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on Central Banking |
| By: | Ehrmann, Michael |
| Abstract: | Trust in the central bank is an essential ingredient for a successful conduct of monetary policy. However, for many central banks trust has recently declined, for instance in the wake of the post-pandemic inflation surge, due to large errors in central banks’ inflation forecasts, or given problems when exiting from forward guidance. The rapid, substantial and persistent erosion of trust makes it clear that trust needs to be earned continuously. This paper reviews why trust is important, what determines it and how central banks can enhance it. It also argues that it is important for central banks to improve the measurement and monitoring of trust. It ends by highlighting some future challenges for maintaining trust. JEL Classification: E52, E58, G53 |
| Keywords: | central banks, credibility, inflation expectations, monetary policy, trust |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20243006 |
| By: | Boris Hofmann; Cristina Manea; Benoit Mojon |
| Abstract: | Monetary theory and central bank doctrine generally prescribe a forceful reaction to demand-driven inflation and an attenuated response, if any, to supply-driven inflation. The Taylor–type rules used so far to describe central banks' reaction functions assume instead a uniform response of policy rates to inflation irrespective of its drivers. In this paper, we refine the specification of these policy rules to allow for a different (targeted) reaction to demand- versus supply-driven inflation. Estimates of the new targeted rule for the United States show a fourfold larger response to demand-driven inflation than to supply-driven inflation. We use a textbook New Keynesian model to discuss the properties of the new type of monetary policy rule in terms of business cycle fluctuations and welfare. |
| Keywords: | monetary policy trade–offs, targeted Taylor rules, inflation targeting |
| JEL: | E12 E3 E52 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1234 |
| By: | Milutin Jesic (University of Belgrade, Serbia); Hans Manner (University of Graz, Austria) |
| Abstract: | The European Central Bank (ECB) adopted a new monetary policy strategy in July 2021 to replace the previous one that had been in place since 2003. This study implicitly analyzes the performance of the previous strategy in achieving price stability by identifying the key macroeconomic determinants that influence inflation dynamics. Methodologically, we apply the nonstationary ordered probit model, which allows the estimation of marginal effects of covariates on the probability of the inflation rate being below, in, or above the assumed targeted range. The results indicate that the crucial determinants of deviation in the inflation rate from the targeted range are fundamental macroeconomic variables, of which some are indirectly under control of the ECB. While the inflation rate has occasionally deviated from the targeted range, the overall conclusion is that the performance of the ECB in fulfilling the primary goal defined in the monetary policy strategy is still manageable to the extent that it can influence some of the factors that are identified as drivers of inflation dynamics. |
| Keywords: | ECB, monetary policy, monetary policy strategy, nonstationary ordered probit model, inflation. |
| JEL: | C25 C54 E31 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:grz:wpaper:2024-17 |
| By: | Atsuki Hirata (Bank of Japan); Sohei Kaihatsu (Bank of Japan); Yoshiyasu Kasai (Bank of Japan); Hiroki Yamamoto (Bank of Japan); Jouchi Nakajima (Hitotsubashi University) |
| Abstract: | Over the past 25 years, the Bank of Japan has conducted a variety of unconventional monetary policies. This paper empirically analyzes the impact of these unconventional monetary policies on Japan's economic activity, prices, and financial sector. First, we investigate the impact of the Bank of Japan's purchase of long-term JGBs on long-term interest rates and find that it lowered the rates by lowering the term premium. Its impact was particularly pronounced following the introduction of Quantitative and Qualitative Monetary Easing (QQE) in 2013. Second, we employ a factor-augmented vector autoregression (FAVAR) and the shadow rates as a proxy of a monetary policy stance reflecting information on the entire government bond yield, and investigate the counterfactual analyses. Our estimation result indicates that the series of unconventional monetary policies had a positive effect on output and prices, and the large-scale monetary easing after the introduction of QQE contributed to fostering a non-deflationary environment in Japan. The empirical analysis also indicates that the unconventional monetary policies may have had the side effect of reducing the profitability of banks by lowering lending rates. |
| Keywords: | Monetary policy; Term structure model; Shadow rate; FAVAR; Counterfactual analysis |
| JEL: | E43 E44 E52 E58 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e21 |
| By: | Fiorella De Fiore; Alexis Maurin; Andrej Mijakovic; Damiano Sandri |
| Abstract: | We analyse the media's role in channelling information about the Fed's monetary policy stance to the public. Using LLMs, we find a tight correspondence between FOMC communication and media coverage, although with significant variation over time. The communication pass-through weakened during the ZLB period and improved with the introduction of press conferences, which now exert strong influence on the media. Media coverage effects households' inflation expectations, particularly when inflation is high and volatile, while we do not detect a direct impact of FOMC communication. This underscores the media's crucial function in channelling central banks' communication to the public. |
| Keywords: | central bank communication, media coverage, large language models, households' expectations |
| JEL: | E50 E52 E58 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1231 |
