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on European Economics |
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Issue of 2025–10–06
thirteen papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | Nghiem, Giang; Marenčák, Michal |
| JEL: | C33 D84 E31 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325454 |
| By: | Saiz, Lorena; Magro, Manuel Medina |
| Abstract: | This study introduces a novel approach to dictionary-based sentiment analysis that extracts valuable insights from economic newspaper articles in the euro area without requiring article translation. We develop sentiment indices that accurately measure economic, labour, and inflation perceptions in Germany, France, Italy, and Spain using native-language texts. The aggregation of these country-specific sentiments provides a reliable indicator for the euro area as a whole, demonstrating the effectiveness of our approach in several nowcasting and forecasting experiments. This translation-free method significantly reduces resource requirements, facilitates easy replication across various languages, and enables daily updates. By eliminating the translation bottleneck, our approach emerges as one of the most timely and cost-effective economic measures available, offering a powerful tool for monitoring and forecasting business cycles in the multilingual context of the euro area. JEL Classification: E32, E37, C53, C82 |
| Keywords: | forecasting, inflation, output, recession, textual analysis |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253122 |
| By: | YiLi Chien; Zhengyang Jiang; Matteo Leombroni; Hanno Lustig |
| Abstract: | We compute the cross-country transfers that result from unconventional monetary policy in the Eurozone. The ECB funds the expansion of its aggregate balance sheet mostly by issuing bank reserves and cash in core countries. The national central banks (NCBs) in periphery countries then borrow from the core NCBs at below-market rates to fund the asset purchases and bank lending. In addition, NCBs in the periphery lend more to their own banks at below market rates. To compute the cross-country transfers, we compare the resulting cross-country distribution of NCB income to a counterfactual scenario without the ECB and without non-marketable intra-Eurozone debt. We document significant and persistent transfers from the core to the periphery. |
| Keywords: | unconventional monetary policy; financial repression; monetary union; Target2 |
| JEL: | E42 E52 F33 G15 |
| Date: | 2025–09–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:101808 |
| By: | Manuel Gonzalez-Astudillo; Diego Vilán |
| Abstract: | A challenge for conducting monetary policy in a currency union is the diverse economic conditions among member states. Such disparities can drive natural interest rates apart, thereby undermining the stabilizing role of a unified monetary policy. To assess the stance of monetary policy across Eurozone-19 countries, we estimate their natural rates of interest (r∗) and inflation trends (π∗) to construct a measure of the country-level neutral nominal interest rates (r∗ + π∗) over 1999-2025, using a semistructural model that jointly characterizes the trend and cyclical components of key macroeconomic variables such as output, unemployment, inflation, 10-year government bond yields, and the common policy interest rate. Our setup improves upon those in the existing literature by allowing both a short-run interest rate gap—driven by the (shadow) policy rate—and a long-run interest rate gap—driven by the country-specific 10-year government bond yields—to affect and reflect economic conditions. We also impose cointegration between the dynamics of the country-specific latent variables and common counterparts to incorporate co-movements across the euro area economies. Our results show that the stance of monetary policy is homogeneous across the countries in our sample, but that a relatively highly degree of heterogeneity emerges at key historical turning points. |
| Keywords: | Common monetary policy challenges; Euro area economies; Interest rate gap; Neutral interest rate; Sovereign debt risk |
| JEL: | C32 E32 E42 E52 |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-87 |
| By: | Kagerer, Benedikt; Pancaro, Cosimo; Reghezza, Alessio; De Vito, Antonio |
