Elena Angelini
- 2 May 2025
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 3, 2025Details
- Abstract
- The start of Russia’s war on Ukraine in early 2022 led to major errors in inflation and GDP growth forecasts from December 2021 onwards. By the end of 2022 inflation projections were off by 8 percentage points and GDP projections by nearly 1 percentage point. Using the ECB-BASE model, this study finds that about 70% of the inflation error stemmed from unexpected energy and food price shocks. Energy prices were the main drivers in 2022, while food prices gained influence in 2023. Fiscal policies initially eased inflation but later this effect was reversed. Tighter financial conditions impacted GDP in 2023 but had little immediate effect on inflation. Nevertheless, monetary policy played a key role, preventing inflation from rising by up to 2 percentage points in a worst-case scenario. The model underestimated second-round effects, wage-price linkages and labour hoarding. These findings highlight the importance of incorporating non-linear price pass-through effects and labour market dynamics into macroeconomic forecasting models.
- JEL Code
- C5 : Mathematical and Quantitative Methods→Econometric Modeling
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
E6 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- 28 April 2025
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 3, 2025Details
- Abstract
- This box provides a model-based analysis of the impact of discretionary fiscal policy measures on economic growth and inflation since the start of the COVID-19 pandemic, as reflected in the March 2025 ECB staff macroeconomic projections for the euro area. Fiscal policy lent substantial support to the euro area economy in response to the pandemic and the energy crisis, while adding to public deficits and debt. Overall, the analysis shows that discretionary fiscal policy measures had a strong positive impact on real GDP growth during the years 2020-2022 and were broadly neutral thereafter owing to their partial reversal. They are also estimated to have had an upward effect on inflation overall, particularly during the years 2023-2024. Having introduced energy and inflation compensatory measures in 2022, which helped contain inflation, governments started to withdraw them from 2023. This unwinding contributed to a build-up of inflationary pressures resulting from the fiscal stimulus in previous years.
- JEL Code
- E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
O40 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→General
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
- 15 March 2024
- OCCASIONAL PAPER SERIES - No. 344Details
- Abstract
- This paper takes stock of the ECB’s macroeconometric modelling strategy by focusing on the models and applications used in the Forecasting and Policy Modelling Division. We focus on the guiding principles underpinning the current portfolio of the main macroeconomic models and illustrate how they can in principle be used for economic forecasting, scenario and risk analyses. We also discuss the modelling agenda which is currently under development, focusing notably on heterogeneity, machine learning, expectation formation and climate change. The paper makes it clear that the large macroeconometric models typically developed in central banks remain stylised descriptions of our modern economies and can fail to predict or assess the nature of economic events (especially when big crises arise). But even in highly uncertain economic conditions, they can still provide a meaningful contribution to policy preparation. We conclude the paper with a roadmap which will allow the ECB and the Eurosystem to exploit technological advances and cooperation across institutions as a useful means of ensuring that the modelling framework is not only resilient to disruptive events but also innovative.
- JEL Code
- C30 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→General
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 21 September 2021
- OCCASIONAL PAPER SERIES - No. 267Details
- Abstract
- This paper provides an assessment of the macroeconomic models regularly used for forecasting and policy analysis in the Eurosystem. These include semi-structural, structural and time-series models covering specific jurisdictions and the euro area within a closed economy, small open economy, multi-country or global setting. Models are used as analytical frameworks for building baseline projections and for supporting the preparation of monetary policy decisions. The paper delivers four main contributions. First, it provides a survey of the macroeconomic modelling portfolios currently used or under development within the Eurosystem. Second, it explores the analytical gaps in the Eurosystem models and investigates the scope for further enhancement of the main projection and policy models, and the creation of new models. Third, it reviews current practices in model-based analysis for monetary policy preparation and forecasting and provides recommendations and suggestions for improvement. Finally, it reviews existing cooperation modalities on model development and proposes alternative sourcing and organisational strategies to remedy any knowledge or analytical gaps identified.
