Financial institutions

IFDP Paper: Imperfect Information and Slow Recoveries in the Labor Market

09/25/2025 Federal Reserve Central banks

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.

FEDS Paper: Virtue or Mirage? Complexity in Exchange Rate Prediction

09/25/2025 Federal Reserve Central banks

Rehim KilicThis paper investigates whether the “virtue of complexity” (VoC), documented in equity return prediction, extends to exchange rate forecasting. Using nonlinear Ridge regressions with Random Fourier Features (Ridge–RFF), we compare the predictive performance of complex models against linear regression and the robust random walk benchmark.

IFDP Paper: Clean Money, High Costs?

09/25/2025 Federal Reserve Central banks

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.

Heterogeneity in macroeconomics

09/25/2025 European Central Bank Central banks

How large are the distributional effects of monetary policy in the euro area? Does heterogeneity matter for monetary policy? We answer these questions based on the results of research projects conducted at the ECB under the aegis of a dedicated research task force. A monetary policy easing causes a temporary reduction in consumption inequality; this is the case for both conventional and unconventional monetary policy.

Heterogeneity in macroeconomics

09/25/2025 European Central Bank Central banks

How large are the distributional effects of monetary policy in the euro area? Does heterogeneity matter for monetary policy? We answer these questions based on the results of research projects conducted at the ECB under the aegis of a dedicated research task force. A monetary policy easing causes a temporary reduction in consumption inequality; this is the case for both conventional and unconventional monetary policy.

What can newspaper articles reveal about the euro area economy?

09/25/2025 European Central Bank Central banks

This study introduces a novel approach to dictionary-based sentiment analysis that extracts valuable insights from economic newspaper articles in the euro area without requiring article translation. We develop sentiment indices that accurately measure economic, labour, and inflation perceptions in Germany, France, Italy, and Spain using native-language texts. The aggregation of these country-specific sentiments provides a reliable indicator for the euro area as a whole, demonstrating the effectiveness of our approach in several nowcasting and forecasting experiments.

What can newspaper articles reveal about the euro area economy?

09/25/2025 European Central Bank Central banks

This study introduces a novel approach to dictionary-based sentiment analysis that extracts valuable insights from economic newspaper articles in the euro area without requiring article translation. We develop sentiment indices that accurately measure economic, labour, and inflation perceptions in Germany, France, Italy, and Spain using native-language texts. The aggregation of these country-specific sentiments provides a reliable indicator for the euro area as a whole, demonstrating the effectiveness of our approach in several nowcasting and forecasting experiments.

Liquidity conditions and monetary policy operations from 23 April to 29 July 2025

09/25/2025 European Central Bank Central banks

This box describes the Eurosystem liquidity conditions and monetary policy operations in the third and fourth reserve maintenance periods of 2025, from 23 April to 29 July 2025.

Macroeconomic impacts of higher defence spending: a model-based assessment

09/25/2025 European Central Bank Central banks

This article uses a suite of macroeconomic models to assess the economic impacts of an increase in euro area defence spending. Multipliers of government purchases average just below 1, and there is notable model uncertainty. Pressures on HICP (Harmonised Index of Consumer Prices) inflation increase only gradually over time. An analysis of the transmission channels suggests that private sector expectations of higher future interest rates and taxes may substantially reduce fiscal multipliers.

Manufacturing versus services: how frontloading and uncertainty shaped recent developments

09/25/2025 European Central Bank Central banks

Manufacturing activity in the euro area rebounded in early 2025, while services activity slowed, marking a reversal of the trends observed in the previous two years. This box analyses the role of frontloading effects and trade policy uncertainty in driving recent production dynamics. It argues that manufacturing benefited temporarily from frontloading ahead of US tariff measures, while services were more directly affected by rising trade policy uncertainty. In particular, hard data reveal that manufacturing subsectors with higher exposure to the United States (e.g.

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