European Central Bank

Estimating the full effect of a partially anticipated event: a market-based approach applied to the case of TLTROIII

09/16/2024 European Central Bank Central banks

This paper presents an event-study methodology that combines market data and survey-based probabilities to infer the full effect of a policy decision, as seen through the lens of financial markets. The market reaction to an event’s outcome reflects its surprise or announcement effect, and generally not its full effect. However, under certain conditions, the unobserved full effect can be derived from the observed surprise effect. Most importantly, the ex-ante probabilities of different outcomes must be known.

Estimating the full effect of a partially anticipated event: a market-based approach applied to the case of TLTROIII

09/16/2024 European Central Bank Central banks

This paper presents an event-study methodology that combines market data and survey-based probabilities to infer the full effect of a policy decision, as seen through the lens of financial markets. The market reaction to an event’s outcome reflects its surprise or announcement effect, and generally not its full effect. However, under certain conditions, the unobserved full effect can be derived from the observed surprise effect. Most importantly, the ex-ante probabilities of different outcomes must be known.

A portfolio perspective on euro area bank profitability using stress test data

09/15/2024 European Central Bank Central banks

This study assesses euro area banks’ profitability using granular stress test data from three EU-wide exercises, coordinated by the European Banking Authority, that took place in 2016, 2018, and 2021. We propose a credit portfolio-level risk-adjusted return on assets for the euro area as a whole and for individual countries to assess the profitability of lending activities among euro area banks.

Digital euro demand: design, individuals’ payment preferences and socioeconomic factors

09/13/2024 European Central Bank Central banks

By applying a structural demand model to unique consumer-level survey data from the euro area, we assess how different CBDC design options, combined with individual (revealed) preferences, influence the potential demand for a digital euro. Estimating the demand for a digital euro, we find that if it were unconstrained, it could range, in steady state, between 3-28% of household liquid assets or €0.12 - €1.11 trillion, depending on whether consumers would perceive the digital euro to be more cash-like or deposit-like.

Tackling the volatility paradox: spillover persistence and systemic risk

09/13/2024 European Central Bank Central banks

Financial losses can have persistent effects on the financial system. This paper proposes an empirical measure for the duration of these effects, Spillover Persistence. I document that Spillover Persistence is strongly correlated with financial conditions; during banking crises, Spillover Persistence is higher, whereas in the run-up phase of stock market bubbles it is lower. Lower Spillover Persistence also associates with a more fragile system, e.g., a higher probability of future crises, consistent with the volatility paradox.

Digital euro demand: design, individuals’ payment preferences and socioeconomic factors

09/13/2024 European Central Bank Central banks

By applying a structural demand model to unique consumer-level survey data from the euro area, we assess how different CBDC design options, combined with individual (revealed) preferences, influence the potential demand for a digital euro. Estimating the demand for a digital euro, we find that if it were unconstrained, it could range, in steady state, between 3-28% of household liquid assets or €0.12 - €1.11 trillion, depending on whether consumers would perceive the digital euro to be more cash-like or deposit-like.

Tackling the volatility paradox: spillover persistence and systemic risk

09/13/2024 European Central Bank Central banks

Financial losses can have persistent effects on the financial system. This paper proposes an empirical measure for the duration of these effects, Spillover Persistence. I document that Spillover Persistence is strongly correlated with financial conditions; during banking crises, Spillover Persistence is higher, whereas in the run-up phase of stock market bubbles it is lower. Lower Spillover Persistence also associates with a more fragile system, e.g., a higher probability of future crises, consistent with the volatility paradox.

The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework in 2022 and 2023

08/29/2024 European Central Bank Central banks

The Eurosystem implements its monetary policy through a set of monetary policy instruments (MPIs). The period covered by this report (2022-23) was dominated by high inflation, which led to a change from an easing to a tightening monetary policy environment in line with the mandate of the European Central Bank (ECB) to pursue price stability. This report focuses on the accompanying shift in the use of MPIs. Key ECB interest rates were hiked to an unprecedented extent and at exceptional speed, leading to an exit from negative interest rates.

Aim, focus, shoot. The choice of appropriate and effective macroprudential instruments

08/29/2024 European Central Bank Central banks

We examine the issue of the appropriate selection of macroprudential instruments according to the vulnerabilities identified and the policymakers’ objectives using a version of the 3D DSGE model following Mendicino et al. (2020) and Hinterschweiger et al. (2021) calibrated for the euro area. We consider a broad set of macroprudential instruments, including broad and sectoral countercyclical capital requirements, LTV and LTI limits and assess their transmission channels as well as their effectiveness in mitigating rising broad and sectoral vulnerabilities.

Macroeconomic modelling of CBDC: a critical review

08/29/2024 European Central Bank Central banks

Over the last decades, macro-economists have renewed their efforts to reduce the gap between monetary macroeconomics and real-world central banking. This paper reviews how macroeconomics has since 2016 approached the possible introduction of retail central bank digital currencies (CBDC). A review of the literature reveals that macroeconomic models of CBDC often rely on CBDC design features and narratives which are no longer in line with the one of central banks actually working on CBDC.

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