European Central Bank

When less is more: behavioral effects of CBDC holding limits

10/15/2026 European Central Bank Central banks

Holding limits are a central design feature of proposed retail central bank digital currencies (CBDC). While such limits mechanically prevent individuals from exceeding a maximum balance, they may also generate behavioral responses whose directions are a priori unclear. We conducted an incentivized online experiment with participants from four euro-area countries, exogenously varying the presence and level of a holding limit to causally separate direct mechanical effects from behavioral effects.

Stop believing in haircuts - at least the way you think about them

10/15/2026 European Central Bank Central banks

We study how frictions impact haircut setting in repo markets. Using transaction-level supervisory data and exploiting the 2021 introduction of the binding leverage ratio requirement, we show that three frictions jointly shape haircuts in the bilateral dealer-to-client segment: dealer balance sheet constraints, collateral convenience yields, and client outside options. In collateral-driven repos, binding leverage constraints and broader client outside options both raise haircuts, while higher convenience yields push them down.

When less is more: behavioral effects of CBDC holding limits

10/15/2026 European Central Bank Central banks

Holding limits are a central design feature of proposed retail central bank digital currencies (CBDC). While such limits mechanically prevent individuals from exceeding a maximum balance, they may also generate behavioral responses whose directions are a priori unclear. We conducted an incentivized online experiment with participants from four euro-area countries, exogenously varying the presence and level of a holding limit to causally separate direct mechanical effects from behavioral effects.

Stop believing in haircuts - at least the way you think about them

10/15/2026 European Central Bank Central banks

We study how frictions impact haircut setting in repo markets. Using transaction-level supervisory data and exploiting the 2021 introduction of the binding leverage ratio requirement, we show that three frictions jointly shape haircuts in the bilateral dealer-to-client segment: dealer balance sheet constraints, collateral convenience yields, and client outside options. In collateral-driven repos, binding leverage constraints and broader client outside options both raise haircuts, while higher convenience yields push them down.

What analysts hear and why it matters for monetary policy

10/14/2026 European Central Bank Central banks

We introduce a novel measure of how European Central Bank (ECB) monetary policy is interpreted by analysts at major investment banks. We construct a “policy interpretation shock” based on the language used in analysts’ reports covering monetary policy decisions by the ECB’s Governing Council (GovC). The main identifying assumption is that changes in the way analysts report on policy communication by the GovC—that is, the change in the policy tone from the preview report to the recap report—reflect unexpected information revealed by the policy event.

What analysts hear and why it matters for monetary policy

10/14/2026 European Central Bank Central banks

We introduce a novel measure of how European Central Bank (ECB) monetary policy is interpreted by analysts at major investment banks. We construct a “policy interpretation shock” based on the language used in analysts’ reports covering monetary policy decisions by the ECB’s Governing Council (GovC). The main identifying assumption is that changes in the way analysts report on policy communication by the GovC—that is, the change in the policy tone from the preview report to the recap report—reflect unexpected information revealed by the policy event.

The heterogeneous bank lending channel of monetary policy

10/14/2026 European Central Bank Central banks

How does heterogeneity in banks’ interest-rate risk exposure shape monetary policy transmission? We develop a quantitative macroeconomic model of heterogeneous banks to answer this question. We establish an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter for transmission only when bank solvency concerns become relevant. Calibrating the model to the euro area, we show that idiosyncratic default risk pushes a substantial share of banks toward the solvency threshold, making heterogeneity quantitatively important.

The heterogeneous bank lending channel of monetary policy

10/14/2026 European Central Bank Central banks

How does heterogeneity in banks’ interest-rate risk exposure shape monetary policy transmission? We develop a quantitative macroeconomic model of heterogeneous banks to answer this question. We establish an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter for transmission only when bank solvency concerns become relevant. Calibrating the model to the euro area, we show that idiosyncratic default risk pushes a substantial share of banks toward the solvency threshold, making heterogeneity quantitatively important.

Fiscal integration as a Pareto improvement

10/12/2026 European Central Bank Central banks

Fiscal integration in a currency union is generally understood as a transfer from fiscally strong to fiscally weak countries. I show that this changes when common debt is paired with a non-defaultable common tax, even if national debt remains defaultable. The risky country gains from intertemporal trade: it receives a grant financed by a perpetual obligation it discounts more heavily than lenders do. The cost to the safe member is second-order and the tax removes it by insuring imperfectly correlated cycles rather than transferring resources in expectation.

Fiscal integration as a Pareto improvement

10/12/2026 European Central Bank Central banks

Fiscal integration in a currency union is generally understood as a transfer from fiscally strong to fiscally weak countries. I show that this changes when common debt is paired with a non-defaultable common tax, even if national debt remains defaultable. The risky country gains from intertemporal trade: it receives a grant financed by a perpetual obligation it discounts more heavily than lenders do. The cost to the safe member is second-order and the tax removes it by insuring imperfectly correlated cycles rather than transferring resources in expectation.

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