PRESS RELEASE
1 August 2024
Insights gained from payment fraud data
Strong customer authentication requirements have had a positive effect on reducing fraudulent payments, especially card fraud, our joint report with the European Banking Authority shows. Nevertheless, industry actors, regulators, and consumers need to stay alert.
Read the press release
ECONOMIC BULLETIN
1 August 2024
ECB publishes Economic Bulletin
This publication presents the economic and monetary information which forms the basis for the Governing Council’s policy decisions. It is released eight times a year, two weeks after each monetary policy meeting.
Read the new Economic Bulletin
THE ECB BLOG
31 July 2024
The impact of central bank communication
Central banks choose their words carefully. And rightly so – policy makers’ wording can move markets and, eventually, the economy. The ECB Blog shows how unexpected changes in communication influence growth and inflation.
Read The ECB Blog- 1 August 2024
- PRESS RELEASE
- 31 July 2024
- MFI INTEREST RATE STATISTICS
- 30 July 2024
- WEEKLY FINANCIAL STATEMENTEnglishOTHER LANGUAGES (22) +Annexes
- 30 July 2024
- WEEKLY FINANCIAL STATEMENT - COMMENTARY
- 26 July 2024
- EURO AREA ECONOMIC AND FINANCIAL DEVELOPMENTS BY INSTITUTIONAL SECTOR (FULL)
- 26 July 2024
- PRESS RELEASE
- 23 July 2024
- Welcome address by Philip R. Lane, Member of the Executive Board of the ECB, at the Joint ECB-IMF-IMFER Conference 2024
- 18 July 2024
- Christine Lagarde, President of the ECB, Luis de Guindos, Vice-President of the ECB, Frankfurt am Main, 18 July 2024EnglishOTHER LANGUAGES (23) +Related
- 18 July 2024
- 18 July 2024
- EnglishOTHER LANGUAGES (23) +
- 4 July 2024
- Keynote speech by Piero Cipollone, Member of the Executive Board of the European Central Bank, at the National Conference of Statistics on official statistics at the time of artificial intelligence
- 4 July 2024
- Slides by Philip R. Lane, Member of the Executive Board of the ECB, at the Master in Economics and Finance (MEF) 2024 Lecture in Naples
- 1 July 2024
- Introductory speech by Christine Lagarde, President of the ECB, at the opening reception of the ECB Forum on Central Banking in Sintra, PortugalRelated
- 6 July 2024
- 26 July 2024
- Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Christian Siedenbiedel on 22 July 2024
- 23 July 2024
- Interview with Luis de Guindos, Vice-President of the ECB, conducted by Sergio Rivas
- 11 June 2024
- Interview with Christine Lagarde, President of the ECB, conducted by Andrés Stumpf, Stefan Reccius, Isabella Bufacchi, Guillaume Benoit and Alexandre Counis in Paris on 7 June 2024
- 27 May 2024
- Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Martin Arnold on 24 May 2024
- 24 May 2024
- Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Steffen Clement on 16 May 2024
- 31 July 2024
- Central banks choose their words very carefully. And rightly so – policy makers’ wording can move markets and, eventually, the economy. This ECB Blog post shows how unexpected changes in communication influence growth and inflation.Details
- JEL Code
- E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
E59 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Other
- 23 July 2024
- Repo markets are vital for banks to source liquidity and securities. They also represent an essential link in the monetary policy transmission chain. While the Eurosystem is in the process of reducing its market footprint, repo markets are going through a phase of change. The ECB Blog looks at dynamics in this market.Details
- JEL Code
- E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
- 10 July 2024
- The green transition will significantly increase demand for key minerals over the coming decades. The impact on energy prices will ultimately depend on how supply adjusts. The ECB Blog looks at the geopolitical risks involved.Details
- JEL Code
- D43 : Microeconomics→Market Structure and Pricing→Oligopoly and Other Forms of Market Imperfection
F51 : International Economics→International Relations, National Security, and International Political Economy→International Conflicts, Negotiations, Sanctions
F55 : International Economics→International Relations, National Security, and International Political Economy→International Institutional Arrangements
- 4 July 2024
- Firms’ inflation expectations are key for monetary policy makers. The ECB Blog presents new survey data on these expectations, evidence on what influences them, how they change when new information becomes available, and if they matter for the plans and choices firms make.Details
- JEL Code
- D22 : Microeconomics→Production and Organizations→Firm Behavior: Empirical Analysis
D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty
D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
- 27 June 2024
- Europe needs trillions of euros to manage climate change, become digital and defend itself. How can EU and national policymakers support these projects? This Blog post discusses the options in times of low growth and high public debt levels.Details
- JEL Code
- E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
H50 : Public Economics→National Government Expenditures and Related Policies→General
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
- 2 August 2024
- WORKING PAPER SERIES - No. 2967Details
- Abstract
- We study how monetary policy shapes the aggregate and distributional effects of an energy price shock. Based on the observed heterogeneity in consumption exposures to energy and household wealth, we build a quantitative small open-economy HANK model that matches salient features of the Euro Area data. Our model incorporates energy as both a consumption good for households with non-homothetic preferences as well as a factor input into production with input complementarities. Independently of policy energy price shocks always reduce aggregate consumption. Households with little wealth are more adversely affected through both a decline in labor income as well as negative direct price effects. Active policy responses raising rates in response to inflation amplifies aggregate outcomes through a reduction in aggregate demand, but speeds up the recovery by enabling households to rebuild wealth through higher returns on savings. However, low-wealth households are further adversely affected as they have little savings to rebuild wealth from and instead loose due to further declining labor income.
