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on Central Banking |
| By: | David Borner |
| Abstract: | This paper presents a novel high-frequency motive classification strategy - the Trading Markov Sign Restriction (TMSR) - to map pure monetary policy and central bank information motives onto monetary surprises. It considers high-frequency dynamics on the interest rate futures and the stock market and examines systematic phases of expectation adjustment behaviour within 30-minute windows around policy announcements. I show that three systematic phases of expectation adjustment intensities can be observed for monetary policy announcements from the Swiss National Bank (SNB). Based on these identified phases, trends in trading directions on the interest rate futures and stock market are then weighted by a measure of expectation adjustment intensity to classify pure monetary policy and central bank information motives per policy announcement. Studying the effects of pure monetary policy and central bank information surprises reveals that both types of surprises affect financial assets; however, for the Swiss case, these effects differ from each other only for the exchange rates and stock market responses. |
| Keywords: | Monetary policy, Central bank information, High-frequency identification, Motive classification |
| JEL: | C36 E43 E52 E58 G14 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2025-01 |
| By: | Dück, Alexander; Verona, Fabio |
| Abstract: | We offer a contribution to the analysis of optimal monetary policy. The standard approach to determine what policy rule a central bank should follow is to take a single structural model and minimize the unconditional volatilities of inflation and real activity. In this paper, we propose monetary policy rules that perform robustly across a broad range of structural models, focusing on minimizing volatility at the frequencies most relevant for policymakers' stabilization goals. Our findings indicate that robust rules, which account for model uncertainty, advocate significantly less aggressive policy responses. Moreover, incorporating frequency-specific stabilization preferences further moderates the optimal policy actions. Ignoring model uncertainty imposes significant costs, while the cost of insuring against this uncertainty is relatively low. This cost-benefit analysis strongly supports adopting a robust-model approach to monetary policy. |
| Keywords: | monetary policy rules, policy evaluation, model comparison, model uncertainty, frequency domain, design limits, DSGE models |
| JEL: | C49 E32 E37 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:308813 |
| By: | Burlon, Lorenzo; Ferrari, Alessandro; Kho, Stephen; Tushteva, Nikoleta |
| Abstract: | Exploiting the recalibration of ECB’s outstanding central bank funding in 2022, we show that a sharp reabsorption of bank liquidity induces a tightening impact on credit supply, as intended when centralbanks reduce their balance sheets. The tightening originates from the sudden relative convenience for banks accustomed to large liquidity holdings to more rapidly adapt to the new environment. Moreover, we show that the associated reduction in credit supply has real economic effects. JEL Classification: E51, E52, G21 |
| Keywords: | banking, credit supply, liquidity, monetary policy, QT |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253010 |
| By: | Altavilla, Carlo; Rostagno, Massimo; Schumacher, Julian |
| Abstract: | Banks are reluctant to tap central bank backup liquidity facilities and use the borrowed funds for loans to the real economy. We show that excessively parsimonious borrowing and lending can arise in a stigma-free model where the banking sector has an incentive to overissue deposits. Banks don’t heed the central bank’s call for more credit to finance investment because they simply ignore the collective gains from stronger activity in their atomistic decisions. Central banks can address this market failure by disintermediating market-based finance. A lender-of-last-resort (LOLR) system in which the central bank offers liquidity liberally but on non-concessionary conditions improves over a pure laissez-faire arrangement, where asset liquidation in the marketplace is the only source of emergency liquidity. But under LOLR banks remain reluctant to intermediate. Credit easing (CE) and quantitative easing (QE), instead, can stimulate bank borrowing and repair the broken nexus between liquidity provision and credit. Empirical analysis using bank-level and loan-by-loan data supports our model predictions. We find no empirical connection between loans and borrowed reserves obtained from conventional refinancing facilities. In contrast, there is a robust connection between loans and structural sources of liquidity: reserves borrowed under a CE program or non-borrowed, i.e. acquired from a QE injection. We also find that firms with greater exposure to banks borrowing in a CE program or holding larger volumes of non-borrowed reserves increase employment, sales, and investment. JEL Classification: E5, E43, G2 |
| Keywords: | credit easing, lending of last resort, loans, quantitative easing, reserves |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253009 |
| By: | H. Burcu Gürcihan |