| By: | Alex Ilek (Bank of Israel); Nimrod Cohen (Bank of Israel); Yaakov Chen-Zion (Bank of Israel) |
| Abstract: | We develop and calibrate a micro-founded DSGE model, tailored to the Israeli economy, based on key stylized facts about the Israeli economy. The model includes the housing market, both ownership and rental, and heterogeneous households. Macroprudential policy is represented by policy regarding the Loan-to-Value (LTV) ratio, a common measure in both literature and practice. Our primary objective is to examine the effects of monetary and macroprudential policies on the housing market, especially on housing prices. Our findings suggest that contractionary monetary policy pushes home prices downward while real rent prices rise. Macroprudential policy does not undermine monetary policy’s ability to achieve its primary goals, although it introduces a slight distributional effect. Tighter macroprudential policy (lower LTV) significantly reduces debt and the ownership-to-rent ratio in the economy, but slightly increases home prices and real rent prices. This challenges the existing DSGE model literature, and we attribute this discrepancy to the absence of a rental market (and real estate investors) in those models. These insights indicate that while macroprudential tools can help manage financial stability, their effect on home prices must be carefully assessed alongside other monetary measures. |
| Keywords: | housing market, monetary policy, macroprudential policy, ownership-to-rent ratio, heterogeneous households |
| JEL: | R21 E12 E32 E52 E61 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2024.14 |
| By: | Kota Ikkatai (Bank of Japan); Takuji Kawamoto (Bank of Japan); Kenichi Sakura (Bank of Japan) |
| Abstract: | This paper empirically examines the response of the nominal exchange rate (U.S. dollar-yen exchange rate) to the monetary policy changes, focusing on the effects of various unconventional monetary policy measures implemented by the Bank of Japan over the past 25 years. Specifically, applying the estimation method proposed by Inoue and Rossi (2019), we identify Japan's "monetary policy shocks" from changes in the entire yield curve and the exchange rate around policy announcements, and estimate the dynamic response of the exchange rate to them. The results show that the yen depreciated against the U.S. dollar in many cases in response to Japan's expansionary monetary policy shocks, and that non-interest rate differential channel - e.g., the shifts in future exchange rate expectations - accounts for the larger parts of such responses than conventional interest rate differential channel. Moreover, our findings suggest that the responses of the exchange rate to unconventional monetary policies have been state-dependent in the sense that they could vary significantly depending on global financial market conditions and investors' herding behavior at each point in time. |
| Keywords: | Unconventional monetary policy; Exchange rate; Functional local projection |
| JEL: | C32 E52 F31 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e23 |
| By: | Ambrocio, Gene; Haavio, Markus; McClung, Nigel |
| Abstract: | We show that sacrifice ratios associated with announcements of the most likely course of monetary policy are lower when the implementation date is further out into the future in the basic New Keynesian framework. This is not due to forward guidance puzzle effects and holds even when agents' expectations feature cognitive discounting. Nevertheless, the rate at which sacrifice ratios fall with the implementation horizon is attenuated by the intensity of cognitive discounting. We also show that our results also hold in a model with additional real and nominal rigidities. These results indicate that telegraphing the most likely course of action for monetary policy attenuates the effects on output relative to inflation. |
| Keywords: | monetary policy announcements, sacrifice ratio, cognitive discounting |
| JEL: | E31 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:306368 |
| By: | Rachael Grant; Kate Poskitt (Reserve Bank of New Zealand) |
| Abstract: | A new Analytical Note measures monetary policy surprises and assesses their effects on financial market instruments. Understanding the effects of monetary policy surprises on financial markets is key given the importance of central bank communication and the role financial markets play in the transmission of monetary policy. The Analytical Note shows that material monetary policy surprises – defined as instances where market pricing for the OCR immediately prior to an announcement is more than 5 basis points different from the announced rate – are relatively rare. Since 2006, fewer than 1 in 5 OCR announcements resulted in a material monetary policy surprise. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nzb:nzbans:2024/08 |
| By: | Claudio Borio |
| Abstract: | From its tentative beginnings, inflation targeting has spread to become the de facto global monetary standard. Historically, only the Gold Standard has had a longer lifespan. Inflation targeting has done its job: helping to hardwire a low-inflation regime, even in the face of the post-Covid inflation surge. But the journey has been far from easy. Inflation targeting had to contend with the rise of financial instability, most spectacularly in the form of the Great Financial Crisis. In the wake of that crisis, it struggled to push inflation back up to point targets, and it saw a historical erosion in the room for policy manoeuvre. This paper assesses these challenges and considers possible adjustments to the framework. These include more systematic consideration of the longer-term damage that financial factors can cause to the economy and of the importance of safety margins in the conduct of policy. And all this should be grounded on a clear recognition of what monetary policy can and cannot deliver. |
| Keywords: | monetary policy, business cycle, financial cycle, inflation targeting, deflation, natural interest rate |
| JEL: | E43 E51 E52 E58 E31 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1230 |
