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on Central Banking |
| By: | Romain Bouis; Mr. Damien Capelle; Mr. Giovanni Dell'Ariccia; Christopher J. Erceg; Maria Soledad Martinez Peria; Mouhamadou Sy; Mr. Ken Teoh; Mr. Jerome Vandenbussche |
| Abstract: | Trade-offs between price and financial stability can occur when inflation is above target and financial stress is rising. Use of central bank liquidity tools and other financial stability policies may, under some circumstances, allow central banks to maintain their inflation fighting stance, while addressing financial stress. However, challenges in deploying these tools and specific country characteristics may hinder central banks’ ability to achieve both price and financial stability. In such circumstances, central banks should account for financial stress increasing downside risks to activity, allow for slower disinflation using monetary policy flexibility, and communicate that deviations from the medium-term inflation target are temporary. Countries with weak central bank credibility, high exposure to exchange rate movements, and limited fiscal space face extra challenges in managing these trade-offs and might have to rely on foreign exchange interventions, macroprudential policies, capital flow measures, and international liquidity tools. |
| Keywords: | Monetary Policy; Financial Stability; Policy Coordination; monetary policy tightening; liquidity from the discount window; monetary policy flexibility; resolution framework; asset purchase; Financial sector stability; Price stabilization; Inflation; Liquidity; Global |
| Date: | 2025–04–11 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfsdn:2025/003 |
| By: | Giovanni Di Bartolomeo; Carolina Serpieri |
| Abstract: | Uncertainty is a challenge for monetary policy. This paper introduces local model uncertainty into a behavioral New Keynesian DSGE framework to derive robust optimal monetary policies. We consider two potential forms of agents' heterogeneity, which refer to two mechanisms of expectation formation used by a fraction of (boundedly rational) agents to generate their beliefs. In contrast, the rest of the population rationally forms its expectations. The central bank ignores the fraction of boundedly rational agents and the mechanism they use to form their expectations. Non-Bayesian robust control techniques are adopted to minimize a welfare loss derived from the second-order approximation of agents' utilities. |
| Keywords: | Brainard Principle; Monetary Policy; Bounded Rationality; Expectation Formation; Non-Bayesian Robust Control |
| JEL: | E52 E58 D84 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:sap:wpaper:wp261 |
| By: | Sangyup Choi (Yonsei University); Jongho Park (Soongsil University); Kwangyong Park (Sogang University) |
| Abstract: | What accounts for cross-country heterogeneity in exchange rate responses to U.S. monetary policy shocks? Using high-frequency data around Federal Open Market Committe (FOMC) announcements, we document that countries with deeper financial markets—proxied by the size of foreign portfolio liabilities—experience larger currency depreciations following U.S. monetary tightening. This effect is particularly strong for forward guidance shocks relative to conventional interest rate surprises. To rationalize these findings, we extend the gradual portfolio adjustment model by introducing a forward-looking news shock and allowing portfolio adjustment costs to decline with financial market depth. The model replicates our empirical findings, offering a unified explanation for heterogeneous short-run exchange rate dynamics. |
| Keywords: | Exchange rates; Monetary policy spillovers; Portfolio adjustment frictions; Forward guidance; Daily data |
| JEL: | E52 F31 F41 G11 G17 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2025rwp-240 |
| By: | Hilde C. Bjornland; Jamie L. Cross; Jonas Holz |
| Abstract: | This paper examines how central banks respond to supply-side shocks and investigates the trade-offs they face in stabilizing inflation and output. To do so we develop a dual external instrument proxy structural vector autoregressive (SVAR) model to disentangle the macroeconomic effects of oil supply news and monetary policy shocks. Our identification strategy, which combines multiple external instruments with sign restrictions, enables a sharp distinction between structural shocks, allowing us to analyze their dynamic effects and construct policy counterfactuals for different central bank objectives. We find that both oil supply and monetary policy shocks significantly influence U.S. output and inflation. Moreover, while monetary policy can mitigate some of the output losses caused by oil price shocks, it cannot fully offset their inflationary effects. Finally, we estimate that the Federal Reserve’s historical response aligns closely with a policy that places twice as much weight on inflation stabilization than on output stabilization. |
| Keywords: | proxy-SVAR, monetary policy instrument, oil price instrument, counterfactual analysis, monetary policy trade-offs |
