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on Central Banking |
| By: | Ivan, Miruna-Daniela (Bank of England); Banti, Chiara (Essex Business School, University of Essex); Kellard, Neil (Essex Business School, University of Essex) |
| Abstract: | This paper explores a novel directional liquidity-based transmission channel of monetary policy, which explains the heterogeneity in the response of commodity future prices to monetary policy. Employing an event-study analysis with a high-frequency instrumental variable estimator, we find that the trading volume of our sample of commodity futures declines following FOMC announcements. Further, we find that more traded commodities are also more exposed to monetary policy surprises, suggesting a significant role for trading activity in the transmission of monetary policy shocks to commodity markets. Lastly, we show that the direction of the target rate change matters to this transmission mechanism of monetary policy. |
| Keywords: | Monetary policy; monetary transmission; financial liquidity; commodity futures |
| JEL: | E52 G12 G14 |
| Date: | 2025–01–24 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1114 |
| By: | Swapan-Kumar Pradhan; Viktors Stebunovs; Előd Takáts; Judit Temesvary |
| Abstract: | We use bilateral cross-border bank claims by nationality to assess the effects of geopolitics on cross-border bank flows. We show that a rise in geopolitical tensions between countries — disagreements in UN voting, broad sanctions, or sentiments captured by geopolitical risk indices — significantly dampens cross-border bank lending. Elevated geopolitical tensions also amplify the international transmission of monetary policies of major central banks, especially when geopolitical tensions coincide with monetary policy tightening. Overall, our results suggest that geopolitics is roughly as important as monetary policy in driving cross-border lending. |
| Keywords: | Monetary policy; Geopolitical tensions; Cross-border claims; Diff-in-diff estimations |
| JEL: | E52 F34 F42 F51 F53 G21 |
| Date: | 2025–02–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1403 |
| By: | David Andolfatto; Fernando M. Martin |
| Abstract: | We use an analytically tractable DSGE model to study the surge in the cost of living in the wake of the COVID-19 pandemic. A calibrated version of the model is used to assess the conduct of US monetary and fiscal policy over the 2020-2024 period. The model is also used to estimate the economic and welfare consequences of alternative monetary and fiscal policies. The calibrated model suggests that while the extraordinary fiscal transfers made in 2020-21 generally improved economic welfare, they were significantly larger than needed. These welfare gains came primarily in the form of insurance, not stimulus. For the observed fiscal policy, an optimal monetary policy would not have resulted in a significantly different inflation dynamic. Although monetary policy could have prevented the inflation surge with sufficient fiscal support, such a policy would have required a permanently higher real rate of interest and a permanent recession. Finally, our model suggests that while observed monetary policy muted the inflation dynamic, it did not significantly alter the total amount of inflation experienced. Finally, the COVID-19 inflation would have been mean-reverting even without an aggressive tightening of monetary policy. |
| Keywords: | monetary policy; fiscal policy; inflation; price level; COVID-19 |
| JEL: | E40 E52 E60 E63 E65 |
| Date: | 2025–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:99576 |
| By: | Burr, Natalie (Bank of England) |
| Abstract: | This paper studies how monetary policy impacts inflation expectations in the United Kingdom. Using higher moments of the distribution of inflation expectations, I construct a summary measure of expectations for households, firms, professional forecasters and financial markets. In a Bayesian VAR identified using a high frequency-identified monetary policy shock series, I find that a monetary policy tightening causes significant variation in the response of inflation expectations across groups: firms’ and financial market median expectations fall, while households’ inflation expectations rise. I document that monetary policy decisions act as a stabilisation mechanism by reducing the dispersion of expectations 12–18 months following a shock. |
| Keywords: | Inflation expectations; monetary policy transmission; structural VAR |
| JEL: | C38 E31 E52 E58 |
| Date: | 2025–01–10 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1109 |
| By: | Khuderchuluun Batsukh; Nicolas Groshenny; Naveed Javed |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tep:teppwp:wp25-02 |
| By: | Hemingway, Benjamin (Bank of England) |
