Central banks

This paper demonstrates that empirically grounding the discount factor significantly influences the determination of the carbon price. Using two complementary nonlinear statistical approaches, we assess which utility formulations and corresponding stochastic discount factors best align with U.S. data. We provide evidence that habit formation is essential for capturing the time variation in the stochastic discount factor necessary to match the data. This increased time variation raises the carbon price by 32% and makes it five times more procyclical compared to standard models.

This edition of the ECB’s Financial Stability Review (FSR) marks the 20th anniversary of its inaugural publication. The FSR was originally launched to help in preventing financial crises, and this special feature draws lessons from two decades of experience in identifying, analysing and communicating about systemic risks via this publication. Although risk analysis and risk communication are distinct processes, the special feature emphasises that they are inextricably intertwined in a seamless cycle where each informs and enhances the other.

Productivity growth in the euro area has been declining for several decades. In light of the importance of bank lending as a source of external funding for euro area firms, this special feature investigates the link between firm productivity and bank credit allocation. Bank credit in the euro area has been skewed towards sectors that have contributed only marginally to aggregate productivity growth, such as real estate. Additionally, bank loans tilted towards less-productive firms within the same sectors during the COVID-19 pandemic, supported by state credit guarantees.

Letter from the Chancellor to the Governor