| Abstract: | This paper investigates how unrealized losses on banks’ amortized cost securities affect monetary policy transmission to bank lending in the euro area. Leveraging the sharp increase in interest rates between 2022 and 2023 and using granular supervisory data on security holdings and loan-level credit register data, we show that a one percentage point increase in the share of unrealized losses on amortized cost securities amplifies the contractionary effect of monetary tightening on lending supply by approximately one percentage point. This effect is more pronounced for weakly capitalized and less liquid banks, and those relying more on uninsured deposits. We further document that banks respond to growing unrealized losses by raising capital and passing through interest rate increases to depositors via higher deposit betas. Importantly, banks that employ interest rate hedging strategies can fully offset the negative impact of unrealized losses on credit supply. The contraction in lending is particularly severe for smaller borrowing firms, highlighting the uneven economic consequences of hidden balance sheet fragilities during a tightening cycle. JEL Classification: E43, E52, G21, G32, M41 |
| Keywords: | amortized cost accounting, bank lending, monetary policy transmission, security holdings, unrealized losses |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253129 |
| By: | Albertazzi, Ugo; Ponte Marques, Aurea; Abbondanza, Aurora; Travaglini, Giulia Leila |
| Abstract: | This paper presents the first causal evidence on how banks adjust their voluntary capital buffers (the capital headroom above the required level) in response to changes in capital requirements. Using granular euro area data and exploiting the threshold-based assignment of Other Systemically Important Institution (O-SII) buffers within a regression discontinuity design, we study the liability side of banks’ balance sheets, complementing the asset-focused literature on lending and risk-taking. This allows us to assess whether capital regulation is effective in enhancing bank resilience, arguably its main objective. We find that banks offset about half of higher capital requirements by cutting their voluntary buffers rather than raising new equity. The offsetting effect is more pronounced among banks with weaker balance sheets, particularly those with higher levels of non-performing loans. These results indicate that regulation aimed at strengthening resilience may be only partially effective, as banks use existing voluntary buffers when subject to higher requirements. JEL Classification: E44, E51, E58, G21, G28 |
| Keywords: | capital buffers, higher requirements, macroprudential policy, voluntary buffer |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253128 |
| By: | Sebastian Dullien (Macroeconomic Policy Institute (IMK)); Katja Rietzler (Macroeconomic Policy Institute (IMK)) |
| Abstract: | This policy brief presents simulation results regarding the macroeconomic effects of a green EU public investment fund using the macroeconometric simulation model NiGEM. After briefly outlining the investment needs in the EU, we first present results using the standard version of NiGEM. We then extend the simulations in the main sections of the Policy Brief by taking climate change into account. By applying the climate version of NiGEM, we simulate various policy scenarios of the Network for Greening the Financial System (NGFS), both with and without an EU investment fund. Our results show considerable negative impacts on GDP, along with inflationary effects arising from CO2-taxation alone. Accounting for climate change and the corresponding long-term damage to GDP, however, our results show that not acting on climate change now causes far more severe damages in the future. A debt-financed EU investment fund would help – besides from faster promoting the greening of the European economies – by cushioning the negative transitory GDP effects in the next ten years, without risking debt sustainability. Finally, our results highlight the importance of cooperation such that climate change policies are implemented on a global level. |
| Keywords: | EU investment fund, green investment, public investment, climate policy, climate change |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:imk:pbrief:197-2025 |
| By: | Dijkstra, Lewis; Kompil, Mert; Proietti, Paola |
| Abstract: | Between 2001 and 2021, capital metro regions had the fastest productivity growth in the EU, followed by non-metro regions, while it was much lower in other metro regions. Capitals reduced their sectoral concentration, while the other regions increased it. Our shift-share analysis confirms that capitals relied entirely on productivity growth within sectors, while the other two types benefitted also from shifting jobs to more productive sectors. Our regression analysis showed that convergence and being a capital boosted productivity growth. Population density also strengthened productivity growth, but not enough to prevent other-metro regions from lagging behind the non-metro regions. |
| Keywords: | growth; productivity; employment; capital; metro; regions; Europe; EU; ARDECO |
| JEL: | E24 O18 O32 P25 R12 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129664 |
| By: | Dionysia Rallatou; Michail Tsagris; Vangelis Tzouvelekas (Department of Economics, University of Crete, Greece) |
