of Difference-in-Differences Methods Using Placebo Event Studies

06/24/2026 Federal Reserve Central banks

John Coglianese and Jade A. FangResearchers are faced with the choice of which of the many recently developed difference-in-differences methods to use in practice. To assess these estimators' relative performance for single-unit event studies, we conduct 134,000+ state-level placebo event studies across 13 estimators. We find that no single method dominates.

Higher oil prices from the war in the Middle East: assessing the headwinds for euro area growth

06/24/2026 European Central Bank Central banks

Oil supply disruptions related to the war in the Middle East have triggered a sharp rise in oil prices, posing headwinds for euro area economic activity. This box assesses the macroeconomic effects of the shock using a Bayesian vector autoregressive model with identified geopolitical oil supply shocks. The results suggest that supply-driven oil price increases associated with geopolitical events have a persistent negative effect on euro area growth, operating through lower private consumption and investment.

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