| By: | Geoffrey R. Dunbar |
| Abstract: | Household inflation can be decomposed into three terms that reflect nominal expenditure, real quantities and household preferences, using the money pump proposed by Echenique, Lee and Shum (2011). I quantify the importance of changes in household preferences on household inflation rates using 11 years of scanner data for 11, 000 US households. I then analyze the effect of monetary policy on household inflation using the monetary policy shocks from Nakamura and Steinsson (2018). I find that monetary policy news shocks affect household inflation through the expenditure and preferences channels for 12 months from the date of the shocks, and that federal funds rate shocks affect inflation through the same channels at a horizon of 13–24 months. The results suggest that changes in household preferences are an important driver of inflation dynamics at the household level. |
| Keywords: | Inflation and prices; Monetary policy transmission |
| JEL: | D12 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-45 |
| By: | Maybrit Wachter; Christian R. Proano; Juan Carlos Pena |
| Abstract: | This paper revisits the “one-size-fits-all†challenge posed by the European Central Bank’s (ECB) monetary policy within the heterogeneous economic landscape of the euro area. Using a dataset spanning from 1999Q1 to 2019Q4 for the ECB interest rate and from 2004Q4 onwards for the Wu-Xia shadow rate, we compute country-specific hypothetical Taylor rates across EU-11 countries and examine the dynamic effects of the difference between these rates and the actual ECB policy rate, the so-called Taylor Rate Gaps (TRGAPs), on GDP growth, inflation, unemployment, and government debt. Employing panel and country-specific local projections, our findings reveal that positive TRGAPs negatively impact economic growth, with this effect being more pronounced in periphery countries compared to core countries. The analysis highlights the limitations of a uniform monetary policy in addressing the diverse economic conditions within the euro area, suggesting the need for a more tailored approach to foster balanced and sustainable growth across the region. |
| Keywords: | monetary policy, Taylor Rule, euro area, economic growth, interest rate gap |
| JEL: | E52 E5 C23 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-77 |
| By: | Wildmer Daniel Gregori; Ângelo Ramos |
| Abstract: | This paper studies empirically the effects of monetary and macroprudential policy shocks on key policy-relevant macroeconomic variables, namely credit, consumer price, and economic growth. The analysis relies on a Bayesian TVP-SVAR model with monthly frequency data in the period 2010-2022 for Portugal. Macroprudential policy shocks are based on two microfounded intensity indicators, for capital and borrower-based measures. Results show that a monetary policy tightening reduces credit growth, especially in periods of high inflation, suggesting a cross-policy effect. In addition, a macroprudential policy tightening does not lower macroeconomic aggregates, highlighting that the implemented measures did not disrupt credit or economic growth. |
| JEL: | E58 E61 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202401 |
| By: | Rodrigo Barbone Gonzalez; Bernardus F. Nazar Van Doornik; João Barata R. B. Barroso |
| Abstract: | This paper estimates the impact of countercyclical reserve requirements (RRs) on credit. We explore differential bank exposure to RRs in matched bank-firm loan-level data from Brazil, where RRs have been used extensively to pursue financial stability. We find that, after tightening RRs, more exposed banks reduce credit to firms; after loosening, they expand credit supply. During booms, private domestic banks with lower capital adequacy are more responsive to a tightening of RRs and to a simultaneous tightening of the short-term policy rate. We also find that higher levels of economic policy uncertainty weaken this channel, and real effects in employment are modest |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:607 |
| By: | Sohei Kaihatsu (Bank of Japan); Shogo Nakano (Bank of Japan); Hiroki Yamamoto (Bank of Japan) |
| Abstract: | This paper examines the impact of shifts in long-term inflation expectations on economic activity and price dynamics in Japan using a time-varying parameter vector autoregressive (TVP-VAR) model. Our empirical findings demonstrate that exogenous positive shocks to long-term inflation expectations improve the output gap and generate upward pressure on inflation rates. These results suggest the existence of an "expectations channel" in Japan, whereby higher inflation expectations stimulate private sector spending through mechanisms such as reducing real funding costs. Looking at the analysis by period, it indicates that during the deflationary phase of the 2000s, declining long-term inflation expectations likely contributed to persistent downward pressure on prices, potentially serving as one factor that hindered Japan's exit from sustained deflation. However, following the introduction of the "price stability target" and Quantitative and Qualitative Monetary Easing (QQE) in 2013, this contribution reversed, appearing to exert upward pressure on inflation rates. In this respect, the findings suggest that the "management of expectations" intended by monetary policy during this period demonstrated some effectiveness. Nevertheless, as inflation rates subsequently declined, the upward contribution of inflation expectations to the inflation rate diminished, failing to anchor expectations to the price stability target. This outcome suggests the inherent difficulty in maintaining a sustained influence on long-term inflation expectations. |
| Keywords: | Inflation Expectation; Inflation; TVP-VAR; Monetary Policy |
| JEL: | C32 E31 E52 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e18 |
| By: | Allayioti, Anastasia; Gόrnicka, Lucyna; Holton, Sarah; Martínez Hernández, Catalina |