| Abstract: | In this paper, we explore the interaction of monetary policy and a regulatory policy for controlling pollution within an economy populated with financially constrained producers exhibiting heterogeneity in production technology and pollution rates. Environment related components of the model include pollution externality, an abatement technology and environmental policy in the form of tax on pollutants. Our analysis is organized around two main topics: assessing the effect of monetary policy on social welfare in the presence of environmental concerns and investigating how the existence of pollution-type externality and environmental regulation influences optimal monetary policy. Our findings suggest that in the presence of heterogeneity, due to its distributional impact, monetary policy can play a role in enhancing social welfare and complementing regulatory efforts to mitigate pollution. In our model, featuring heterogeneity in productivity and pollution intensity, monetary policy influences social welfare through both pollution and consumption. The impact of monetary policy on pollution occurs indirectly through change in the allocation of production. The impact of monetary policy on consumption operates through real wage adjustments and money transfers. Furthermore, the indirect effect on consumption arises from the impact of monetary policy on optimal regulatory policy. Money growth that redirects production away from the pollutant agent creates a room for looser regulatory policy, leading to higher consumption. |
| Keywords: | Monetary policy, Environmental policy, Pollution, Cash-in-advance |
| JEL: | E58 H23 Q52 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2502 |
| By: | Ricardo J. Caballero; Tomás E. Caravello; Alp Simsek |
| Abstract: | We present evidence that noisy financial flows influence financial conditions and macroeconomic activity. How should monetary policy respond to this noise? We develop a model where it is optimal for the central bank to target and (partially) stabilize financial conditions beyond their direct effect on output and inflation gaps, even though stable financial conditions are not a social objective per se. In our model, noise affects both financial conditions and macroeconomic activity, and arbitrageurs are reluctant to trade against noise due to aggregate return volatility. Our main result shows that Financial Conditions Index (FCI) targeting—announcing a (soft and temporary) FCI target and setting the policy rate in the near future to maintain the actual FCI close to the target—reduces the FCI volatility and stabilizes the output gap. This improvement occurs because a more predictable FCI enables arbitrageurs to trade more aggressively against noise shocks, thereby "recruiting" them to insulate FCI from financial noise. FCI targeting is similar to providing forward guidance about the FCI, and in our framework it is strictly superior to providing forward guidance about the policy interest rate. Finally, we extend recent policy counterfactual methods to incorporate our model's endogenous risk reduction mechanism and apply it to U.S. data. We estimate that FCI targeting could have reduced the variance of the output gap, inflation, and interest rates by 36%, 2%, and 6%, respectively, and decreased the conditional variance of the FCI by 55%. When compared with interest rate forward guidance, it would have reduced output gap variance by 21%. We also show that a significant share of the gains from FCI targeting can be attained by an augmented version of a Taylor rule that gives a large weight to a simplified financial conditions target. |
| JEL: | E12 E32 E44 E52 G10 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33206 |
| By: | Maria Atamanchuk; Alejandro Hajdenberg; Dalia Kadissi; Giulio Lisi; Nasir H Rao |
| Abstract: | In parallel with global developments, inflation in the Central Asia and Caucasus (CCA) has exhibited large swings in recent years. This paper investigates inflation dynamics in the CCA and its main drivers and derives conclusions that can inform policymaking. The analysis is based on three empirical approaches. Inflation drivers and its dynamics are investigated through the estimation of a Phillips curve augmented with foreign factors and a panel vector autoregression. The paper also assesses the role of monetary policy in steering inflation outcomes by estimating a local projection model. The paper finds that external factors play a major role in determining CCA inflation dynamics, although domestic factors (e.g., demand conditions, expectations) also contribute. Monetary policy is found to have a statistically significant effect on inflation, including by moderating the impact of external drivers. The findings point to the need to continue strengthening policy frameworks to steer expectations and improve the effectiveness of monetary policy, while establishing adequate social safety nets to cushion the impact from global shocks. |
| Keywords: | Inflation; Caucasus and Central Asia; Phillips curve; panel VAR; local projection method; monetary policy |
| Date: | 2025–01–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/003 |
| By: | Laurence M. Ball; Junnan Zhang |
