Central banks

Global or regional safe assets: evidence from bond substitution patterns

12/01/2025 European Central Bank Central banks

This paper provides novel empirical evidence on portfolio rebalancing in international bond markets through the prism of investors’ demand for bonds. Using a granular dataset of global government and corporate bond holdings by mutual funds domiciled in the world’s two largest currency areas, I estimate heterogeneous and time varying demand elasticities for bonds. Safe assets such as US Treasuries or German Bunds face especially inelastic demand from investment funds compared to riskier bonds. But spillovers from these safe assets to global bond markets are strikingly different.

Inflation narratives and expectations

12/01/2025 European Central Bank Central banks

I study how demand-supply narrative disagreement between general and specialized newspapers can explain households’ absolute gap in inflation expectations with experts. I measure inflation narratives via a Causality Extraction algorithm that can identify causal relationships between events in a text and, hence, extract the perceived triggers of inflation. Causal relations can explain why narratives affect people’s beliefs and cannot be captured by dictionary methods, topic models, and word embeddings.

Monetary transmission with frequent policy events

11/27/2025 European Central Bank Central banks

We empirically examine the role of both official monetary policy announcements and policymakers’ speeches in the transmission of monetary policy to financial markets and the real economy in the euro area. Using intraday data covering a broad cross-section of financial assets, we construct the Euro Area Extended Monetary Policy Event-Study Database (EA-EMPD). We refine the identification of monetary policy surprises by exploiting granular, quote-level data on individual participants’ bid and ask submissions.

Inflation risk and heterogeneous trading down

11/25/2025 European Central Bank Central banks

I examine how households adjust the quality of their purchases in response to adverse economic shocks. Using household scanner data from Germany, I document heterogeneous responses across income levels. Higher-income households tend to reduce the quality of the goods they purchase, whereas lower-income households, who typically consume lower-quality goods, show a limited propensity to trade down, likely due to a limited ability to do so. To assess the equilibrium effects of an aggregate shift in demand toward lower-quality varieties, I implement a shift-share research design.

Walking the talk? Green politicians and pollution patterns

11/20/2025 European Central Bank Central banks

Exploiting three decades of detailed regional data for Germany, we find that when the Green Party is successful at the polls, local hazardous emissions decline. The level of political representation matters, too. Green politicians’ gaining influence at county level is followed largely by a decline in air pollutants that have an immediate adverse health effect. In contrast, when the Green party joins the state government, only greenhouse gas emissions that affect the welfare of future generations via climate change decline.

The complex linkages between euro area insurers and sovereign bond markets

11/20/2025 European Central Bank Central banks

Euro area insurers manage several trillion euro in assets and take a long‑term investment perspective. To counteract the long period of low interest rates, they have shifted towards holding more alternative and less liquid assets. As a result, their balance sheets have become less liquid and more sensitive to market conditions overall. Meanwhile, their holdings of sovereign bonds show a significant home bias, which may have even increased with quantitative easing.

Labor supply response to windfall gains

11/18/2025 European Central Bank Central banks

Using a large survey of euro area consumers, we conduct an experiment in which respondents report how they would adjust their labor market participation, hours worked, and job search effort (if not employed) in response to randomly assigned windfall gain scenarios. Windfall gains reduce labor supply, but only when the gains are substantial. At the extensive margin, gains of €25,000 or less have no effects, while gains between €50,000 and €100,000 reduce the probability of working by 1.5 to 3.5 percentage points.

The fiscal sources of euro area inflation through the lens of the Bernanke-Blanchard model

11/17/2025 European Central Bank Central banks

We estimate the contribution of discretionary fiscal policy measures to euro area inflation in the post-pandemic era using an extension of Bernanke and Blanchard (2024b)’s semi-structural model. Since the pandemic, aggregate discretionary fiscal measures had a modest yet progressively increasing positive contribution to inflation that partly worked through an indirect effect on wage growth and inflation expectations. However, net indirect taxes helped to contain inflationary pressures, both during the pandemic and energy crises.

Supply chain decoupling in green products: a granular input-output analysis

11/13/2025 European Central Bank Central banks

This paper introduces a novel methodology to enhance the granularity of Inter-Country Input-Output (ICIO) tables. While our general methodology can be applied to any products of interest, we show that the well-documented distortions caused by sectoral aggregation in ICIO tables are particularly pronounced for products with a low substitutability, such as those essential to the green transition (e.g. electric batteries, rare earths). We therefore apply our framework to construct a disaggregated ICIO table that singles out 129 products essential to the energy transition.

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