| Abstract: | We document that about 33% of the core inflation basket in the euro area is sensitive to monetary policy shocks. We assess potential theoretical mechanisms driving the sensitivity. Our results suggest that items of a discretionary nature, as reflected in a higher share in the consumption baskets of richer households, and those with larger role of credit in financing their purchase, tend to be more sensitive.Non-sensitive items are more frequently subject to administered prices and include non-discretionary items such as rents and medical services. Energy intensity does not seem to drive our results and the sensitive items are not dominated by durable goods, but are relatively evenly split between goods and services. Estimations over different samples show that the impact of monetary policy shocks on sensitive core inflation has become larger recently. JEL Classification: E30, E50, C32 |
| Keywords: | BVAR, euro area, inflation, monetary policy |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20243003 |
| By: | Guangling Liu; Marrium Mustapher |
| Abstract: | This study examines how different policy mix regimes affect the impact of recent US contractionary monetary policy on South Africa's inflation and business cycles. The study uses a small open economy New Keynesian Dynamic Stochastic General Equilibrium model with an integrated fiscal block to analyse these effects. Regime M (active monetary policy) is more effective at containing the spillover effects but leads to higher public debt, requiring larger future fiscal surpluses. |
| Keywords: | Monetary and fiscal policy, Spillovers, New Keynesian models, Dynamic stochastic general equilibrium model, Policy coordination |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2024-68 |
| By: | Eduardo G. C. Amaral |
| Abstract: | Rupert and Šustek (2019) showed that introducing endogenous capital into the canonical New-Keynesian model allows real interest rates to move in any direction after a positive monetary shock. According to them, this would prove that the real interest rate channel of monetary policy transmission is only observational — not structural — in that class of models, and therefore subject to the Lucas (1976) critique. In this paper, I show that such an identification problem for dynamic stochastic general equilibrium (DSGE) and vector autoregression (VAR) models can be circumvented by incorporating interest-rate smoothing — a feature as prevalent in medium-scale New-Keynesian models as capital itself — into the Taylor rule. I find that the negative association between changes in inflation and changes in the real interest rate is actually more robust than that between the former and changes in the nominal interest rate. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:606 |
| By: | Noam Ben-Ze’ev (Bank of Israel); Sigal Ribon (Bank of Israel); Roy Stein (Bank of Israel) |
| Abstract: | We examine the mutual fund market, focusing on its role in the transmission of monetary policy and its impact on asset market liquidity. Utilizing daily data on mutual fund flows in Israel, we observe that in response to contractionary monetary policy of one percentage point, mutual fund holders—which are predominantly households—reduce their investments in corporate and government bonds and equity funds by approximately 6-10% of the funds' assets, over about a month after the change. This reaction is accompanied by an expansion of money market funds, indicating a shift by retail investors from higher-risk to lower-risk assets. This finding is supported by indications of a parallel increase of Institutional investors’ holdings of higher-risk assets. Concurrently, we note a decrease in market liquidity of the underlying assets in response to the monetary tightening. Our findings suggest that the adjustments in asset portfolios through changes in mutual fund flows only partially explain the decline in liquidity. Unlike the strong and immediate reactions observed during real shocks such as the COVID crisis, responses to changes in monetary policy are moderate and gradual, posing less significant risks to market liquidity |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2024.11 |
| By: | De Polis, Andrea (University of Strathclyde & ESCOE); Melosi, Leonardo (University of Warwick, European University Institute, DNB & CEPR); Petrella, Ivan (Collegio Carlo Alberto, University of Turin & CEPR) |
| Abstract: | We document that inflation risk in the U.S. varies significantly over time and is often asymmetric. To analyze the first-order macroeconomic effects of these asymmetric risks within a tractable framework, we construct the beliefs representation of a general equilibrium model with skewed distribution of markup shocks. Optimal policy requires shifting agents’ expectations counter to the direction of inflation risks. We perform counterfactual analyses using a quantitative general equilibrium model to evaluate the implications of incorporating real-time estimates of the balance of inflation risks into monetary policy communications and decisions. |
| Keywords: | Asymmetric risks ; optimal monetary policy ; balance of inflation risks ; risk-adjusted inflation targeting ; flexible average inflation targeting JEL Codes: E52 ; E31 ; C53 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1530 |
| By: | Angeloni, Ignazio |
| Abstract: | In this paper, the ECB monetary policy stance is assessed by comparing the recent tightening cycle (2022-today) with the two preceding ones, which took place in 2000-2001 and in 2006-2008. Interest rates, quantitative indicators and monetary conditions indices (MCIs) are used for this purpose. The main finding is that at the peak of the latest tightening cycle, the ECB monetary policy stance was no more restrictive than it was at the peak of the two preceding ones; actually, probably less. This contrasts with the fact that in the more recent case inflation was higher and more persistent than in the two earlier episodes. This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 4 December 2024. |
