Financial institutions

The geography of capital allocation in the euro area

12/18/2024 European Central Bank Central banks

We assess Euro Area financial integration correcting for the role of “onshore offshore financial centers” (OOFCs) within the Euro Area. The OOFCs of Luxembourg, Ireland, and the Netherlands serve dual roles as both hubs of investment fund intermediation and centers of securities issuance by foreign firms. We provide new estimates of Euro Area countries’ bilateral portfolio investments which look through both roles, attributing the wealth held via investment funds to the underlying holders and linking securities issuance to the ultimate parent firms.

Trust in central banks

12/17/2024 European Central Bank Central banks

Trust in the central bank is an essential ingredient for a successful conduct of monetary policy. However, for many central banks trust has recently declined, for instance in the wake of the post-pandemic inflation surge, due to large errors in central banks’ inflation forecasts, or given problems when exiting from forward guidance. The rapid, substantial and persistent erosion of trust makes it clear that trust needs to be earned continuously. This paper reviews why trust is important, what determines it and how central banks can enhance it.

Why do we need to strengthen climate adaptations? Scenarios and financial lines of defence

12/16/2024 European Central Bank Central banks

Adaptation needs are vast, rising fast and difficult to determine in their entirety, especially with uncertain adverse scenarios due to climate inertia and implementation lags. Adaptation is hindered by a lack of a unified understanding of what it necessitates; the challenge in pointing out its costs, benefits, and residual risks; insufficiently prescriptive policy and legal frameworks; and the growing financing gap.

The “doom loop” and default incentives

12/16/2024 European Central Bank Central banks

The “doom loop” or “sovereign-bank nexus” has been a key factor in the European debt crisis, driven by feedback between fiscal sustainability risks and financial stability. This Research Bulletin revisits the doom loop, examining strategic default incentives and the unintended effects of policy interventions. While limiting banks’ exposure to sovereign debt can break the doom loop, it may increase default risks by weakening governments’ repayment incentives.

Nowcasting Made Easier: a toolbox for economists

12/13/2024 European Central Bank Central banks

We provide a versatile nowcasting toolbox that supports three model classes (dynamic factor models, large Bayesian VAR, bridge equations) and offers methods to manage data selection and adjust for Covid-19 observations. The toolbox aims at simplifying two key tasks: creating new nowcasting models and improving the policy analysis. For model creation, the toolbox automatizes testing input variables, assessing model accuracy, and checking robustness to the Covid period.

IFDP Paper: Corporate Debt Maturity Matters for Monetary Policy

12/06/2024 Federal Reserve Central banks

Joachim Jungherr, Matthias Meier, Timo Reinelt, and Immo SchottWe provide novel empirical evidence that firms’ investment is more responsive to monetary policy when a higher fraction of their debt matures. In a heterogeneous firm New Keynesian model with financial frictions and endogenous debt maturity, two channels explain this finding: (1.) Firms with more maturing debt have larger roll-over needs and are therefore more exposed to fluctuations in the real interest rate (roll-over risk).

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