2025 Working papers
Oļegs Tkačevs, Karsten Staehr
This paper examines the effects of macroeconomic and budget balance shocks on public debt trajectories in the euro area. Country-specific SVAR models are used to identify various shocks, which are subsequently incorporated into local projection models that use panel data to estimate the impulse responses. The analysis indicates that a positive GDP shock leads to a persistent decline in the debt-to-GDP ratio, while a positive GDP deflator shock reduces the debt ratio only temporarily.
A positive interest rate shock results in a substantial and lasting increase in the debt ratio. A positive primary balance shock, reflecting discretionary austerity, lowers the debt ratio considerably, albeit with a lag of around one year. We find evidence of state- dependent and non-linear effects. Fiscal austerity is more effective in reducing debt after periods of economic expansion than after recessions, and more effective when the initial public debt is low than when it is high.
Moreover, a positive GDP shock reduces the debt stock to a larger extent when the debt stock is large than when it is low. Finally, the response of debt to a pos- itive budget balance shock is more persistent and statistically significant when the shock is large.
Keywords: public debt; fiscal policy; macroeconomic shocks; euro area
JEL Codes: H6, H63, E62
Esteban García-Miralles, Maximilian Freier, Sara Riscado, Chrysa Leventi, Alberto Mazzon, Glenn Abela, Laura Boyd, Baiba Brusbārde, Marion Cochard, David Cornille, Emanuele DiCarlo, Ian Debattista, Mar Delgado-Téllez, Mathias Dolls, Ludmila Fadejeva, Maria Flevotomou, Florian Henne, Alena Harrer-Bachleitner, Viktor Jászberényi-Király, Max Lay, Laura Lehtonen, Mauro Mastrogiacomo, Tara McIndoe-Calder, Mathias Moser, Martin Nevicky, Andreas Peichl, Myroslav Pidkuyko, Mojca Roter, Frédérique Savignac, Andreja Strojan Kastelec, Vaidotas Tuzikas, Nikos Ventouris, Lara Wemans
This paper presents a comprehensive characterization of “fiscal drag”—the increase in tax revenue that occurs when nominal tax bases grow but nominal parameters of progressive tax legislation are not updated accordingly—across 21 European countries using a microsimulation approach.
First, we estimate tax-to-base elasticities, show- ing that the progressivity built in each country’s personal income tax system induces elasticities around 1.7–2 for many countries, indicating a potential for large fiscal drag effects. We unpack these elasticities to show stark heterogeneity in their underlying mechanisms (tax brackets or tax deductions and credits), across income sources (labor, capital, self-employment, public benefits), and across the individual income distribu- tion.
Second, we extend the analysis beyond these elasticities to study fiscal drag in practice between 2019 and 2023, incorporating observed income growth and legislative changes. We quantify the actual impact of fiscal drag and the extent to which govern- ment policies have offset it, either through indexation or other reforms. Our results provide new insights into the fiscal and distributional effects of fiscal drag in Europe, as well as useful statistics for modeling public finances.
Keywords: Personal income tax, inflation, indexation, bracket creep
JEL Classification: D31, H24, E62
Konrad Kuhmann
Bank lending is a key factor in the transmission of monetary policy to the real economy. Using granular loan data on the euro area, I analyze how bank specialization interacts with the effects of monetary policy on credit. I first document that bank lending in the euro area is characterized by a substantial degree of specialization. That is, banks tend to be over-exposed to borrowers in certain industries and of certain size. I also find that higher specialization is generally associated with more favorable lending conditions. Most importantly, banks partly insulate their preferred borrowers from the consequences of monetary policy. In particular, they adjust interest rates and lending relatively less strongly for borrowers from groups in which they specialize. My findings suggest that bank specialization is relevant for the aggregate and distributional consequences of monetary policy.
Keywords: Bank specialization, Bank lending, Monetary policy, AnaCredit
JEL Classification: E51, E52, G21
Patrick Grüning
During the recent monetary policy tightening cycle, the pass-through of monetary policy to interest rates offered by commercial banks and the size of bank profits have attracted substantial attention. In this study, I explore the economic effects of reducing the adjustment speed of monetary policy changes to deposit interest rates, using a suitable New-Keynesian dynamic stochastic general equilibrium model. A lower deposit interest rate adjustment speed increases macroeconomic volatility but decreases the volatility of the credit spread (except in the case of a very low ad- justment speed). Bank net interest income and aggregate consumption typically increase relative to a model where the deposit interest rate perfectly tracks the monetary policy rate, while aggregate output and investment dynamics deteriorate. Introducing a tax on the interest income earned by setting deposit interest rates below the monetary policy rate leads to amplified short- and medium-run macroe- conomic costs. However, the tax improves long-run economic dynamics.