| Keywords: | ECB Monetary Policy Stance, Tightening Cycle, Inflation |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewh:308084 |
| By: | Fengler, Matthias; Koeniger, Winfried; Minger, Stephan |
| Abstract: | We analyze the transmission of monetary policy to the costs of hedging using options order book data. Monetary policy transmits to hedging costs both by changing the relevant state variables, such as the value of the underlying, its volatility and tail risk, and by affecting option market liquidity, including the bid-ask spread and market depth. Our estimates suggest that during the peak of the pandemic crisis in March 2020, monetary policy decisions resulted in substantial changes in hedging costs even within short intraday time windows around the decisions, amounting approximately to the annual expenses of a typical equity mutual fund. |
| Keywords: | Liquidity, Monetary policy, Option order books, Option markets, COVID-19 pandemic |
| JEL: | G13 G14 D52 E52 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:usg:econwp:2025:01 |
| By: | Patrice T. Robitaille; Brent Weisberg; Tony Zhang |
| Abstract: | In the late 1990s and early 2000s, Brazil, Chile, Colombia, Mexico, and Peru (hereafter referred to as the Latin 5) adopted inflation targeting frameworks as their monetary policy strategy, allowing greater exchange rate variability than in the past. By taking this step, policy makers aimed to put an end to a historical record of high and variable inflation. |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-12-20-2 |
| By: | Andrade, Philippe (Federal Reserve Bank of Boston); Ferroni, Filippo (Federal Reserve Bank of Chicago); Melosi, Leonardo (University of Warwick, EUI, DNB & CEPR) |
| Abstract: | We introduce a method that exploits some non-gaussian features of structural shocks to identify structural vector autoregressive models. More specifically, we propose to combine inequality restrictions on the higher-order moments of the structural shocks of interest with other set-identifying constraints, typically sign restrictions. We illustrate how, both in large or small sample settings, higher-moment restrictions considerably narrows the identification of monetary policy shocks compared to what is obtained with minimal sign restrictions typically used in the SVAR literature. The proposed methodology also delivers new insights on the macroeconomic effects of sovereign risk in the Euro Area, and on the transmission of geopolitical risk to the US economy. |
| Keywords: | Shock identification ; skewness ; kurtosis ; sign restrictions ; monetary policy ; sovereign risk ; geopolitical risk. JEL Codes: C32 ; E27 ; E32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1537 |
| By: | ITO Arata; SATO Masahiro; OTA Rui |
| Abstract: | Policy uncertainty has the potential to reduce policy effectiveness. Existing studies have measured policy uncertainty by tracking the frequency of specific keywords in newspaper articles. However, this keyword-based approach fails to account for the context of the articles and differentiate the types of uncertainty that such contexts indicate. This study introduces a new method of measuring different types of policy uncertainty in news content which utilizes large language models (LLMs). Specifically, we differentiate policy uncertainty into forward-looking and backward-looking uncertainty, or in other words, uncertainty regarding future policy direction and uncertainty about the effectiveness of the current policy. We fine-tune the LLMs to identify each type of uncertainty expressed in newspaper articles based on their context, even in the absence of specific keywords indicating uncertainty. By applying this method, we measure Japan’s monetary policy uncertainty (MPU) from 2015 to 2016. To reflect the unprecedented monetary policy conditions during this period when the unconventional policies were taken, we further classify MPU by layers of policy changes: changes in specific market operations and changes in the broader policy framework. The experimental results show that our approach successfully captures the dynamics of MPU, particularly for forward-looking uncertainty, which is not fully captured by the existing approach. Forward- and backward-looking uncertainty indices exhibit distinct movements depending on the conditions under which changes in the policy framework occur. This suggests that perceived uncertainty regarding monetary policy would be state-dependent, varying with the prevailing social environment. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:24080 |
| By: | Honkapohja, Seppo; McClung, Nigel |
| Abstract: | Properties of average inflation targeting under imperfect knowledge and learning have been studied only for the Rotemberg NK model, where price stickiness arises from adjustment costs in price setting. This note fills the gap by studying average inflation targeting in the NK model with Calvo price stickiness. It is shown that in this setting the two models have the same basic properties, unless the central bank aggressively stabilizes output instead of average inflation. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:306369 |
| By: | Mr. JaeBin Ahn; Euihyun Bae; Jing Zhou |
| Abstract: | The U.S. economy has been exceeding expectations amid one of the most aggressive monetary policy tightening cycles. This paper provides firm-level evidence showing that abundant cash holdings enable firms to benefit from higher interest rates, thereby reducing net interest payments and mitigate the adverse impact from interest rate hikes to firms' investment and employment. |
| Keywords: | Corporate cash; Monetary policy transmission; Interest income; Interest expense; Net interest payment; cash holding; tightening JaeBin Ahn; Monetary tightening; Interest payments; Income; Employment; Capital spending; North America; Global |
| Date: | 2024–11–22 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/245 |
| By: | Gregor Boehl; Flora Budianto; Elod Takats |
