Financial institutions

Monetary policy transmission through cross-selling banks

11/10/2025 European Central Bank Central banks

Banks trade off short-term losses on deposits against long-term profits from cross-selling other products to new depositors. This strategy is especially attractive when policy rates are low and future sales are more valuable. Therefore, deposit rates move less than policy rates: banks keep them relatively higher when policy rates fall, and relatively lower when policy rates rise. As returns on other financial assets follow policy rates more closely, this makes deposits relatively less attractive for depositors at higher policy rates.

Monetary and fiscal policy interactions in the aftermath of an inflationary shock

11/06/2025 European Central Bank Central banks

This paper studies the effect of alternative monetary policy responses and the implementation of different fiscal policy measures to an inflationary shock in a monetary union, through the lens of a global DSGE model calibrated to the euro area. We find that a more aggressive monetary policy response mitigates the inflation surge, but has a detrimental impact on economic activity that imposes a stronger increase of public debt, reducing the fiscal policy space.

The protectionist gamble: How tariffs shape greenfield foreign direct investment

11/05/2025 European Central Bank Central banks

Motivated by current events, this paper assesses the impact of tariff increases on bilateral greenfield foreign direct investment (FDI) over the period 2016-2023. Leveraging a comprehensive dataset of announced greenfield investment projects, official FDI statistics, and bilateral product-level tariff data, we estimate a series of gravity equations to uncover key relationships. Our results show that, at an aggregate level, tariff increases are associated with a rise in greenfield FDI, consistent with the tariff-jumping hypothesis.

Geopolitical risk, bank lending and real effects on firms: evidence from the Russian invasion of Ukraine

11/05/2025 European Central Bank Central banks

This paper investigates whether geopolitical risk causes a reduction in bank lending. In particular, it focuses on how the increase in geopolitical risk stemming from the Russian invasion of Ukraine affected euro area bank credit supply. Matching granular supervisory and credit register data and using a panel difference-in-difference approach, the results show that banks with larger exposure to the increase in geopolitical risk cut lending significantly more than those with smaller exposure.

Developing distributional national accounts: first attempt to estimate a joint distribution for income and wealth for the euro area

11/04/2025 European Central Bank Central banks

In recent years, projects have sought to embed distributional aspects within national accounts, with household distributional information set to feature in the next System of National Accounts. There is growing emphasis on capturing all material dimensions of welfare—income, consumption, and wealth—at both macro and micro levels within a unified framework.

Reputation for Confidence

11/04/2025 European Central Bank Central banks

We model how a central bank communicates its noisy forecasts (forward guidance) while taking into account its own uncertainty (confidence) and the public’s perception of the bank’s uncertainty (reputation for confidence). This creates a mismatch between the public and central bank’s interpretation of the bank announcement which induces the bank to communicate with partial transparency and deliberate imprecision. Moreover, with higher confidence (lower reputation) announcements are more precise.

Banking on assumptions? How banks model deposit maturities

11/03/2025 European Central Bank Central banks

How do banks manage the behavioural maturity of non-maturing deposits (NMDs)? Using a rich and confidential dataset, we investigate how banks model deposit maturities based on internal assumptions. Although NMDs are contractually floating-rate liabilities with zero maturity, banks reallocate them across different maturity buckets using models that reflect past customer behaviour. Notably, only 20% of NMDs are treated as having zero maturity, while about 10% are assigned maturities beyond seven years. We assess whether these modelling assumptions align with banks’ deposit structures.

FEDS Paper: Declining Search Frictions, Unemployment, and Growth Revisited

10/31/2025 Federal Reserve Central banks

Juan Carlos Córdoba, Anni T. Isojärvi, and Haoran LiThis paper revisits the conditions under which search models generate balanced growth paths (BGPs)—equilibria where unemployment, vacancies, and job flows remain steady as search frictions decline. Martellini and Menzio (2020) claim that such paths exist only when matches are “inspection goods” and match quality follows a Pareto distribution. We show that these conditions are sufficient but not necessary.

FEDS Paper: Do the Rich Really Save More? Answering an Old Question Using the SCF with Direct Measures of Lifetime Earnings and an Expanded Wealth Concept

10/31/2025 Federal Reserve Central banks

Elizabeth Llanes, Jeffrey Thompson, and Alice Henriques VolzThe question of whether affluent households save at a higher rate than other parts of the distribution has been asked by economists on numerous occasions since the 1950s. It is standard in this research to define affluent, or “rich,” households as those with high lifetime earnings or income to better ground the empirical question in relevant theory.

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