|
on Central Banking |
| By: | Anthony Brassil (Reserve Bank of Australia); Christopher G Gibbs (University of Sydney); Callum Ryan (Reserve Bank of Australia) |
| Abstract: | Expectations play a central role in the transmission of monetary policy, but how people form expectations is widely debated. We revisit optimal monetary policy design in a model with behavioural expectations that nest rational and adaptive learning beliefs as special cases, and approximates several alternative expectations theories, such as myopic or level- k expectations. Optimal policy is a weighted average inflation target plus adjustments for belief persistence and constraints faced by the central bank (information frictions and the zero lower bound). Optimal policy is well-approximated in all cases by flexible average inflation targeting, where we make explicit what average and flexible mean. |
| Keywords: | optimal policy; behavioural macroeconomics; average inflation targeting; zero lower bound |
| JEL: | D83 D84 E31 E32 E52 E71 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2025-02 |
| By: | List, Sophia; Metiu, Norbert |
| Abstract: | This paper examines the impact of monetary policy and central bank information on banks' lending using data on German bank balance sheets from 2002 to 2018. Local projection estimates show that the volume of loans to non-financial corporations declines significantly after a restrictive monetary policy shock that is independent of non-monetary information in central bank announcements. This decline is stronger for relatively small banks with less liquid balance sheets, which have less access to external financing. By contrast, the volume of loans increases significantly following an unexpected monetary policy rate tightening that is associated with favorable information on the economic outlook. This increase is stronger for relatively small banks with more liquid balance sheets, which are better able to boost lending. This insight adds a new dimension to the role of banks in the transmission of central bank policy. |
| Keywords: | Bank lending, Central bank, Credit, Information shock, Monetary policy, Transmission mechanism |
| JEL: | C33 E51 E58 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:314412 |
| By: | Behn, Markus; Claessens, Stijn; Gambacorta, Leonardo; Reghezza, Alessio |
| Abstract: | We investigate the interaction between monetary and macroprudential policy in affecting banks’ lending and risk-taking behaviour using rich euro area credit registry data and exploiting a unique setting that combined a sharp and unexpected monetary tightening with a wave of macroprudential tightening initiated before. While, for the average bank, required capital buffer increases did not significantly reduce lending additionally during the monetary tightening, for those banks that became capital-constrained lending fell by about 1.3-1.8 percentage points more for existing credit relationships and new bank-firm relationships were 2.5-4.4 percentage points less likely to be established, both relative to better-capitalized banks. In addition, such banks were more reluctant to pass higher policy interest rates on to their borrowers and took fewer risks, with a greater reduction in the LTV ratio for newly originated loans, and less reliance on risky assets, such as commercial real estate, as collateral. Our analysis shows that when calibrating monetary and macroprudential policies, it is crucial to account for the effects of policy interactions and the role of bank heterogeneity. JEL Classification: E5, E51, G18, G21 |
| Keywords: | bank lending, macroprudential policy, monetary policy, risk-taking |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253043 |
| By: | Holm-Hadulla, Fédéric; Pool, Sebastiaan |
| Abstract: | We study how short-term interest rate volatility affects the transmission of monetary policy. To identify exogenous changes in volatility, we exploit the pronounced heteroskedasticity visible in the time-series of euro area short-term rates over the past two and a half decades. Interacting the exogenous variation in volatility with high-frequency-identified monetary policy shocks, we find that increases in volatility dampen the effects of monetary policy on output and prices. This dampening effect is visible already at the earlier stages of transmission, including in the pricing and volume of bank lending. JEL Classification: E44, E52, E58 |
| Keywords: | interest rate volatility, monetary policy implementation, monetary policy transmission |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253048 |
| By: | Bobasu, Alina; Repele, Amalia |
