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on Central Banking |
| By: | Orphanides, Athanasios |
| Abstract: | The post-pandemic inflation surge underscores that monetary policy continues to be hampered by two long-standing challenges: the pretence of knowledge and the proclivity for discretion. Focusing on the Federal Reserve, this paper demonstrates how simple policy rules, designed to be robust under imperfect knowledge, can mitigate these challenges. The Fed's post-pandemic policy error-maintaining excessive accommodation as inflation pressures mounted-could have been avoided with guidance from a simple natural growth targeting rule that had been included in the Fed's Bluebook/Tealbook starting in 2004, but was not disclosed to the public in real time. Formal adoption and disclosure of such a rule can help discipline discretion and improve both the conduct and communication of monetary policy. |
| Keywords: | Policy discretion, simple rules, natural growth targeting, inflation surge |
| JEL: | E52 E58 E61 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:325829 |
| By: | Albertazzi, Ugo; Hooft, James ’t; Ter Steege, Lucas |
| Abstract: | In contrast to the conventional Fisherian view that inflation reduces real debt positions, we show that significant increases in inflation are strongly associated with financial crises. In the spirit of Jordà et al. (2020), countries with free and fixed ex-change rates can be compared to difference out the confounding reaction of monetary policy. Across a dataset of 18 advanced economies over 151 years, we show that the impact of inflation extends beyond its indirect effect via monetary policy. To further corroborate causality, we instrument inflation with oil supply shocks, finding that a 1pp rise in inflation doubles the probability of financial crisis from its sample average. We give evidence for the redistribution channel, where inflationary shocks directly cut real incomes, as a possible mechanism. In conjunction with recent literature on the dangers of rapidly tightening monetary policy, our results point to a difficult trade-off for central banks once inflation has risen. JEL Classification: E31, E44, E58, G01 |
| Keywords: | currency pegs, financial crises, inflation, monetary policy, oil supply |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253108 |
| By: | Zsámboki, Balázs; Doležal, Jakub; Singh, Jaspal; Leitner, Georg; Vasilakos, Stamatis |
| Abstract: | This paper explores the interplay between the risk- and leverage-based prudential and the resolution frameworks within the EU banking system. The prudential framework is designed to enhance the resilience of both individual banks and the banking sector as a whole. It does so by imposing minimum capital requirements and capital buffers that can absorb losses during periods of financial stress. Conversely, the resolution framework focuses on ensuring that banks have adequate loss-absorbing and recapitalisation capacity to facilitate an orderly resolution process, thereby safeguarding public funds. The simultaneous use of capital across and within these two frameworks can have an impact on the effectiveness of capital buffers, presenting various challenges for macroprudential authorities. Our analysis shows that overlaps between risk-based and leverage-based requirements within the prudential framework reduce buffer usability to around 65% to 74% of the overall combined buffer requirement. When the resolution framework is also considered, buffer usability further declines to an average of 40% to 50%, depending on the analytical approach employed. Our simulations of buffer usability under different regulatory options discussed in the literature suggest that implementing the final Basel III standards in the EU would significantly increase buffer usability. The paper also analyses the impact of other options that could reduce or eliminate overlaps between capital buffers and other parallel requirements and quantifies the trade-offs between increased buffer usability and the costs of implementation. As resolution requirements are fully phased in as of 2024, the future evolution of buffer usability and the potential challenges for macroprudential authorities will also depend on how banks set their capital targets relative to the parallel frameworks and how they adapt their balance sheet structures to meet prudential and resolution requirements. JEL Classification: G21, G28, G32 |
| Keywords: | banking regulation, buffer usability, capital requirements, macroprudential policy |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2025374 |
| By: | Kerola, Eeva; Norring, Anni |
| Abstract: | We use confidential loan-level data from the European Central Bank to investigate how changes in the countercyclical capital buffer requirement in Germany affect lending to firms. We find evidence showing that tightening the countercyclical capital buffer leads German banks to reduce the volume of corporate loans and increase the price of new loans. These effects take place immediately after the announcement, given 12 months before the change was implemented. Importantly, we find that the reduction in credit availability notably affects small and medium-sized enterprises, which experience both a significant decrease in available credit and an increase in credit costs. In contrast, large firms are not affected. |