| JEL: | C32 E31 E43 Q41 Q43 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-19 |
| By: | David M. Arseneau; Mark A. Carlson; Kathryn Chen; Matt Darst; Dylan Kirkeeng; Elizabeth C. Klee; Benjamin A. Malin; Matthew Malloy; Friederike Niepmann; Emilie O'Malley; Mary-Frances Styczynski; Melissa Vanouse; Alexandros Vardoulakis |
| Abstract: | A core task of central banks is to provide liquidity to banks, with the goal of facilitating monetary policy implementation, ensuring the smooth functioning of the payment system, and promoting financial stability. While central banks around the world pursue these goals, the design of liquidity facilities differs across countries. This note provides an overview of liquidity facilities around the world that resemble the Federal Reserve’s discount window as well as intraday credit, comparing and contrasting setups in different countries. |
| Date: | 2025–02–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-02-26-1 |
| By: | Ekaterina Pirozhkova; Nicola Viegi |
| Abstract: | This paper studies the bank lending channel of monetary policy transmission in South Africa where the bank loan-level data, which are typically used for this type of analysis, are unavailable. Supply-side changes in credit provision are measured with data on the composition of home-loan supply by banks versus nonbanks. High-frequency surprises in forward rate agreements are used to instrument for exogenous shifts in monetary policy in a proxy-structural vector autoregression model. The bank lending channel is found to be operative, as banks reduce the supply of home loans following monetary tightening, with a negative effect on the housing market. The effectiveness of the deposits channel is shown: banks widen the deposit spread after monetary tightening, and the volume of deposits shrinks. As retail deposits provide a unique, stable source of funding for banks, the deposits channel underlies the operativeness of the bank lending channel in South Africa, consistent with theory. |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11072 |
| By: | Martin Cesnak (National Bank of Slovakia); Andrej Cupak (National Bank of Slovakia); Pirmin Fessler (Oesterreichische Nationalbank); Jan Klacso (National Bank of Slovakia) |
| Abstract: | This paper examines the impact of borrower-based macroprudential policy tightening on mortgage lending in Slovakia, focusing in particular on the role of financial advisors in shaping loan characteristics. Using a comprehensive loan-level dataset from Slovak banks, weanalyzetheeffectsofkeyregulatorytools—Loan-to-Value(LTV), Debt-to-Income(DTI), and Debt Service-to-Income (DSTI) limits — on mortgage risk profiles. Our contributions include: (1) showing that restrictive borrower-based measures (BBMs) reduce the riskiest loans but push lower-risk segments toward regulatory thresholds, thus increasing portfolio risk; (2) demonstrating that advisor-mediated loans tend to have higher amounts, LTVs, DTIs, and longer maturities, raising their riskiness; and (3) finding that strict enough DSTI limits not only reduce DSTI but may also indirectly effect other loan characteristics, such as DTI, LTV ratios, and loan volumes, suggesting broader policy impacts. Additionally, we identifysignificantfront-loadingbehaviorfollowingpolicytighteningannouncements, par-ticularly for advisor-mediated loans. These findings highlight the importance of detailed micro-level data in capturing policy effects and informing more effective macroprudential regulation. |
| JEL: | G21 D18 D12 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1118 |
| By: | András Borsos (Magyar Nemzeti Bank, Complexity Science Hub Vienna and University of Oxford); Adrian Carro (Banco de España and University of Oxford); Aldo Glielmo (Banda d’Italia); Marc Hinterschweiger (Bank of England); Jagoda Kaszowska-Mojsa (University of Oxford, Narodowy Bank Polski and Polish Academy of Sciences); Arzu Uluc (Bank of England) |
| Abstract: | Over the past decade, agent-based models (ABMs) have been increasingly employed as analytical tools within economic policy institutions. This paper documents this trend by surveying the ABM-relevant research and policy outputs of central banks and other related economic policy institutions. We classify these studies and reports into three main categories: (i) applied research connected to the mandates of central banks; (ii) technical and methodological research supporting the advancement of ABMs; and (iii) examples of the integration of ABMs into policy work. Our findings indicate that ABMs have emerged as effective complementary tools for central banks in carrying out their responsibilities, especially after the extension of their mandates following the global financial crisis of 2007-2009. While acknowledging that room for improvement remains, we argue that integrating ABMs into the analytical frameworks of central banks can support more effective policy responses to both existing and emerging economic challenges, including financial innovation and climate change. |