| Abstract: | The introduction of an unremunerated retail central bank digital currency (CBDC) is currently under consideration by several central banks. Motivated by the decline in transactional cash usage and the increase in online sales in the UK, this paper provides a theoretical framework to study the underlying drivers of these trends and the welfare implications of introducing an unremunerated retail CBDC. I develop a cash credit model with physical and digital retail sectors, endogenous entry of firms and directed consumer search. Calibrating to UK data between 2010 and 2022 the model suggests that there are positive welfare gains from introducing an unremunerated retail CBDC, but these have likely declined over time. |
| Keywords: | CBDC; credit; digital currency; money |
| JEL: | E41 E42 E58 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1101 |
| By: | Mark M. Spiegel |
| Abstract: | The period following the global financial crisis was marked by low interest rates and low responsiveness of bank lending to monetary policy. This led some to conclude that the bank lending channel for monetary policy to influence economic activity had weakened. This paper revisits the responsiveness of the bank lending channel using a bank-level panel of US Call Report data and updated measures of U.S. monetary policy shocks. Results indicate that the efficacy of the bank lending channel increased over our sample period. We find tepid responses in bank lending to monetary shocks from 2012H1 through 2016H2, matching the existing literature, but significantly more robust responsiveness after liftoff, represented by the latter portion of our sample from 2017H1 through 2023H2. Separating the later panel by bank size reveals that the bank lending channel is larger for small and medium-sized banks than for large banks over this later period, also consistent with studies predating the global financial crisis. Increases in responsiveness at conventional rates are even greater for small business lending. An interactive specification over our entire sample period confirms that the stronger recent bank lending responses to monetary policy shocks are associated with sufficiently high prevailing levels of the federal funds rate. |
| Keywords: | credit channel; monetary policy; interest rate channel |
| JEL: | E58 E63 G14 G18 G32 |
| Date: | 2025–02–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99557 |
| By: | Kaminska, Iryna (Bank of England); Kontoghiorghes, Alex (Bank of England); Ray, Walker (Federal Reserve Bank of Chicago, London School of Economics and CEPR) |
| Abstract: | We analyse the role of preferred habitat (PH) demand in the transmission of quantitative tightening (QT) and quantitative easing (QE) programmes. For this, we combine granular data from Bank of England QT and QE auctions with secondary market bond level transaction data. We find that when dealers traded on behalf of pension funds and insurance companies, their bidding at QE auctions was less elastic, in line with PH demand theory. In contrast, during QT auctions, there is no evidence of significant PH demand pressures. To account for the observed asymmetric demand effects during QE and QT, we build on and extend the constant elasticity demand model by Vayanos and Vila (2021), so that the PH demand elasticity can depend on available bond supply. We show that the decreased role of the PH demand channel during QT is consistent with the increased government bond issuance post the Covid-19 pandemic. |
| Keywords: | Quantitative easing; quantitative tightening; central bank auctions; monetary policy; monetary transmission mechanism; preferred habitat; gilt market |
| JEL: | E43 E52 E58 G12 |
| Date: | 2025–01–10 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1108 |
| By: | Chan, Jenny (Bank of England) |
| Abstract: | Sentiments, or beliefs about aggregate demand, can be self-fulfilling in models departing slightly from the complete information benchmark in the New Keynesian framework. Through its effect on aggregate variables, the policy stance determines the degree of complementarity in firms’ production (pricing) decisions and consequently, the precision of endogenous signals that firms receive. As a result, aggregate fluctuations can be driven by both fundamental and non-fundamental shocks. The distribution of non-fundamental shocks is endogenous to policy, introducing a novel trade-off between stabilising output and inflation. Both strong inflation targeting and nominal flexibilities increase the variance of non-fundamental shocks, which are shown to be suboptimal. Moreover, the Taylor principle is no longer sufficient to rule out indeterminacy. Instead, an interest rate rule that places sufficiently low weight on inflation eliminates non-fundamental volatility and thereby the output-inflation trade-off. |
| Keywords: | New Keynesian; sunspots; animal spirits; rational expectations; optimal monetary policy; indeterminacy |