| Keywords: | Macroprudential policy, Countercyclical capital buffer, Loan level data |
| JEL: | E58 G21 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:325482 |
| By: | Emi Nakamura; Venance Riblier; Jón Steinsson |
| Abstract: | The Federal Reserve partially "looked through" the post-Covid rise in inflation and ultimately managed to bring about an "immaculate disinflation." The Fed's policy deviated strongly from the Taylor rule during this period. More generally, central banks with strong inflation-fighting credentials looked through post-Covid inflationary shocks yet experienced less inflation than more hawkish but less credible central banks. In light of this episode, we assess the degree to which the Taylor rule is descriptive, and the degree to which it should be viewed as prescriptive. While the Taylor rule (generally) fits well during the Greenspan period, it (generally) fits poorly in the early 1980s and after the early 2000s. Academic work has emphasized the role of the Taylor rule in preventing self-fulfilling fluctuations (guaranteeing determinacy). These concerns can be addressed with a shock-contingent commitment and are fragile to deviations from fully rational expectations. We discuss three reasons why optimal policy may not always imply a one-for-one response of interest rates to inflation (forward guidance, correlated shocks, and "long and variable lags"). The main challenge arising from such policies is not indeterminacy but erosion of inflation-fighting credibility and potential deanchoring of long-run inflation expectations. Only central banks with strongly anchored inflation expectations and large amounts of inflation-fighting credibility are likely to be able to look through inflationary shocks. |
| JEL: | E5 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34200 |
| By: | Volha Audzei; Sergey Slobodyan |
| Abstract: | This paper studies convergence properties, including local and global strong E-stability, of the rational expectations equilibrium (REE) under non-smooth learning dynamics, and the role of monetary policy in agents’ expectation formation. In a New Keynesian model, we consider two types of informational constraints that operate jointly - Sparse Rationality under Adaptive Learning. We study the dynamics of the learning algorithm for the positive costs of attention, initialized from the equilibrium with mis-specified beliefs. We find that, for any initial beliefs, the agents’ forecasting rule converges either to the Minimum State Variable (MSV) REE, or, for large attention costs, to a rule with anchored inflation expectations. With stricter monetary policy the convergence is faster. A mis-specified forecasting rule that uses a variable not present in the MSV REE does not survive this learning algorithm. We apply the theory of non-smooth differential equations to study the dynamics of our learning algorithm. |
| Keywords: | Bounded rationality, Expectations, Learning, Monetary policy |
| JEL: | D84 E31 E37 E52 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cer:papers:wp797 |
| By: | Kerola, Eeva; Laine, Olli-Matti; Paavola, Aleksi |
| Abstract: | This study examines the floating rate channel-a mechanism through which monetary policy affects firms' investment and credit demand based on their exposure to variable rate loans. Using a granular loan-level dataset from the euro area, we find that firms with variable rate loans significantly reduce their investment-related borrowing after monetary tightening, compared to firms with fixed rate loans. This effect is most pronounced among the smallest firms, consistent with the theoretical view that the floating rate channel is explained by financial constraints. Our results highlight the heterogeneity in firms' reactions to interest rate changes and underscore the importance of accounting for firm size and financial constraints in monetary policy analysis. |
| Keywords: | monetary policy, floating rate channel, euro area |
| JEL: | G21 G30 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:325483 |
| By: | Smoleńska, Agnieszka; Weber, Anne-Marie; Opoka, Marcin |
| Abstract: | This article discusses the idea of a judicial accountability gap in the obligations of EU central banks in relation to climate change policy. With the interest in incorporating climate change considerations into monetary policy on the rise, legal scholarship has focussed largely on the toolbox at the disposal and the political accountability of central bankers with respect to the sustainability transition. The judicial route has so far remained largely unexplored, the general global trend of climate litigation notwithstanding. In light of this omission, we develop a framework to address the judicial accountability gap in three steps. First, we explain the implications of the special status of climate change mitigation objectives in the EU constitutional order on members of the European System of Central Banks (ESCB). Then, we explain how these treaty obligations apply not only to the Eurosystem, which has been well explored in the literature, but also to non-euro area Member States. This point is particularly underexplored, despite its significant implications for the success of the EU’s sustainable finance agenda, which is contingent on a supportive macrofinancial regime. Finally, we discuss different judicial accountability routes to ensuring that central banks adequately incorporate the secondary mandate objectives in their policies. We examine whether establishing a “minimum standard” for meeting treaty obligations on incorporating climate change considerations into central bank policies could lead to the conceptualisation of a standard of judicial review across the EU, thereby enhancing the democratic legitimacy of central banks within the EU’s economic constitution. |
