Financial institutions

We analyse the impact of macroeconomic and monetary policy shocks on corporate credit risk as measured by firms’ probabilities of default (PDs) for the four largest euro area countries. We estimate the impact of shocks on one-year PDs using local projections (LP). For the period 2014-19, we find that aggregate shocks significantly affect the dynamics of credit risk. An adverse supply shock leads to a deterioration of firms’ riskiness 10 per cent above the average PD. Contractionary monetary policy shocks exert similar, but delayed effects.

I study the transmission of monetary policy to deposit rates in the euro area with a focus on asymmetries and the role of banking sector concentration. Using a local projections framework with 2003-2023 country-level and bank-level data for thirteen euro area member states, I find that deposit rates respond symmetrically to an unexpected tightening or easing of monetary policy.

When inflationary pressures started intensifying in 2022, the world’s major central banks faced a dilemma. They could rapidly tighten monetary policy at the risk of fuelling financial distress after years of ultra-low interest rates and balance sheet expansion. Or they could take a more gradual approach to fighting inflation that would protect the financial system, but risk high inflation becoming entrenched. While severe financial instability may be an unlikely event (or “tail risk”), it can have devastating macroeconomic consequences.

Using microdata from a U.S. household survey, we document that immigrants who lived through a sovereign default episode are 6% less likely to hold debt relative to otherwise similar immigrants who reside in the same U.S. state and come from the same foreign country but who did not experience a default. Conditional on holding debt, consumers in the former group borrow less and service lower debt burdens. The negative effect on borrowing behavior of having experienced a sovereign default increases with family size and declines with education.