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
Q43 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Energy and the Macroeconomy
- 2 August 2024
- DISCUSSION PAPER SERIESDetails
- Abstract
- We study whether it is desirable for the central bank to supply reserves abundantly, i.e. beyond the level that satisfies financial institutions’ aggregate liquidity needs. Using a theoretical framework, we demonstrate that abundant reserves would help fulfil the private sector’s demand for safe and liquid assets, because reserves affect financial institutions’ leverage constraints. More specifically, systematic central bank purchases of medium-term government bonds from financial institutions would relax those institutions’ leverage constraints and allow them to expand their balance sheets and issue more private liquidity, in the form of deposits. However, a very large increase in the average size of its balance sheet would expose the central bank to the risk of large financial losses. On balance, only amoderately larger supply of reserves than the level that satisfies financial institutions’ aggregate liquidity needs appears desirable.
- JEL Code
- E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
- 1 August 2024
- EBA/ECB REPORT
- 1 August 2024
- WORKING PAPER SERIES - No. 2966Details
- Abstract
- In this paper, we propose a new framework to jointly calibrate cyclical and structural capital requirements. For this, we integrate a non-linear macroeconomic model and a stress test model. In the macroeconomic model, the severity of the scenarios depends on the level of cyclical risk. Risk-related scenarios are used as inputs for the stress test model. Banks’ capital losses derived from a scenario based on a reference level of risk are used to set the structural requirement. Additional losses associated with the current risk scenario are used to set the cyclical requirement. This approach provides a transparent method to strike the balance between cyclical and structural requirements.
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G01 : Financial Economics→General→Financial Crises
- 1 August 2024
- ECONOMIC BULLETIN
- 1 August 2024
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 5, 2024Details
- Abstract
- This box presents the main results of the 2024 Ageing Report for the European Union Member States. Ageing-related fiscal costs in the euro area are projected to rise by 1.4 percentage points by 2070, increasing from 24.1% of GDP to stand at 25.6% of GDP, with notable variance across countries. These costs are a key consideration in assessing long-term fiscal sustainability.
- JEL Code
- J11 : Labor and Demographic Economics→Demographic Economics→Demographic Trends, Macroeconomic Effects, and Forecasts
H55 : Public Economics→National Government Expenditures and Related Policies→Social Security and Public Pensions
H68 : Public Economics→National Budget, Deficit, and Debt→Forecasts of Budgets, Deficits, and Debt
- 1 August 2024
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 5, 2024Details
- Abstract
- Since the 1980s the divergence between the returns on capital and on safe assets has increased. This box examines what might account for this wedge and finds that, while the capital risk premium is the main factor, partly reflecting the demand for safe assets and a general decline in their supply, mark-ups also play a role. Since the pandemic, divergence has increased in the euro area, while it has remained broadly stable, albeit wider, in the United States, with mark-ups playing a greater role. During this period, the contribution from the risk premium has marginally increased in the euro area, whereas mark-ups have slightly decreased. In the United States, both the risk premium and mark-ups are largely unchanged. The elevated risk premium, to the extent that it reflects capital market imperfections, is one potential explanation for subdued investment levels in the euro area, which also pose a challenge to meeting the substantial investment needed to advance the green transition.
