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on Central Banking |
| By: | Haselmann, Rainer; Heider, Florian; Pelizzon, Loriana; Weber, Michael |
| Abstract: | Monetary policy in the euro area faces significant challenges due to the evolving economic landscape marked by the return of inflation, financial instability risks, and the consequences of unconventional monetary policy (UMP) to the operational framework of monetary policy. This article evaluates these key challenges in the context of the European Central Bank's (ECB) mandate and its broader implications. It highlights the unprecedented resurgence of inflation, which has complicated monetary policy decisions and revealed gaps in understanding household inflation expectations. Financial stability, now integral to the ECB's mandate, is strained by trade-offs between short-term and long-term stability, particularly under high-interest rate environments. Finally, UMP has disrupted traditional financial mechanisms and increased dependency on the central bank's liquidity operations. |
| Keywords: | Monetary Policy, Inflation, Financial Stability, Balance Sheet |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safepl:310334 |
| By: | Thibaut Duprey; Victoria Fernandes; Kerem Tuzcuoglu; Ruhani Walia |
| Abstract: | We introduce a history of macroprudential policy (MPP) events in Canada since the 1980s. We document the short-run effects of MPP announcements on market-based measures of systemic risk and find that MPPs can influence the market’s perception of large banks’ resilience. |
| Keywords: | Financial system regulation and policies; Financial stability; Financial institutions; Econometric and statistical methods |
| JEL: | E58 G21 G28 G32 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-4 |
| By: | Balazs Istvan Horvath (Magyar Nemzeti Bank (the Central Bank of Hungary)); Pal Peter Kolozsi (Magyar Nemzeti Bank (the Central Bank of Hungary)); Marton Varga (Magyar Nemzeti Bank (the Central Bank of Hungary)); Eszter Baranyai (Magyar Nemzeti Bank (the Central Bank of Hungary)); Kristof Lehmann (Magyar Nemzeti Bank (the Central Bank of Hungary)); Adam Banai (Magyar Nemzeti Bank (the Central Bank of Hungary)); Gabor Neszvada (Magyar Nemzeti Bank (the Central Bank of Hungary)) |
| Abstract: | Central banks can play a key role in the change in finance needed for the green transition, but green central bank measures may also have an impact on the general public’s trust in the institution. Trust, in turn, is crucial for central banks to successfully conduct monetary policy. The objective of our study is to examine how this trust may change in response to green central bank measures in Hungary, using an independently conducted survey of 1, 000 adults. Our results indicate that there is potential for some increase and a limited risk of a decrease in trust as a result of green measures. Although most respondents indicated that their trust in the central bank would not change if it took pro-environmental measures, over one third of respondents thought their trust would increase (37 per cent), while the share of those indicating a decline in trust was low (6 per cent). The majority supports the active involvement of the Central Bank of Hungary in the fight against climate change, but only as long as this does not pose risks to the inflation target and the stability of the banking system. We also find that Hungarians tend to worry about climate change and, accordingly, they consider the central bank’s role in environmental sustainability important, but have little knowledge about the tasks of central banks. |
| Keywords: | green transition, public confidence, central bank, monetary policy |
| JEL: | E58 E61 Q54 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:mnb:opaper:2025/153 |
| By: | Zabi Tarshi; Gitanjali Kumar |
| Abstract: | Changes in the term premium can reflect uncertainty about inflation, growth and monetary policy. Understanding the key factors that influence the term premium is important when central banks make decisions about monetary policy. In this paper, we derive the real term premium from the nominal term premium in Canada. |
| Keywords: | Financial markets; Interest rates; Econometric and statistical methods; Monetary policy and uncertainty |
| JEL: | C5 C58 E4 E43 E47 G1 G12 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-3 |
| By: | Buda, G; Carvalho, V. M.; Corsetti, G; Duarte, J. B.; Hansen, S.; Moura, A. S.; Ortiz, Ã .; Rodrigo, T.; Rodríguez Mora, J. V.; Alves da Silva, G. |
| Abstract: | We examine the transmission of monetary policy shocks to the macroeconomy at high frequency. To do this, we build daily consumption and investment aggregates using bank transaction records and leverage administrative data for measures of daily gross output and employment for Spain. We show that variables typically regarded as "slow moving", such as consumption and output, respond significantly within weeks. In contrast, the responses of aggregate employment and consumer prices are slow and peak at long lags. Disaggregating by sector, consumption category and supply-chain distance to final demand, we find that fast adjustment is led by downstream sectors tied to final consumption—in particular luxuries and durables—and that the response of upstream sectors is slower but more persistent. Finally, we find that time aggregation to the quarterly frequency alters the identification of monetary policy transmission, shifting significant responses to longer lags, whereas weekly or monthly aggregation preserves daily-frequency results. |
