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on Central Banking |
| By: | Leek, Lauren Caroline (European University Institute); Bischl, Simeon |
| Abstract: | Although central bank communication is a core monetary policy and accountability tool for central banks, little is known about what shapes it. This paper develops and tests a theory regarding a previously unconsidered variable: central bank independence (CBI). We argue that increases in CBI alter the pressures a central bank faces, compelling them to address these pressures to maintain their reputation. We fine-tune and validate a Large Language Model (Google's Gemini) to develop novel textual indices of policy pressures regarding monetary policy communication of central banks in speeches of 100 central banks from 1997 to 2023. Employing a staggered difference-in-differences and an instrumental variable approach, we find robust evidence that an increase in independence decreases monetary pressures and increases financial pressures discussed in monetary policy communication. These results are not, as generally is assumed, confounded by general changes in communication over time or singular events, in particular, the Global Financial Crisis. |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:yrhka |
| By: | Baioni Tomás |
| Abstract: | Standard macroeconomic theory shows that a contractionary monetary policy reduces inflation. However, Argentina's recent history of active contractionary monetary policy stance and increasing inflation suggests otherwise. I construct monthly monetary policy shocks, first as deviations from the Central Bank's policy rule, following Romer & Romer (2004), and secondly as daily forward premium to overcome a potential "prize puzzle", following Witheridge (2024), to estimate the dynamic responses of inflation, economic growth and bilateral exchange rate to higher interest rates. Results from a SVAR model suggest that, as opposed to standard macroeconomic theory, a 10% hike in the monetary policy rate unequivocally increases headline inflation using both approaches. Furthermore and as robustness checks, I estimate the impulse response functions with an instrumental-variables local-projections approach (IV-LP), first, and I then compare my prior estimations with a "one-step" approach, following Lloyd & Manuel (2024), and find that my original conclusions hold. I theorize that this seemingly unconventional result is consistent with standard macroeconomic theory, when one accounts for a Central Bank with increasing interest-bearing liabilities as an active policy stance. |
| JEL: | E31 E52 G15 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4709 |
| By: | Gobbi, Lucio; D'Ippoliti, Carlo; Temperini, Jacopo |
| Abstract: | In this paper we analyze the impact of less conventional monetary policy tools on the personal and functional distribution of income. We focus on the issuance of central bank digital currency (CBDC) in a comparative perspective, using a stock-flow consistent model of the eurozone economy. We consider two kinds of policies: helicopter money policies such as Quantitative Easing and the issuance of a CBDC; and scenarios not based on balance sheet expansions, such as an interest rate policy following the Pasinetti Rule, or a sterilized issuance of CBDC. Monetary policies using CBDCs tend to increase the wage share at the expense of financial rents. The targeted issuance of CBDCs to firms might produce an increase in GDP, corporate profits, and the wage share. The Pasinetti Rule reduces personal income inequality the most, but if applied mechanically, its impact on growth is also the least desirable. |
| Keywords: | Inequality; Monetary policy; Central Bank Digital Currencies; Pasinetti Rule |
| JEL: | E12 E5 G0 I3 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122934 |
| By: | Saki Bigio; Nicolas Caramp; Dejanir Silva; Dejanir H. Silva |
| Abstract: | We append the expectation of a monetary-fiscal reform into a standard New Keynesian model. If a reform occurs, monetary policy will temporarily aid debt sustainability through a temporary burst in inflation. The anticipation of a possible reform links debt levels with inflation expectations. As a result, interest rates have two effects: they influence demand and affect expected inflation in opposite directions. The expectations effect is linked to the impact of interest rates on public debt. While lowering inflation in the short term is possible through demand control, inflation tends to rise again due to its impact on inflation expectations (sticky inflation). Optimal monetary policy may allow low real interest rates after fiscal shocks, temporarily breaking away from the Taylor principle. We assess whether the Federal Reserve’s “staying behind the curve” was the right strategy during the recent post-pandemic inflation surge. |
| Keywords: | monetary policy, monetary-fiscal coordination, inflation expectations |
| JEL: | E31 E52 E63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11495 |
| By: | Ansgar Rannenberg (Economics and Research Department, National Bank of Belgium) |
| Abstract: | I show that in linear rational expectation models, the effect of a monetary tightening can be simulated using contemporaneous and anticipated monetary policy shocks that replicate the forward curves observed during the period of interest, normalized with the forward curve observed in the quarter before the tightening period of interest begins. In particular, the shocks in response to which the tightening occurs are irrelevant. All required information is incorporated in the normalized forward curves. I confirm this result via simulations and a formal proof. Then I use it to assess the effects of the recent monetary tightening in the Euro Area.. |
