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on European Economics |
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Issue of 2025–11–17
sixteen papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | Ángel Estrada García (BANCO DE ESPAÑA); Christian E. Castro (CAIXABANK); Gonzalo Fernández Dionis (GWU) |
| Abstract: | The 2010 sovereign crisis in the euro area brought to light the depth of the monetary union’s structural weaknesses. In particular, it highlighted the dangers of the sovereign-bank nexus – the amplification effect resulting from sovereign debt being held primarily by domestic banks. In response, important changes have been put in place. From a crisis management perspective, new institutions were created, such as the European Stability Mechanism which acts as a lender of last resort for euro area countries in difficulties. From an ex ante perspective, the crisis led to the launch of the banking union, which comprises the Single Resolution Mechanism – including the Single Resolution Fund – and the still-pending European Deposit Insurance Scheme. In addition, a wide array of regulation has been put in place, including Basel III and MREL/TLAC requirements to reduce the need for bailouts during financial crises and therefore limit the use of public funds in resolution processes. Despite this, the regulatory debate on how banking regulation should address this sovereign-bank interdependence continues today. In this paper we review the main regulatory proposals aimed at curtailing both exposure to sovereign risk and ownership concentration - two factors often associated to the broader sovereign-bank nexus. We assess their impact on bank capital and risk-weighted assets and simulate banks’ responses to these measures. We find that these solutions could entail significant side effects for both banks and bond markets, highlighting the importance of completing the monetary union and, in particular, issuing a European safe asset as key measures to mitigate this vulnerability. |
| Keywords: | sovereign debt, banking regulation, safe asset, monetary union |
| JEL: | H63 G21 G28 F45 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2540 |
| By: | Dettmann, Eva; Fritz, Sarah |
| Abstract: | This study provides new evidence on the impact of the EU Cohesion Policy on income growth in less developed regions. Our panel includes data from all European regions for the years 1989-2020. Using a fuzzy Regression Discontinuity Design, we model treatment dynamics by applying a random effects estimator. Based on digitized historical data, we precisely replicate the policy rule and correctly classify the regions' eligibility status. Results show that the policy has a moderate positive effect on GDP per capita growth in the targeted regions. |
| Keywords: | causal analysis, EU Cohesion Policy, regression discontinuity design, place-based policy |
| JEL: | H20 R11 R58 Z18 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhdps:330917 |
| By: | Alexopoulou, Ioana; Brancatelli, Calogero; Fudulache, Adina-Elena; Gomes, Diana; Gybas, Daniel; Sauer, Stephan |
| Abstract: | In this paper we explore the role of the temporary and country-specific Additional Credit Claims (ACC) frameworks as a monetary policy implementation tool. We discuss their evolution and provide a novel and detailed description of all ACC measures adopted by the different euro area NCBs since 2012. Reviewing the literature, we document the channels through which ACCs contributed to liquidity distribution during the euro area sovereign debt crisis, the negative interest rate period and the pandemic. Drawing on panel data on the use of collateral and securities holding statistics, we document novel stylised facts about ACC mobilisation patterns during these episodes. A number of conceptual contributions and empirical findings emerge. While ACCs started out as a crisis instrument, the historical review highlights that ACCs constitute a policy tool that is suitable for enhancing monetary policy implementation. Empirically we find that pledging ACCs was not systematically associated with more concentrated collateral pools. Banks pledging ACCs were mostly universal banks and diversified lenders of varying size and were associated with higher funding costs for their short-term secured debt instruments, though the causality is unclear. Finally, drawing on the implementation and risk management experience with ACC frameworks as well as our empirical findings, we establish five lessons to inform future policy discussions on collateral JEL Classification: E4, E5, E65 |
| Keywords: | Additional Credit Claims, collateral framework, monetary policy implementation |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2025378 |
| By: | McQuade, Peter; Pancaro, Cosimo; Reghezza, Alessio; Avril, Pauline |