| Keywords: | accountability; central banks; climate change; economic and monetary policy; EU law; European Central Bank; European system of central banks; sustainability |
| JEL: | F3 G3 |
| Date: | 2024–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125471 |
| By: | Fabio Milani |
| Abstract: | This paper studies the transition to high inflation during the COVID-19 pandemic, using a behavioral version of the New Keynesian model, which replaces the conventional assumption of Rational Expectations with subjective and heterogeneous expectations. Different shares of agents in the economy form expectations based on alternative views regarding future economic variables: 1) a share of agents forecasts that inflation and output will rapidly revert to steady state; 2) another share forms forecasts based on a model resembling the MSV solution under rational expectations; 3) a third share of agents uses an under-specified model that captures trend-following, adaptive, or extrapolative behavior. Agents learn over time the parameters of their perceived model and they can also shift across different views based on past forecasting performance. The macroeconomic model is estimated using Bayesian methods to fit realized macroeconomic variables and data on expectations from surveys. The results document an additional channel that operates through switches in agents' perceptions and amplifies the impact of the original inflationary shocks. In response to rising inflation after COVID, agents begin shifting from the mean reversion model to the trend-following specification (with a belief about perceived inflation persistence that is simultaneously revised upward). Consequently, the impact of inflationary shocks is magnified and the effects of monetary policy attenuated. |
| Keywords: | heterogeneous expectations, post-COVID inflation, learning, inflation persistence, monetary policy effectiveness |
| JEL: | E31 E32 E52 E58 E65 E70 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12123 |
| By: | Claeys, Irene; Barmes, David; Suresh Kumar, Ram Smaran |
| Abstract: | The Bank of England created the Asset Purchase Facility (APF) after the global financial crisis of 2007–08 to implement its quantitative easing (QE) programme. However, the Bank’s recent tightening of monetary policy has caused the APF to incur substantial losses, at great cost to the public finances. This policy brief examines the policy options available to minimise this fiscal burden and create savings that could be directed elsewhere – including towards green investment projects that are vital to creating jobs and facilitating the UK’s net zero transition. |
| JEL: | E6 F3 G3 |
| Date: | 2024–09–18 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129340 |
| By: | Coste, Charles-Enguerrand; Pantelopoulos, George |
| Abstract: | To ensure that means of payments are readily interchangeable at face value – i.e. fungible – for retail payments, three elements are required: (1) settlement finality; (2) interoperability; and (3) seamless convertibility of the means of payment into the “ultimate” or quasi-ultimate means of payment. This paper argues that stablecoins issued by different issuers on different blockchains can be fungible to the same extent as commercial bank deposits from different banks provided that (i) payment and settlement technologies are interoperable, (ii) payments are transacted on ledgers that offer settlement finality, and (iii) that central bank money acts as the anchor to the monetary system (assuming that the central bank money is itself underscored by a homogenous unit of account). On this basis, this paper asserts that tokenised funds and off-chain collateralised stablecoins are fungible means of payments under some conditions, and that on-chain collateralised stablecoins can be prima facie classified as fungible means of payments, so long as the identical preconditions associated with accomplishing means of payment fungibility for tokenised funds/off-chain collateralised stablecoins can be fulfilled, and on the premise that the on-chain collateral can be readily converted into higher level money. Finally, it is determined that algorithmic stablecoins are not fungible means of payments. JEL Classification: B26, E42 |
| Keywords: | central bank, electronic money token, fungibility, stablecoin |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253111 |
| By: | Daniel Dias; Tim Schmidt-Eisenlohr |
| Abstract: | We estimate the uninsured deposit premium - the difference between the rates paid on uninsured versus insured deposits - by linking observed average deposit rates to an estimated share of uninsured deposits. Using U.S. bank data from 1991 to 2025, we show that the average uninsured deposit premium rose by nearly 400 basis points over this period. This rise reflects both falling insured deposit rates and rising uninsured deposit rates. We find a strong correlation with the monetary policy cycle: a one-percentage-point increase in the Federal Funds Rate corresponds to a rise of roughly 32 basis points in the uninsured deposit premium. We develop a bargaining model between banks, insured depositors, and uninsured depositors that explains these dynamics. |
