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ECB - European Central Bank
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Latest releases on the ECB website - Press releases, speeches and interviews, press conferences.
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Estimating the natural rate of interest in a macro-finance yield curve model
Using a novel macro-finance model we infer jointly the equilibrium real interest rate r*, trend inflation, interest rate expectations, and bond risk premia for the United States. In the model r* plays a dual macro-finance role: as the benchmark real interest rate that closes the output gap and as the time-varying long-run real interest rate that determines the level of the yield curve. Our estimated r* declines over the last decade, with estimation uncertainty being relatively contained. We show that both macro and financial information is important to infer r*. Accounting for the secular decline in interest rates renders term premia more stable than those based on stationary yield curve models. A previous version of this paper by the same authors entitled “Natural rate chimera and bond pricing reality” has been published as ECB Working Paper No 2612.
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The ESCB forecasting models: what are they and what are they good for?
This report provides a comprehensive overview of the models and tools used for macroeconomic projections within the European System of Central Banks (ESCB). These include semi-structural models, dynamic stochastic general equilibrium (DSGE) models, time series models and specialised satellite models tailored to particular questions or country-specific aspects. Each type of model has its own strengths and weaknesses and can help answer different questions. The models should therefore be seen as complementary rather than mutually exclusive. Semi-structural models are commonly used to produce baseline projection exercises, since they offer the flexibility to combine expert judgement with empirical data and have enough complexity and structure to provide a good representation of the economy. DSGE models, valued for their internal consistency and strong theoretical foundations, are another core forecasting tool used by some central banks, particularly to analyse counterfactuals. Time series models tend to be better suited to forecasting the short term, while scenario analysis and special events may require satellite models, extensions of existing models or even the development of new models tailored to the question at hand. The report also addresses the challenges to macroeconomic projections posed by data quality, including revisions and missing data, and describes the methods implemented to mitigate their effects. The report identifies “quick wins” to improve the projection process by enhancing the transparency and comparability of results through standardised reporting frameworks and better measurement of the judgement integrated in forecasts. The findings highlight the fundamental role of macroeconomic models in underpinning the ESCB’s projection exercises and ensuring that the Governing Council’s assessments and deliberations rest on coherent, granular and credible analysis of both demand-side and supply-side dynamics.
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Insurance companies in the Euro area: asset allocation and impact on financial markets
Euro area insurers manage several trillion euro in assets and take a long-term investment perspective. They hold more alternative and less liquid assets than in the past, partly resulting from the long period of low interest rates until 2022. As a result, their balance sheets have become less liquid and more sensitive to market conditions overall. Meanwhile their holdings of sovereign bonds show significant home bias, which may have even increased with quantitative easing policies. Sovereign bonds also serve as key liquidity source for insurers, who sell sovereign bonds to meet the liquidity needs in response to large claims after natural disasters. Thus, liquidity shocks can spill over from insurance to the sovereign debt markets, increasing market volatility. Capital markets union would likely help insurers diversify their bond portfolios and promote cross-country risk sharing.
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Nature at risk: Implications for the euro area economy and financial stability
Degraded ecosystems undermine productivity, disrupt supply chains and heighten vulnerability to shocks, creating risks for the real economy and the financial sector. Biodiversity loss and ecosystem degradation also pose a growing risk to price stability, with increasing evidence that ecosystem shocks contribute to inflationary pressures in the euro area. This paper moves from dependency mapping to a risk-based assessment of the euro area economy and banks, applying the nature value-at-risk (NVaR) framework, which links biophysical shocks to ecosystem services with sectoral-production functions1. Water-related risks, including flood protection, surface water and groundwater scarcity, and water quality, emerge as the most material for the euro area economy. Surface-water scarcity alone could expose up to 24% of euro area output to risk under a drought event with a 100-year return period. A complementary endogenous-risk analysis that was conducted, quantified the extent to which euro area firms and banks may contribute to the very ecosystem degradation on which their activities depend, creating feedback loops that could amplify financial risks over time. The results showed material feedback loops between ecosystem degradation and banks’ own portfolios, with water-related risks being the dominant transmission channel. Overall, this study takes a first step towards the identification of risk hotspots and provides a more robust assessment of nature-related risks than prior studies. It also discusses the remaining data gaps and methodological constraints, and outlines the next steps to be taken, as a priority, to address this.
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Global or regional safe assets: evidence from bond substitution patterns
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. Funds substitute US Treasuries with global bonds, including risky corporate and emerging market bonds, whereas German Bunds are primarily substitutable within a narrow set of euro area safe government bonds. Substitutability deteriorates in times of stress, impairing the transmission of monetary policy.
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Inflation narratives and expectations
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. I then classify inflation narratives into demand and supply narratives based on their focus on demand and supply triggers. I measure narrative disagreement between general and specialized newspapers from their attention difference on demand and supply narratives. The absolute expectation gap widens when narrative disagreement increases, especially for non-college-educated and older households. Unlike the narratives of specialized newspapers, the narratives of general newspapers incorrectly align with experts’ demand-supply views.
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Monetary transmission with frequent policy events
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. This novel dataset expands the set of identifiable policy events by an order of magnitude relative to databases based solely on scheduled rate-setting meetings. Our analysis yields three main findings. First, speeches by euro area policymakers exert statistically and economically significant effects on asset prices across maturities, with magnitudes comparable to those observed following official policy announcements. Second, the transmission of speech-induced short-rate changes to the real economy closely mirrors that of policy decisions and combining both types of surprises significantly enhances the precision of statistical inference. Finally, when speeches are included in the measurement of policy surprises, the share of real-economy variance attributable to monetary policy increases fivefold, although its absolute magnitude remains relatively modest.
