European Central Bank

Integrating climate risk into the 2025 EU-wide stress test: the effects of climate risks for firms

11/19/2025 European Central Bank Central banks

As authorities across the euro area work towards including climate risks into regular stress-testing frameworks, this article offers a starting point for assessing bank resilience to climate risks that materialise under a short-term horizon. This is relevant since acute physical risks and abrupt policy changes can also materialise at short notice and affect the balance sheet of financial institutions.

A framework to assess the severity of adverse scenarios in EU-wide stress tests

11/19/2025 European Central Bank Central banks

The severity and the plausibility of stress test scenarios are crucial elements for interpreting the results and ensuring the credibility of stress-testing exercises. This article introduces a comprehensive framework for assessing scenario severity and plausibility in the context of the adverse scenarios used in the EU-wide stress tests. Two families of indicators are developed, characterised by a backward-looking and a forward-looking perspective.

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.

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.

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.

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.

Not all prices disinflate alike: disentangling the dynamics of sticky and flexible-price items

11/13/2025 European Central Bank Central banks

This box draws on micro price evidence on the frequency of price adjustments to disentangle the roles of sticky and flexible-price items in shaping recent disinflation dynamics in the euro area. Inflation of sticky core items has eased only gradually, while flexible core inflation has returned closer to its pre-pandemic average. Among subcategories, flexible goods drove the surge in non-energy industrial goods inflation, while the persistence of services inflation reflects contributions from both sticky and flexible-price items.

Exploring EU-UK trade and investment four years after Brexit

11/13/2025 European Central Bank Central banks

This paper looks at how Brexit has affected trade and foreign direct investment (FDI) between the United Kingdom and the EU. In 2020 the United Kingdom and the EU signed the Trade and Cooperation Agreement (TCA) , establishing the post-Brexit relationship and, in particular, a tariff-free area for goods produced in either of the two economies. However, non-tariff barriers to the trading of goods and services have emerged. Moreover, the United Kingdom’s departure from the EU has affected its attractiveness as an investment target.

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