Central bank liquidity lines have gained importance as a cross-currency liquidity management tool with the intention to prevent threats to financial stability. We provide a complete timeline of ECB liquidity line announcements and quantify their signaling effect. The premium to borrow euros in FX markets is estimated to decrease by 51 basis points upon announcement. Moreover, we test for spillbacks and find that bank stock prices increase by around 2.1 percent in euro-area countries highly exposed via banking linkages to currencies targeted by liquidity lines. The mechanism behind this novel result is illustrated in a stylized bank default model.
This paper challenges the assumption that the intensificaward pressures, respectively, on international food commodity prices that, in turn, affect consumer prices even in Europe. We show that the impact is weaker nowadays and, in some cases, may even change sign. Indeed, our results suggest that El Nino may not have contributed to the upward inflation pressures in the euro area during the most recent inflationary episode. Considering domestic agricultural policies is key for the results. We construct two databases: (i) a comprehensive granular database covering both euro-area consumer prices and European Union food commodity prices; (ii) a new database of EU prices from 1972 onward, which allows us to test the effect of these events on a larger sample. We assess the impact of these climatic events by means of local projections techniques. Our bottom-up approach, which factors in disaggregated effects on specific food components to assess the overall effect of El Nino , La Nina on aggregated prices, provides a more nuanced understanding of these phenomena. Furthermore, armed with our databases, we can replicate most of the existing evidence on international food commodity prices, thereby validating our approach and indirectly testing the robustness of our main results based on the euro area.
Understanding euro-area financial market dynamics requires looking beyond borders. We introduce a novel Bayesian structural VAR model designed to jointly estimate the main drivers of euro-area financial asset prices on a daily basis. The model explicitly accounts for transatlantic spillovers and the distinctive influence of the United States, particularly through its monetary policy and its role as a safe haven during periods of heightened risk aversion. The results show that euro-area financial markets are influenced by a complex interplay of domestic factors, U.S. influences, and global risk shocks, which can either amplify or mitigate financial dynamics at home. These significant spillovers can pose substantial challenges for monetary policy, particularly amidst economic and monetary policy divergence.
This study introduces a novel and simple method for estimating the real-time output gap using data from Israel's Business Tendency Survey. We develop an index of excess demand or supply, defined as the difference between reported supply and demand constraints. This index is incorporated into a state-space model alongside actual output to estimate the output gap. Our findings demonstrate that the derived output gap measure has a positive and statistically significant impact on both consumer price index and producer price inflation in Israel. This measure yields promising results, exhibiting explanatory power that compares favorably to several widely used alternative output gap estimation methods. Furthermore, our output gap measure demonstrates higher real-time reliability than the standard univariate method. The proposed approach complements existing methods, providing valuable insights for economic analysis and policymaking by leveraging real-time survey data and capturing businesses' perceptions of economic constraints.
Extended periods of ultra-low monetary policy rates in advanced economies have rekindled debates about the zombification of weak companies and its impact on resource allocation, economic growth, inflation, and financial stability. Using both firm-level and macroeconomic data, we find that recessions are a critical factor in the increase in the number of zombie firms and that extended periods of low interest rates are associated with a higher probability of zombification. Our findings imply a trade-off between conducting a countercyclical monetary policy and using expansionary tools for long periods, which may lead to a combination of low interest rates, low growth, and high financial vulnerability. We also find that strong banking supervision reduces the probability of zombification.