| JEL: | E31 E32 E52 E63 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1106 |
| By: | Pablo Aguilar Perez |
| Abstract: | This paper examines the effects of monetary policy on the profitability of life insurers during the prolonged low-interest-rate period, leveraging a novel dataset of 31 leading French insurers from 2009 to 2018. We classify insurers into three business models—bancassurers, traditional S.A insurers, and mutual insurers—and provide new evidence on the mechanisms driving performance differences. Bancassurers demonstrate consistently higher profitability levels and expanding market shares over the period. This advantage is driven by their ability to mitigate the "income channel" effect of low rates by rapidly reducing guaranteed yields offered to policyholders more effectively than their peers, thereby sustaining profitability and gaining market share throughout the low-yield environment. We also examine how insurers’ portfolio strategies shape profitability in this context. Specifically, we explore the "hunt-for-yield" effect by analyzing the impact of higher equity allocations compared to bonds, the shift toward greater reliance on unit-linked policies, and the role of capital adequacy structures. Our findings reveal substantial heterogeneity in how different types of insurers adapt to monetary policy, illustrating the diverse effects of prolonged monetary easing on non-bank financial intermediaries. |
| Keywords: | Low interest rate environment, Insurance profitability, Monetary policy, Financial stability |
| JEL: | G22 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-8 |
| By: | DiGiuseppe, Matthew (Leiden University); Garriga, Ana Carolina (University of Essex); Kern, Andreas |
| Abstract: | Why do citizens support central bank independence (CBI)? Despite important research on economic and political reasons to grant independence to central banks, we know little about what the public thinks about CBI. This is important given citizens' potential role in constraining politicians' ability to alter CBI. We hypothesize that support for CBI is influenced by citizens' limited understanding of central bank governance and their beliefs about who will gain control over monetary policy if independence is reduced. Our expectations are confirmed by a preregistered survey experiment and a pre-post-election test in the U.S. Support for CBI increases when respondents learn that the President would gain more influence if independence was reduced. This support decreases when respondents expect a co-partisan to lead the executive branch. These findings shed light on the legitimacy basis of monetary institutions in politically polarized contexts and, from a policy perspective, indicate the limits of central bank communication. |
| Date: | 2025–02–08 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:trpgz_v1 |
| By: | NAKAJIMA, Jouchi |
| Abstract: | This study revisits the impact of US monetary policy (MP) spillovers on international bond markets through an empirical analysis of Japanese government bond yields. The analysis investigates how US MP shocks affect the yield curve and the components of expected rates and term premiums. A key insight of this study, supported by the empirical findings, is that the impacts of US MP spillovers on the term premium of domestic yields are muted during the yield curve control (YCC) policy, where the targeted long-term yield is kept within a certain small range. This novel finding implies that the policy is effective in preventing longterm yields from increasing upward pressure from US MP spillovers. |
| Keywords: | Monetary policy, Term premium, Shadow rate, Yield curve control |
| JEL: | E43 E52 E58 G12 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hituec:760 |
| By: | Salib, Michael (Bank of England); Ghazaleh, Mesha (Bank of England) |
| Abstract: | The Bank’s monetary policy objectives are among the most significant statutory objectives bestowed by Parliament on any UK public authority. The objectives make the Bank responsible for maintaining price stability and, subject to that, for supporting the government’s economic policy, including its objectives for growth and employment. When granted in 1998, the objectives were a watershed moment in the three centuries‑old history of an institution that had long‑resisted having its role prescribed or, as Bank officials at the time saw it, constrained by, law. Yet the Bank quickly embraced the benefits of having greater clarity in its legal mandate, and the objectives have proved remarkably resilient in directing the Bank’s monetary response over the past 25 years. This paper offers an in‑depth historical and legal account of the Bank’s statutory monetary policy objectives; it explores the relevant statutory provisions in the Bank of England Act 1998 and the debates that surrounded their drafting, as well as their application and interpretation in practice. |