| Abstract: | This paper investigates whether geopolitical risk causes a reduction in bank lending. In particular, it focuses on how the increase in geopolitical risk stemming from the Russian invasion of Ukraine affected euro area bank credit supply. Matching granular supervisory and credit register data and using a panel difference-in-difference approach, the results show that banks with larger exposure to the increase in geopolitical risk cut lending significantly more than those with smaller exposure. Banks with greater exposure raised impairments despite exhibiting similar levels of credit distress to their peers, suggesting that the fall in lending was driven by uncertainty. Moreover, firms that were heavily reliant on banks with high exposure to geopolitical risk were unable to fully substitute this shortfall in credit by borrowing more from less affected banks, which significantly constrained firm investment and employment. JEL Classification: G1, G21, E22 |
| Keywords: | banks, financial markets, uncertainty |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253143 |
| By: | Giovanna Ciaffi; Matteo Deleidi; Antonino LOfaro |
| Abstract: | This paper evaluates the impact of Mission–Oriented Innovation Policies (MOIPs) and public R&D investment by quantifying the responses of GDP, private investment, hours worked, labour productivity, and the real hourly wage. We combine a Bartik–type identification strategy with the Local Projections method on a novel dataset with a sectoral–regional dimension, covering 333 European NUTS–2 regions over 1995–2019. Results show that R&D government spending exerts robust and persistent expansionary effects, crowding in private investment, raising employment, and boosting productivity. Sectoral heterogeneity emerges, with high multiplicative effects in construction and finance, while employment effects are concentrated in construction and market services. |
| Keywords: | Fiscal policy; Mission-Oriented Innovation Policies; R&D government spending; Sectoral heterogeneity; Regional economics; Local Projections; European regions. Jel Classification: R11; E62; H50; O38 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:usi:wpaper:934 |
| By: | De Jonghe, Olivier; Benkovskis, Konstantins; Bielskis, Karolis; Bonfim, Diana; Bottero, Margherita; Briglevics, Tamás; Cesnak, Martin; Dirma, Mantas; Emiris, Marina; Filep-Mosberger, Pálma; Jouvanceau, Valentin; Kaiser, Nicholas; Khametshin, Dmitry; Lalinsky, Tibor; Grolmusz, Viola M.; Moretti, Laura; Nikitins, Artūrs Jānis; Nunnari, Angelo; Rodriguez-Moreno, Maria; Stefanova, Elitsa; Szabó, Lajos Tamás; Vilerts, Kārlis; Zhao, Sujiao Emma |
| Abstract: | We study heterogeneity in households’ credit across nine European countries (Belgium, Spain, Hungary, Ireland, Italy, Latvia, Lithuania, Portugal, and Slovakia) during 2022-2024 using granular credit register data. We first document substantial between- and within-country variation in mortgage and consumer lending by borrower age, loan maturity, and interest rate fixation. We then quantify the passthrough of the ECB’s recent tightening cycle to household borrowing costs, and assess its heterogeneous impact across households. Pass-through is nearly complete for mortgages (around 0.9) but considerably weaker for consumer credit (around 0.4). While mortgage pass-through is relatively homogeneous across countries, consumer credit shows pronounced cross-country differences that cannot be explained by borrower or loan characteristics. Younger households face stronger mortgage pass-through but weaker consumer credit pass-through relative to older borrowers, and longer maturities are associated with stronger pass-through in both credit markets. JEL Classification: E52, G21, D14 |
| Keywords: | credit registers, cross-country heterogeneity, household borrowing, interest rate pass-through, monetary policy transmission |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253146 |
| By: | Natalie Kessler |
| Abstract: | We develop a method to measure ambiguity—uncertainty about the distribution of out-comes—in asset markets, using the volatility of the empirical distribution of unpredictable components in transaction prices. For comparison, we measure risk as the volatility of the unpredictable price component itself, following the conventional practice of using the cross-sectional standard deviation. Applying this framework to 22 million secured lending transactions in the EU, we estimate ambiguity and risk perceived by major money market lenders. Unexpected monetary policy tightening raises both measures. Higher ambiguity reduces repo market liquidity by lowering loan volumes and increasing repo rates, thereby amplifying contractionary effects. Higher risk lowers loan volumes but also repo rates, partly dampening contractionary effects. Our results suggest that ambiguity plays a distinct and quantitatively important role in monetary policy transmission that is overlooked when fo-cusing on risk alone. |