| Abstract: | This paper investigates the role of firms in the transmission of monetary policy to individual labor market outcomes, both the intensive and extensive margins. Using German matched employer-employee administrative data, we study the effects of monetary policy shocks on individual employment and labor income conditioning on the firm characteristics. First, we find that the employment of workers in young firms are especially sensitive to monetary policy shocks. Second, wages of workers in large firms react relatively more, with some pronounced asymmetries: differences between large and small firms are more evident during monetary policy easing. The differential wage response is driven by above-median workers and cannot be fully explained by a worker component. Notably, larger firms adjust wages more significantly despite experiencing similar changes in investment and turnover compared to smaller firms. Furthermore, monetary policy tightening disproportionately impacts low-skilled and low-wage earners, while easings amplify inequality due to substantial wage increases for top earners. Overall, the effect of monetary policy on inequalities is however larger in easing periods – driven by a large increase in wages for top earners. JEL Classification: E24, E52, E58 |
| Keywords: | employment, labor market, monetary policy, workers type |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253046 |
| By: | Jung, Alexander; Romelli, Davide; Farvaque, Etienne |
| Abstract: | This paper investigates the impact of reforms altering legal central bank independence (CBI) on monetary policy discipline and credibility, two key mechanisms shaping price stability. Using a sample of 155 countries over more than 50 years (1972–2023), we show that reforms improving CBI strengthen monetary discipline and the credibility of central banks. Larger reforms enhance monetary discipline with a lag, achieving their full effect after ten years. Central bank reforms have a greater impact on monetary discipline in countries that have not reversed earlier reforms. CBI reforms have the strongest impact in democratic countries, countries with flexible exchange rates, and those without a monetary policy strategy. The effects of CBI on monetary discipline and credibility are amplified when public debt-to-GDP ratios are high. These findings underscore the crucial role of CBI as a key factor influencing price stability and highlight the risks associated with weakening institutional autonomy. |
| Keywords: | independence, institutional reforms, local projections, monetary policy, money growth |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253049 |
| By: | Frederik Kurcz |
| Abstract: | In macroeconomic models featuring borrowing-constrained agents, the effects of monetary policy depend on the fiscal reaction to interest rate changes. This paper presents new evidence on the dynamic causal effects of U.S. monetary policy shocks on fiscal instruments and estimates a Heterogeneous Agent New Keynesian model with fiscal feedback rules to match the empirical results. I find that U.S. fiscal policy responds to monetaryinduced output contractions with debt-financed, countercyclical tax and transfer policies, amid a gradual decline in spending to accommodate the debt increase. The model implies that monetary policy unopposed by a business cycle stabilization motive of fiscal policy would be roughly one third more contractionary. |
| Keywords: | Macroeconomic policy, HANK, monetary fiscal interaction, Impulse Response Matching |
| JEL: | E21 E52 E60 E63 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2109 |
| By: | Shabalina, Ekaterina; Tzaawa-Krenzler, Mary |
| Abstract: | We study how heterogeneous attention to inflation across households affects the transmission of monetary policy. Using household-level surveys for the US and Australia, we first show that households' attention to inflation varies across income levels. Specifically, we find that high-income households pay more attention to inflation than other income groups. To quantify the effects for the aggregate economy, we build a Heterogeneous Agent New Keynesian model with an endogenous attention choice where the level of attention to inflation varies along the income distribution. Compared to fully rational inflation expectations, we find that the economy faces a less severe recession after a monetary policy tightening when households' expectations are stable. This result is driven by the misperceived fall in future real labor income of low-income households that incentivizes an increase in their labor supply. At the same time, in response to the tightening, low-earners experience an even larger decrease in their welfare under inattention compared to the rational expectations case. |
| Keywords: | Inattention, HANK, Monetary Policy, Inflation Expectations |
| JEL: | D84 D91 E21 E71 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:315192 |
| By: | Lorenzo Garlanda-Longueville |
