Research & Policy work 

Publications

Abstract: This paper quantifies the economic influence that shocks to EMU cohesion, which in turn reflect the incomplete nature of the monetary union, have on the rest of the world. Disentangling euro area stress shocks and global risk aversion shocks based on a combination of sign, magnitude and narrative restrictions in a daily Structural Vector Autoregression (VAR) model with financial variables. We find that the effects of euro area stress shocks are significant not only for the euro area but also for the rest of the world. Notably, an increase in euro area stress entails a slowdown of economic activity in the rest of the world, as well as a fall in imports/exports of both the euro area and the rest of the world. A decrease in euro area stress has somewhat more widespread beneficial effects on both economic performance and global trade activity. 

Working paper version(s): ECB WP No 2459, Banque de France WP No. 795

Media coverage: VoxEU

Abstract: In this paper we explore the cross-country implications of climate-related mitigation policies. Specifically, we set up a two-country, two-sector (brown vs green) DSGE model with negative production externalities stemming from carbon-dioxide emissions. We estimate the model using US and euro area data and we characterize welfare-enhancing equilibria under alternative containment policies. Three main policy implications emerge: i) fiscal policy should focus on reducing emissions by levying taxes on polluting production activities; ii) monetary policy should look through environmental objectives while standing ready to support the economy when the costs of the environmental transition materialize; iii) international cooperation is crucial to obtain a Pareto improvement under the proposed policies. We finally find that the objective of reducing emissions by 50%, which is compatible with the Paris agreement's goal of limiting global warming to below 2 degrees Celsius with respect to pre-industrial levels, would not be attainable in absence of international cooperation even with the support of monetary policy. [Replication code]

Working paper version(s): ECB WP No.  2568, Banque de France WP No. 815

Media coverage: SUERF policy brief

Abstract: This paper proposes an approach to estimate the impact of adverse climatic events on the profitability of small European banks (LSIs). By focusing on a category of such risks, namely river flooding phenomena, we construct a unique database matching the information on location, frequency and severity of floods with the location of those institutions that by definition conduct most of their business in the areas where they are headquartered (territorial LSIs). We then compare the performance of territorial LSIs across regions with low and high risk of floods by means of dynamic panel regressions. Specifically, we focus on the so-called “core lending channel”, whereby lending to the real economy (households and non financial corporations) is a catalyst for physical risks at territorial LSIs located in areas at higher flooding risks. Our estimates show that an adverse event leading to a drop in loans to households and non-financial corporations by one percentage point of total assets would entail a decrease in the Return of Assets (ROA) at territorial LSIs in riskier areas by 0.011 percentage points, which correspond to around 3.1% of the average ROA at these banks. In addition, via a counterfactual experiment we show that, if all territorial LSIs were located in areas subjected to more frequent severe floods, one bank out of two would display an average ROA between 0.0001 and 0.52 percentage points lower than what observed in reality. 

Working paper version(s): ECB WP No. 2517

Abstract: We use machine learning techniques to quantify trade tensions between US and China. Our measure matches well-known events in the US-China trade dispute and is exogenous to the developments on global financial markets. Local projections show that rising trade tensions leave US markets largely unaffected, except for firms that are more exposed to China, while negatively impacting stock market indices and exchange rates in China and EMEs. We complement these findings with additional evidence suggesting that the US-China trade tensions have been interpreted as a negative demand shock for the Chinese economy rather than as a global risk shock.

Working paper version(s): ECB WP No 2490,  Banque de France WP No. 802

Media coverage: French Finance Ministry

Working papers

Abstract: We develop a two-country DSGE model with financial frictions to study the transition from a steady-state without CBDC to one in which the home country issues a CBDC. The CBDC provides households with a liquid, convenient and storage-costfree means of payments which reduces the market power of banks on deposits. In the steady-state CBDC unambiguously improves welfare without disintermediating the banking sector. But macroeconomic volatility in the transition period to the new steady-state increases for plausible values of the latter. Demand for CBDC and money overshoot, thereby crowding out bank deposits and leading to initial declines in investment, consumption and output. We use non-linear solution methods with occasionally binding constraints to explore how alternative policies reduce volatility in the transition, contrasting the effects of restrictions on non-residents, binding caps, tiered remuneration and central bank asset purchases. Binding caps reduce disintermediation and output losses in the transition most effectively, with an optimal level of around 40% of steady-state CBDC demand. 