| Keywords: | agent-based models, central bank policies, monetary policy, financial stability, prudential policies, payment systems |
| JEL: | C63 E27 E37 E42 E58 G10 G21 G23 G51 Q54 R21 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bde:opaper:2503e |
| By: | Dupraz, Stéphane; Picco, Anna Rogantini |
| Abstract: | Are restrictions on fiscal policy necessary for monetary policy to be able to deliver price stability? When households are Ricardian, the net present value of future fiscal surpluses needs to equate the real value of government debt absent inflation. We show that when households are not Ricardian, fiscal requirements still exist but take the very different form of a limit on the debt-to-GDP ratio. The debt-to-GDP limit captures the idea that public debt cannot be so large that the wealth effect of public debt on aggregate spending can no longer be counter-balanced by interest rate hikes, however large. To implement price stability when the debt-to-GDP requirement is satisfied, monetary policy must respond to the level of public debt, not just to the inflation it creates. JEL Classification: E31, E62 |
| Keywords: | monetary-fiscal interactions, non-Ricardian households, price stability |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253038 |
| By: | Georgarakos, Dimitris; Kenny, Geoff; Laeven, Luc; Meyer, Justus |
| Abstract: | We field a series of experiments in a population-representative survey of European consumers to examine their attitudes towards the possible introduction of a digital euro. First, we show that a short video explaining the key features of the digital euro is effective in changing consumers’ beliefs about such a new form of payment and increases the likelihood of adoption by 12pp relative to a control group that is not shown the video. Second, we find that on aggregate consumers would allocate a relatively small fraction from a positive wealth shock to digital euros and their allocation to other liquid assets would be little affected. Third, holding limits in the range of €1, 000 to €10, 000 have insignificant differential effects on the composition of liquid asset holdings. We also show that a non-trivial fraction of consumers report that they will not adopt the digital euro due to strong preferences for existing forms of payment. JEL Classification: E41, E58, D12, D14, G51 |
| Keywords: | Central Bank Digital Currencies (CBDC), consumer expectations survey, household expectations, household finance, money, payments, Randomized Control Trial (RCT) |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253035 |
| By: | Sushant Acharya; Ozge Akinci; Silvia Miranda-Agrippino; Paolo Pesenti |
| Abstract: | As covered in the first post in this series, the international transmission of monetary policy shocks features positive output spillovers when the so-called expenditure-switching effect is sufficiently large. Departing from textbook analysis, this post zooms in on the implications of differences across market participants with respect to their consumption preferences and ability to insure against income risk. The key message is that these features can, at least theoretically, change the impact of spillovers from positive to negative as well as alter their overall magnitude. These aspects of the international transmission mechanism are especially relevant when addressing spillovers from advanced to emerging economies. |
| Keywords: | Global spillovers |
| JEL: | E32 E44 F41 |
| Date: | 2025–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99794 |
| By: | Hempell, Hannah S.; Rancoita, Elena; Coi, Claudio Corte; Dadoukis, Aristeidis |
| Abstract: | Targeted longer-term refinancing operations (TLTROs)helped supporting bank lending to firms and to households in the course of the COVID-19 pandemic. The use of TLTRO funding for mortgage loans to households had explicitly not been included into the targeted loan categories of these schemes, thereby, limiting potential unintended side effects on residential real estate markets. This paper, by means of an empirical analysis, assesses the impact of the relaxation of TLTRO III conditions at the beginning of the COVID-19 pandemic on euro area banks' loan portfolio composition. Our findings suggest that the targeted funding instrument under the relaxed pandemic conditions might, to some extent, have contributed to further fuelling residential real estate vulnerabilities, especially for banks in already vulnerable countries. Our results also contribute to the discussion on policy design and the preservation of the targeted nature of such support measures going forward and their interaction with financial stability. JEL Classification: E52, E58, G01, G21, G28 |
| Keywords: | COVID-19 pandemic, residential real estate, TLTRO, unconventional monetary policy |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253040 |
| By: | Monique Reid; Pierre Siklos |