| Abstract: | Hong Kong has been China’s largest net banking creditor from 2009 to 2023, with an important decline starting in 2015. This paper presents an explanation for this decline and assess the impact of Chinese and US monetary policy on international positions between China and Hong Kong during this period, using a local projection approach. Our results indicate that a large part of the decline in the level of outstanding amounts can be attributed to the People’s Bank of China’s (PBoC) accommodative monetary policy and its direct consequence: the narrowing of the spread between Chinese interest rates and those of advanced countries. We explain this development by yield-seeking behavior on the part of international banks resident in Hong Kong. In line with recent literature on the transmission of Chinese monetary policy, we show that the PBoC now operates fully within a market interest rate logic and no longer through purely quantitative instruments (quotas, credit controls and reserve requirements). Finally, our results indicate that the effect of Chinese monetary policy on Hong Kong’s international banking assets is stronger than that of Fed policy, despite the currency peg to the dollar. |
| Keywords: | International Banking, Hong Kong, China, Monetary Policy |
| JEL: | E52 G21 F34 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-16 |
| By: | Aliaksandr Zaretski (University of Surrey) |
| Abstract: | I study the optimal regulation of a financial sector where individual banks face self-enforcing constraints countering their default incentives. The constrained-efficient social planner can improve over the unregulated equilibrium in two dimensions. First, by internalizing the impact of banks’ portfolio decisions on the prices of assets and liabilities that affect the enforcement constraints. Second, by redistributing future net worth from new entrants to surviving banks, which increases the current forward-looking value of all banks, relaxing their enforcement constraints and decreasing the probability of banking crises. The latter can be accomplished with systemic preemptive bailouts that are time consistent and unambiguously welfare improving. Unregulated banks can be both overleveraged and underleveraged depending on the state of the economy, thus macroprudential policy requires both taxes and subsidies, while minimum bank capital requirements are generally ineffective. |
| JEL: | E44 E60 G21 G28 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0325 |
| By: | Matthias Burgert; Tobias Cwik; Joséphine Molleyres; Barbara Rudolf; Jörn Tenhofen |
| Abstract: | Obtaining reliable estimates of the natural rate of interest, r*, and understanding its drivers is key for assessing long-run trends in real interest rates. In turn, this plays a role in assessing the stance of monetary policy. Against this backdrop, we discuss the evolution of real interest rates in Switzerland and present a portfolio of models used by the Swiss National Bank (SNB) to estimate r* as well as investigate its drivers. Moreover, we discuss the implications of the r* estimates for monetary policy. We find that, consistent with the evolution of real interest rates globally and in Switzerland, all model estimates point to a significant decline in r* since the mid-1980s. Also, r* is lower in Switzerland than abroad. Potential output growth as well as global factors related to the demand for and supply of safe and liquid assets (i.e., the convenience yield) and to demographics (as reflected in the discount factor) appear to be important drivers of the downward trend in r*. However, generally speaking, r* estimates are subject to sizeable model and statistical uncertainty. Concerning policy implications for Switzerland, we argue that while estimates of r* provide an important piece of information for monetary policy, other factors, such as the exchange rate, are also key determinants of monetary conditions for a small open economy such as Switzerland. |
| Keywords: | Natural rate of interest, Demographics, Productivity growth, Monetary policy |
| JEL: | E52 E43 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbecs:2025-14 |
| By: | Jose Luis Oreiro |
| Abstract: | The current article has two main objectives. The first one is to make a historical reconstruction of the debate between Keynes and Classical economists in the period just after the publication of the General Theory (1937-1939) in order to highlight the differences between Liquidity Preference and Loanable funds theory of interest rate determination. In opposition of what seemed to be a consensus in economic literature (See Oreiro, 2001), both theories had very different implications about the nature of the rate of interest and the role of money in economic process. The second objective is to build a simple Keynesian Stock-Flow consistent model for the funding stage of the process of capital formation, represented by the Finance-Investment-Saving-Funding circuit. This simple model makes clearly that long-term interest rate for corporate bonds is a strict monetary variable, being dependent of liquidity preference of households and the monetary policy conducted by the Central Bank. In such framework, an increase in the households´ s propensity to save will increase, rather then decrease, the long term interest rate over corporate debt since it will decrease corporate profits which are the main source of internal funding for firms´ s investment plans, forcing then to issue more corporate debt in order to get the money required for funding investment, thereby reducing the price of corporate bonds and hence increasing the rate of interest over corporate debt. |
