|
on European Economics |
|
Issue of 2026–09–07
sixteen papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | Clemente Pinilla-Torremocha (Bank of England and European Research University) |
| Abstract: | This paper investigates the post-Covid inflation surge in the euro area, combining three features: decomposition of long-term trends and business-cycle dynamics – such as potential GDP, trend inflation, output-gap, and inflation-gap; time-varying volatility and fat-tailed distributions to accommodate extreme observations; and structural shock identification, distinguishing shocks by their persistence (permanent versus transitory) and domain (global versus domestic, demand versus supply, or energy specific). Unlike the existing literature, findings show that domestic supply shocks feed into the persistent component of euro-area inflation, raising trend inflation to 3% by 2022. Demand shocks – domestic and global – manifest in the transitory component (inflation gap), explaining 85% of the post-Covid inflation surge. |
| Keywords: | Inflation dynamics;trends and cycles;permanent and transitory shocks;stochastic volatility;fat-tails;domestic-global;demand-supply |
| JEL: | E31 E32 E44 |
| Date: | 2026–02–13 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023292 |
| By: | Herrala, Risto |
| Abstract: | We study empirically the impact of European integration on goods trade with India. The estimation sample covers goods trade of 41 European countries during 1992- 2024, a transformative period when European integration deepened and India joined the ranks of the world's largest economies. Using standard estimation approaches we find only weak evidence that specific types of integration alone impacted the trade partnership. Instead, the degree of integration, measured by the types of integration in which a country engaged, shows a significant positive effect on goods trade with India. |
| Keywords: | integration, external trade, Europe, India |
| JEL: | F02 F14 F15 C23 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitb:343100 |
| By: | Agnès Bénassy-Quéré; Matthieu Bussière; Thaïs Masseï; Arthur Saint-Guilhem |
| Abstract: | We assess the degree of heterogeneity in monetary policy transmission (MPT) across euro area countries for the period 2000–2025. Using monthly local projections, we estimate the effects of monetary policy on a broad set of transmission variables at both euro area and national levels. First, we find limited heterogeneity of output and inflation responses to monetary policy shocks, despite asymmetric responses of mortgage market-related variables. Second, key structural differences, such as households’ indebtedness, debt maturity, interest rate rigidity and sectoral composition, do shape heterogeneities in MPT across euro area countries, according to our results. Considered jointly, though, these differences partly offset one another, leading to a relatively homogeneous transmission of monetary policy. Third, a monthly FAVAR estimation confirms and broadens our local projections results: asymmetry remains contained for output and inflation, but it is higher for sovereign spreads, food prices, credit variables and our consumption proxy. Finally, a rolling-window estimation of the FAVAR model shows that time-varying heterogeneity in MPT is characterized by temporary and crisis-driven divergences that consistently revert to a low baseline, reflecting key monetary policy interventions rather than deeper structural economic divergences. Unconventional monetary policies play a central role in this pattern: they tend to reduce country divergences during crisis periods, impacting more strongly the countries most affected, hence operating, by design, as a heterogeneous policy shock according to our main metric. |
| Keywords: | Monetary Policy Transmission, High-Frequency Identification, Local Projections, FAVAR |
| JEL: | C32 C38 F45 E52 E31 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1062 |
| By: | Maczulskij, Terhi |
| Abstract: | Abstract This study examines the effects of the 2004 European Union enlargement on firm productivity and innovation in Finland. Using linked employer–employee and firm-level data, the analysis exploits increased access to workers from the ten new EU member states (EU10). To address the endogenous geographic distribution of immigrants, I construct an instrumental variable based on historically predetermined migration patterns. The results show that increased EU10 employment raises firm labor productivity, the probability of having a granted patent, and STEM employment, while effects on other innovation outcomes are more limited. The responses also differ across sectors. In manufacturing, EU10 employment increases process innovation but reduces STEM employment, whereas in services it increases labor productivity and the probability of having granted patents. Overall, the findings suggest that immigration-induced labor-supply changes can improve firm performance and affect selected dimensions of innovation, with the effects varying across sectors and innovation margins. |
| Keywords: | EU enlargement, Firms, Immigration, Innovation, Instrumental variables, Productivity |
| JEL: | D22 F22 O30 |
| Date: | 2026–08–27 |
| URL: | https://d.repec.org/n?u=RePEc:rif:wpaper:145 |