| Abstract: | This paper derives the optimal monetary-policy rule in a simple model with anchored inflation expectations and an effective lower bound (ELB) on interest rates, assuming a long-run inflation goal of 2%. With fully anchored expectations, the optimal policy is a version of average inflation targeting: to offset periods when the ELB forces inflation below 2%, policymakers target a fixed inflation rate above 2% whenever they are unconstrained. With expectations that are partially but not fully anchored, the inflation target away from the ELB varies with the state of the economy. For some parameter values, the target is highest after a period when inflation has been low. |
| JEL: | C61 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33160 |
| By: | Manthos Delis (Audencia Business School); Sotirios Kokas (University of Essex); Alexandros Kontonikas (University of Essex) |
| Abstract: | We examine how a policy change by the FDIC, which unexpectedly exempted some banks, affects corporate lending via changes in reserves during the Quantitative Easing (QE) era. To address the endogeneity of reserves, we use a unique hand-collected dataset on the bank's share of exemption from the policy shift, and differentiate between loan demand and loan supply. We find important differences in loan-level outcomes, attributed to the heterogeneous impact of the new regulation on the net return on holding reserves. The effectiveness of the risk-taking channel is significantly weaker for banks with larger exemption shares and this has real effects in terms of borrowers' leverage, growth, and return on assets. |
| Keywords: | FDIC regulation, Bank lending, Quantitative easing, Syndicated loans |
| Date: | 2024–10–16 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04768503 |
| By: | Gauti B. Eggertsson; Sergey K. Egiev |
| Abstract: | This paper presents a unified framework to explain three major economic downturns: the U.S. Great Depression, the U.S. Great Recession, and Japan’s Long Recession. Temporary economic disruptions, such as banking crises and excessive debt accumulation, can drive natural interest rates into negative territory in the short term. At the same time, structural factors, including demographic decline and rising inequality, can depress natural interest rates over short and long horizons. A negative natural interest rate and the zero lower bound (ZLB) are necessary conditions for a liquidity trap. Credible monetary policy can counteract the adverse effects of short-run liquidity traps. Diminished monetary policy credibility or persistent negative natural rates may necessitate fiscal interventions. The framework sheds light on the macroeconomic challenges of low-interest-rate environments and underscores the central importance of policy regimes. We close by reflecting on the great macroeconomic question of our time: Will short-term interest rates collapse back to zero once the inflation surge of the 2020s moves to the back mirror and the political landscape in the US has dramatically changed? |
| JEL: | E0 E52 N12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33195 |
| By: | Gary Richardson; David W. Wilcox |
| Abstract: | Congressional intent concerning the independence of the Federal Reserve matters because it protects the public from the politicization of monetary policy. Attempts to subordinate monetary policy to the President could easily end up in front of the Supreme Court. The outcome of such a case would depend importantly on the historical record. Understanding what Congress intended when it designed the decision-making structure of the Fed requires a clear understanding Marriner Eccles’ proposal for the structure of monetary policymaking in Title II of the Banking Act of 1935 and the Congressional response. Eccles' proposal vested monetary policymaking in a body beholden to the President. Eccles argued that leaders of the Fed should serve at the discretion of the President and implement the President's monetary program. The Senate and House rejected Eccles' proposal and explicitly designed the Fed's leadership structure to limit politicians'—particularly the President's—influence on monetary policymaking. |
| JEL: | B22 B26 E5 G2 N12 N22 N42 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33174 |
| By: | Jan Pr\"user |
| Abstract: | We propose a large structural VAR which is identified by higher moments without the need to impose economically motivated restrictions. The model scales well to higher dimensions, allowing the inclusion of a larger number of variables. We develop an efficient Gibbs sampler to estimate the model. We also present an estimator of the deviance information criterion to facilitate model comparison. Finally, we discuss how economically motivated restrictions can be added to the model. Experiments with artificial data show that the model possesses good estimation properties. Using real data we highlight the benefits of including more variables in the structural analysis. Specifically, we identify a monetary policy shock and provide empirical evidence that prices and economic output respond with a large delay to the monetary policy shock. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2412.17598 |
| By: | Marcos Cardozo; Yaroslav Rosokha; Cathy Zhang |