| Abstract: | Lars Svensson (1997) argued that inflation targeting should be called inflation forecast targeting, capturing the fact that monetary policy is necessarily forward looking. Inflation forecast performance is therefore a critical element for good conduct in monetary policy. As more measures of inflation expectations have become available, it is worth asking whether some are better than others at forecasting inflation and whether the long-held belief that forecast averaging outperforms individual forecasts continues to hold. We consider five sources of inflation forecasts for South Africa, including three unique quarterly surveys of firms, financial analysts and trade unions. We find that a linear combination of forecasts obtained from a factor model can improve the accuracy of forecasting over alternative forms of aggregation. |
| Date: | 2025–03–14 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11077 |
| By: | Roberto Duncan; Enrique Martínez García; Luke Miller |
| Abstract: | In August 2020, the Federal Reserve replaced Flexible Inflation Targeting (FIT) with Flexible Average Inflation Targeting (FAIT), introducing make-up strategies that allow inflation to temporarily exceed the 2% target. Using a synthetic control approach, we estimate that FAIT raised CPI inflation by about 1 percentage point and core CPI inflation by 0.5 percentage points, suggesting a moderate impact net of food and energy and a largely temporary effect. Short- to medium-term inflation expectations increased by approximately 0.8 percentage points, while long-term expectations remained anchored. The effects of FAIT on economic activity were, if anything, minimal. Our results are robust across multiple specifications, including alternative price indices, synthetic control estimators, control groups and adjustments for global supply chain pressures, economic activity, fiscal policy, commodity prices, interest rates and monetary aggregates. The differing macroeconomic outcomes under FAIT versus a counterfactual FIT characterized by moderate inflationary effects, negligible real effects and anchored long-term expectations, are consistent with the hypothesis of a steeper-than-expected post-pandemic Phillips curve in the New Keynesian model. |
| Keywords: | flexible average inflation targeting; flexible inflation targeting; monetary policy counterfactuals; Phillips curve slope; inflation expectations anchoring; synthetic control method |
| JEL: | C32 C54 E52 E58 E61 E65 |
| Date: | 2025–04–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99826 |
| By: | Sushant Acharya; Ozge Akinci; Silvia Miranda-Agrippino; Paolo Pesenti |
| Abstract: | Understanding cross-border interdependencies and inspecting the international transmission mechanism of policy shocks is the raison d’être of open-economy macroeconomics as an intellectual discipline. The relevance for the policy debate is pervasive: over and over in the history of the international monetary system national policymakers have pointed at — and voiced concerns about—the effects of policy actions undertaken in foreign countries on the outlook and financial conditions in their own domestic economies. The most recent example involves the spillovers of tighter monetary policies aimed at addressing the inflationary spikes associated with the COVID-19 pandemic. In this three-part series, we provide a non-technical introduction to the multifaceted literature on global spillovers, building in particular on our own research. This post introduces the subject and offers an overview of the classic transmission channels. |
| Keywords: | spillovers |
| JEL: | E32 E44 F41 |
| Date: | 2025–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99793 |
| By: | Natsuki Arai; Shian Chang |
| Abstract: | This paper analyzes the Federal Open Market Committee (FOMC) policymakers' economic projections with identities published after 2007 and presents three sets of results. First, the dispersion of projections across policymakers is associated with the regional economic conditions they represent and their monetary policy preferences. Second, the policymakers' reaction function is consistent with the Taylor rule and satisfies the Taylor principle for stability. Their projections align with Okun's law and the Phillips curve. Finally, the efficiency evaluations to test the unpredictability of forecast errors and revisions indicate that the efficiency is rejected by many policymakers, with rejections concentrated in the years following the Great Recession. |
| Keywords: | FOMC, Individual Projections, Regional Influence, Policy Preference, Forecast Efficiency |
| JEL: | C53 E43 E47 E58 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:gwc:wpaper:2025-003 |
| By: | Marco Del Negro; Ibrahima Diagne; Keshav Dogra; Pranay Gundam; Donggyu Lee; Brian Pacula |
| Abstract: | We use an estimated medium-scale HANK model to investigate how the tradeoff between stabilizing inflation and consumption volatility varies for households with different levels of wealth. Consumption for the rich is mostly affected by demand shocks via their exposure to highly procyclical profits—for them, stabilizing consumption and inflation coincide. The poor are more vulnerable to supply shocks, hence aggressively stabilizing inflation is costly in terms of their consumption volatility. While they dislike inflation because it erodes real wages, they are hurt even more by an aggressive monetary policy response to inflation, which reduces real wages further while increasing unemployment. |