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What safe haven after the April US tariff announcement? Implications for euro area financial stability
Trade turmoil in April 2025 saw a marked change in cross-asset behaviour compared with typical patterns. Notably, the US dollar depreciated strongly while US Treasury yields rose – the opposite of what usually happens in a risk-off environment. This prompted discussions as to whether the safe-haven properties of US dollar-denominated assets might be changing. This is particularly important for euro area financial stability since euro area investors hold US dollar-denominated securities in an amount equivalent to €6 trillion, which represents a significant share of their portfolios. As policy uncertainty remains high and alternative safe assets are scarce, investors’ risk management practices may be evolving. Immediate and decisive implementation of policies associated with the savings and investments union and the capital markets union would help foster an alternative market of safe assets for euro area and global investors.
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Financial Stability Review, November 2025
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Inflation risk and heterogeneous trading down
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. This approach leverages two key components: (i) pre-determined spending shares on middle-quality varieties across the product space for a wide range of sociodemographic groups prior to the great financial crisis, and (ii) variation in population growth across these groups during the crisis. I find that a 1% aggregate demand shift toward lower-quality varieties following a recession raises the relative price of low-quality varieties by about 0.45% on average.
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Systemic risks in linkages between banks and the non-bank financial sector
Linkages between euro area banks and entities in the non-bank financial intermediation (NBFI) sector may lead to the emergence of systemic risk in at least two fields. First, the banking sector receives short-term deposit, repo and debt securities liabilities from NBFI entities. Such liabilities may be prone to flight risk and difficult to substitute. Second, euro area banks provide credit to NBFI entities which follow leveraged investment strategies. Hedge funds, mainly based outside of the euro area, together with non-bank lenders and real estate funds are the main groups of such leveraged NBFI entities. These interconnections are particularly important for euro area global systemically important banks (G-SIBs), which play a central role in financial intermediation and transform short-term NBFI liabilities into credit granted to other NBFI entities. While the scale of these linkages is generally contained, they could make euro area banks vulnerable to asset price shocks which, by triggering NBFI funding outflows and counterparty credit losses on exposures to NBFI entities, could lead to deleveraging by banks, reduced provision of leverage by banks to NBFI entities and asset fire sales. G-SIBs’ loss-absorbing capacity is thus essential to ensure the smooth provision of financial services in times of stress.
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Walking the talk? Green politicians and pollution patterns
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 primary mechanism to achieve lower emissions appears to be a reduction in output, rather than more efficient energy use.
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A framework to assess the severity of adverse scenarios in EU-wide stress tests
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. Backward-looking indicators compare the scenario with historical regularities, using as key metrics deviations from baseline projections and comparisons with the extreme values of key variables. Forward-looking indicators are drawn from macroeconomic modelling and compare the scenario with projected distributions about future economic developments incorporating the co-movement of variables within a unified analytical framework. These forward-looking metrics enable the severity assessment to account for the prevailing financial conditions and the level of systemic risk in the economy. The analysis presented suggests that the adverse scenarios used in the EU-wide stress tests have become more severe over time, peaking in the 2023 exercise and stabilising in 2025. Taking into account systemic risk, the 2025 scenario appears to be slightly more severe than the 2023 scenario. Overall, the article supports the idea of fostering a more effective definition, monitoring and communication of scenario severity, thereby strengthening the policy relevance and transparency of stress-testing exercises.
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Integrating climate risk into the 2025 EU-wide stress test: the effects of climate risks for firms
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. The analysis uses an adverse macroeconomic backdrop that combines the EBA’s adverse scenario with the Network for Greening the Financial System’s Nationally Determined Contributions (NGFS NDCs) scenarios. It extends the EU-wide 2025 stress test results by incorporating both transition and acute physical climate risks into the credit risk assessment for non-financial corporations by means of top-down models. Transition risks driven by green investments to reduce emissions amplify credit losses and reduce banks’ CET1 capital, particularly in high energy-intensive sectors. Similarly, acute physical risks such as extreme flood events reduce CET1 capital through direct damage, local disruptions and macroeconomic spillovers. While the magnitude of impacts varies across banks, the analysis shows that both types of climate risk can have a moderate but consequential effect on capital ratios. Notably, the banks most exposed to climate-related losses may differ from those identified as the most vulnerable in the broader EU-wide assessment. These findings underscore the importance of incorporating both types of climate risk into regular financial stability assessments.
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Integrating contagion risk into the 2025 EU-wide stress test: a system-wide analysis with amplification effects between banks and non-banks
This article expands the 2025 EU-wide stress test by incorporating a system-wide perspective to capture contagion risks across investment funds and insurance corporations alongside the banking sector. It examines potential short-term contagion effects under the EBA’s adverse scenario as financial institutions adjust their balance sheets in response to stress. These adjustments would result in additional average CET1 ratio depletion of 29 basis points, increasing first-round effects by 12%. Among institutional sectors, investment funds, in particular equity funds, face the greatest losses under the EBA’s adverse scenario, while banks with less sophisticated hedging capabilities are also significantly affected. The findings emphasise the importance of a holistic, system-wide perspective to capture spillover effects both within and across financial sectors. Furthermore, the results show how solvency-driven liquidity shocks can trigger market reactions, which in turn propagate through the financial system and amplify the losses stemming from initial exogenous shocks. The article also includes two boxes which expand the way in which the EBA methodology accounts for counterparty credit risk. It does so by looking at exposures to additional institutional sectors such as central clearing counterparties (Box 1), and the losses that materialise when the failures of counterparties become more interdependent (Box 2).
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