| By: | Jacopo Ghirri; Carlos Rodriguez-Pardo; Lara Aleluia Reis; Massimo Tavoni |
| Abstract: | The European Union has committed to reducing greenhouse gas emissions 55% below 1990 levels by 2030, but whether current trends are compatible with this ambition remains uncertain. We apply deep learning to high-resolution socioeconomic and sectoral data across EU27 member states till 2023 to project sectoral CO$_2$ trajectories under current trends, extrapolating observed sectoral momentum without assuming changes in the pace or effectiveness of the policy environment beyond what is already reflected in historical data. We project that EU27 emissions will exceed the 2030 target by 35% (620 Mt CO$_2$ shortfall), with only a small minority of countries on trajectories consistent with the bloc's commitments. While the Power sector achieves target-consistent reductions driven by the renewable transition, Mobility shows minimal progress and accounts for over a third of total emissions by 2030, reflecting a structural inertia across member states rather than geographically concentrated lag. Our findings indicate that substantial additional intervention is required to close Europe's ambition-implementation gap, and call for establishing up-to-date energy information in Europe. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.18690 |
| By: | Marta Garcia-Rodriguez (Bank of Spain); Clemente Pinilla-Torremocha (Bank of England) |
| Abstract: | We show that the joint behaviour of confidence measures and unemployment in a panel of European countries favours a view of labour market fluctuations driven largely by a shock that does not affect unemployment contemporaneously but affects it persistently over business‑cycle horizons and explains the major share of the forecast error variance of confidence measures. This shock is captured in firm and household surveys and is almost perfectly correlated (-0.95) with non-technological disturbances driving the long-run behaviour of unemployment, but only modestly correlated with shocks affecting long-run productivity. One structural interpretation is that it represents news about future non-technological fundamentals, which is first captured in confidence measures. This shock accounts for 50% of unemployment variance at business-cycle frequency. It behaves as a mildly inflationary transitory demand shock – raising investment, wages, interest rates, fiscal surplus, and vacancies – is orthogonal to identified monetary policy shocks, and induces professional forecasters to revise unemployment expectations downward. |
| Keywords: | Non‑technological news shocks;unemployment fluctuations;confidence measures;panel favar;mixed‑frequencies. |
| JEL: | C32 D83 E24 E30 |
| Date: | 2026–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023304 |
| By: | Hegemann, Hendrik; Wieland, Volker |
| Abstract: | This note updates our March 2026 scenario analysis of the inflationary consequences of the energy-price shock associated with the Iran war. Using the same Bayesian VAR specification and posterior estimates, we incorporate observed energy prices through July 2026. Despite a different monthly price profile, the implications of the July baseline for euro area consumer prices are broadly similar to the March baseline. A significant share of the effect is still to materialize: relative to July, the contribution to year-on-year headline HICP rises by a further 0.6- 0.7 percentage points to a peak of around 1.75 percentage points in February 2027. The contribution to core HICP rises by about 0.4 percentage points to a peak of approximately 0.5 percentage points by mid-2027. By contrast, a scenario with "gradual normalization" would unwind most of the remaining headline pressure within a few months, whereas a "renewed supply disruptions" scenario with a temporary return of oil-product prices to their earlier peaks would add moderately to the July baseline. More persistent disruptions, however, could generate larger effects than the three-month scenarios considered here. |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:343085 |
| By: | Sandra M. Leitner (The Vienna Institute for International Economic Studies, wiiw); Roman Stöllinger (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | This paper analyses the impact of offshoring in the EU – both in total and differentiated by destination region (advanced Europe, developing Europe, developed non-Europe, developing non-Europe) – on six different non-wage working conditions physical environment, work intensity, worktime quality, social environment, skills and discretion, and prospects. Results from instrumental variable (IV) estimations show that offshoring has substantial causal effects, improving the physical environment and career prospects, but also worsening the social environment, particularly in old EU member states. Moreover, the effects vary by destination offshoring to advanced Europe improves skills and discretion but can increase work intensity, whereas offshoring to developing Europe enhances the physical environment and career prospects. Effects for non-European destinations are more heterogeneous and sometimes opposite to those observed in Europe. |
| Keywords: | Offshoring, destination region, non-wage working conditions, instrumental variable estimation |
