Research

This paper investigates how the so-called China shock 2.0 affects the EU economy through distinct channels operating through trade in intermediate inputs and final goods. The structure of EU-China trade has shown a marked shift in Chinese import penetration toward medium- and high-tech goods, concentrated in intermediate products rather than final goods. Using country-sector panel data and a shift-share design, we find that higher exposure to Chinese intermediate goods imports is associated with stronger industrial production in Europe — consistent with an input cost-reducing channel — while exposure to Chinese final goods imports is associated with weaker production, reflecting product-market competition. We then explore the short-run aggregate implications in a multi-country multi-sector DSGE framework with global production linkages. Sectoral productivity shocks in China induce a moderately positive impact on EU GDP, driven by cheaper intermediate inputs and positive income effects due to declining relative prices of imported goods. However, aggregate gains diminish substantially when Chinese and EU products are more substitutable, and the most exposed sectors can experience production declines. 

Coverage: ECB Economic Bulletin (Issue 3, Box 2 - May 2026); Keynote speech by ECB Executive Board Member P. R. Lane at the Asian Monetary Policy Forum (May 2026).

What are the macroeconomic impacts of tariffs on final goods versus intermediate inputs? We set up a two-region, multi-sector model with global production networks, sticky prices and wages, and trade in consumption, investment, and intermediate goods. We show, analytically and quantitatively, that import tariffs on final goods have a smaller negative impact on GDP compared to tariffs on intermediate inputs, as final goods can be more readily substituted domestically. By contrast, tariffs on intermediate inputs lead to larger GDP losses, given the limited substitutability of foreign inputs. Moreover, inflation persistence is lower under tariffs on final goods, whereas tariffs on intermediate goods give rise to persistent cost pressures through production linkages. The results imply that revenue-equivalent import tariffs targeting only final goods can cushion the adverse effects of trade fragmentation.

Coverage: VoxEU.org (May 2025); Hutchins Roundup (Aug. 2025); Speech by ECB Executive Board Member I. Schnabel at the EIB Chief Economists’ meeting (Sep. 2025); Keynote speech by ECB President C. Lagarde at the Bank of Finland’s 4th International Monetary Policy Conference (Sep. 2025).

Presentations (incl. scheduled and by co-authors): Sailing the Macro Workshop (Sep. 2025), MMF Annual Conference (Sep. 2025), 3CMFI Conference (Mar. 2026), Annual Workshop of ESCB Research Cluster 1 (Mar. 2026), CAM-Risk Conference (Apr. 2026), EAYE Annual Meeting (May 2026), ICMAIF Conference (May 2026).

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This paper studies, analytically and quantitatively, how business cycles are amplified by endogenously countercyclical job destruction via aggregate demand. In the presence of imperfect job-loss insurance, endogenous job destruction strengthens precautionary savings, further dampening aggregate demand compared to the case in which unemployment risk stems only from reduced job creation. When coupled with plausible degrees of real wage rigidity, the endogenous job destruction risk channel also causes adverse supply shocks to trigger demand-deficient recessions, pushing the economy below potential. The resulting deflationary pressure implies that monetary policy is accommodative rather than restrictive. Quantitatively, demand-like effects of adverse productivity shocks plausibly arise only when endogenous separations are in place, rather than from reduced job creation alone.