| Keywords: | Ambiguity and Risk; Repurchase Agreements; Monetary Policy Transmission; Liquidity Provision |
| JEL: | E52 G24 D43 D86 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:847 |
| By: | Bobasu, Alina; Ciccarelli, Matteo; Notarpietro, Alessandro; Ambrocio, Gene; Auer, Simone; Bonfim, Diana; Bottero, Margherita; Brázdik, František; Buss, Ginters; Byrne, David; Casalis, André; Conti, Antonio M.; Di Casola, Paola; Dobrew, Michael; Dupraz, Stéphane; Giammaria, Alessandro; Gomes, Sandra; Goodhead, Robert; Grimaud, Alex; Haavio, Markus; Martínez Hernández, Catalina; Imbierowicz, Björn; Jacquinot, Pascal; Kalantzis, Yannick; Kornprobst, Antoine; Kortelainen, Mika; Lozej, Matija; Mandler, Martin; McClung, Nigel; Mogliani, Matteo; Müller, Georg; Odendahl, Florens; Priftis, Romanos; Rannenberg, Ansgar; Reichenbachas, Tomas; Repele, Amalia; Theofilakou, Anastasia; Valderrama, María T.; Vestin, David; Vetlov, Igor; Wacks, Johannes; Zhutova, Anastasia; Zimic, Srečko; Zlobins, Andrejs; Berg, Tim Oliver; Delis, Panagiotis; Gonçalves, Nuno Vilarinho; Izquierdo, Matías Covarrubias; Le Gall, Claire; Nilavongse, Rachatar; Yakut, Dilan Aydın |
| Abstract: | This paper serves as a reference guide on the effects of “standard” monetary policy shocks on output and prices, based on harmonised simulation exercises conducted across models of the European System of Central Banks (ESCB), meta-analysis of existing empirical literature for the euro area, and selected works on heterogeneity and non-linearities in the monetary transmission mechanism as captured by empirical models. Our analysis starts by comparing the effects of monetary policy shocks as estimated by structural, semi-structural and dynamic stochastic general equilibrium (DSGE) models, and identifying the main sources of heterogeneity – most notably via the specification of monetary policy rules, the slope of the Phillips curve, the role of real rigidities and financial frictions, and the expectations formation mechanism. While DSGE models tend to produce sharper responses, semi-structural models often reveal more gradual and persistent effects, in line with backward-looking empirical models. The second chapter presents a meta-analysis of estimated effects based on the empirical literature, which are broadly consistent with the results obtained from the ESCB models, although differences might appear when correcting for publication bias, or accounting for different identification frameworks. The study is then complemented by selected works on heterogeneity and non-linearities in the monetary transmission mechanism as captured by empirical models. Our analysis in the final chapter shows that monetary policy transmission is heterogeneous across countries, sectors, demand components, and time. It also reveals important non-linear and state-dependent dynamics: in high-inflation periods, greater price and wage flexibility amplifies the response of inflation while dampening output effects, thereby lowering the sacrifice ratio. [...] JEL Classification: C22, C52, D58, E31, E52, E58, F45 |
| Keywords: | empirical models, heterogeneity, inflation, meta-analysis, monetary policy, output, semi-structural, structural models |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2025377 |
| By: | Tomaso Duso; Martin Peitz |
| Abstract: | Trade conflicts, geopolitical tensions, digital disruption, and the climate crisis pose major challenges for the European Union (EU) and its member states. As called for in the Draghi Report, industrial policy measures can increase competitiveness, strengthen resilience, and facilitate the twin transformation. This article explores ways in which competition policy can be realigned to better accommodate industrial policy objectives. Using German competition law as a reference point, it presents options with which legislatures and competition authorities can respond to current challenges, reconcile conflicting objectives, and adapt the decision-making framework. It then considers elements of a competition-oriented industrial policy, understood as an evidence-based, targeted approach in which competition serves both as a guiding principle and as a control variable. |
| Keywords: | industrial policy, protection of competition, competition, regulation, competition policy, competitiveness, internal market |
| JEL: | L40 L50 L52 K21 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_710 |
| By: | Alexiou, Georgios Angelis; Pereira, Sofia M.; Rodrigues-Gomes, Victor |