| JEL: | F14 F16 J81 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:wii:wpaper:278 |
| By: | Fernandez-Gallardo, Alvaro; Lloyd, Simon; Manuel, Ed |
| Abstract: | We estimate the causal effects of macroprudential policies on the entire distribution of GDP growth for advanced European economies using a narrative-identification strategy in a quantile-regression framework. While macroprudential policy has near-zero effects on the center of the GDP-growth distribution, tighter policy brings benefits by reducing the variance of future growth, significantly boosting the left tail while simultaneously reducing the right. Assessing a range of channels through which these effects materialize, we find that macroprudential policy particularly operates through ‘credit-at-risk’: it reduces the right tail of future credit growth, dampening booms, in turn reducing the likelihood of extreme GDP-growth outturns. |
| Keywords: | growth-at-risk;macroprudential policy;narrative identification;quantile local projections |
| JEL: | E32 E58 G28 |
| Date: | 2026–07–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:140592 |
| By: | Somnath Chatterjee (Bank of England); David Humphry (Bank of England) |
| Abstract: | The paper presents two risk-based capital frameworks for systemically important European life insurers by drawing a distinction between solvency risk and systemic risk. Solvency risk arises when the value of a life insurer's assets falls below some threshold proportion of its liabilities. To assess solvency risk we implement the Merton-Vasicek portfolio credit risk model and determine capital adequacy of life insurers that correspond to a value-at-risk measure. We measure systemic risk as the expected capital shortfall of an insurer conditional on the overall European life insurance sector being in distress. Our results show that European life insurers have been growing in systemic risk exposure since 2007 and suggest that regulatory capital requirements should account for this. We also find evidence of interconnectedness between systemically important banks and insurance companies, as measured by the transmission of volatility shocks, which increased during periods of financial stress. |
| Keywords: | Solvency risk;systemic risk;insurers;banks;capital shortfall |
| JEL: | C61 C63 G01 G21 G28 |
| Date: | 2026–01–23 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023290 |
| By: | Tom Coupé (University of Canterbury) |
| Abstract: | Fears that automation destroys more jobs than it creates have resurfaced with artificial intelligence. Using five Eurobarometer waves (1989–2024) covering 12 European countries, I examine the long-run evolution of perceptions of technological unemployment. Contemporary pessimism is not historically unusual, it was substantially higher in 1989, and especially 1992, than in 2024. Social divides have also changed. Pronounced educational and occupational differences in 1989 had largely disappeared by 2024. An Oaxaca–Blinder decomposition shows that changing population composition explains little of the decline. These findings show that both the level and the socioeconomic and national patterning of concerns about technological unemployment have changed substantially over time. |
| Keywords: | Artificial Intelligence, Attitudes, Employment |
| JEL: | J24 O33 J23 |
| Date: | 2026–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:cbt:econwp:26/07 |
| By: | Loureiro Lopes, A.I.; Gonçalves, João (Erasmus University Rotterdam) |
| Abstract: | We analyzed the social media posts of top 20 European and US companies for their Diversity related content before (2024) and after (2025) the election of Donald Trump. We find that there was a decline in diversity related content in 2025 both in the US and in Europe, with the biggest drop being registered in the US. From all social media content, 6, 7% of posts by US based companies in 2024 included diversity related topics, while in 2025 only 1, 3% were about diversity. For European companies, the scenario is similar. In 2024, 12, 6% of social media posts by European companies touch upon diversity content which dropped to 7, 0% in the same period of 2025. In general, European companies posted more on diversity than American companies both in 2024 and in 2025. These results show us that while the drop in diversity related talk by corporations was more accentuated in the US, other geographies seem to also replicate the trend. |
| Date: | 2026–08–16 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:dnra7_v1 |
| By: | Bo Becker; Efraim Benmelech; Joao Monteiro |
| Abstract: | In 2008, the aggregate market value of U.S.-listed firms was roughly one-third higher than that of European-listed firms. By 2023, it was more than 300% higher, a difference of $34 trillion. The valuation gap is broad-based, rather than concentrated among a few superstar firms, and is driven by differences in firm values, not in the number of listed firms. Across sectors, the gap is larger in R&D-intensive industries and in industries with high returns to scale. European firms’ size is strongly correlated with home-country GDP, whereas U.S. firms’ size is unrelated to home-state GDP. Smaller European firms also face a particularly large cost-of-capital gap and do not appear able to substitute debt for limited access to equity financing, including venture capital. Taken together, these facts suggest that financial and product-market frictions constrain European firms’ ability to scale. |