Keywords: Monetary policy, Financial intermediaries, Deposit interest rates, New- Keynesian DSGE model, Excess bank interest income tax
JEL codes: E31, E32, E44, E52, H25
Kārlis Vilerts, Sofia Anyfantaki, Konstantīns Beņkovskis, Sebastian Bredl, Massimo Giovannini, Florian Matthias Horky, Vanessa Kunzmann, Tibor Lalinský, Athanasios Lampousis, Elizaveta Lukmanova, Filippos Petroulakis, and Klāvs Zutis.
Does the maturity of the relevant risk-free rate influence the strength of monetary policy pass- through to interest rates on new loans? To address this question, we present novel empirical evidence on lending practices across all euro area countries, using AnaCredit data covering nearly seven million new loans issued to non-financial corporations in 2022–2023. We document sub- stantial variation in (a) the prevalence of fixed- vs floating-rate loans, (b) rate fixation periods, and (c) reference rates. This variation results in lending rates being exposed to different seg- ments of the risk-free rate yield curve which, in turn, influence their sensitivity to monetary policy changes. We show that loans linked to shorter-maturity risk-free rates experience more pronounced monetary pass-through. Importantly, this effect is not purely mechanical, as part of the effect is offset by adjustments in the premium, revealing previously less-explored hetero- geneity in the pass-through to lending rates.
Keywords: Lending Rates, Interest Rate Pass-Through, Fixed-Rate Loans, Floating-Rate Loans
JEL Codes: E52, E43, G21, E58
Nicolas Gavoille
This paper examines firm-level responses to the large trade shock induced by the 2022 Russian invasion of Ukraine and the ensuing European Union sanctions. Using detailed administrative data from Latvia – a small, open economy with strong pre-war trade ties with Russia – I document the heterogeneous effects of the shock across firms with varying degrees of exposure. Employing a machine learning-based approach to determine a set of impacted firms and a difference-in-differences local projection method, the analysis shows that firms with lower initial exposure to Russia are the most likely to sever trade ties. Only a small set of firms, the most exposed to Russian trade, suffered significant losses in turnover, employment, and profitability, despite some trade reorientation towards CIS countries. Mere exposure to Russia emerges as the primary determinant of these patterns, whereas sanctions targeting specific goods do not play a direct role. These findings contribute to the broader literature on economic sanctions and trade policy by providing micro-level evidence on the adjustment mechanisms of European firms in response to geopolitical disruptions.
Keywords: Sanctions, Trade shock, Firm behavior, Adjustment margins
JEL codes: F14, F16, F61
Ginters Bušs
Guido Traficante
This paper studies monetary policy in a New Keynesian model with incomplete information regarding the persistence of cost-push shocks. The central bank and the private sector gradually learn about the persistence of the shock as it propagates through the economy. The central bank adopts a look-through policy in response to temporary cost-push shocks; otherwise, it follows a Taylor rule. If agents initially believe the cost-push shock to be temporary, while the true shock is persistent, it takes some time for the central bank, acting initially under an incorrect assumption, to realise its mistake and switch to monetary tightening. As a result, the actual inflation is higher than in a complete information case. Data-dependent discretionary early liftoff strategies can partially mitigate the effects of the initial policy misjudgment. Contrary to the full-information conditions, the findings cast doubt on the effectiveness of look-through policies in environments of incomplete information, irrespective of the actual persistence of the cost-push shock.
Keywords: Monetary policy, imperfect information, cost-push shock, high inflation
JEL codes: D83, E17, E31, E47, E52
Andrejs Zlobins
This paper documents the transmission of conventional monetary policy (MP) shocks over the period of two decades of the euro area’s existence. First, we estimate a linear Bayesian struc- tural vector autoregression (SVAR) and show that it takes approximately 12 – 18 months for the MP shock to fully transmit to both output and headline inflation. However, the transmission lags to the core and services inflation are longer, with full pass-through requiring more than 2 years. This implies that the impact of policy rate hikes implemented in 2022 and 2023 are still unwinding and will further contribute to disinflation of these HICP items. We then extend the SVAR system to allow for time-variation in both the parameter space and shock volatilities to pin down potential changes in the transmission mechanism. Time-varying impulse response functions reveal that the impact on output has been broadly stable over time. However, the reaction of inflation to policy rate hikes has been much stronger and more persistent in the recent tightening cycle, suggesting an exceptionally low sacrifice ratio. Finally, we rationalize those findings in a medium-scale New Keynesian DSGE framework. Model simulations suggest that two factors have contributed to the stabilisation properties of monetary policy: a forceful central bank response to the inflation surge and an increase in the frequency of price changes. While frictions related to wage-setting and real rigidities have likely had only minor implications concerning the effectiveness of monetary policy in the recent tightening cycle.
Keywords: monetary policy, transmission lags, sacrifice ratio, price-setting, euro area
JEL Codes: C54, E31, E50, E52, E58