| Abstract: | We integrate theory and experimental evidence to study the emergence of different international monetary arrangements based on the circulation of two intrinsically worthless fiat currencies as media of exchange. Our framework is based on a two-country, two-currency search model where the value of each currency is jointly determined by private agents’ decisions and monetary policy formalized as changes in a country’s money growth rate. Results from the experiments indicate subjects coordinate on a regime where both currencies are accepted even when other regimes are theoretically possible. At the same time, we find the acceptance of foreign currency depends on relative inflation rates where sellers tend to reject payment with a more inflationary foreign currency. We also document the presence of learning in shaping acceptance patterns over time. |
| Keywords: | international currency, monetary policy, inflation, experimental macroeconomics |
| JEL: | C92 D83 E40 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:pur:prukra:1351 |
| By: | Jim Bullard (Purdue University); Alex Grimaud (Bank of Austria); Isabelle Salle (University of Amsterdam and Tinbergen Institute); Gauthier Vermandel (Ecole Polytechnique Paris) |
| Abstract: | We discuss the timing and strength of the Fed’s reaction to the recent inflation surge within an estimated macroeconomic model where long-run inflation expectations are heterogeneous and can lose their anchoring to the target. The resulting inflation scare worsens the real cost of disinflation. We derive a closed-form solution that retains the entire time-varying cross-sectional distribution of subjective inflation beliefs. We estimate the model using Bayesian techniques on both US macroeconomic time series and forecast data from the Survey of Professional Forecasters. Counterfactual simulations show that the timing – rather than the strength – of the policy reaction to the inflation surge is critical to contain the development of an inflation scare and prevent the entrenchment of above-target inflation. We show that the Fed fell behind the curve in 2021 since an earlier tightening could have reduced the inflation peak without triggering a recession. However, further delays would have unanchored inflation expectations, aggravated the inflation scare and strengthened the inflation surge, resulting in larger output losses. |
| Keywords: | Monetary Policy, Inflation scare, Heterogeneous expectations, Bayesian estimation |
| JEL: | C63 E31 E52 E70 |
| Date: | 2025–01–08 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20250001 |
| By: | Benjamin Schwanebeck (Fern Universität in Hagen); Luzie Thiel (University of Kassel) |
| Abstract: | Household heterogeneity has been shown to be an important driver of aggregate demand. In this research, we demonstrate that it also impacts the supply side. We build a model in which heterogeneous households vary in their extent to which they supply production factors (labor and capital). Our model offers novel results about the consequences of inequality for the supply side, showing that (i) inequality distorts the factor allocation leading to higher marginal costs, and (ii) inequality becomes part of the Phillips curve. This is the “misallocation channel of inequality†. The cyclicality of inequality crucially depends on how important capital is for production. Our findings have important implications for building models with household heterogeneity and for optimal monetary policy. |
| Keywords: | Household Heterogeneity, Inequality, Supply-Side Effects, Optimal Monetary Policy, Factor Misallocation. |
| JEL: | E52 E61 E32 D24 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:mar:magkse:202503 |
| By: | Shin-ichi Fukuda (Faculty of Economcis, The University of Tokyo); Naoto Soma (Faculty of International Social Sciences, Division of International Social Sciences) |
| Abstract: | The purpose of this study is to examine how short-term and medium-term inflation expectations evolved on a sustained basis in Japan. In the analysis, we define the "anchor of inflation expectations" as inflation expectations excluding the expected effects of the GDP gap and supply shocks. We examine the extent to which the "anchor of inflation expectations" has changed since 2010 using Japanese forecaster-level data in the "ESP Forecast." The estimated anchor of inflation expectations increased significantly after the Bank of Japan launched unprecedented monetary easing in April 2013. However, the increase was not only modest but also temporary. In contrast, the estimated anchor continued to rise after the global supply shocks became noticeable in April 2022. The estimated anchor has already exceeded 2% for short-term inflation expectations and is approaching 2% for medium-term inflation expectations. This means that the global supply shocks and the subsequent depreciation of the yen have caused a dramatic change in inflation expectations. However, the increased anchor of medium-term inflation expectations is still about the same as in 2014-2015. Given that the upward shift did not continue in 2014-2015, the Japanese economy may not be able to achieve the 2% target on a sustainable basis unless there are additional changes, such as an improvement in consumer sentiment through real wage increases. |
| URL: | https://d.repec.org/n?u=RePEc:tky:fseres:2024cf1238 |
| By: | Gauti B. Eggertsson; Finn D. Schüle |
| Abstract: | In standard New Keynesian models, future interest rate cuts have larger effects than current cuts—this is called the forward guidance puzzle. We argue that the forward guidance puzzle is not a puzzle. We show the puzzle arises from an implausibly large monetary regime change, exceeding anything in U.S. history since the Great Depression. By calibrating our model to four regime changes during the U.S. Great Depression, disciplined by changes in long-term bond yields, we find the model’s predictions are broadly consistent with historical data. |
