Anne Lundgaard Hansen and Seung Jung LeeThis paper investigates the impact of the adoption of generative AI on financial stability. We conduct laboratory-style experiments using large language models to replicate classic studies on herd behavior in investment decisions. Our results show that AI agents make more rational decisions than humans, relying predominantly on private information over market trends.
Anushka MitraThe unemployment rate remains elevated long after recessions, a persistence that standard search-and-matching models cannot explain. I show that noise shocks—expectational errors due to the noise in received signals about aggregate shocks—account for much of this sluggishness. Using a structural VAR, I find that absent noise shocks unemployment would have recovered to its pre-recession level six quarters earlier over 1968–2019.
Viktors StebunovsA cornerstone of the law-and-finance literature is that stronger institutions reduce financial intermediation costs. Using global data on cross-border payment costs, I show this relationship can reverse in heavily regulated sectors. Anti-money laundering risks have larger cost effects in advanced economies with strong enforcement than in developing countries with weak enforcement, despite the former having lower underlying risks.
In surveys with information provision experiments, researchers can observe how people change beliefs, and sometimes also actions, after having been confronted with information. This article interprets information provision experiments from the perspective of the theory of rational inattention, discussing what survey findings tell us about economic behaviour outside the survey and deriving implications for central bank communication.
We investigate the impact of climate risks on sovereign credit ratings worldwide. Our analysis shows that higher temperature anomalies and more frequent natural disasters – measures of physical risk – correlate with lower credit ratings. We find that long-term shifts in climate patterns (“chronic risk”) primarily affect advanced economies, while the increased frequency and severity of extreme weather events (“acute risk”) matters more for emerging economies. However, the estimated impact of both types of risk on credit ratings is low and the economic effects are negligible.
Our paper uses a general equilibrium framework to examine the effects of temperature on firm-level demand, productivity and input allocative efficiency. Using data from Italian firms and detailed climate data, it uncovers a sizeable negative effect of extreme temperatures on firm-level productivity. Based on these estimates, the model generates aggregate productivity losses from local temperature fluctuations that are higher than previously thought, ranging from 0.60% to 6.82% depending on the scenario and the extent of adaptation.
This article studies the supply of private safe assets by banks and its implications for financial stability. Banks originate loans and improve loan quality through hidden screening efforts. They can then create safe assets by issuing debt backed by the safe payoffs, from both loans they have originated and a diversified pool of loans from other banks. The interaction between banks’ screening efforts and diversification decisions determines the volume of safe assets they supply.
The recent surge in inflation has led to a significant increase in the frequency of price changes, making prices more flexible. Conventional models assume a constant price change frequency, but in state-dependent models the frequency varies with economic conditions. Price flexibility has an impact on the effectiveness of monetary policy. In high inflation periods, frequent price changes make monetary policy more effective in reducing inflation with less impact on economic activity. Therefore, monetary policy should be more aggressive during such periods to stabilise prices efficiently.
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.
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.