| Keywords: | uninsured deposits, monetary policy, bank funding, deposit pricing |
| JEL: | E52 G21 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12103 |
| By: | Hannah Magdalena Seidl |
| Abstract: | I study the transmission mechanism of Quantitative Easing (QE) in the form of large-scale asset purchases in the mortgage market to aggregate consumption. To this end, I develop a New Keynesian model that features heterogeneous households, a microfounded housing market, and frictional intermediation. This model helps explain the empirical evidence suggesting that QE increases aggregate consumption by raising house prices. I find that higher house prices account for around half of QE’s stimulative effects, with higher labor income contributing the remaining half. |
| Keywords: | Quantitative easing, heterogeneous agents, incomplete markets, sticky wages, housing, asset prices |
| JEL: | E12 E21 E44 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2141 |
| By: | Klaus Abberger; Alexander Rathke; Samad Sarferaz; Pascal Seiler |
| Abstract: | We study the investment channel of monetary policy through a randomized survey experiment, exposing Swiss firms directly to shocks to the Swiss National Bank's policy rate. Our survey experiment randomizes pure policy-rate shocks - uncontaminated by information effects - and records firms' revisions to investment plans and financing choices. We find pronounced asymmetry: firms respond strongly to unanticipated rate hikes but only moderately to equivalent cuts. This asymmetry varies with firm size, sector, export intensity, and investment types. Investment financing shapes the response: reliance on internal funds and being financially unconstrained amplifies investment sensitivity. |
| Keywords: | monetary policy, investment, firm heterogeneity, survey experiment, external finance, randomized control trial |
| JEL: | E22 E52 C93 G32 D22 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12099 |
| By: | Vanessa Schmidt; Hannah Magdalena Seidl |
| Abstract: | We study the effects of movements in aggregate lending standards on macroeconomic aggregates and inequality. We show in a New Keynesian model with heterogeneous households and housing that a looser loan-to-value (LTV) ratio stimulates housing demand, nondurable consumption, and output. Our model implies that the LTV shock transmits to macroeconomic aggregates through higher household liquidity and a general-equilibrium increase in house prices and labor income. We also show that a looser LTV ratio redistributes housing wealth from the top 10% of the housing wealth distribution to the bottom 50%, indicating an overall decrease in inequality. |
| Keywords: | Heterogeneous agents, incomplete markets, housing, macroprudential policies |
| JEL: | E12 E21 E44 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2140 |
| By: | Bandoni, Emil; Jarmulska, Barbara; Fourné, Friederike |
| Abstract: | Using a granular database of variable rate euro area loans and analysing their defaults between 2014 and 2019, we show that the effect of interest rate changes on mortgage defaults is highly non-linear. First, we find that the risk associated with higher contemporaneous interest rates is concentrated among borrowers who got the loan at ultra-low interest rates, their default probability being 2.6 times higher than our sample average. Second, we show that the effect of interest rate changes on the default probability is asymmetric: interest rate cuts have rather small effects, whereas increases significantly raise default probabilities. Finally, we show that the magnitude of the effect of an interest rate increase depends on the history of net interest rate changes, with a consecutive interest rate increase having a 3 times stronger impact on the default probability than an increase following an interest rate decrease. JEL Classification: E52, G21, G51 |
| Keywords: | financial stability, monetary policy, mortgages |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253112 |
| By: | Jean-Marie Dufour; Endong Wang |
| Abstract: | This paper introduces a novel concept of impulse response decomposition to disentangle the dynamic contributions of the mediator variables in the transmission of structural shocks. We justify our decomposition by drawing on causal mediation analysis and demonstrating its equivalence to the average mediation effect. Our result establishes a formal link between Sims and Granger causality. Sims causality captures the total effect, while Granger causality corresponds to the mediation effect. We construct a dynamic mediation index that quantifies the evolving role of mediator variables in shock propagation. Applying our framework to studies of the transmission channels of US monetary policy, we find that investor sentiment explains approximately 60% of the peak aggregate output response in three months following a policy shock, while expected default risk contributes negligibly across all horizons. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.05284 |