- JEL Code
- C5 : Mathematical and Quantitative Methods→Econometric Modeling
E47 : Macroeconomics and Monetary Economics→Money and Interest Rates→Forecasting and Simulation: Models and Applications
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
F4 : International Economics→Macroeconomic Aspects of International Trade and Finance
- 4 February 2021
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 1, 2021Details
- Abstract
- We augment the ECB-BASE model using the predictive dynamics of an SIR model in order to assess the interplay between epidemiological fundamentals, containment policies and the macroeconomy, investigating the macro impact of pandemic-related risk factors associated with a medical solution to the COVID‑19 crisis.
- JEL Code
- E1 : Macroeconomics and Monetary Economics→General Aggregative Models
E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
I1 : Health, Education, and Welfare→Health
- 29 June 2020
- WORKING PAPER SERIES - No. 2431Details
- Abstract
- This paper studies the macroeconomic consequences of the COVID-19 pandemic and makes a first step in adapting the central bank modelling apparatus to the new economic landscape. We augment the ECB-BASE model with the predictive dynamics of the SIR model in order to assess the interplay between epidemiological fundamentals, containment policies and the macroeconomy. Containment policies considerably reduce the share of infected and deceased people, but generate a sharp decline in economic activity. Barring the materialization of amplification risks, the induced recession may remain broadly V-shaped under targeted confinement policies. By comparison, a "laissez-faire" approach to the pandemic emergency can even inflict in some cases higher long-term economic costs. Nevertheless, the depth of the recession and the speed of the recovery (if at all) crucially depend on the magnitude and persistence of the supply-side retrenchment, as well as on the risk of macro-financial feedback loops.
- JEL Code
- E1 : Macroeconomics and Monetary Economics→General Aggregative Models
E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
I1 : Health, Education, and Welfare→Health
- 16 September 2019
- WORKING PAPER SERIES - No. 2315Details
- Abstract
- This paper presents the blueprint of a new ECB multi-country model. The version documentedin the following pages is estimated on euro area data. As a prelude to the countrymodels, this version is meant to enhance the understanding of the main model mechanisms,enlarge the suite of area wide tools, and provide a tool for a top down approach betweeneuro area and country modelling. The model converges to a well-de ned steady state and itsproperties are in line with macroeconomic theory and standard empirical benchmarks. Thedesign is aligned to its role as workhorse model in the context of the forecasting and policysimulation exercises at the ECB.
- 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
- 28 January 2019
- WORKING PAPER SERIES - No. 2227Details
- Abstract
- The Eurosystem staff forecasts are conditional on the financial markets, the global economy and fiscal policy outlook, and include expert judgement. We develop a multi-country BVAR for the four largest countries of the euro area and we show that it provides accurate conditional forecasts of policy relevant variables such as, for example, consumer prices and GDP. The forecasting accuracy and the ability to mimic the path of the Eurosystem projections suggest that the model is a valid benchmark to assess the consistency of the projections with the conditional assumptions. As such, the BVAR can be used to identify possible sources of judgement, based on the gaps between the Eurosystem projections and the historical regularities captured by the model.
- JEL Code
- C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection
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
- 10 March 2014
- WORKING PAPER SERIES - No. 1647Details
- Abstract
- A balanced current account in the euro area has disguised sizeable net lending imbalances at the country level, exposing the common currency area to severe pressures during the financial crisis. The key contribution of this paper is to evaluate the adjustment process through the lenses of the New Multi Country Model at the country and sectoral level. We find that shocks to the external, fiscal and monetary environment help explain, to a large degree, the sizeable current account adjustment and rise in unemployment in Spain. The model also suggests that a recovery in wage competitiveness helps to reduce external deficits at the cost of higher net borrowing by households. The stimulus effects on aggregate demand, via the interest rate response of the common monetary authority and the competitiveness channel, are present but not overly large, as the rebound in economic activity depends mainly on global demand, supportive monetary policy, business and consumer confidence.
