European Central Bank

Estimating the natural rate of interest in a macro-finance yield curve model

12/03/2025 European Central Bank Central banks

Using a novel macro-finance model we infer jointly the equilibrium real interest rate r*, trend inflation, interest rate expectations, and bond risk premia for the United States. In the model r* plays a dual macro-finance role: as the benchmark real interest rate that closes the output gap and as the time-varying long-run real interest rate that determines the level of the yield curve. Our estimated r* declines over the last decade, with estimation uncertainty being relatively contained. We show that both macro and financial information is important to infer r*.

Estimating the natural rate of interest in a macro-finance yield curve model

12/03/2025 European Central Bank Central banks

Using a novel macro-finance model we infer jointly the equilibrium real interest rate r*, trend inflation, interest rate expectations, and bond risk premia for the United States. In the model r* plays a dual macro-finance role: as the benchmark real interest rate that closes the output gap and as the time-varying long-run real interest rate that determines the level of the yield curve. Our estimated r* declines over the last decade, with estimation uncertainty being relatively contained. We show that both macro and financial information is important to infer r*.

The ESCB forecasting models: what are they and what are they good for?

12/03/2025 European Central Bank Central banks

This report provides a comprehensive overview of the models and tools used for macroeconomic projections within the European System of Central Banks (ESCB). These include semi-structural models, dynamic stochastic general equilibrium (DSGE) models, time series models and specialised satellite models tailored to particular questions or country-specific aspects. Each type of model has its own strengths and weaknesses and can help answer different questions. The models should therefore be seen as complementary rather than mutually exclusive.

Insurance companies in the Euro area: asset allocation and impact on financial markets

12/02/2025 European Central Bank Central banks

Euro area insurers manage several trillion euro in assets and take a long-term investment perspective. They hold more alternative and less liquid assets than in the past, partly resulting from the long period of low interest rates until 2022. As a result, their balance sheets have become less liquid and more sensitive to market conditions overall. Meanwhile their holdings of sovereign bonds show significant home bias, which may have even increased with quantitative easing policies.

Insurance companies in the Euro area: asset allocation and impact on financial markets

12/02/2025 European Central Bank Central banks

Euro area insurers manage several trillion euro in assets and take a long-term investment perspective. They hold more alternative and less liquid assets than in the past, partly resulting from the long period of low interest rates until 2022. As a result, their balance sheets have become less liquid and more sensitive to market conditions overall. Meanwhile their holdings of sovereign bonds show significant home bias, which may have even increased with quantitative easing policies.

Nature at risk: Implications for the euro area economy and financial stability

12/02/2025 European Central Bank Central banks

Degraded ecosystems undermine productivity, disrupt supply chains and heighten vulnerability to shocks, creating risks for the real economy and the financial sector. Biodiversity loss and ecosystem degradation also pose a growing risk to price stability, with increasing evidence that ecosystem shocks contribute to inflationary pressures in the euro area.

Inflation narratives and expectations

12/01/2025 European Central Bank Central banks

I study how demand-supply narrative disagreement between general and specialized newspapers can explain households’ absolute gap in inflation expectations with experts. I measure inflation narratives via a Causality Extraction algorithm that can identify causal relationships between events in a text and, hence, extract the perceived triggers of inflation. Causal relations can explain why narratives affect people’s beliefs and cannot be captured by dictionary methods, topic models, and word embeddings.

Inflation narratives and expectations

12/01/2025 European Central Bank Central banks

I study how demand-supply narrative disagreement between general and specialized newspapers can explain households’ absolute gap in inflation expectations with experts. I measure inflation narratives via a Causality Extraction algorithm that can identify causal relationships between events in a text and, hence, extract the perceived triggers of inflation. Causal relations can explain why narratives affect people’s beliefs and cannot be captured by dictionary methods, topic models, and word embeddings.

Global or regional safe assets: evidence from bond substitution patterns

12/01/2025 European Central Bank Central banks

This paper provides novel empirical evidence on portfolio rebalancing in international bond markets through the prism of investors’ demand for bonds. Using a granular dataset of global government and corporate bond holdings by mutual funds domiciled in the world’s two largest currency areas, I estimate heterogeneous and time varying demand elasticities for bonds. Safe assets such as US Treasuries or German Bunds face especially inelastic demand from investment funds compared to riskier bonds. But spillovers from these safe assets to global bond markets are strikingly different.

Global or regional safe assets: evidence from bond substitution patterns

12/01/2025 European Central Bank Central banks

This paper provides novel empirical evidence on portfolio rebalancing in international bond markets through the prism of investors’ demand for bonds. Using a granular dataset of global government and corporate bond holdings by mutual funds domiciled in the world’s two largest currency areas, I estimate heterogeneous and time varying demand elasticities for bonds. Safe assets such as US Treasuries or German Bunds face especially inelastic demand from investment funds compared to riskier bonds. But spillovers from these safe assets to global bond markets are strikingly different.

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