Media coverage: VoxEU

Abstract:  This paper investigates the effects of monetary policy in the euro area. We make three main contributions to the literature. First, we use the information from movements in the entire yield curve around monetary policy events to shed light on the efficacy of monetary policy. Second, we construct a novel and easy-to-update database of surprises based on intra-day quotes of Euro Area OIS forward rates and sovereign yields of France, Germany, Italy and Spain. Third, we show that the way conventional and unconventional monetary policy announcements shape expectations inherent in the term structure influences the response of key macroeconomic variables.

Abstract: This paper aims at assessing the macroeconomic impact of unconventional monetary policies (UMPs) that the ECB has put in place in the euro area after the 2007 financial crisis. With this purpose, we first document how the relative importance of the main transmission channels of such measures has changed over time, with the portfolio rebalancing being generally more impactful than the signaling channel after the “Whatever it takes” speech in July 2012. However, we also provide evidence of a great degree of heterogeneity across core and peripheral economies, as well as over time. We then adopt a time-varying SVAR with stochastic volatility to account for such heterogeneity, by identifying UMP shocks via “dynamic” sign restrictions. By means of counterfactual experiments, we provide evidence of how a different stance on the part of the ECB would have led to a significantly different economic performance of euro area economies. For instance, if the ECB had not put in place the measures adopted between 2014 and 2017, annual output growth would have been, on average, 0.67 percentage points lower in peripheral countries. 

Media coverage: SUERF policy brief

Abstract: Capital flow volatility is a concern for macroeconomic and financial stability. Nonetheless, literature is scarce in this topic. Our paper sheds light on this issue in two dimensions. First, using quarterly data for 61 countries over the period 1970Q1-2016Q4, we construct three measures of volatility, for total capital flows and key instruments. Second, we perform panel regressions to understand the determinants of volatility. The measures show that the volatility of all instruments is prone to bouts, rising sharply during global shocks like the taper tantrum episode. Capital flow volatility thus remains a challenge for policy makers. The regression results suggest that push factors can be more important than pull factors in explaining volatility, illustrating that the characteristics of volatility can be different from those of the flows levels.

Media coverage: Central Banking

Abstract: This paper presents DSGE Nash, a toolkit to solve for pure strategy Nash equilibria of global games in macro models. Although primarily designed to solve for Nash equilibria in DSGE models, the toolkit encompasses a broad range of options including solutions up to the third order, multiple players/strategies, the use of user-defined objective functions and the possibility of matching empirical moments and IRFs. When only one player is selected, the problem is re-framed as a standard optimal policy problem. We apply the algorithm to an open-economy model where a commodity importing country and a monopolistic commodity producer compete on the commodities market with limits to entrance. If the commodity price becomes relevant in production, the central bank in the commodity importing economy deviates from the first best policy to act strategically. In particular, the monetary authority tolerates relatively higher commodity price volatility to ease barriers to entry in commodity production and to limit the market power of the dominant exporter. [CODE HERE]

Media coverage: SUERF policy brief

Abstract:  This paper investigates the climate impact of central bank refinancing operations, with a focus the ECB’s TLTRO III program. Notably, we construct a novel database that combines i) confidential data on loans granted by EU banks to non-financial corporations; ii) confidential data on TLTRO III participation and iii) data on sectoral emissions. We find that the emissions content of bank loans granted over the TLTRO III reference period amount to 8% of overall Euro Area 2019 emissions and that more than 80% of total cumulated loans issued in the reference period was directed towards polluting companies. We then investigate the effectiveness of a green credit easing  scheme via a general equilibrium model. Our findings are twofold: first, the central bank policy can increase the costs for lending to polluting companies, thus re-directing loans to less-polluting firms; second, the financial stability implications of such a policy should be carefully considered. Finally, we address legal and operational challenges to such a policy by outlining three alternative ways of implementing a “green” TLTRO programme.

Media coverage: SUERF policy brief

Research in progress

Policy work