- JEL Code
- E01 : Macroeconomics and Monetary Economics→General→Measurement and Data on National Income and Product Accounts and Wealth, Environmental Accounts
E6 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- 1 August 2024
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 5, 2024Details
- Abstract
- Available surveys of selling price expectations of firms for the euro area point to price dynamics that have substantially moderated after the recent large inflationary shock, albeit with a more sluggish adjustment for services than for goods. This box focuses on services and investigates the leading indicator properties of the forward-looking survey data provided by the European Commission. These data tend to anticipate notable turning points in services inflation. In addition, in a forecasting exercise, we find that their leading properties manifest in a non-linear way and are particularly useful in unusual times, such as during the recent inflation spike.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
- 1 August 2024
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 5, 2024Details
- Abstract
- Euro area inflation differentials rose sharply during the pandemic and the energy crisis but have since largely returned to previous levels. Monitoring the evolution and nature of inflation differentials is informative when assessing the transmission of the single monetary policy. This box puts the recent developments in inflation dispersion into perspective. Headline inflation and its subcomponents have all experienced considerable divergences across countries, with energy and food inflation playing a significant role. However, with a few exceptions, these temporarily sizeable differentials did not result in substantial changes in relative price levels across countries.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes
- 1 August 2024
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 5, 2024Details
- Abstract
- This box considers the outlook for euro area business investment growth in 2024, as inferred from recent surveys. While suggesting a muted outlook for business investment growth this year, the surveys reveal considerable cross-country and cross-sectoral variation. Southern euro area countries and sectors with stronger demand appear more inclined to expand investment, whereas investment intentions in energy-intensive sectors have become weaker since the 2022-23 energy crisis. While investment priorities have changed somewhat in the face of recent shocks, scope remains for considerable expansion in business investment, not least related to the green and digital transitions.
- JEL Code
- E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E66 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General Outlook and Conditions
- 1 August 2024
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 5, 2024Details
- Abstract
- A combination of various adverse shocks has contributed to productivity growth being suppressed in the euro area over the last four years. In the first quarter of 2024 productivity per person employed was 0.7% lower than in the fourth quarter of 2019 and productivity per hour worked was just 0.7% higher. The pandemic, along with disruptions in global supply chains and the rise in energy prices from 2021, which were aggravated by the repercussions from the Russian war in Ukraine, have all contributed to a slowdown in productivity growth. While there are some differences, the slowdown is broad-based across sectors and the five largest euro area economies. A shift-share analysis shows that the documented slowdown in productivity is the result of within-sector developments and not of a reallocation of labour to less productive sectors.
- JEL Code
- E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
- 1 August 2024
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 5, 2024Details
- Abstract
- Based on granular data at the product level, this box discusses whether and how the euro area and the United States have modified their import sourcing strategies since 2016, the role played by geopolitical tensions and the potential impact on import prices. It considers two different, but not mutually exclusive, strategies: increasing the number of sourcing countries and reducing the import market share of the main supplier country per product. Data suggest that both regions have increased, on average, the number of sourcing countries, particularly for those products mostly imported from geopolitically distant countries. Broadening the number of supplier countries has come at a cost, however, it has affected only a small share of total imports, with modest implications for inflation and the terms of trade. At the same time, evidence of a reduction in the import share of the main supplier country is more mixed and is generally associated with a shift towards cheaper – and not necessarily geopolitically closer – countries, suggesting the prevalence of cost considerations over supply-chain resilience and national security concerns.
- JEL Code
- F14 : International Economics→Trade→Empirical Studies of Trade
F51 : International Economics→International Relations, National Security, and International Political Economy→International Conflicts, Negotiations, Sanctions
F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts
- 31 July 2024
- LEGAL ACT
- 31 July 2024
- WORKING PAPER SERIES - No. 2965Details
- Abstract
- This paper introduces ECB-(RE)BASE as the model-consistent, or rational expectation version of the ECB-BASE model. It brings new analytical capabilities to consider varying degrees of heterogeneity in expectation formation across the agents of the model. While the original version of ECB-BASE features VAR-based expectations, we examine two alternative versions either with full model-consistent expectations or with hybrid expectations. The paper provides a didactic exposition of the changes in the model properties brought by the various expectation settings. Furthermore, we conduct illustrative scenarios around the macroeconomic shocks experienced over the recent years. The simulations notably suggest that moving from VAR-based to model-consistent expectations would limit the pandemic-induced macroeconomic volatility but would exacerbate the price pressures during the inflation surge period. Overall, this model development extends the range of possibilities for risk and policy analysis which can enhance the contribution of ECB-(RE)BASE to monetary policy preparation.