| Keywords: | inflation; inequality; monetary policy; HANK model |
| JEL: | E12 E31 E52 E58 |
| Date: | 2025–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99759 |
| By: | Simon Freyaldenhoven; Shikun Ke; Dingyi Li; Jose Luis Montiel Olea |
| Abstract: | What does the Fed talk about in its monetary policy discussions? We introduce a new statistical methodology to analyze text documents, and we use that methodology to recover the topics discussed during FOMC meetings. Topic models are a simple and popular tool for the statistical analysis of textual data. Their identification and estimation are typically enabled by assuming the existence of anchor words; that is, words that are exclusive to specific topics. In this paper we show that the existence of anchor words is statistically testable: There exists a hypothesis test with correct size that has nontrivial power. This means that the anchor-words assumption cannot be viewed simply as a convenient normalization. Central to our results is a simple characterization of when a column-stochastic matrix with known nonnegative rank admits a separable factorization. We test for the existence of anchor words in two different datasets derived from monetary policy discussions in the Federal Reserve and reject the null hypothesis that anchor words exist in one of them. |
| Keywords: | Anchor Words; Topic Models; Nonnegative Matrix Factorization; Hypothesis Testing |
| JEL: | C39 C55 |
| Date: | 2025–03–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:99851 |
| By: | Prayudhi Azwar (Bank Indonesia); Cicilia Anggadewi Harun (Bank Indonesia); Annes Nisrina Khoirunnisa (Bank Indonesia) |
| Abstract: | Employing System Thinking (ST) and Bayesian Networks (BN), this research has developed framework for a digital transformation of a central bank. The transformation is influenced by three key elements: technology-driven transformation, human capital digital capabilities, and digitalized policymaking capacities. The role of transformative digital leader is the initial critical factor in the causal loop diagram (CLD). Institutional digital leadership is set as the end state of digital transformation, which reflects the lev el of digital maturity. The strength analysis in the BN confirms that the most significant influence on the maturity level of the digital transformation is the digitalized policy making capacities. The combination of digitalized policy-making capacities, human capital digital capabilities, and technology-driven transformation serves as the key factors of central banks transformation towards digital maturity, respectively. The results also show the necessity of addressing operational and cyber risks, formulating robust regulations, and enhancing technological resilience to ensure sustainability and effectivity of the integrated digital central bank transformation. |
| Keywords: | Digital central bank, digital transformation, system thinking, bayesian network, public policy, human capital capabilities, digitalized policy making capacities |
| JEL: | E58 L20 O15 Z18 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idn:wpaper:wp152024 |
| By: | Xolani Sibande; Dumakude Nxumalo; Keaoleboga Mncube; Steve Koch; Nicola Viegi |
| Abstract: | The extension of affordable credit is key to financial inclusion but it could reduce the stability of the financial sector. Macroprudential policy, on the other hand, is designed to mitigate financial sector risk. Thus, inclusion and macroprudential regulations may be in opposition. This study estimates and contrasts the impact of these potentially contradictory regulations on the bank lending rates and volumes of South Africas largest banks. Our results suggest that macroprudential policy is working as intended, as it is associated with increases in interest rates on unsecured lending rates and decreases in short-term secured and mortgage lending rates. Inclusion-focused regulation is associated with increased bank lending rates in unsecured credit. We observe a decrease in the growth of unsecured lending for households and an increase in secured lending for corporates. We find that the estimated effects of financial inclusion initiatives largely overlap with rather than offset the estimated effects of macroprudential policy. |
| Date: | 2024–10–22 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11069 |
| By: | Julian A. Parra-Polania; Constanza Martínez-Ventura |