| Abstract: | This paper investigates the link between political polarisation and inequality in Europe from 1989 to 2024. Using Bayesian Aldrich-McKelvey scaling, the DER polarisation index, and Araar decomposition, it traces polarisation's regional and structural foundations. Results show that polarisation has risen steadily, with Mediterranean and Central/Eastern Europe consistently more polarised than Western and Northern regions. Araar decomposition reveals that polarisation stems mainly from between-group alienation, not within-group identification. Divides over EU membership, class, and urban-rural residence account for much of the increase, with radical groups contributing disproportionately. Fixed-effects regressions confirm that inequality is the strongest determinant of polarisation: higher Gini values consistently predict greater antagonism. Economic growth reduces polarisation only under egalitarian conditions; when coupled with inequality, it amplifies divides. These findings highlight |
| Keywords: | political polarisation, inequality, EU, economic growth, affective polarisation |
| JEL: | C23 C38 D31 D72 |
| Date: | 2025–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:crt:wpaper:2501 |
| By: | Andros Kourtellos; Christos Antonios Statheas; Marios Zachariadis |
| Abstract: | Quite a lot. We use a very large dataset of inflation expectations formed by households across the euro-area over the period 2004:1-2023:11 to assess the degree of existing heterogeneity, and whether features of the households’ cross-sectional distribution in these economies are informative for inflation realizations. We summarize the heterogeneity across households using a recent functional data approach, and show that the functional components affect inflation realizations across the euro-area. This points to a role for the distribution of inflation expectations in the Phillips Curve relation, beyond the role of consensus expectations implied by models which do not allow for such heterogeneity. Moreover, we find that the inflationary impact of the functional components differs across high-inflation and low-inflation environments. Importantly, empirical models that account for the distribution of past expectations of current inflation in addition to the distribution of current expectations of future inflation, do better during the period under study as compared to models that include only the forward-looking component, especially during turbulent times. This suggests that rational inattention models with heterogeneity would be a good starting point for building macroeconomic models which can give an empirically relevant Phillips Curve relation. |
| Keywords: | inflation, inflation expectations, heterogeneity, functional regression. |
| JEL: | E31 D84 |
| Date: | 2025–09–29 |
| URL: | https://d.repec.org/n?u=RePEc:ucy:cypeua:02-2025 |
| By: | Kaaresvirta, Juuso; Nuutilainen, Riikka; Pitkäranta, Juho |
| Keywords: | Economic dependence, foreign trade, direct investments, subsidiaries, financial sector, Finland, EU, USA |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitb:327103 |
| By: | Di Carlo, Donato; Moretti, Lorenzo; Moschella, Manuela |
| Abstract: | This article examines the political foundations of industrial policy amid the return of state economic interventionism. Comparing the United States' Inflation Reduction Act (IRA) and the European Union's Green Deal Industrial Plan (GDIP), it shows that contrasting industrial policy strategies were ultimately shaped by differences in the two polities' legislative rules. In both cases, geopolitical pressures sparked renewed interest in green industrial policymaking. However, procedural mechanisms for majoritarian decision‐making in the U.S. Senate enabled the government to overcome partisan veto players and compelled the design of the IRA as a budgetary instrument centered on fiscal subsidies. By contrast, unanimity requirements in the EU's joint decision‐making system prevented the Commission from overcoming Member State veto players in the Council, precluding supranational fiscal instruments and resulting in a regulation‐based, decentralized approach via national state aid. The findings contribute to the burgeoning debates on the return of industrial policy and state activism by showing how political institutions contribute to shaping not only the scope but also the form of economic interventionism within different polities. |
| Keywords: | economic interventionism; green deal industrial plan; green industrial policy; inflation reduction act (IRA); political institutions |
| JEL: | J1 |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129545 |
| By: | Konysev, Vasilij; Fehrle, Daniel |
| JEL: | E13 E24 N14 O11 O47 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325462 |