| Keywords: | : John Maynard Keynes, Liquidity Preference, Capital Formation, Finance and Funding. |
| JEL: | E10 E12 E44 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2509 |
| By: | Janine Aron; John Muellbauer |
| Abstract: | Aggregate consumption typically exceeds 60 per cent of GDP and should be pivotal in central bank policy models. Most use semi-structural macro-models, yet consumption is usually inadequately specified. We use a systems approach to estimate new equations for South African consumption, house prices, mortgage and non-mortgage debt, and income forecasting. A credit-augmented consumption function approach introduces a greater role for uncertainty and a key role for credit conditions, and varies the spendability of different wealth components. |
| Keywords: | Consumption, House prices, Credit, Household Debt, Monetary policy, Households balance sheets |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2025-8 |
| By: | Granziera, Eleanora (Norges Bank); Larsen, Wegard H. (BI Norwegian Business School); Meggiorini, Greta (University of Auckland); Melosi, Leonardo (University of Warwick, European University Institute, DNB, and CEPR) |
| Abstract: | We investigate how speeches by Federal Open Market Committee (FOMC) members and regional Federal Reserve presidents influence private sector expectations. Speeches highlighting upcoming inflationary pressures lead both households and professional forecasters to raise their inflation expectations, suggesting the presence of Delphic effects. While professional forecasters adjust their expectations in response to Odyssean communications—i.e., statements about the central bank’s reaction to the announced inflationary pressures—households do not, leaving Delphic effects dominant. A novel general equilibrium model, in which agents differ in their ability to interpret Odyssean signals, accounts for these differential patterns. |
| Keywords: | Central bank communication ; Delphic, Odyssean ; inflation expectations ; textual analysis ; expectation formation |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1555 |
| By: | Kinda Hachem; Martin Kuncl |
| Abstract: | Several countries now require banks or money market funds to impose state-contingent costs on short-term creditors to absorb financial stress. We study these requirements as part of the broader prudential toolkit in a model with five key ingredients: banks may face an aggregate stress state with high withdrawals; a fire-sale externality motivates a mix of non-contingent and state-contingent regulation; banks may use shadow technologies to circumvent regulation; parameters of the shadow technologies may be private information; and bailouts may occur. We characterize the optimal policy for various combinations of these ingredients and demonstrate that the threat of shadow activities constrains state-contingent regulation more than noncontingent regulation, especially when imperfect information and limited commitment coexist. The planner triggers shadow activities with positive probability under imperfect information, and shadow activities that deplete resources in the stress state elicit larger bailouts under limited commitment, rendering the requirement of state-contingent costs a weak instrument. |
| Keywords: | pecuniary externality; bailout; Bail-in; shadow banking; optimal regulation |
| JEL: | D62 E61 G01 G21 G28 |
| Date: | 2025–03–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99645 |
| By: | Lukas Altermatt; Hugo van Buggenum; Lukas Voellmy |
| Abstract: | We introduce banks that issue liquid deposits backed by illiquid bonds and capital into an otherwise standard cash-in-advance economy. Liquidity transformation can lead to multiple steady-state equilibria with different interest rates and real outcomes. Whenever multiple equilibria exist, one of them is a 'liquidity trap', in which nominal bond rates equal zero and banks are indifferent between holding bonds or reserves. Whether economic activity is higher in a liquidity trap or in a (coexisting) equilibrium with positive interest rates is ambiguous, but the liquidity trap equilibrium is more likely to go in hand with inefficient overinvestment. While liquidity transformation can lead to macroeconomic instability in the form of multiple equilibria, aggregate consumption is higher than in a cash-only economy, regardless of which equilibrium is selected. |
| Keywords: | Banks, Liquidity, Monetary policy, Zero-lower bound |
| JEL: | E4 E5 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2025-04 |