| Abstract: | We examine the optimal design of central bank digital currencies (CBDCs) by focusing on two key features: the anonymity-security trade-off and the remuneration (i.e., interest rate). Building on the extended model by Agur et al. (2022), which accounts for potential negative externalities associated with the anonymity of payment methods, we incorporate the possibility of multiple CBDCs into the framework. Our findings reveal that with optimally designed CBDCs and when anonymity costs are significant, a cashless economy is the preferred choice for the central bank. Furthermore, irrespective of anonymity costs, an economy with cash and one or more CBDCs is welfare dominated by a cashless economy with one additional CBDC. These results underscore the exibility and welfare-enhancing potential of CBDCs compared to cash in modern payment systems. **** RESUMEN: Analizamos el diseño óptimo de las monedas digitales de los bancos centrales (CBDC), centrándonos en dos características clave: la disyuntiva entre anonimato versus seguridad y la remuneración (tasa de interés). Con base en el modelo extendido de Agur et al. (2022), que considera las posibles externalidades negativas asociadas con el nivel de anonimato de los métodos de pago, incorporamos la posibilidad de múltiples CBDCs. Nuestros hallazgos revelan que con CBDCs óptimamente diseñadas, y cuando los costos de la anonimato son relativamente altos, una economía sin efectivo es la opción preferida del banco central. Adicionalmente, independientemente de los costos de la anonimato, una economía con efectivo y una o más CBDCs es menos preferida, en términos de bienestar social, que una economía sin efectivo y con una CBDC adicional. Estos resultados resaltan la flexibilidad y el potencial de mejora del bienestar de las CBDCs en comparación con el efectivo en los sistemas de pago modernos. |
| Keywords: | CBDC, optimal design, anonymity, security, digital currency, cashless economy, CBDC, diseño óptimo, anonimato, seguridad, monedas digitales, economía sin efectivo |
| JEL: | D60 E41 E42 E43 E58 G21 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1311 |
| By: | Aryo Sasongko (Bank Indonesia); Cicilia Anggadewi Harun (Bank Indonesia); Geyana Ledy Fista (Bank Indonesia); Kusfisiami Wima Mustika (Bank Indonesia); Aninditha Kemala Dinianyadharani (Bank Indonesia); Karanissa Larasati (Bank Indonesia); Puput Kurniati (Bank Indonesia); Dila Safitri (Bank Indonesia) |
| Abstract: | This study examines the formation of interest rates in the government bond market and the price discovery process in the foreign exchange market through yield curve models and supply-demand curves to support pro-market monetary operations. Using the Nelson-Siegel model and its extensions, the study aims to establish more accurate yield curve parameters through conventional methods (first algorithm), determine short- and long-term interest rates (second algorithm), and ensure a positive slope for the yield curve (third algorithm). The results from the yield curve model demonstrate that this approach is effective under conditions of steepening, inverting curves, and negative interest rates. Furthermore, the creation of the supply and demand curve model and the simulation results explain the formation of foreign exchange rates and the impact of triple interventions. Foreign exchange spot transactions, domestic non-deliverable forwards, and government securities are reflected in the cleared volume indicator (µ) and the demand volume multiplier. Efforts to stabilize the market, such as central bank announcements, are reflected in the parameter σ. |
| Keywords: | yield curve, supply-demand curve, price discovery, price formation, promarket monetary operations, exchange rate interventions |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idn:wpaper:wp092024 |
| By: | Aryo Sasongko (Bank Indonesia); Cicilia Anggadewi Harun (Bank Indonesia); Rahutomo Anugrah Dewanto (Bank Indonesia); Wahyu Widianti (Bank Indonesia); Geyana Ledy Fista (Bank Indonesia); Kusfisiami Wima Mustika (Bank Indonesia); Astrika Erlin (Bank Indonesia); Ibrahmi Adrian Nugroho (Bank Indonesia); Putra Prima Raka (Bank Indonesia); Misbahol Yaqin (Bank Indonesia) |
| Abstract: | TThis study explores the impact of primary dealer system implementation on counterparty connections, prices, liquidity, and concentration risk in the Indonesian Money market. Using transaction data of interbank money market instruments, we find that the implementation of the primary dealer system increases the degree of centrality (number of counterparty connections) in the Indonesian Repo and time deposit markets. The implementation of primary dealers also leads to an increase in nominal transactions of Bank Indonesia Rupiah Securities (SRBI). The simulation results of primary dealer selection by clients show that the greater the demand of banks participating in monetary operations with limited primary dealer liquidity, the faster the orders are concentrated on primary dealers with large liquidity. Vice versa, the smaller the demand of banks participating in monetary operations with large liquidity, the orders tend to be scattered. The larger the order size of banks participating in monetary operations, the faster orders are concentrated in primary dealers with large liquidity. Vice versa, the smaller the order size of banks participating in monetary operations, the orders tend to be scattered. |
| Keywords: | Primary dealer, concentration risk, liquidity, interest rate, counterparty connection |
