![]() Aggregate potential output in 2025 might be about 0.8% lower than it would have been without the crisis, and importantly, without support from the Next Generation EU (NGEU), signalling somewhat larger losses than embedded in the Autumn 2021 forecast of the European Commission (which takes the NGEU into account). The results show that sectors of “trade, transport and accommodation”, “other services” and “industry” may suffer a loss in trend output of around 1.4-1.6% by 2025. The estimates are based on a supply-demand shock decomposition and are meant to quantitatively support the estimation of scarring effects stemming from the pandemic. This paper presents a sectoral-level, bottom-up method to estimate euro area potential output in order to assess the impact of the crisis on it. JEL Code E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy 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 F34 : International Economics→International Finance→International Lending and Debt ProblemsĪbstract The COVID-19 crisis has affected economic sectors very heterogeneously, with possible risks for permanent losses in some sectors. These findings hold important policy implications as they provide evidence on a beneficial second-order effect of negative interest rates on bank efficiency. In addition, we document that enhancements in cost efficiency are statistically significant only when breaching the zero lower bound (ZLB), indicating that the pass-through of interest rates to cost efficiency is not effective when policy rates are positive. We also show that improvements in cost efficiency are more pronounced for banks that are larger, less profitable, with lower asset quality and that operate in more competitive banking sectors. We find that banks most affected by negative interest rates responded by enhancing their cost efficiency. JEL Code 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 G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages G28 : Financial Economics→Financial Institutions and Services→Government Policy and RegulationĪbstract Do negative interest rates affect banks’ cost efficiency? We exploit the unprecedented introduction of negative policy interest rates in the euro area to investigate whether banks make a virtue out of necessity in reacting to negative interest rates by adjusting their cost efficiency. Our assessment also reveals a marginal impact of the macro-financial policies applied, which is particularly notable throughout 2020. This trend is abruptly interrupted at the onset of the Covid-19 pandemic but reappears at the end of 2020 before picking up again over the first half of 2021. Our results uncover mild tightening of the macroprudential policy stance before the end of 2019. This approach employs a large-scale semi-structural model reflecting the dynamics of 91 significant euro area banks and 19 euro area economies and is presented through an assessment of the stance evolution for the aggregate euro area economy and for the individual euro area countries. Abstract This paper proposes a methodology for measuring the macroprudential policy stance based on a distance-to-tail metric perspective.
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