| Abstract: | The paper investigates the macroeconomics of an energy transition – a shift from brown to green energy production through carbon taxation. Using a medium-scale DSGE model with energy production sectors and endogenous innovation in the green energy sector, we show that an energy transition – initiated through a brown energy tax – resembles a large supply side shock, causing a surge in inflation and energy prices and a decline in consumption. Innovation increases the efficiency of green energy production and drives energy prices down in the medium run. We document that monetary policy plays a critical role for the dynamics and pace of the transition, even if the transition is not explicitly part of the policy rule. A monetary policy with less emphasis on inflation stabilization allows for temporarily higher inflation and energy prices, which boosts R&D and innovation, enhancing welfare and accelerating the transition. |
| Keywords: | energy transition, innovation, inflation dynamics, monetary policy |
| JEL: | O44 E31 E52 E58 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1237 |
| By: | Diessner, Sebastian |
| Abstract: | Post-crisis accounts of economic governance in Europe have often analysed the monetary policy decisions of the supranational European Central Bank and the fiscal policy coordination of the intergovernmental Council and Eurogroup separately. This is unfortunate since both policy fields are closely linked and increasingly interdependent. We put forward a theory of monetary-fiscal interactions in the Economic and Monetary Union based on the notion of de-commitment and re-commitment. In juxtaposition to the grand theories of neo-functionalism and liberal intergovernmentalism, we argue that EU institutions serve not only to tie the member states to policy commitments but also to untie them from previous policy commitments that have become outdated and harmful. The European Central Bank’s main contribution to safeguarding the Eurozone in 2012 and 2020 has not been to enforce but to relax the monetary financing prohibition of the Treaty, and the Council’s main contribution in 2020 was not to double down on the no bail-out clause but to re-commit to risk-sharing and burden-sharing through the NextGenerationEU programme. We argue and show that economic governance in Europe has progressed through three stages of commitment. Whereas monetary-fiscal interactions followed a commitment logic during the first decade of the Economic and Monetary Union (the “old normal”), the defining feature of the second decade has been de-commitment (the “new normal”). In the Covid-19 crisis, economic governance finally entered a phase of re-commitment (taking the Economic and Monetary Union “back to the future”). The analysis has implications for our understanding of the purpose and power of supranational institutions in overcoming the problem of outdated commitments post-crisis. |
| Date: | 2024–12–17 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:vwrgs |
| By: | Dong Lou; Gabor Pinter; Semih Uslu; Danny Walker |
| Abstract: | UK government bond yields tend to rise in a two-day window before scheduled macroeconomic announcements such as labour market data releases and monetary policy news. This effect, particularly pronounced during UK bond issuances, is linked to higher term premia. Financial intermediary constraints play a role as dealers avoid accumulating inventory in pre-news windows with issuances. The composition of liquidity providers also shifts: hedge funds buy a larger share of the bond issuance outside pre-news windows, but more passive investors, such as foreign central banks and pension funds, provide liquidity in pre-news windows. We outline a simple model to rationalise these findings. |
| Keywords: | macroeconomic announcements, interest rate drift, bond supply, liquidity provision |
| JEL: | G11 G12 G14 D83 D84 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1232 |
| By: | Zhesheng Qiu (The Hong Kong University of Science and Technology); Yicheng Wang (Peking University, HSBC Business School); Le Xu (Shanghai Jiao Tong University); Francesco Zanetti (University of Oxford; Centre for Economic Policy Research) |
| Abstract: | This paper studies the design of monetary policy in small open economies with domestic and cross-border production networks and nominal rigidities. The monetary policy that closes the domestic output gap is nearly optimal and is implemented by stabilizing the aggregate inflation index that weights sectoral inflation according to the sector’s roles as a supplier of inputs and a net exporter of products within the international production networks. To close the output gap, monetary policy should assign large weights to inflation in sectors with small direct or indirect (i.e., via the downstream sectors) import shares and failing to account for the cross-border production networks overemphasizes inflation in sectors that export intensively directly and indirectly (i.e., via the downstream sectors). We validate our theoretical results using the World Input-Output Database and show that the monetary policy that closes the output gap outperforms alternative policies that abstract from the openness of the economy or the input-output linkages. |
| Keywords: | Production networks, small open economy, monetary policy |
| JEL: | C67 E52 F41 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2501 |
| By: | Michael D. Bordo; Edward Simpson Prescott |
| Abstract: | We evaluate the decentralized structure of the Federal Reserve System as a mechanism for generating and processing new ideas on banking policy in the 1950s and 1960s. We document that demand for research and analysis was driven by banking industry developments and legal changes that required the Federal Reserve and other banking regulatory agencies to develop guidelines for bank mergers. In response to these developments, the Board and the Reserve Banks hired industrial organization economists and young economists out of graduate school who brought in the leading theory of industrial organization at the time, which was the structure, conduct, and performance (SCP) paradigm. This flow of ideas into the Federal Reserve from academia paralleled the flow that was going on in monetary policy and macroeconomics at the time and contributed to the increased professionalization of research at the Federal Reserve. We document how several Reserve Banks, particularly Boston and Chicago, innovated by creating dissertation support programs, collecting specialized data, and creating the Bank Structure Conference, which became the clearinghouse for academic work on bank structure and later for bank risk and financial stability. We interpret these examples as illustrating an advantage that a decentralized central bank has in the production of knowledge. |