| Keywords: | Monetary policy; objectives; price stability |
| JEL: | E52 E58 E63 K23 |
| Date: | 2025–01–17 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1110 |
| By: | Silva Paranhos, Livia (Bank of England) |
| Abstract: | How do monetary policy shocks affect firm investment? This paper provides new evidence on US non-financial firms and a novel non-parametric framework based on random forests. The key advantage of the methodology is that it does not impose any assumptions on how the effect of shocks varies across firms thereby allowing for general forms of heterogeneity in the transmission of shocks. My estimates suggest that there exists a threshold in the level of firm risk above which monetary policy is much less effective. Additionally, there is no evidence that the effect of policy varies with firm risk for the 75% of firms in the sample with higher risk. The proposed methodology is a generalisation of local projections and nests several common local projection specifications, including linear and nonlinear. |
| Keywords: | Local projection; impulse response estimation; nonlinearity; heterogeneity; firm investment |
| JEL: | C14 C23 E22 E52 |
| Date: | 2024–12–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1100 |
| By: | Bracke, Philippe (Bank of England); Everitt, Matthew (Bank of England); Fazio, Martina (Bank of England); Varadi, Alexandra (Bank of England) |
| Abstract: | This study examines how UK mortgagors adjusted their spending and saving habits in response to the post-2021 monetary tightening, highlighting the interplay between collateral‑driven borrowing and the cash-flow channel of monetary policy. Unlike in markets with long-term fixed-rate mortgages, UK mortgagors face heightened exposure to interes rate shifts due to periodic refinancing requirements. By combining transaction-level data from a financial app with loan-level records, we create a detailed and representative view of UK mortgagors’ monthly balance sheets from 2021 to 2023. This allows us to explore how mortgage modifications – particularly equity extraction and term extensions – shapes household responses to rising borrowing costs. Our findings reveal stark heterogeneity: households leveraging equity extraction, enabled by nominal house price appreciation, offset higher mortgage payments and maintain or increase discretionary spending while reducing unsecured debts. Conversely, households unable or unwilling to adjust loans face significant spending cuts in response to higher rates. These results suggest that collateral-driven debt, amplified by rising property values and mortgage term extensions, can partially compensate for the cash-flow channel in driving consumption and financial behaviour during tightening cycles. This highlights the dual role of loan modifications: while mitigating immediate consumption declines, they may affect monetary policy transmission for some groups and contribute to more persistent borrowing. |
| Keywords: | Monetary policy; household behaviour; consumption; high-frequency data; difference-in-differences; panel data |
| JEL: | D14 E21 G51 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1105 |
| By: | Garriga, Ana Carolina |
| Abstract: | How has central bank independence (CBI) changed over time and across countries? This paper introduces the most comprehensive dataset on de jure CBI, including country-year observations covering 192 countries between 1970 and 2023. The dataset identifies statutory reforms affecting CBI, their direction, and codes four dimensions of CBI (personnel independence, central bank’s objectives, policy formulation, and limits on lending). It includes two CBI indices and a regional diffusion variable. The broader coverage of this dataset has important implications. First, although this dataset coding decisions are generally consistent with previous research, countries included only in this dataset tend to have lower CBI and differ in other dimensions with those previously coded. This suggests that systematically missing data in other data sources may have effects on inferences. Second, extended temporal coverage allows analyzing the evolution of central bank governance for more than a decade since the Global Financial Crisis. Finally, the data show that although there is a global tendency towards more CBI, there is significant variance across and within regions, including numerous reforms reducing CBI in the past two decades. This data contribution is important for research beyond the study of monetary institutions and their effects. |
| Keywords: | Central bank independence; Central banks; Data; Delegation; Global Financial Crisis; Great Moderation; Reforms |
| JEL: | E02 E5 E58 Y10 |
| Date: | 2025–01–21 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123578 |
| By: | Klaus, Hendrik |