| JEL: | E40 E5 E50 N0 N12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33180 |
| By: | Jiti Gao; Fei Liu; Bin Peng; Yanrong Yang |
| Abstract: | In this paper, we investigate a semiparametric regression model under the context of treatment effects via a localized neural network (LNN) approach. Due to a vast number of parameters involved, we reduce the number of effective parameters by (i) exploring the use of identification restrictions; and (ii) adopting a variable selection method based on the group-LASSO technique. Subsequently, we derive the corresponding estimation theory and propose a dependent wild bootstrap procedure to construct valid inferences accounting for the dependence of data. Finally, we validate our theoretical findings through extensive numerical studies. In an empirical study, we revisit the impacts of a tightening monetary policy action on a variety of economic variables, including short-/long-term interest rate, inflation, unemployment rate, industrial price and equity return via the newly proposed framework using a monthly dataset of the US. |
| Keywords: | Dependent Wild Bootstrap; Group-LASSO; Semiparametric Model; Treatment Effects |
| JEL: | C14 C22 C45 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:msh:ebswps:2024-14 |
| By: | Luís de Carvalho Campos; Lígia Maria Nunes; Mafalda Sousa Trincão; Bruno Tissot |
| Date: | 2023–02–15 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisifr:15 |
| By: | Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne - EM - EMLyon Business School - CNRS - Centre National de la Recherche Scientifique); Rodolphe Dos Santos Ferreira (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | Using a simple microfounded macroeconomic model with price making firms and a central bank maximizing the welfare of a representative household, we show that the presence of firms'motivated beliefs has stark consequences for central banks' optimal communication and stabilization policies. Under pure communication, motivated beliefs overweighting the accuracy of firms'private information may reverse the bang-bang solution of transparency found in the literature under objective beliefs and lead to intermediate levels of communication. Similarly, when communication and stabilization policies are combined, motivated beliefs overweighting firms'ability to process idiosyncratic information in general may reverse the bang-bang solution of opacity applying under objective beliefs, leading again to intermediate levels of communication and stabilization. |
| Keywords: | Motivated beliefs, Public and private information (accuracy), Overconfidence, Communication policy, Stabilization policy |
| Date: | 2024–07–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04808798 |
| By: | Pierre Delandre (Etopia); Philippe Derruder (L'homme en devenir); Fabien Fert (Chercheur indépendant); Ariane Tichit (CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne) |
| Abstract: | Defining a Monetary Topology : A framework for evaluating and comparing diverse monetary systems In a world facing complex social and environmental challenges, innovative approaches to monetary systems are essential. Our group, motivated by a concern for both society and ecology, developed the concept of "monetary topology" to evaluate and compare various monetary systems. This framework focuses on six key themes: legislator, institution, emission rules, conditionality of uses, coinage rules, and the system's operating properties, along with its societal and ecological consequences. Each theme contains objective evaluation characteristics, offering a detailed analysis of any monetary proposal. Monetary topology provides a holistic approach, evaluating the entire structure and impact of a monetary system. It allows for systematic comparison, identifying strengths, weaknesses, and areas of applicability across different systems. This approach helps policymakers, economists, and community leaders make informed decisions that align with societal and ecological goals. The tool we designed is structured around these six domains, with each characteristic assessed from monetary, social, and ecological perspectives. This multidimensional framework delivers a comprehensive assessment of each system, providing a functional method for describing and comparing monetary systems, answering critical questions such as who controls the system, how it operates, and its purpose. Aligned with the principles of RAMICS, our group aims to explore innovative monetary solutions that address pressing societal and environmental issues. Monetary topology is a powerful tool in this endeavor, providing a structured framework for evaluating, understanding, and improving monetary systems. In conclusion, monetary topology offers a fresh, comprehensive way to assess monetary systems, enabling us to transcend traditional boundaries and design systems that better serve both communities and the planet. |
| Keywords: | Monetary system topology, Monetary system analysis, Classification of monetary system |
| Date: | 2024–11–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04773860 |