How does monetary policy affect the exchange rate? This question is important to central banks because the exchange rate has an indirect impact on inflation. It has therefore been looked at extensively in the economic literature. Even so, there is no consensus on how monetary policy impulses take effect over time and on their overall importance for exchange rate developments. A recent study delivers new insights: monetary policy impulses take full effect with no time lag and could play a greater role for exchange rate developments than previously thought.

The outcome of the Brexit referendum in June 2016 brought about an abrupt increase in political and economic uncertainty. In a new study, we show that German banks reduced lending to firms in the United Kingdom (UK) following the referendum. These firms reduced employment and investment as a result of the credit supply shock. Multinational corporations in the UK were able to mitigate this decline in external financing by making greater use of internal capital markets operated within their international corporate structures. Our study shows that the outcome of the Brexit referendum put pressure on the UK economy via indirect channels as well. Moreover, it highlights the role of multinational corporations, which were better able to mitigate the impact.

Central banks have used communication about the inflation outlook as an additional policy tool in response to the post-pandemic inflation surge. We present novel survey evidence that the ECB’s guidance about its projected inflation path can substantially lower households’ inflation expectations when kept in a sophisticatedly simple (KISS) way.

In recent years, geopolitical risks have risen in many places. This not only has a direct impact on the countries affected, but also on international trade. In a new study, we show that rising geopolitical risks in trade partner countries dampen imports of goods, make them more expensive and impair supply chains. In addition, they are likely to be conducive to a fragmentation of global trade. Risks associated with China are particularly significant in this context.

The advantages or disadvantages firms experience as a result of their size, referred to in the economic literature as returns to scale, are of central importance in many economic models. Increasing returns to scale, whereby unit costs decrease as output volume increases, could explain productivity differences between Europe and the United States. We present fresh evidence on the returns to scale of European firms: most exhibit constant returns to scale, but a non-trivial share also show increasing returns to scale.