| JEL: | E43 G21 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idn:wpaper:wp102024 |
| By: | Parush Arora (Ashoka University); Derek Tran (Economist, Amazon.com Inc.) |
| Abstract: | This paper uses loan-level transactions from the Paycheck Protection Program (PPP) to understand how a bank’s decision to borrow funds from the discount window (DW) affected its lending behavior during the COVID-19 crisis. Implementation of the PPP can be seen as an exogenous shock to the liquidity demand for banks, independent of their financial conditions. By exploiting this independence, we find a causal relationship between use of DW and the number of PPP loans extended by large banks but not small banks. While both types used the DW in the absence of a long-term funding source, usage of the DW almost doubled PPP lending for large banks. After the establishment of a long-term funding source, however, this effect was reduced to 69% due to substitution away from the DW. These findings suggest that in the presence of an unexpected liquidity shock, the DW plays a critical role in extending short-term liquidity to the banking sector. |
| Date: | 2024–11–04 |
| URL: | https://d.repec.org/n?u=RePEc:ash:wpaper:132 |
| By: | Ye Chen (Capital University of Economics and Business); Peter C.B. Phillips (Yale University, University of Auckland, Singapore Management University); Shuping Shi (Macquarie University) |
| Abstract: | To safeguard economic and financial stability policymakers regularly take actions designed to increase resilience to systemic risks and curb speculative market behavior. To assess the effectiveness of such mitigation policies, we introduce a counterfactual approach tailored to accommodate the mildly explosive dynamics that occur during speculative bubbles. We derive asymptotics of the estimated treatment effect under a common factor structure that allows for explosive, I(1), and stationary factors, thereby having applicability to a wide range of prevailing economic conditions. An inferential procedure is proposed for the policy treatment effect that has asymptotic validity and demonstrates satisfactory finite sample performance. An empirical analysis examines the monetary policy of interest rate hikes implemented by the Reserve Bank of New Zealand, beginning in October 2021.This policy exerted a statistically significant cooling effect on all regional housing markets in New Zealand. Our findings show that this policy led to 20%-33% reductions in house prices in five out of six regions seven months after the enactment of the interest rate hike. |
| Date: | 2025–03–17 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2433 |
| By: | Bambe, Bao-We-Wal |
| Abstract: | This paper examines the effect of macroprudential policies on private domestic investment using a panel of 87 developing countries from 2000 to 2017. Our instrumental variables strategy exploits the geographic diffusion of macroprudential policies across countries, with the idea that reforms in neighbouring countries can affect the adoption or strengthening of domestic reforms through peer pressure or imitation effects. The findings indicate that the tightening of macro-prudential policies significantly reduces private domestic investment. This effect holds for both instruments targeting borrowers and those targeting financial institutions, and is subject to heterogeneity depending on several economic and institutional factors. The transmission channel analysis highlights that the negative impact of macroprudential policies on investment is primarily driven by a reduction in credit supply and financial inclusion. |
| Keywords: | Macroprudential policies, private domestic investment, developing countries, instrumental variables |
| JEL: | E22 E44 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:diedps:313611 |
| By: | Sigmund, Michael; Agati, Alessandra |
| Abstract: | We analyze the impact of negative reference rates on the interest rate behavior of more than 500 Austrian banks from 2009Q1 to 2021Q4. Using panel vector error correction analysis with the Engle-Granger procedure in two steps, we establish a cointegration vector that links bank-specific lending rates, deposit rates, the 3-month Euribor, and the ECB Deposit Facility Rate. We propose two hypotheses to evaluate the effects of negative 3-month Euribor on this vector. Firstly, we explore how an Austrian Supreme Court decision enforcing a zerolower bound on household deposits could decrease the lending-deposit rate spread. Secondly, we examine the emergence of two “true prices” for loans and deposits due to the negative 3-month Euribor. This is linked to an Austrian Supreme Court decision mandating the transmission of negative reference rates to bank-specific lending rates, potentially affecting cointegration with the 3-month Euribor. Our findings show a significant spread reduction after the introduction of negative reference rates, primarily driven by changes in the cointegration relationship between bank-specific lending rates and the 3-month Euribor. Additionally, by including the ECB Deposit Facility in our cointegration model, we capture the direct impact of the Targeted Long-Term Refinancing Operations on the lending rate. JEL Classification: C33, G21, E58, E43 |