| By: | Jonas D. M. Fisher; Bart Hobijn; Alessandro Villa |
| Abstract: | We provide a brief primer on how the core of usable macroeconomic theory for monetary policymakers has evolved over the past 50 years. Today’s policy discussions center on the New Keynesian (NK) synthesis, which builds on the Neoclassical growth model and the AS-AD framework. It incorporates nominal and real rigidities, financial and labor market frictions, the importance of expectations, and inspired terms used by policymakers such as “anchored inflation expectations” and “forward guidance.” While essential for communication during the Great Recession and Covid-19 pandemic, these events also revealed the NK model’s limitations. Newer models incorporating heterogeneous agents potentially offer richer policy insights but add complexity and the challenge of distilling their main policy implications going forward. |
| Keywords: | economic history; Monetary policy |
| JEL: | B22 E50 |
| Date: | 2025–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:99676 |
| By: | Marcin Kolasa (SGH Warsaw School of Economics, IMF International Monetary Fund); Małgorzata Walerych (Institute of Economics, Polish Academy of Sciences); Grzegorz Wesołowski (Faculty of Economic Sciences, University of Warsaw) |
| Abstract: | This paper examines the effects of asset purchase programs (APPs) that were implemented in a number of countries during the COVID-19 pandemic in concert with large fiscal stimulus packages. We identify APP shocks for 14 advanced and emerging market economies using high-frequency identification techniques. We next estimate panel local projections, finding that APPs tend to stimulate output, but decrease prices. By using a Kitagawa-Blinder-Oaxaca decomposition, we demonstrate that these responses significantly depend on the magnitude of the simultaneously applied fiscal stimulus. Remarkably, higher government purchases during that period crowded in private consumption and had a large effect on inflation. We show that these empirical findings, some of which are inconsistent with a standard New Keynesian framework, can be rationalized in a simple general equilibrium model with segmented asset markets and fiscal dominance. |
| Keywords: | asset purchases, monetary-fiscal interactions, fiscal dominance, high-frequency identification, local projections, general equilibrium models |
| JEL: | E44 E52 F41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:war:wpaper:2025-08 |
| By: | Naoko Hara; Yoshiyasu Ono |
| Abstract: | We construct a macroeconomic model based on household wealth preferences to identify the theoretical conditions under which full-employment and/or stagnation steady states hold. The theoretical conditions also specify the minimum level of inflation target that shifts the economy from stagnation to full employment. Applying these conditions to Japanese and US data, we assess whether both economies have experienced stagnation in recent decades. Our findings suggest that both steady states are feasible in Japan, while only the full-employment steady state holds in the US. If Japan were to transition to full employment solely through monetary expansion, the inflation target would need to be 5% or higher, with an immediate and significant price increase unavoidable. Moreover, even if a 5 percent inflation target had been implemented in the late 1990s, it would have led to a welfare loss owing to the substantial reduction in the real value of financial assets caused by the initial price surge and subsequent inflation, which outweigh welfare gains from consumption. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1282 |
| By: | Millard, Joe |
| Abstract: | Humanity is at a critical juncture. Despite our efforts to set targets and goals, biodiversity and climate are both changing rapidly, pushing us towards a biosphere our species has not known. To solve this problem one view is that we need transformational change of the economic paradigm, but that might be more an ideal than pragmatic. A new idea could be to take inspiration from recent developments in global carbon market theory and spatial finance, and devise a new central bank digital currency (CBDC) for nature, paid to individuals for reductions in anthropogenic pressure. We could then track a conjunction of anthropogenic pressures from space or remotely, combine that with a model predicting biodiversity change, and then link that to our new global currency that would self-regulate those pressures towards bending the curve. In biodiversity modelling alone there is a lot we would need to learn to make this work, but I think one federated currency for nature might be the economic mechanism we need to fully integrate the pathway of detection, attribution, and action into one global biodiversity observing system (GBiOS), and finally slow biodiversity change. |
| Date: | 2023–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:j7phu_v1 |