European Central Bank

The macroeconomic impact of euro area discretionary fiscal policy measures since the start of the pandemic

04/28/2025 European Central Bank Central banks

This box provides a model-based analysis of the impact of discretionary fiscal policy measures on economic growth and inflation since the start of the COVID-19 pandemic, as reflected in the March 2025 ECB staff macroeconomic projections for the euro area. Fiscal policy lent substantial support to the euro area economy in response to the pandemic and the energy crisis, while adding to public deficits and debt.

Mortgage refinancing and the marginal propensity to consume

04/24/2025 European Central Bank Central banks

This paper investigates the role of mortgage refinancing in shaping the estimates of marginal propensity to consume (MPC) and its implications for fiscal policy. Using U.S. household data, we find that MPCs decrease during the year of mortgage refinancing and stabilize afterwards, particularly among households with lower liquid assets, higher debtto-income ratios, and valuable illiquid assets. The empirical evidence suggests that refinancing provides extra liquidity, reducing MPCs.

Do central bank reforms lead to more monetary discipline?

04/09/2025 European Central Bank Central banks

This paper investigates the impact of reforms altering legal central bank independence (CBI) on monetary policy discipline and credibility, two key mechanisms shaping price stability. Using a sample of 155 countries over more than 50 years (1972–2023), we show that reforms improving CBI strengthen monetary discipline and the credibility of central banks. Larger reforms enhance monetary discipline with a lag, achieving their full effect after ten years. Central bank reforms have a greater impact on monetary discipline in countries that have not reversed earlier reforms.

Do central bank reforms lead to more monetary discipline?

04/09/2025 European Central Bank Central banks

This paper investigates the impact of reforms altering legal central bank independence (CBI) on monetary policy discipline and credibility, two key mechanisms shaping price stability. Using a sample of 155 countries over more than 50 years (1972–2023), we show that reforms improving CBI strengthen monetary discipline and the credibility of central banks. Larger reforms enhance monetary discipline with a lag, achieving their full effect after ten years. Central bank reforms have a greater impact on monetary discipline in countries that have not reversed earlier reforms.

Interest rate control and the transmission of monetary policy

04/02/2025 European Central Bank Central banks

We study how short-term interest rate volatility affects the transmission of monetary policy. To identify exogenous changes in volatility, we exploit the pronounced heteroskedasticity visible in the time-series of euro area short-term rates over the past two and a half decades. Interacting the exogenous variation in volatility with high-frequency-identified monetary policy shocks, we find that increases in volatility dampen the effects of monetary policy on output and prices.

Interest rate control and the transmission of monetary policy

04/02/2025 European Central Bank Central banks

We study how short-term interest rate volatility affects the transmission of monetary policy. To identify exogenous changes in volatility, we exploit the pronounced heteroskedasticity visible in the time-series of euro area short-term rates over the past two and a half decades. Interacting the exogenous variation in volatility with high-frequency-identified monetary policy shocks, we find that increases in volatility dampen the effects of monetary policy on output and prices.

Word2Prices: embedding central bank communications for inflation prediction

04/01/2025 European Central Bank Central banks

Word embeddings are vectors of real numbers associated with words, designed to capture semantic and syntactic similarity between the words in a corpus of text. We estimate the word embeddings of the European Central Bank’s introductory statements at monetary policy press conferences by using a simple natural language processing model (Word2Vec), only based on the information and model parameters available as of each press conference. We show that a measure based on such embeddings contributes to improve core inflation forecasts multiple quarters ahead.

Word2Prices: embedding central bank communications for inflation prediction

04/01/2025 European Central Bank Central banks

Word embeddings are vectors of real numbers associated with words, designed to capture semantic and syntactic similarity between the words in a corpus of text. We estimate the word embeddings of the European Central Bank’s introductory statements at monetary policy press conferences by using a simple natural language processing model (Word2Vec), only based on the information and model parameters available as of each press conference. We show that a measure based on such embeddings contributes to improve core inflation forecasts multiple quarters ahead.

Geopolitical risk and its implications for macroprudential policy

04/01/2025 European Central Bank Central banks

This article explores the link between geopolitical risk and bank solvency and discusses the potential implications for macroprudential policy. Drawing on 120 years of data, analysis reveals that heightened geopolitical risk has been associated with lower bank capitalisation over the past century. This effect can arise through multiple economic and financial channels, including reduced economic activity, surging inflation, increased sovereign risk, and shifts in capital flows and asset prices.

Effects of monetary policy on labor income: the role of the employer

03/31/2025 European Central Bank Central banks

This paper investigates the role of firms in the transmission of monetary policy to individual labor market outcomes, both the intensive and extensive margins. Using German matched employer-employee administrative data, we study the effects of monetary policy shocks on individual employment and labor income conditioning on the firm characteristics. First, we find that the employment of workers in young firms are especially sensitive to monetary policy shocks.

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