| Keywords: | : policy counterfactualsmonetary policyinterest rate expectations |
| JEL: | E52 E43 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202501-471 |
| By: | Martin Groiss; Nicolas Syrichas |
| Abstract: | How do different monetary policy tools influence residential housing markets, and how do these effects vary between owner-occupied and rental segments? To answer this question, we assemble a new monthly regional dataset from 35 million real estate listings over the period 2007-2023 and exploit high-frequency monetary policy surprises for identification. Focusing on Germany—where half of households rent—we find that expansionary monetary policy significantly boosts property prices, with forward guidance and quantitative easing having more pronounced and persistent effects than conventional rate cuts. Rents also rise, albeit more modestly and less persistently. Housing demand—measured by daily contacts per listing—rises sharply, while the number of for-sale properties falls, tightening the owner-occupied market more than the rental market. Linking these findings to survey microdata, we show that renters become homeowners at higher rates, homeowners reduce home-to-home moves, and renters make more rent-to-rent transitions. The results suggest that accommodative monetary policy can widen price-to-rent ratios, fueling housing affordability pressures and potentially exacerbating the wealth gap between owners and renters. |
| Keywords: | housing markets, monetary policy, rents, property prices, forward guidance, quantitative easing, household mobility |
| JEL: | E52 R21 R31 |
| Date: | 2025–01–14 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0058 |
| By: | Barthelemy, Jean (Banque de France); Mengus, Eric (HEC Paris); Plantin, Guillaume (Sciences Po) |
| Abstract: | Fiscal dominance refers to situations in which fiscal policy imposes restrictions on monetary policy. Large shifts in the dynamics of sovereign debts, surpluses, and central bank's balance sheets since the Great Financial Crisis have created the perception of a heightened risk of such fiscal dominance in major jurisdictions. This paper reviews the theoretical and empirical literature on fiscal dominance. We offer a simple theory in which fiscal dominance arises as the outcome of strategic interactions between the government, the central bank and the bond markets. |
| Keywords: | Fiscal dominance; game of chicken; Fiscal-Monetary Interactions |
| JEL: | E31 E52 E63 H63 |
| Date: | 2024–11–08 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1532 |
| By: | Jyotsana Kala; Lucie Lebeau; Lu Wang |
| Abstract: | We study the dynamic interplay between monetary policy and market power in a decentralized monetary economy. Building on Choi and Rocheteau (2024), our key innovation is to model rent seeking as a process that takes time, allowing market power to evolve gradually. Our model predicts that a gradual reduction in the nominal interest rate causes a simultaneous increase in rent-seeking effort and producers’ market power, consistent with the stylized correlation observed in the U.S. over the last few decades. Producer entry can however reverse this relation in the short run, and neutralize it in the long run. Indeterminacy and hysteresis emerge when consumers benefit from valuable outside options, with short-run monetary policy shocks potentially locking the economy into high- or low-market-power equilibria in the long run. |
| Keywords: | search; money; market power; monetary policy |
| JEL: | D82 D83 E40 E50 |
| Date: | 2025–01–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99409 |
| By: | Michael D. Bordo; Klodiana Istrefi; Humberto Martínez |
| Abstract: | This study provides evidence on the usage and preferences of Federal Reserve’s Federal Open Market Committee (FOMC) regarding the balance between rules and discretion in policy decisions. Analyzing FOMC transcripts over 40 years, we find that while Discretion has been a consistent feature in the language of the FOMC, the use of the language of Rules surged notably in the mid-1990s, aligning with theoretical advancements in monetary policy. We identify that a rise in Discretion terminology occurs during economic downturns and periods of heightened uncertainty. In contrast, a rise in the language of Rules is supported by higher references to terms such as “credibility” and “commitment, ” and is more prevalent among hawkish FOMC members. Our findings link the increased use of the language of Rules (Discretion) language to tighter (easier) monetary policy, revealing a significant role of this debate in shaping policy outcomes, in particular periods. |
| JEL: | E03 E50 E61 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33262 |
| By: | Dibiasi, Andreas (Aix Marseille University); Mikosch, Heiner (ETH Zürich); Sarferaz, Samad (ETH Zurich); Steinbach, Armin (HEC Paris) |
| Abstract: | In a novel survey, we study how German senior government officials systematically adjust fiscal policy in response to economic shocks, focusing on their fiscal responses to a contractionary monetary policy shock. Using randomized vignette treatments, we examine how officials update GDP and inflation expectations under fiscal and monetary policy shock scenarios and assess their preferred fiscal adjustments. Our findings show that officials predominantly respond by increasing debt and reducing spending, with tax increases playing a minor role, often combining multiple fiscal instruments. Counterfactual analysis reveals that officials’ reasoning aligns with key insights from the Heterogeneous Agent New Keynesian literature. |
