European Central Bank

Mortgage loan rates and the defaults of variable rate mortgages

09/16/2025 European Central Bank Central banks

Using a granular database of variable rate euro area loans and analysing their defaults between 2014 and 2019, we show that the effect of interest rate changes on mortgage defaults is highly non-linear. First, we find that the risk associated with higher contemporaneous interest rates is concentrated among borrowers who got the loan at ultra-low interest rates, their default probability being 2.6 times higher than our sample average.

The signaling effects of fiscal announcements

09/15/2025 European Central Bank Central banks

Announcing a large fiscal stimulus may signal the government’s pessimism about the severity of a recession to the private sector, impairing the stabilizing effects of the policy. Using a theoretical model, we show that these signaling effects occur when the stimulus exceeds expectations and are more noticeable during periods of high economic uncertainty. Analysis of a new dataset of daily stock prices and fiscal news in Japan supports these predictions.

The heterogeneous impact of labor market shifts on household mortgage-taking

09/15/2025 European Central Bank Central banks

This paper examines how structural change in labor markets affects household credit outcomes. Using a Shift-Share instrumental variable approach, we find that occupational shifts negatively influence mortgage holding for households facing fa-vorable job market conditions, such as stable employment and income growth. Our results, robust to alternative specifications, suggest that when both individual and economy-wide career prospects are favorable, the opportunity costs of settling down grow accordingly.

The causal effect of inflation on financial stability, evidence from history

09/12/2025 European Central Bank Central banks

In contrast to the conventional Fisherian view that inflation reduces real debt positions, we show that significant increases in inflation are strongly associated with financial crises. In the spirit of Jordà et al. (2020), countries with free and fixed ex-change rates can be compared to difference out the confounding reaction of monetary policy. Across a dataset of 18 advanced economies over 151 years, we show that the impact of inflation extends beyond its indirect effect via monetary policy.

Buffer usability in a complex world: Interactions between macroprudential regulation and the resolution framework

09/12/2025 European Central Bank Central banks

This paper explores the interplay between the risk- and leverage-based prudential and the resolution frameworks within the EU banking system. The prudential framework is designed to enhance the resilience of both individual banks and the banking sector as a whole. It does so by imposing minimum capital requirements and capital buffers that can absorb losses during periods of financial stress.

Public debt, iMPCs & fiscal policy transmission

09/03/2025 European Central Bank Central banks

This paper investigates the relationship between public debt and the effectiveness of fiscal policy, presenting evidence of an inverse relationship between government debt and fiscal multipliers. To explain the results, I develop and calibrate a HANK model tailored to the U.S. economy. The model reveals that higher public debt diminishes fiscal multipliers by making households less constrained. Theoretically, I show intertemporal marginal propensities to consume (iMPCs) are sufficient statistics of public debt, influencing fiscal multipliers.

Nonlinearities and heterogeneity in firms response to aggregate fluctuations: what can we learn from machine learning?

09/03/2025 European Central Bank Central banks

Firms respond heterogeneously to aggregate fluctuations, yet standard linear models impose restrictive assumptions on firm sensitivities. Applying the Generalized Random Forest to U.S. firm-level data, we document strong nonlinearities in how firm characteristics shape responses to macroeconomic shocks. We show that nonlinearities significantly lower aggregate esponses, leading linear models to overestimate the economy’s sensitivity to shocks by up to 1.7 percentage points.

Opening the black box of local projections

08/27/2025 European Central Bank Central banks

Local projections (LPs) are widely used in empirical macroeconomics to estimate impulse responses to policy interventions. Yet, in many ways, they are black boxes. It is often unclear what mechanism or historical episodes drive a particular estimate. We introduce a new decomposition of LP estimates into the sum of contributions of historical events, which is the product, for each time stamp, of a weight and the realization of the response variable. In the least squares case, we show that these weights admit two interpretations. First, they represent purified and standardized shocks.

Geography versus income: the heterogeneous effects of carbon taxation

08/27/2025 European Central Bank Central banks

The distributive effects of carbon taxation are critical for its political acceptability and depend on both income and geographic factors. Using French administrative data, household surveys, and matched employer-employee records, we document that rural households spend 2.8 times more on fossil fuels than urban households and are employed in firms that emit 2.7 times more greenhouse gases. We incorporate these insights into a spatial heterogeneous-agent model with endogenous migration and wealth accumulation, linking spatial and macroeconomic approaches.

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