| JEL: | G12 G15 G32 O36 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35577 |
| By: | Kyyrönen, Otto |
| Abstract: | This paper critically examines the debt sustainability analysis (DSA) calculations underpinning Finland's new national fiscal rule, the "debt brake." The rule requires the public debt-to-GDP ratio, currently around 90 percent, to decline by at least 0.75 percentage points annually until it reaches 40 percent. Its implementation will rely on DSA calculations by the Finnish Ministry of Finance (MoF), which estimates that the next government must undertake fiscal adjustment amounting to more than 10 percent of this year's central government appropriations. Drawing on the European Commission's DSA framework, the paper reconstructs a model analogous to the MoF's unpublished model and analyses how assumptions about fiscal multipliers, automatic stabilisers, and hysteresis effects shape projected debt dynamics. It then compares expenditure-based consolidation with revenueand investment-based alternatives under different multiplier assumptions. The results suggest that the MoF's calculations may underestimate the adverse effects of spending cuts on growth and debt dynamics. Alternative scenarios based on revenue measures and public investment can produce comparable or better debt outcomes while sustaining higher output. The paper shows how technical modelling choices, which often escape sufficient critical scrutiny, shape perceived fiscal policy space. |
| Keywords: | debt sustainability analysis, fiscal rules, debt brake, political economy, Finland |
| JEL: | E17 E62 H20 H50 H63 H68 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ipewps:343108 |
| By: | Michael Dueker; Inés Kishkill; Martín Sola |
| Abstract: | We study the extraction of a common European business cycle from quarterly GDP growth when countries need not provide equally informative signals about the contemporaneous common regime. We show that the usual signal-extraction argument for enlarging a cross section can fail when country-specific regime behavior is imperfectly aligned: additional observations may then weaken rather than strengthen common-state identification. Motivated by this result, we develop a Markov-switching Seemingly Unrelated Regressions (MS–SUR) model with an endogenous positive-definite crosssectional weighting structure. The model distinguishes the informational influence of each economy in identifying the common regime from the strength of its cross-sectional commonality. A separate Markov process governs the innovation covariance matrix, allowing changes in the volatility environment to be separated from the weighting mechanism. Empirically, alternative treatments of the cross section generate materially different common-cycle signals, with the largest differences arising during periods of pronounced cross-country heterogeneity. The endogenous specification assigns approximately 95 percent of the posterior informational weight to Germany and the Netherlands, while the estimated commonality loadings produce a substantially different cross-country ranking. These results show that common-regime inference depends not only on the amount of cross-sectional information available, but also on which observations are most informative about the latent state. |
| Keywords: | EuropeanBusiness Cycle, Markov switching, Endogenous weighting, Bayesian estimation. |
| JEL: | C11 C32 E32 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:udt:wpecon:2026_05 |
| By: | Federico D'Amario (Bank of England); Sebastian de-Ramon (Bank of England); William Francis (Bank of England) |
| Abstract: | Strong bank capitalisation provides long‑run financial‑stability benefits. However, transitioning to higher capital levels may involve short‑run costs. We analyse the effects of prudential capital changes on lending behaviour, macroeconomic outcomes, and banking competition using UK data within a structural VAR framework with sign and narrative restrictions. Narrative constraints draw on the UK regulator’s 2014–15 stress tests and the 2016 annual cyclical scenario. Impulse responses indicate that banks primarily adjust by reducing risk-weighted assets rather than raising new equity. Higher capital requirements entail negligible long-run costs, with modest short-run macroeconomic effects consistent with other VAR studies on bank capital. These impacts are driven by a contraction in lending and increase in spreads across sectors. We find that effects of altering prudential capital requirements are state dependent. Altering during recessions, as compared with expansions, amplifies short-run contractions, but these are more short-lived, with output recovering more quickly. Indicators of market power (Boone, HHI, Lerner) suggest that tighter capital requirements temporarily reduce banking competition. |
| Keywords: | Bayesian VAR models;narrative restrictions;financial stability;bank competition;state‑dependent local projections |
| JEL: | C11 C32 E32 G21 G28 |
| Date: | 2026–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023294 |