| Abstract: | Collateral reuse in repo markets helps entities meet short-term funding needs, maintain market efficiency, and anchor collateral valuations, although it creates risks through interconnectedness. A prominent view in the literature is that securities dealers use their market position to obtain temporary free-cash wedges from differences in collateral requirements when reusing collateral, so-called “liquidity windfalls”. By affecting dealers’ funding structures, such windfalls could influence yield curve determination, leverage, and monetary policy transmission. Yet the evidence has been largely theoretical, with limited empirical work. Using a novel, confidential regulatory dataset on European Securities Financing Transactions, this study helps fill that gap. We find that about 11.6% of European repo transaction volume relies on reused securities, averaging more than 49 billion euros per day. Moreover, contrary to the liquidity windfalls hypothesis, dealers do not seem to systematically obtain extra liquidity through collateral reuse in repos. JEL Classification: G15, G21, G23 |
| Keywords: | collateral reuse, haircuts, repo |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253147 |
| By: | Nicholas Bloom; Philip Bunn; Paul Mizen; Pawel Smietanka; Gregory Thwaites |
| Abstract: | This paper examines the impact of the UK's decision to leave the European Union (Brexit) in 2016. Using almost a decade of data since the referendum, we combine simulations based on macro data with estimates derived from micro data collected through our Decision Maker Panel survey. These estimates suggest that by 2025, Brexit had reduced UK GDP by 6% to 8%, with the impact accumulating gradually over time. We estimate that investment was reduced by between 12% and 18%, employment by 3% to 4% and productivity by 3% to 4%. These large negative impacts reflect a combination of elevated uncertainty, reduced demand, diverted management time, and increased misallocation of resources from a protracted Brexit process. Comparing these with contemporary forecasts – providing a rare macro example to complement the burgeoning micro-literature of social science predictions – shows that these forecasts were accurate over a 5-year horizon, but they underestimated the impact over a decade. |
| JEL: | E0 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34459 |
| By: | Dimitris Georgarakos (European Central Bank (E-mail: Dimitris.Georgarakos@ecb.europa.eu)); Yuriy Gorodnichenko (University of California, Berkeley (E-mail: ygorodni@econ.berkeley.edu)); Olivier Coibion (University of Texas at Austin (E-mail: ocoibion@austin.utexas.edu)); Geoff Kenny (European Central Bank (E-mail: geoff.kenny@ecb.europa.eu)) |
| Abstract: | We implement a survey-based randomized information treatment that generates independent variation in the inflation expectations and the uncertainty about future inflation of European households. This variation allows us to assess how both first and second moments of inflation expectations separately affect subsequent household decisions. We document several key findings. First, higher inflation uncertainty leads households to reduce their subsequent durable goods purchases for several months, while a higher expected level of inflation increases them. Second, an increase in uncertainty about inflation induces households to tilt their portfolios towards safe and away from riskier asset holdings. Third, higher inflation uncertainty encourages household job search consistent with a strong precautionary motive for labor supply, leading to higher subsequent employment among the unemployed and less part-time employment among the alreadyemployed. Finally, we document that the level of inflation expectations has a different effect from uncertainty in inflation expectations and thus it is crucial to take into account both to measure their separate effects on decisions and in policy communication. |
| Keywords: | inflation uncertainty, consumption, household finance, labor supply, Consumer Expectations Survey |
| JEL: | E31 C83 D84 G51 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-12 |
| By: | Bassa, Karolina (The Institute for New Economic Thinking at the Oxford Martin School, University of Oxford); Cont, Rama (Mathematical Institute, University of Oxford) |
| Abstract: | We propose an empirically grounded quantitative framework for modeling sovereign credit risk and evaluating the sustainability of sovereign debt. We study the impact of fiscal and public investment policies on the sovereign's borrowing cost and credit risk in the presence of stochastic output shocks and credit-sensitive funding from investors, with a focus on the dynamics of liquidity flows and the sustainability of sovereign debt. The model is able to replicate a range of empirical observations on sovereign credit risk and sovereign defaults, in particular Argentina's 2001 default and Greece's 2012 debt restructuring events, with realistic dynamics for debt, spreads and credit ratings conditional on output. The framework is useful for debt sustainability analysis and to estimate the impact of fiscal policy on debt and output. Finally, we propose a transparent methodology for sovereign credit ratings based on this approach. |