- JEL Code
- C3 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables
C5 : Mathematical and Quantitative Methods→Econometric Modeling
E1 : Macroeconomics and Monetary Economics→General Aggregative Models
E2 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
- 31 July 2024
- WORKING PAPER SERIES - No. 2964Details
- Abstract
- This article measures the degree of potential de-anchoring of inflation expectations in the euro area vis-à-vis the inflation objective of the European Central Bank (ECB). A no-arbitrage term structure model that allows for a time-varying long-term mean of inflation expectations, π∗t , is applied to inflation-linked swap (ILS) rates, while taking into account survey-basedinflation forecasts. Estimates of π∗t have been close to 2% since the mid-2000s, indicating that long-term inflation expectations have overall remained well anchored to the ECB’s inflation objective. As this objective is however related to the "medium term", expectations components of various forward ILS rates are extracted: they appear to have been broadlyanchored, with tentative signs of de-anchoring up to the two-year horizon. Using backcasted ILS rates, estimates of π∗t are much above 2% in the early 1990s, but they convergence to levels below 2% by the end of the decade when the ECB was established.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E47 : Macroeconomics and Monetary Economics→Money and Interest Rates→Forecasting and Simulation: Models and Applications
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
- 31 July 2024
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 5, 2024Details
- Abstract
- This article provides a technical evaluation of the performance of ECB/Eurosystem staff inflation projections since 2000. It complements the existing literature by examining the influence of HICP components as well as conditioning variables on the properties of HICP inflation projections, also taking into account potential time variation in forecast performance. The article shows how, from the low projection errors over the period leading up to the pandemic, Eurosystem/ECB staff forecast accuracy deteriorated in the face of atypical post-pandemic shocks before improving again since late 2022. However, it finds that the accuracy of Eurosystem/ECB staff projections of headline HICP inflation is broadly comparable to real-time market-based and private professional forecasts even after including the post-pandemic period of high inflation. The HICP forecast accuracy is comparable across main HICP components, including HICP excluding energy and food (HICPX), although HICPX inflation projections tend to show smaller errors than headline inflation projections. The article finds that ECB/Eurosystem staff inflation projections are unbiased overall but exhibit specific periods over the last 25 years in which this unbiasedness broke down. It also points to some rigidities in ECB/Eurosystem staff inflation projections, in particular for HICPX, which might explain part of this occasional bias. Finally, the article underscores the contribution of not only oil price assumptions but also other conditioning assumptions to the rigidities, occasional bias and reduced accuracy of ECB/Eurosystem staff projections of HICP inflation.
- JEL Code
- C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
- 30 July 2024
- WORKING PAPER SERIES - No. 2963Details
- Abstract
- This paper examines the use of ETFs by open-ended investment funds in the euro area to manage liquidity. We find that during the COVID-19 market turmoil, investment funds were the most run-prone investor type in the market for ETFs. We also show that open-ended funds that faced larger outflows in March 2020 scaled down their ETF holdings by a larger amount. These results are consistent with open-ended funds passing on their outflows to the ETF shares they held. Since open-ended investment funds are the largest group of ETF investors in the euro area, their trading can materially impact primary ETF flows during times of stress.
- JEL Code
- G01 : Financial Economics→General→Financial Crises
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
- 30 July 2024
- WORKING PAPER SERIES - No. 2962Details
- Abstract
- The European fiscal governance framework remains incomplete, hindering policy coordination during economic shocks and affecting the transmission of the single monetary policy. High public debt and low public investment worsen resilience across Member States. Many policymakers, institutions, and academics support establishing a central fiscal capacity (CFC) as a solution. Against this backdrop, we propose a framework to assess a CFC in the euro area, aimed at stabilizing the business cycle, promoting sovereign debt sustainability, and reducing procyclicality in public investment. Our two-region DSGE model with a permanent CFC allocates resources based on the relative output gap while earmarking funds for public investment and imposing fiscal adjustment requirements for the high-debt region. The CFC enhances business cycle stabilization for both regions and significantly reduces the welfare cost of fluctuations. We also explore European bond issuance and a supranational investment strategy to address investment needs through European Public Goods.
- JEL Code
- E12 : Macroeconomics and Monetary Economics→General Aggregative Models→Keynes, Keynesian, Post-Keynesian
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
- 30 July 2024
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 5, 2024Details
- Abstract
- This article introduces the Distributional Wealth Accounts (DWA) developed by the European System of Central Banks and explores some of their main features and use cases. First, it describes the methodology behind DWA compilation, detailing data sources, estimation techniques and the significance of the dataset for economic analysis. It then highlights key stylised evidence on the changes in the wealth distribution of households over time and across countries. In this context, it highlights the heterogeneous portfolio composition and the varied effects of housing and financial asset prices on wealth accumulation, and their implications for inequality. Finally, the article investigates how the recent surge in inflation and the subsequent monetary policy tightening have affected the distribution of wealth.
- JEL Code
- E4 : Macroeconomics and Monetary Economics→Money and Interest Rates
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 29 July 2024
- WORKING PAPER SERIES - No. 2961Details
- Abstract
- This paper introduces a New Keynesian multi-sector industry model that integrates firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We investigate the effects of a sustained increase in fossil fuel prices on sectoral size, labor productivity, and inflation. A hike in the price of fossil resources results in higher energy prices. Due to ex-ante heterogeneity in energy intensity in production, the profitability of sectors is impacted asymmetrically.As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labor productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs. This policy entails a higher impact cost in terms of output and lower average productivity, but leads to a faster recovery in business dynamism. Thus, our results suggest that monetary policy faces a trade-off between stabilizing aggregate activity and business dynamism.
- JEL Code
- E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
L16 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Industrial Organization and Macroeconomics: Industrial Structure and Structural Change, Industrial Price Indices
O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes
Q43 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Energy and the Macroeconomy
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