European Central Bank

Financial stability and macroprudential regulation under diagnostic expectations

11/23/2022 European Central Bank Central banks

Recent empirical findings (Bordalo et al., 2018, 2019; Greenwood et al., 2022) have vindicated the view thatsystemic risk in financial markets is also influenced by cognitive misperceptions about future economicdevelopments in addition to being influenced by financial frictions. Most of the literature on macroprudentialregulation, nonetheless, has omitted those misperceptions and instead has derived policy implicationsassuming rational expectations.

Cold hard (digital) cash: the economics of central bank digital currency

10/31/2022 European Central Bank Central banks

Central banks around the world are exploring the case for central bank digital currency (CBDC) – essentially a digital version of cash. In this article, we provide an overview of the economics of CBDC (Ahnert et al., 2022a). First, we outline the economic forces that shape the rise of digital money and motivate the current debate. We then look at the implications for monetary policy and financial stability before discussing policy issues and challenges. Finally, we highlight several areas where our understanding of digital money could be improved by further research.

Green QE and carbon pricing: looking at potential tools to fight climate change

09/28/2022 European Central Bank Central banks

While there is broad consensus that carbon pricing is an effective instrument for combatting climate change, the potential contribution of central banks is still debated. Central banks around the world have adopted different strategies to consider climate change in their monetary policy frameworks. This article focuses on green quantitative easing (QE). Compared with a carbon tax, we find that green QE would contribute only moderately to reducing global temperatures, while partially crowding out green private investment.

Striking a bargain: narrative identification of wage bargaining shocks

07/27/2022 European Central Bank Central banks

Labour market developments are important drivers of the business cycle and are therefore closely watched by monetary policymakers. One process with significant macroeconomic ramifications are wage negotiations, where workers and employers bargain over the surplus income generated by an employment relationship. Bargaining power determines how this surplus is split between negotiating parties. However, it is unobserved, and can be driven by a number of factors.

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