- JEL Code
- C5 : Mathematical and Quantitative Methods→Econometric Modeling
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe - Network
- Competitiveness Research Network
- 13 February 2013
- WORKING PAPER SERIES - No. 1512Details
- Abstract
- In this paper we show that higher flexibility, measured by lower wage and price mark-ups leads to reduced inflationary pressures, increase in competitiveness, and higher output. A rational expectation and a learning version of the ECB
- 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
E27 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Forecasting and Simulation: Models and Applications
E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General
- 28 October 2008
- WORKING PAPER SERIES - No. 953Details
- Abstract
- We estimate and forecast growth in euro area monthly GDP and its components from a dynamic factor model due to Doz et al. (2005), which handles unbalanced data sets in an efficient way. We extend the model to integrate interpolation and forecasting together with cross-equation accounting identities. A pseudo real-time forecasting exercise indicates that the model outperforms various benchmarks, such as quarterly time series models and bridge equations in forecasting growth in quarterly GDP and its components.
- JEL Code
- E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
- 28 October 2008
- WORKING PAPER SERIES - No. 949Details
- Abstract
- Global financial integration unlocks a huge potential for international risk sharing. We examine the degree to which international equity holdings act as a risk sharing device in industrial and emerging economies. We split equity returns into investment income (dividend distribution) and capital gains to investigate which of the two channels delivers the largest potential for risk sharing. Our evidence suggests that net capital gains are a more potent channel of risk sharing. They behave in a countercyclical way, that is they tend to be positive (negative) when the domestic economy is growing more slowly (rapidly) than the rest of the world. Countries with more countercyclical net capital gains experience improved consumption risk sharing. The empirical analysis furthermore suggests that these risk sharing properties of net capital gains have increased through time, in particular in the 1990s and early-2000s, on the back of a declining equity home bias and financial market deepening.
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
- 23 May 2007
- WORKING PAPER SERIES - No. 752Details
- Abstract
- In this paper we compare alternative approaches for the construction of time series of macroeconomic variables for Unified Germany prior to 1991, and then use them for the construction of corresponding time series for the euro area. The resulting series for Germany and the euro area are compared with existing ones on the basis of both descriptive statistics and results of econometric analyses conducted with the alternative time series. We find that more sophisticated time series methods for backdating can yield sizeable gains.
- 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
C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation
C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access
- 20 July 2006
- WORKING PAPER SERIES - No. 660Details
- Abstract
- This paper documents the structure, estimation and simulation properties of the Italian block of the ESCB-multi-country model (MCM). The model is used regularly as an input into Eurosystem projection exercises and, to a lesser extent, in simulation analysis. The specification of the Italian model follows closely that of the Area-Wide Model (AWM) and indeed the other MCM country blocks (in terms of specification and accounting framework). The MCM is a quarterly estimated structural macroeconomic model that treats the economy in a relatively closed manner. It has a long-run classical equilibrium with a vertical Phillips curve but with some short-run frictions in price/wage setting and factor demands. Consequently, activity is demand-determined in the short-run but supply-determined in the longer run with employment having converged to a level consistent with an exogenously given level of equilibrium unemployment. The precise properties of the model are illustrated using a number of standard variant simulations.
- 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
- 26 June 2006
- WORKING PAPER SERIES - No. 646Details
- Abstract
- The paper presents the Dutch country block of the ESCB Multi-Country Model (MCM) for the euro area. We show how a theoretical model is translated into an econometric specification and how this specification is in turn estimated and used in the projection exercises of the E(S)CB. The dynamic properties of the model are analyzed and the effects of six exogenous shocks to the economy discussed. The long run simulations performed deliver responses of the baseline economy in line with both macroeconomic theory and practice, from a quantitative and a qualitative point of view.
- 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
- 1 August 2003
- WORKING PAPER SERIES - No. 252Details
- Abstract
- Existing methods for data interpolation or backdating are either univariate or based on a very limited number of series, due to data and computing constraints that were binding until the recent past. Nowadays large datasets are readily available, and models with hundreds of parameters are fastly estimated. We model these large datasets with a factor model, and develop an interpolation method that exploits the estimated factors as an efficient summary of all the available information. The method is compared with existing standard approaches from a theoretical point of view, by means of Monte Carlo simulations, and also when applied to actual macroeconomic series. The results indicate that our method is more robust to model misspecification, although traditional multivariate methods also work well while univariate approaches are systematically outperformed. When interpolated series are subsequently used in econometric analyses, biases can emerge, depending on the type of interpolation but again be reduced with multivariate approaches, including factor-based ones.
- 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
C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation
C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access