European Central Bank

Sustainability labels vs. reality: how climate-friendly are green and ESG funds?

09/24/2025 European Central Bank Central banks

This paper assesses the environmental performance of sustainability-related investment funds compared to conventional ones across three dimensions: financed activities, portfolio carbon footprint, and investment in firms with ambitious science-based targets. We identify ESG funds using Morningstar (MS) strategies, the Sustainable Finance Disclosure Regulation’s Article 8/9 classification, and funds’ self-naming. We find that the greenest funds invest more in low-carbon sectors, but their carbon footprints are comparable to conventional funds.

Macroeconomic regime change and the size of supply chain disruption and energy supply shocks

09/24/2025 European Central Bank Central banks

The COVID-19 pandemic and Russia’s invasion of Ukraine have complicated macroeconomic forecasting and policymaking due to unprecedented disruptions in supply chains and energy markets, suggesting a new macroeconomic regime. However, we are unable to reject the null hypothesis of no structural break in March 2020. We then examine whether these shocks have increased post-COVID-19. Their sizes were initially elevated, but then have been gradually returning to pre-pandemic levels.

The ECB-Multi Country Model. A semi-structural model for forecasting and policy analysis for the largest euro area countries

09/23/2025 European Central Bank Central banks

This paper introduces the European Central Bank’s Multi Country model (ECB-MC), a coherent macroeconomic framework designed to support economic forecasting and policy analysis within the Eurosystem. The ECB-MC captures the economic dynamics of the five major economies in the euro area – Germany, France, Italy, Spain, and the Netherlands – which account for more than 80 percent of the euro area total GDP.

Mortgage loan rates and the defaults of variable rate mortgages

09/16/2025 European Central Bank Central banks

Using a granular database of variable rate euro area loans and analysing their defaults between 2014 and 2019, we show that the effect of interest rate changes on mortgage defaults is highly non-linear. First, we find that the risk associated with higher contemporaneous interest rates is concentrated among borrowers who got the loan at ultra-low interest rates, their default probability being 2.6 times higher than our sample average.

Central bank money as a catalyst for fungibility: the case of stablecoins

09/16/2025 European Central Bank Central banks

To ensure that means of payments are readily interchangeable at face value – i.e. fungible – for retail payments, three elements are required: (1) settlement finality; (2) interoperability; and (3) seamless convertibility of the means of payment into the “ultimate” or quasi-ultimate means of payment.

The signaling effects of fiscal announcements

09/15/2025 European Central Bank Central banks

Announcing a large fiscal stimulus may signal the government’s pessimism about the severity of a recession to the private sector, impairing the stabilizing effects of the policy. Using a theoretical model, we show that these signaling effects occur when the stimulus exceeds expectations and are more noticeable during periods of high economic uncertainty. Analysis of a new dataset of daily stock prices and fiscal news in Japan supports these predictions.

The heterogeneous impact of labor market shifts on household mortgage-taking

09/15/2025 European Central Bank Central banks

This paper examines how structural change in labor markets affects household credit outcomes. Using a Shift-Share instrumental variable approach, we find that occupational shifts negatively influence mortgage holding for households facing fa-vorable job market conditions, such as stable employment and income growth. Our results, robust to alternative specifications, suggest that when both individual and economy-wide career prospects are favorable, the opportunity costs of settling down grow accordingly.

The causal effect of inflation on financial stability, evidence from history

09/12/2025 European Central Bank Central banks

In contrast to the conventional Fisherian view that inflation reduces real debt positions, we show that significant increases in inflation are strongly associated with financial crises. In the spirit of Jordà et al. (2020), countries with free and fixed ex-change rates can be compared to difference out the confounding reaction of monetary policy. Across a dataset of 18 advanced economies over 151 years, we show that the impact of inflation extends beyond its indirect effect via monetary policy.

Nonlinearities and heterogeneity in firms response to aggregate fluctuations: what can we learn from machine learning?

09/03/2025 European Central Bank Central banks

Firms respond heterogeneously to aggregate fluctuations, yet standard linear models impose restrictive assumptions on firm sensitivities. Applying the Generalized Random Forest to U.S. firm-level data, we document strong nonlinearities in how firm characteristics shape responses to macroeconomic shocks. We show that nonlinearities significantly lower aggregate esponses, leading linear models to overestimate the economy’s sensitivity to shocks by up to 1.7 percentage points.

Public debt, iMPCs & fiscal policy transmission

09/03/2025 European Central Bank Central banks

This paper investigates the relationship between public debt and the effectiveness of fiscal policy, presenting evidence of an inverse relationship between government debt and fiscal multipliers. To explain the results, I develop and calibrate a HANK model tailored to the U.S. economy. The model reveals that higher public debt diminishes fiscal multipliers by making households less constrained. Theoretically, I show intertemporal marginal propensities to consume (iMPCs) are sufficient statistics of public debt, influencing fiscal multipliers.

European Central Bank

Pages