| Keywords: | interest rate setting, negative interest rate environment, panel cointegration |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253039 |
| By: | Mark A. Carlson; Mary-Frances Styczynski |
| Abstract: | The Federal Reserve’s discount window is a tool that can provide reserves to banks at a rate set by the Federal Reserve, the discount rate. During the past several years, there have been large fluctuations in the level of reserves in the banking system and in the level discount rate relative to other interest rates. In this paper, we explore how banks’ holdings of reserves, especially relative to the amount of reserves that banks prefer to hold, and the interest rate available at the discount window influence borrowing at the window. We find that banks borrow more when their reserves are low and when the discount rate is relatively attractive, although the size of these effects depends on a bank’s size, FHLB membership status, and financial condition. |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-15 |
| By: | Tsvetelina Nenova |
| Abstract: | This paper provides novel empirical evidence on portfolio rebalancing in international bond markets through the prism of investors' demand for bonds. Using a granular dataset of global government and corporate bond holdings by mutual funds domiciled in the world's two largest currency areas, I estimate heterogeneous and time varying demand elasticities for bonds. Safe assets such as US Treasuries or German Bunds face especially inelastic demand from investment funds compared to riskier bonds. But spillovers from these safe assets to global bond markets are strikingly different. Funds substitute US Treasuries with global bonds, including risky corporate and emerging market bonds, whereas German Bunds are primarily substitutable within a narrow set of euro area safe government bonds. Substitutability deteriorates in times of stress, impairing the transmission of monetary policy. |
| Keywords: | international finance, portfolio choice, safe assets |
| JEL: | F30 G11 G15 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1254 |
| By: | Jon Durfee; Michael Junho Lee; Joseph Torregrossa |
| Abstract: | Novel payment systems based on blockchain networks promise to redesign financial architecture, but a notable concern about these systems is whether they can be made interoperable. This concern stems from the concept of the “singleness of money”—that payments and exchange are not subject to volatility in the value of the money itself. Volatility and speculation can arise from the payment medium, which may have speculative characteristics, or from frictions that undermine the ability of one or more payments systems to interoperate. In this two-part series, we outline a framework for analyzing payment system interoperability, apply it to traditional and emerging financial architectures, and relate it to the ability of the payment systems to maintain singleness of money. |
| Keywords: | interoperability; payments; singleness of money; central banks |
| JEL: | E5 O3 |
| Date: | 2025–03–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99737 |
| By: | Sophia Cho; John C. Williams |
| Abstract: | Estimates of the natural rate of interest, commonly called “r-star, ” garner a great deal of attention among economists, central bankers, and financial market participants. The natural interest rate is the real (inflation-adjusted) interest rate expected to prevail when supply and demand in the economy are in balance and inflation is stable. The natural rate cannot be measured directly but must be inferred from other data. When assessing estimates of r-star, it is important to distinguish between real-time estimates and retrospective estimates. Real-time estimates answer the question: “What is the value of r-star based on the information available at the time?” Meanwhile, retrospective estimates answer the question: “What was r-star at some point in the past, based on the information available today?” Although the latter question may be of historical interest, the former question is typically more relevant in practice, whether in financial markets or central banks. Thus, given their different nature, comparing real-time and retrospective estimates is like comparing apples to oranges. In this Liberty Street Economics post, we address this issue by creating new “synthetic real-time” estimates of r-star in the U.S. for the Laubach-Williams (2003) and Holston-Laubach-Williams (2017) models, using vintage datasets. These estimates enable apples-to-apples comparisons of the behavior of real-time r-star estimates over the past quarter century. |
| Keywords: | natural rate of interest; real time estimation; Laubach-Williams model; Holston-Laubach-Williams model; R-Star |
| JEL: | C32 E43 |
| Date: | 2025–03–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99638 |