| Abstract: | This paper explores the genesis of the German monetary framework between 1866 and 1876, with a specific focus on the 1875 Banking Act. The Banking Act constituted the final piece within the legislation that established Germany's post- unification monetary order, regulated bank note issuance across the Reich, and established the Reichsbank as Germany's first central bank. The Banking Act has rarely featured prominently in the literature, and it has often been regarded as a subordinate aspect of Germany's adoption of a gold currency. Drawing on a broad range of primary sources, this study argues that the Banking Act was in fact the most complicated and politicised element of the monetary reform. The debates on the centralisation of note issuance and banking functions are a fascinating window into how late nineteenth-century monetary management developed within the political imperatives of the time. As a case study, the historical perspective on the development of Germany's monetary framework is relevant in a broader context. It offers insight into the dynamics that have shaped political economies past and present, and it enables us to reflect critically on outcomes and alternatives for specific forms of monetary governance |
| Keywords: | Bankgesetz, Banking Act, Reichsbank, Ludwig Bamberger, Otto Michaelis, financial history, central bank history, free banking |
| JEL: | N13 N23 B15 B17 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ibfpps:311086 |
| By: | Joyce, Michael (Bank of England); Lengyel, Andras (Bank of England) |
| Abstract: | We analyse the market reaction of yields to UK government debt auction announcements to quantify the potential impact of quantitative tightening (QT) by the Bank of England. Our results suggest that the yield reaction to debt issuance surprises comes through both duration risk and local supply channels, and depends critically on the level of market stress. Based on these estimates, a fully unanticipated announcement that mimics the Bank’s first annual QT programme would raise 10-year yields by 20 basis points under low market stress, with the impact from passive unwind broadly equivalent to that from active sales. |
| Keywords: | Yield curve; government debt auctions; quantitative easing; quantitative tightening |
| JEL: | E43 E52 E58 G12 G14 G18 |
| Date: | 2024–11–15 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1097 |
| By: | Ozge Akinci; Martín Almuzara; Silvia Miranda-Agrippino; Ramya Nallamotu; Argia M. Sbordone; Greg Simitian; William Zeng |
| Abstract: | Our previous post identified strong global components in the slow-moving and persistent dynamics of headline consumer price index (CPI) inflation in the U.S. and abroad. We labeled these global components as the Global Inflation Trend (GIT), the Core Goods Global Inflation Trend (CG-GIT) and the Food & Energy Global Inflation Trend (FE-GIT). In this post we offer a narrative of the drivers of these global inflation trends in terms of shocks that induce a trade-off for monetary policy, versus those that do not. We show that most of the surge in the persistent component of inflation across countries is accounted for by global supply shocks—that is, shocks that induce a trade-off for central banks between their objectives of output and inflation stabilization. Global demand shocks have become more prevalent since 2022. However, had central banks tried to fully offset the inflationary pressures due to sustained demand, this would have resulted in a much more severe global economic contraction. |
| Keywords: | global inflation; persistence; Multivariate Core Trend (MCT); supply chains; demand shocks |
| JEL: | E31 E37 E52 F34 |
| Date: | 2025–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99630 |
| By: | Koetter, Michael; Noth, Felix; Wöbbeking, Carl Fabian |
| Abstract: | We study whether and how EU banks comply with tighter macroprudential policy (MPP). Observing contractual details for more than one million securitized loans, we document an elusive risk-shifting response by EU banks in reaction to tighter loan-to-value (LTV) restrictions between 2009 and 2022. Our staggered difference-in-differences reveals that banks respond to these MPP measures at the portfolio level by issuing new loans after LTV shocks that are smaller, have shorter maturities, and show a higher collateral valuation while holding constant interest rates. Instead of contracting aggregate lending as intended by tighter MPP, banks increase the number and total volume of newly issued loans. Importantly, new loans finance especially properties in less liquid markets identified by a new European Real Estate Index (EREI), which we interpret as a novel, elusive form of risk-shifting. |
| Keywords: | European Real Estate Index, LTV, macroprudential policy, risk shifting |
| JEL: | H30 R00 R31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhdps:311202 |