| Keywords: | Event-study, Monetary Policy, Economic Activity, High-Frequency Data, Local Projections |
| JEL: | E31 E43 E44 E52 E58 |
| Date: | 2025–02–11 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2504 |
| By: | Shunsuke Haba (Bank of Japan); Yuichiro Ito (Bank of Japan); Yoshiyasu Kasai (Bank of Japan) |
| Abstract: | This paper examines the impact of the introduction of the negative interest rate policy (NIRP) on interest rate formation and lending in Japan through literature reviews and empirical analyses. Previous studies indicated that NIRP had the effect of lowering the effective lower bound on nominal interest rates and encouraging search for yield behavior among investors, pushing down not only short-term interest rates but also long-term interest rates. Analyzing data from Japan and the euro area, we find that NIRP had a significant downward effect on interest rates for longer maturities in addition to the short-term interest rates. Next, with regard to the impact on lending, previous studies suggested that the introduction of NIRP could create accommodative financial conditions and increase lending as with conventional monetary policy that guides short-term interest rates, while it could impede the financial intermediation function by deteriorating the profitability of financial institutions ("reversal interest rate" mechanism). In this regard, analyzing data on Japanese financial institutions, we find no evidence that even financial institutions with a larger amount of deposits relative to total assets, whose earnings are likely to be affected by NIRP, experienced a declining trend in lending after the introduction of the policy. This result may have been influenced by factors such as the introduction of the three-tier system for current accounts at the Bank of Japan that eased the contractionary impact on financial institutions' earnings and maintained their risk-taking capacity. |
| Keywords: | Negative interest rate policy; Yield curve; Reversal interest rate; Lending |
| JEL: | C23 E43 E44 E52 G21 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp25e01 |
| By: | Andreeva, Desislava; Samarina, Anna; Faria, Lara Sousa |
| Abstract: | This paper explores the impact of the regulatory leverage ratio (LR) on banks’ demand for reserves and thus the pricing of overnight liquidity in the euro area money markets. We use daily transaction-level money market data during the period between January 2017 - February 2023 and examine the two major overnight money market segments – the unsecured and the secured one, distinguishing between over-the-counter (OTC) and CCP-cleared trades for the latter. We find a significant positive link between a bank’s LR and the spread between its money market borrowing rate and the DFR. Banks with a higher LR offer deposits at higher interest rates, thereby reducing the markdown vis-à-vis the DFR. The impact of the LR dampens during the period in which central bank reserves did not count towards the LR exposure measure (or the denominator of the ratio). It is stronger for G-SIBs, who need to comply with a G-SIB LR add-on on top of the minimum requirement applicable to all euro area banks. Moreover, the impact is weaker for CCP-cleared transactions compared to OTC trades, likely reflecting the possibility to net bilateral exposures if cleared via CCPs, which effectively allows banks to finance the respective gross money market exposures with a smaller share of Tier 1 capital. JEL Classification: G12, G21, G28 |
| Keywords: | bank balance sheet constraints, leverage ratio, money markets, €STR |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253016 |
| By: | Alejandro Gurrola Luna (HSBC Mexico); Stephen McKnight (El Colegio de Mexico) |
| Abstract: | We analyze how bounded rationality affects the equilibrium determinacy properties of forecast-based interest-rate rules in a behavioural New Keynesian model with limited asset market participation (LAMP). We show that the key policy prescriptions of rational expectation models do not carry over to behavioural frameworks with myopic agents. In high participation economies, the Taylor principle is more likely to induce indeterminacy when bounded rationality is introduced following the cognitive discounting approach of Gabaix (2020). Indeterminacy arises from a discounting channel and the problem is exacerbated under flexible prices and nominal illusion. In contrast, cognitive discounting plays a stabilizing role in LAMP economies, where passive policy is no longer required to prevent indeterminacy, and determinacy can potentially be restored under the Taylor principle. We investigate how our results depend on the timing of the interest-rate rule, alternative forms of bounded rationality, and the presence of a cost-channel of monetary policy. |
| Keywords: | Bounded rationality, Cognitive discounting, Equilibrium determinacy, Limited asset markets participation, Taylor principle, Monetary policy |
| JEL: | E31 E32 E44 E52 E71 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:emx:ceedoc:2025-02 |
| By: | Meijers, Huub (RS: GSBE MORSE, RS: GSBE other - not theme-related research, Macro, International & Labour Economics, Mt Economic Research Inst on Innov/Techn); Muysken, Joan (RS: GSBE other - not theme-related research, Macro, International & Labour Economics, RS: GSBE - MACIMIDE) |