| Keywords: | Federal Reserve System; banking; industrial organization; financial regulation; governance |
| JEL: | B2 E58 G2 H1 L1 |
| Date: | 2025–01–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:99372 |
| By: | Ichiro Fukunaga (Bank of Japan); Yoshihiko Hogen (Bank of Japan); Yoichi Ueno (Bank of Japan) |
| Abstract: | This paper provides an overview of economic activity and prices in Japan since the 1990s, based on discussions mainly in academia as well as the survey of corporate behavior, and then discusses some issues related to the signs of change in recent years. In the 1990s, monetary policy faced a lower bound on nominal interest rates as the economy fell into stagnation and mild deflation due to various factors both on the demand and supply sides. In the 2010s, the economy recovered thanks to the effects of quantitative and qualitative monetary easing and other measures, which brought about a situation of no longer being in deflation. However, the "price stability target" of 2 percent could not be achieved while people's mindset and practices based on the assumption that wages and prices were unlikely to rise remained. After the pandemic in the 2020s, as the economic recovery and the tightening of labor markets as well as the surge in import prices have strengthened the virtuous cycle between wages and prices, it came in sight that the "price stability target" would be achieved in a sustainable and stable manner. Against this background, signs of change have been seen in the global economic landscape, labor markets, and firms' price-setting behavior. The mindset and practices based on the assumption that wages and prices were unlikely to rise, which took root during the deflation period, appear to be dissolving. |
| Keywords: | Japan's economy; Prices; Labor market; Globalization; Monetary policy |
| JEL: | E31 E32 E52 F62 J20 O53 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e14 |
| By: | Zhesheng Qiu; Yicheng Wang; Le Xu; Francesco Zanetti |
| Abstract: | This paper studies the design of monetary policy in small open economies with domestic and cross-border production networks and nominal rigidities. The monetary policy that closes the domestic output gap is nearly optimal and is implemented by stabilizing the aggregate inflation index that weights sectoral inflation according to the sector’s roles as a supplier of inputs and a net exporter of products within the international production networks. To close the output gap, monetary policy should assign large weights to inflation in sectors with small direct or indirect (i.e., via the downstream sectors) import shares and failing to account for the cross-border production networks overemphasizes inflation in sectors that export intensively directly and indirectly (i.e., via the downstream sectors). We validate our theoretical results using the World Input-Output Database and show that the monetary policy that closes the output gap outperforms alternative policies that abstract from the openness of the economy or the input-output linkages |
| Date: | 2025–01–06 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1064 |
| By: | Cristiano Cantore; Vedanta Dhamija |
| Abstract: | We study the implications of a ‘dual mandate’ of price and output stability in a heterogeneous agent New Keynesian economy where fiscal policy is set in nominal terms. Specifically, the government controls the quantity of nominal debt, enabling price level determination independently of the interest rate trajectory (Hagedorn, 2021). Our findings indicate that under an inflation-targeting regime, price level determinacy is often the exception than the norm when the central bank pursues a dual mandate. The dynamics of government spending emerge as a crucial driver of this result. To address this challenge, we show that possible solutions include price level targeting and stabilizing consumption inequality. |
| Date: | 2024–12–09 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1059 |
| By: | Rakesh Arora; Han Du; Raza Ali Kazmi; Duc-Phong Le |
| Abstract: | With the rapid digitization of financial transactions, central banks have given considerable focus in recent years to the research and development of central bank digital currencies (CBDCs). While CBDCs could offer several advantages, there are concerns about end-user privacy. Traditional methods of protecting confidentiality in banking and financial systems have primarily relied on data encryption and access control techniques. However, these techniques alone are inadequate, especially in cases where data are shared across different entities because privacy in such situations is typically governed by legal frameworks. Privacy-enhancing technologies (PETs) can offer robust protection for data throughout their lifecycle, whether stored, in transit or during processing, and ensure privacy is maintained even when data are extensively shared or analyzed. This study explores the use of PETs in the design of CBDC systems, potentially paving the way for solutions that better safeguard end-user privacy and meet rigorous data protection standards. While PETs promise significant advancements in privacy protection, they present some challenges in implementation. They can introduce performance overheads and add complexity to systems, and their effectiveness and applicability are currently limited due to their early stage of development. As these technologies evolve, it is crucial for organizations to carefully consider these factors to fully leverage PET benefits while managing associated challenges. This paper provides a comprehensive overview of how PETs can transform privacy design in financial systems and the implications of their broader adoption. |
