Central banks

A theory of bank liquidity requirements

07/09/2026 European Central Bank Central banks

We develop a general equilibrium theory of financial intermediation and its implications for liquidity regulation. The model is built around an agency problem arising from leveraged intermediation: banks finance loan origination with deposits and face moral hazard in risk management, while holding cash mitigates these incentives at the cost of foregone investment returns. Liquidity demand therefore emerges endogenously from incentive considerations rather than from exposure to exogenous funding shocks.

IFDP Paper: Multi-Plant Firms, Variable Capacity Utilization, and the Aggregate Hours Elasticity

07/08/2026 Federal Reserve Central banks

Domenico Ferraro, Giuseppe Fiori, and Damian PierriWe develop a business cycle model with perfectly competitive product and labor markets in which production requires a minimum labor input, generating endogenous capacity utilization. The aggregate production function is kinked, featuring constant returns to scale below capacity—typically in recessions—and decreasing returns at capacity in expansions.

How do economies with open labour markets work? The role of temporary migration in the European Union

07/08/2026 European Central Bank Central banks

This paper studies how temporary migration affects macroeconomic fluctuations and the conduct of stabilisation policies using a two-country DSGE model with search-and-matching frictions and endogenous cross-border labour mobility. The analysis shows that migration responds endogenously to both labour market conditions and exchange rate movements, making it an important channel of cross-country adjustment. Labour mobility alters the transmission of shocks in three main ways.

FEDS Paper: Capturing Heterogeneity: Machine Learning Approaches to Implied Volatility Forecasting

07/07/2026 Federal Reserve Central banks

Hyung Joo Kim and Dong Hwan OhDespite documented heterogeneity in volatility dynamics across the option surface, standard implied volatility forecasting models apply homogeneous parameters throughout. We introduce a machine-learning framework that uses regression trees to partition the surface along both moneyness and maturity dimensions, identifying data-driven regions where distinct forecasting models perform best.

Barriers to a European Banking Union

07/07/2026 European Central Bank Central banks

We quantify barriers to cross-border bank lending to firms within the euro area and their consequences for credit allocation and output. Using loan-level data from the European credit registry (AnaCredit) and group structures (RIAD),we estimate barriers to relationship formation, loan pricing, and banks’ branching decisions at the country-pair level. We find that barriers to cross-border relationships between banks and firms and cross-border bank entry are large while wedges on interest rates and loan quantities are comparatively small.

Measuring geoeconomic tension: a large-language-model approach for the euro area

07/07/2026 European Central Bank Central banks

We construct an index of geopolitical and geoeconomic tension for the euro area using Large-Language Models (LLMs) that prompt a large dataset of European, local-language newspaper articles. The resulting LLM Geoeconomic and Geopolitical Tension (LGPT) index and its subindices seek to provide an accurate narrative of tensions and their sources over the past quarter century. The multilingual LLM approach allows for a separation between geopolitical and geoeconomic tensions and for granularity in the identification of the source of such tensions including trade, energy and finance.

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