| Abstract: | This paper argues that interest rate policy is a wrong tool to reduce inflation for two reasons. First, it ignores the causes of inflation, which started with bottlenecks in the economy, energy price shocks and some important sectors raising their profit markups. Second the financial fragility of the economy poses a serious risk, which should be solved first. We elaborate these points for the Dutch economy. This economy is characterised by several stylised facts which constitute a highly interdependent framework: (1) households with positive savings, large pension claims and a huge mortgage debt; (2) firms with large positive savings and large financial claims abroad; (3) a large financial sector with assets mainly invested in mortgages and abroad; (4) a large balance of trade surplus; (5) a Central Bank owning a large stock of Dutch government bonds; and (6) a government with modest negative savings and a moderate debt. The various interdependencies and imbalances are not sufficiently recognised in most debates on economic policy. The risks they imply for a financial crisis are also relevant for many other developed countries. In the paper we use an open economy stock-flow consistent model with a well-developed financial sector. Next to the banking sector we distinguish a pension fund which invests to a large extent abroad. Firms invest a considerable part of their retained earnings abroad in financial assets. We also introduce an inflationary process, based on conflict inflation, which allows for external inflation shocks. The model recognises the balance sheets and portfolios of financial assets of the six sectors in the model – the prices of these assets are explicitly modelled. The financial flows leading to wealth changes are analysed and both wealth effects and transmission channels for the impact of monetary policy play an important role. We estimate the model, using quarterly stock-flow consistent data for the Dutch economy. This enables us to reproduce the stylised facts presented above. From simulations with our model we show (a) why a price (and wage) policy is much more effective to reduce inflation than an interest rate policy (which mainly supresses economic growth); (b) how the vulnerability of the financial sector is aggravated by interest rate policy, and therefore can be used to blackmail central banks to reduce the interest rate. |
| JEL: | E44 B50 E60 G21 G32 O23 |
| Date: | 2024–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:unm:unumer:2024030 |
| By: | Alper, Koray; Baskaya, Soner; Shi, Shuren |
| Abstract: | This study investigates the influence of macroprudential policies (MaPs) on corporate investment, employing firm-bank level microdata from the European Investment Bank Investment Survey (EIBIS) for the period 2015-2022. We initially document that MaP tightening, particularly through supply-based MaPs, leads to a reduction in corporate investment. We then delve into the transmission mechanism of MaPs. Our analysis suggests that MaPs affect corporate investment through bank lending decisions. MaP tightening correlates with greater reliance on internal finance and reduced use of external finance. Further, we find that both bank and firm characteristics significantly contribute to the effect of MaPs on corporate investment. Specifically, we observe that financially weaker banks are more likely to restrict credit in response to MaP tightening. Moreover, firms that are heavily reliant on external finance for investment, as well as those that are financially weaker, appear to be more adversely affected by a reduced credit supply. Lastly, we find that MaPs exert a stronger impact on tangible investments, whereas intangible investments are less sensitive to MaPs. Our finding suggests that the insignificance is due to the lower reliance of intangible investments on external finance, verifying the presence of the bank lending channel of MaP transmission. |
| Keywords: | Macroprudential policies, bank lending, tangible investments, intangible investments, financial stability |
| JEL: | D22 E22 E58 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:eibwps:310332 |
| By: | Vedanta Dhamija; Ricardo Nunes; Roshni Tara |
| Abstract: | Housing is a closely monitored and prominent sector for households. We find that households tend to overweight house price expectations when forming inflation expectations with a coefficient of 25–45 percent, significantly above the weight of house prices in the inflation index. We first use two datasets, a multitude of controls, and an instrumental variable approach to address endogeneity. We then use a second strategy based on household heterogeneity. As expected, we find a significant effect of cognitive abilities and whether households moved house recently. We model this household behavior in a two-sector New Keynesian model with an overweighted and a non-overweighted sector and show that overweighted sectors are disproportionately more important for monetary policy. |
| Date: | 2025–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1069 |
| By: | Olena Kostyshyna; Isabelle Salle; Hung Truong |
| Abstract: | We analyze micro-level data from the Canadian Survey of Consumer Expectations through the lens of a heterogeneous-expectations model to study the state-dependent risk of inflation expectations unanchoring in low- and high-inflation environments. In our model, agents are either trend-chasing or mean-reverting forecasters of inflation. We interpret the degree of mean reversion in inflation expectations as a measure of anchoring, which varies over time with the share of agents using each approach. We find that during the post-pandemic inflation spike, trend-chasing expectations surged, resulting in a heightened risk of unanchoring expectations and entrenching above-target inflation. Furthermore, forming trend-chasing inflation expectations is associated with higher expectations for other key economic variables — such as interest rates, wages, and house prices — and a restraint in household spending. We provide additional new insights into household expectation formation, documenting that forecasting behaviors, attention, and noise in beliefs vary across socio-demographic groups and correlate with views about monetary policy. |