| Keywords: | sovereign debt, fiscal policy, sovereign credit risk, sovereign default, liquidity risk, debt sustainability analysis, sovereign credit ratings |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:amz:wpaper:2025-24 |
| By: | Ardelia L. Amardana (Ca’ Foscari University of Venice); Diana Barro (Ca’ Foscari University of Venice); Marco Corazza (Ca’ Foscari University of Venice) |
| Abstract: | Sustainability in financial markets has gained attention. This study addresses it by enhancing portfolio optimization through as additional inputs alongside price data that can improve stock return prediction. Using LSTM models with RMSProp optimizer performs best in consistency of minimizing prediction errors and given the ability to capture complex pattern between price, greenhouse gas (GHG) emissions and environmental scores (E-Scores). This study uses data from the EURO STOXX 50 between 2016 and 2022, focusing on out-of-sample weekly return predictions in 2022. Four model setups are tested: price-only, and price combined with GHG, E-score, or both. Our findings show that incorporating the E-Score improves price and return predictions in several sectors, whereas some sectors show limited benefit, indicating sustainability information may already be priced in. Additionally, in portfolio optimization shows that models including E-Score gives better performance across different holding periods by setting more effective weightings and aligning closely with our benchmark. This results provides further evidence in the following year 2023 and EURO STOXX 50 ESG performance. |
| Keywords: | Sustainable Indicators; Long Short Term Memory; Return Prediction; Portfolio Optimization |
| JEL: | C45 C53 C63 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ven:wpaper:2025:25 |
| By: | Küblböck, Karin; Papatheophilou, Simela; Tröster, Bernhard |
| Abstract: | In response to growing critical raw material demand and increasing instability in global supply chains, the European Union has established Strategic Partnerships with resource-rich third countries. These partnerships aim connect raw material projects in third countries with European industries, while promoting 'mutual benefits' and more sustainable raw material supply chains. Yet their effectiveness is limited by restricted policy space resulting from EU Free Trade and Investment Agreements, insufficient funding mechanisms, and weak consultation with affected communities, carrying the risk of legitimizing extractive projects rather than delivering genuine mutual benefits. This policy note assesses the potential and limits of Strategic Partnerships, highlighting the need for policy alignment to protect partner countries' policy space, support local value addition, provide dedicated financing, and promote demand reduction to ensure resilient and sustainable CRM supply chains. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:oefsep:330672 |
| By: | Brehmer, Sarah; Cézanne, Thibault; Kirschenmann, Karolin; Zilke, Philip |
| Abstract: | Nearly two decades of green bond issues have ignited various research questions and fields surrounding the topic. It is therefore time to take stock. Green bonds were launched with the goal of greening the financial sector by investing the generated funds into sustainable projects that support the transition to a resilient, climate-neutral economy. But are green bonds living up to their promise? In this policy brief, we provide evidence on the role that green bonds can play in the green transition. Our findings are based on a recent project funded by the German Federal Ministry of Research, Technology and Space (BMFTR). When examining the potential distortionary effects of policy interventions (such as green government bond issues) in the green bond market, we only find small effects on average, even though those are stronger for large and specific interventions. Looking at green bond auction design from a theoretical perspective, it can be seen that strategic bidding behaviour can incentivise investors to shift their portfolios towards green investments in general. When banks issue green bonds, they increase the financing of green firms in the form of sustainability-linked loans. As a result, environmental benefits materialise as recipient firms reduce their emissions. These effects are only evident for firms that are already greener than others, however, so more targeted incentives seem needed to channel financial flows more effectively into sustainable transition projects. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewpbs:331234 |