| Keywords: | Central bank research; Digital currencies and fintech; Financial system regulations and policies; Payment clearing and settlement systems |
| JEL: | E4 E42 O3 O31 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:25-01 |
| By: | Möhlmann, Axel; Vogel, Edgar |
| Abstract: | This paper empirically analyses the effect of unemployment on mortgage loan late payments using German household panel data. Regressions with individual fixed effects suggest that for each person who becomes unemployed, the probability of missing a mortgage payment increases by two percentage points. The effect intensifies with the length of unemployment. When examining the interaction between mortgage late payments and households' debt service, we find that higher borrower-based risk amplifies the effect of unemployment. Crucially, the effect is non-linear. The odds of individuals who have lost their jobs making a late mortgage payment increases disproportionately for those with a debt service ratio of 30% to 40% of their income. This implies that capping debt service to income ratios can reduce the risk of mortgage defaults and buffer against labour market shocks, which is relevant for financial stability analysis and macroprudential regulation. |
| Keywords: | Mortgage loans, default, unemployment, DSTI, macroprudential policy, financial stability |
| JEL: | D14 G28 G21 G33 G51 J63 L85 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:308093 |
| By: | Wolf Wagner; Jing Zeng |
| Abstract: | We show that the too-many-to-fail problem can be resolved through an appropriate design of the bailout regime. In our model, optimal investment balances benefits from more banks investing in high-return projects against higher systemic costs due to more banks failing simultaneously. Under a standard bailout regime, banks herd, anticipating that simultaneous failures trigger bailouts. However, a policy that prioritizes bailing out a predesignated group of banks eliminates herding and achieves the first-best. If such a policy is not feasible, its benefits can be attained by decentralizing bailout decisions to two regulators each responsible for a separate group of banks. |
| Keywords: | systemic risk, optimal investment, too-many-to-fail, time-consistency, bailouts |
| JEL: | G1 G2 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_613 |
| By: | Melissa van Rensburg (The Treasury) |
| Abstract: | Over the past few decades, there has been a persistent decline in the level of real interest rates, both in New Zealand and in many other advanced countries. This decline is thought to reflect a decline in the neutral level of the real interest rate. The neutral level of the real interest rate can be defined as the real interest rate level that would be consistent with an economy that is in equilibrium over the medium term. That is, all resources are fully utilised, inflation is stable at its target, and the output gap is closed. Whilst the neutral interest rate is not observable, and cannot be measured with much precision or certainty, it is a useful theoretical concept that can be helpful for analysing the appropriate setting of monetary and fiscal policies. Following a long period of decline, interest rates have increased in the post-COVID-19 environment, which has raised important questions about the outlook for the structural factors affecting the level of real neutral interest rates over the long term. The objective of this note is to better understand these structural drivers. This will help us to design robust macroeconomic frameworks to ensure the effectiveness of monetary and fiscal policies in stabilising economic fluctuations. This paper gives an overview of the literature on the drivers that have contributed to the decline in real neutral interest rates over recent decades. It considers whether the direction or magnitude of these factors are likely to change in the next few decades and possible scenarios are presented. |
| JEL: | E43 E52 E61 E62 |
| Date: | 2023–08–23 |
| URL: | https://d.repec.org/n?u=RePEc:nzt:nztans:an23/05 |
| By: | Pedro Teles; Oreste Tristani |
| Abstract: | Motivated by the surge in debt levels through the pandemic crisis, we revisit the issue of the optimal financing of public debt. In contrast with the existing literature, we find that the optimal response of inflation to a large increase in debt levels is a gradual but significant and long-lasting rise in inflation. The difference in our results is due to a different assumption on the source of nominal rigidities. While the literature has focused on sticky prices, of either the Calvo or Rotemberg type, we consider sticky plans as in the sticky information set up of Mankiw and Reis (2002). A crucial feature of our results is that a significant inflation response is desirable only if the maturity of debt is (realistically) long. In a calibrated example, we show that QE policies, by reducing the maturity of the debt held by the private sector, may lead to an optimally higher response of inflation. |
| JEL: | E31 E32 E52 E58 H21 H63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202403 |
| By: | Bruce White (The Treasury) |
| Abstract: | This paper takes a high-level, helicopter view, look back at the course of fiscal and monetary policy, alongside that of the New Zealand macro-economy, over the past three decades or so. It does so with an eye to seeing how those macro variables have evolved in relation to each other, in the context of helping to inform assessments of whether and, if so how, there may be scope for fiscal and monetary policy to be coordinated in ways that help to achieve best possible macro-stabilisation outcomes. |
| Date: | 2024–08–15 |
| URL: | https://d.repec.org/n?u=RePEc:nzt:nztans:an24/07 |