| Keywords: | Fiscal policy; Monetary policy; Fiscal-monetary interaction; Expectation formation; Survey experiment |
| JEL: | D83 E52 E62 E63 |
| Date: | 2024–10–02 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1531 |
| By: | Gunther Schnabl; Taiki Murai |
| Abstract: | The paper examines the relationship between money and prices in Japan based on Fisher’s (1911) transactions version of the quantity theory of money. Money is defined as aggregate debt less net foreign assets. A general price index is constructed from consumer prices, real estate prices, stock prices, nominal wages and the nominal effective exchange rate. Evidence shows a high correlation between money growth and general price inflation for Japan from 1980 to 2022, supporting the view that inflation is a monetary phenomenon. The paper argues that Japan’s inflation has remained low since the 1990s because the policy mix of monetary and fiscal expansion led to the fall of private debt and the rise of government debt, resulting in a low money growth at the aggregate level. An exit from monetary and fiscal expansion would contribute to the recovery of private debt creation, which would restore the money, price and growth dynamics in Japan. |
| Keywords: | quantity theory of money, inflation, monetary policy |
| JEL: | E31 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11476 |
| By: | Michael D. Bordo; Edward S. 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. |
| JEL: | B20 E58 G2 H1 L1 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33263 |
| By: | Aromí J. Daniel; Heymann Daniel |
| Abstract: | We propose a method to generate “synthetic surveys” that reveal policymakers’ perceptions and narratives. This exercise is implemented using 80 time-stamped Large Language Models (LLMs) fine-tuned with FOMC meetings’ transcripts. Given a text input, fine-tuned models identify highly likely responses for the corresponding FOMC meeting. We demonstrate the value of this tool in three different tasks: measurement of perceived economic conditions, evaluation of transparency in Central Bank communication and extraction of policymaking narratives. Our analysis covers the housing bubble and the subsequent Great Recession (2003-2012). For the first task, LLMs are prompted to generate phrases that describe economic conditions. The resulting outputs show policymakers informational advantage. Anticipatory ability increases as models are prompted to discuss future scenarios and financial conditions. To analyze transparency, we compare the content of each FOMC meeting minutes to content generated synthetically through the corresponding fine-tuned LLM. The evaluation suggests the tone of each meeting is transmitted adequately by the corresponding minutes. In the third task, LLMs produce narratives that show policymakers’ views on their responsibilities and their understanding of main forces shaping macroeconomic dynamics. |
| JEL: | E58 E47 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4707 |
| By: | Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos |
| Abstract: | This paper quanti.es the future implications of repayment of bailout loans received by Greece from the EU in the previous decade. These debt obligations amount today to 240 billion euros or 70% of the country’s total public debt and have to be repaid by 2070. This is investigated in a dynamic general equilibrium model calibrated to the Greek economy, in which fiscal policy is conducted under the rules of the new fiscal governance framework and quantitative monetary policy is subject to the rules of the Eurosystem. Our simulations show that, other things equal, repayment will have recessionary implications in the years to come, although the magnitude of these unpleasant implications will depend on how much privately-held public debt rises as the EU-held public debt falls. We then search for ways to mitigate these recessionary effects. While NGEU/RRF funds as they take place at the moment, as well as a new hypothetical support from the ES in the form of more quantitative easing are found to have small and/or temporary ben-eficial effects only, our simulations show that what can really help is an improvement in total factor productivity. |
| Keywords: | international loans, fiscal policy, monetary regimes |
| JEL: | F34 E62 E42 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11519 |
| By: | Katsafados, Apostolos G.; Leledakis, George N.; Panagiotou, Nikolaos P.; Pyrgiotakis, Emmanouil G. |
| Abstract: | We combine machine learning algorithms (ML) with textual analysis techniques to forecast bank stock returns. Our textual features are derived from press releases of the Federal Open Market Committee (FOMC). We show that ML models produce more accurate out-of-sample predictions than OLS regressions, and that textual features can be more informative inputs than traditional financial variables. However, we achieve the highest predictive accuracy by training ML models on a combination of both financial variables and textual data. Importantly, portfolios constructed using the predictions of our best performing ML model consistently outperform their benchmarks. Our findings add to the scarce literature on bank return predictability and have important implications for investors. |
| Keywords: | Bank stock prediction; Trading strategies; Machine learning; Press conferences; Natural language processing; Banks |
| JEL: | C53 C88 G00 G11 G12 G14 G17 G21 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122899 |