| Keywords: | Inflation and prices |
| JEL: | E70 E31 D84 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-5 |
| By: | Edouard Challe (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Mykhailo Matvieiev (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Episodes of low natural interest rates, even transitory, pose a challenge to monetary policy, by possibly causing the effective lower bound (ELB) on the policy rate to bind. Those episodes are more likely to occur not only when the natural rate is low on average but also when fluctuations around its average level are large. We study the responsiveness of the natural interest rate to structural aggregate shocks affecting the aggregate supply of and demand for savings. Using a quantitative overlapping-generations model, we trace back this responsiveness to the slopes of aggregate savings supply and demand curves and argue that both curves have likely flattened over the past four decades in the US This implies a greater sensitivity of the natural interest rate to structural shocks affecting the supply of and demand for aggregate savings – making it more likely, all else equal, that it fall into negative territory. |
| Keywords: | Natural interest rate, Intertemporal income effects, Overlapping-generations |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:hal-04645669 |
| By: | Gulnara Nolan; Jonathan Hambur; Philip Vermeulen |
| Abstract: | We use administrative and survey evidence from Australia to provide several new empirical facts about how monetary policy affect investment. First, we demonstrate that contractionary policy affects both the intensive and extensive margins of investment, with the latter particularly important for small and young firms, suggesting quadratic adjustment costs do not accurately capture firm-level dynamics. Second, we show that firms’ actual and expected investment respond at the same time. This suggests that models of myopia may be more realistic way of incorporating slow aggregate investment responses into models. It also suggests that the user cost channel may be less important than other channels, as user costs would adjust immediately following the policy change. Finally, we show that firms that claim to be financially constrained, a more direct measure of constraints than previously used in the literature, are more responsive to monetary policy, and that more most the difference comes through the extensive margin. Moreover, contractionary policy leads to an increase in the share of constrained firms. |
| Keywords: | investment, monetary policy, financial constraints |
| JEL: | E22 E52 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-09 |
| By: | Roberto Bonfatti; Adam Brzezinski; K. Kivanc Karaman; Nuno Palma |
| Abstract: | Monetary capacity refers to the maximum level of monetization attainable by a state, given scarcity of commodity money and the need to finance public expenditure by taxing money. We develop a model showing that monetary and fiscal capacity are complements in imperfectly monetized economies. A positive shock to fiscal capacity implies lower expected seignorage and thereby increases monetary capacity. Simultaneously, a positive shock to monetary capacity increases the efficiency of taxation, and hence the incentive to invest in fiscal capacity. We take this model to the data by exploiting an exogenous shock to Europe’s monetary capacity: the inflow of precious metals from the Americas (1550-1790). Our causal estimates indicate that increases in monetary capacity led to gradual and persistent increases in fiscal capacity in England, France and Spain. A historical overview of Europe and China from antiquity to the early-modern period confirms that monetary and fiscal capacity co-evolved in the long run. |
| Keywords: | monetary capacity, fiscal capacity, monetization, inflation, taxation, quantity theory of money, monetary non-neutrality |
| JEL: | E50 E60 H21 N10 O11 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:man:allwps:0007 |
| By: | Barbara Annicchiarico (Department of Law, Roma Tre University); Cédric Crofils (LEDa, Paris-Dauphine and PSL Research Universities) |
| Abstract: | Using data from a selection of Latin American countries affected by El Ni˜no-Southern Oscillation climate phenomena, we observe that extreme weather events can be highly disruptive for an economy, particularly in the agricultural sector, while also giving rise to inflationary pressures. Motivated by these findings, this paper examines the optimal stabilization policies for a climate-vulnerable economy with two segmented sectors: agriculture (producing food) and manufacturing. In response to climate disasters affecting agriculture, it is found to be optimal to increase fiscal transfers to farmers while maintaining core inflation at its target level. Deviating from the optimal policy mix results in smaller welfare losses as long as core inflation remains stabilized. |
| Keywords: | Climate change; Physical risk; Dual Economy; Optimal Monetary and Fiscal Policy; E-DSGE modeling |
| JEL: | E32 E52 Q54 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2504 |