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on Central Banking |
| By: | Geiger, Felix; Kanelis, Dimitrios; Lieberknecht, Philipp; Sola, Diana |
| Abstract: | Central bank communication has become a crucial tool for steering the monetary policy stance and shaping the outlook of market participants. Traditionally, analyzing central bank communication required substantial human effort, expertise, and resources, making the process time-consuming. The recent introduction of artificial intelligence (AI) methods has streamlined and enhanced this analysis. While fine-tuned language models show promise, their reliance on large annotated datasets is a limitation that the use of large language models (LLMs) combined with prompt engineering overcomes. This paper introduces the Monetary-Intelligent Language Agent (MILA), a novel framework that leverages advanced prompt engineering techniques and LLMs to analyze and measure different semantic dimensions of monetary policy communication. MILA performs granular classifications of central bank statements conditional on the macroeconomic context. This approach enhances transparency, integrates expert knowledge, and ensures rigorous statistical calculations. For illustration, we apply MILA to the European Central Bank's (ECB) monetary policy statements to derive sentiment and hawkometer indicators. Our findings reveal changes in the ECB's communication tone over time, reflecting economic conditions and policy adaptions, and demonstrate MILA's effectiveness in providing nuanced insights into central bank communication. A model evaluation of MILA shows high accuracy, flexibility, and strong consistency of the results despite the stochastic nature of language models. |
| Keywords: | Central bank communication, monetary policy, sentiment analysis, artificial intelligence, large language models |
| JEL: | C45 E31 E44 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:316448 |
| By: | Dimitrios Kanelis; Lars H. Kranzmann; Pierre L. Siklos |
| Abstract: | We analyze how financial stability concerns discussed during Federal Open Market Committee (FOMC) meetings influence the Federal Reserve’s monetary policy implementation and communication. Utilizing large language models (LLMs) to analyze FOMC minutes from 1993 to 2022, we measure both mandate-related and financial stability-related sentiment within a unified framework, enabling a nuanced examination of potential links between these two objectives. Our results indicate an increase in financial stability concerns following the Great Financial Crisis, particularly during periods of monetary tightening and the COVID-19 pandemic. Outside the zero lower bound (ZLB), heightened financial stability concerns are associated with a reduction in the federal funds rate, while within the ZLB, they correlate with a tightening of unconventional measures. Methodologically, we introduce a novel labeled dataset that supports a contextualized LLM interpretation of FOMC documents and apply explainable AI techniques to elucidate the model’s reasoning. |
| Keywords: | explainable artificial intelligence, financial stability, FOMC deliberations, monetary policy communication, natural language processing |
| JEL: | E44 E52 E58 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-26 |
| By: | Shi, Jiping (University of Warwick) |
| Abstract: | I investigate how news uncertainty influences the signaling effects of monetary policy, a key element for understanding how central bank communication impacts households and firms. Utilizing a monetary policy news uncertainty index from newspaper data, I apply a smooth transition local projection model to examine the effects of contractionary monetary shocks under varying levels of news uncertainty. I find that under high news uncertainty, inflation expectations, and output rise—contrary to the central bank’s goals—demonstrating the price and output puzzles. However, when news uncertainty is low, these variables decrease as expected following contractionary policy shocks. My findings illustrate that high news uncertainty amplifies signaling effects, leading to unintended economic outcomes, whereas minimizing news uncertainty reduces these effects and supports the efficacy of traditional policy mechanisms. I propose two mechanisms : (1) households pessimistically misjudge monetary shocks in the opposite direction when conflicting media reports distort the information they receive, and (2) households misinterpret monetary policy as a signal of rising inflation, while firms misinterpret it as a combination of a positive preference shock and a negative productivity shock. These insights underline the importance of reducing news uncertainty through clear and consistent central bank communication. |
| Keywords: | E43 ;E52 ; E71 ; D83 JEL classifications: News Uncertainty ; Dispersed Information ; Disanchoring of Inflation Expectations ; Monetary Policy Transmission ; Price and Output Puzzles |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:wrkesp:81 |
| By: | Cao, Jin (Norges Bank); Dubuis, Pierre (Bank of England); Liaudinskas, Karolis (Norges Bank) |
| Abstract: | This paper investigates the link between bank‑firm lending relationships and monetary policy pass‑through, focusing on episodes of low interest rates. Using administrative tax and bank supervisory data ranging from 1997 to 2019, we track the entirety of bank‑firm relationships in Norway. Our analysis shows that when the central bank’s policy rate is relatively low, firms that have maintained a long‑term relationship with their bank experience a lower pass‑through of further policy rate cuts. Specifically, we find that when the policy rate is around 1%, each additional year of relationship decreases the pass‑through of a rate cut by 2.7 percentage points. We propose a theoretical model to rationalise our empirical findings, where state‑dependent differential pass‑through results from the presence of firms’ switching costs and banks’ leverage constraint. The model highlights that the composition of relationship lengths in the economy matters for aggregate monetary policy pass‑through. The proportion of long‑term relationships in the Norwegian economy significantly increased after the global financial crisis. Using the model, we calculate a counterfactual aggregate pass‑through for 2017, a period of monetary easing in a low‑rate environment, assuming this proportion had remained at its pre‑crisis level. |
| Keywords: | Relationship lending; monetary policy pass-through; low interest rates; policy rate; switching costs |
| JEL: | E43 E50 E52 E58 G21 |
| Date: | 2025–03–21 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1123 |
| By: | Paweł Kopiec (Narodowy Bank Polski) |
| Abstract: | This paper examines the non-linear impact of unemployment levels on the effectiveness of monetary policy. Using a standard heterogeneous-agent model with uninsured income risk, integrated with a canonical frictional labor market framework, I compare two versions of the model calibrated to reflect high- and low-unemployment regimes in the Polish economy. The findings reveal that the output response to a policy rate change is 60% larger in the high-unemployment scenario than in the low-unemployment one, while price reactions are more pronounced when unemployment is low. Additionally, I investigate the role of incomplete insurance markets in the transmission of monetary policy and assess the welfare implications of policy changes, both at the aggregate level and across different household subgroups. |
| Keywords: | Monetary Policy, Heterogeneous Agents, Frictional Markets, Unemployment |
| JEL: | D30 D31 D52 E21 E24 E43 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:nbp:nbpmis:375 |
| By: | Pablo Andrés Neumeyer; Martín González-Rozada; Can Soylu |
| Abstract: | This paper documents that monetary financing of unfunded fiscal deficits drives inflation in Ethiopia, a country with moderate but persistent inflation, which averaged 14% for the period 2002-2021. We make the case for the fiscal-monetary origin of inflation in two steps. First, we estimate a long-run money demand function for the monetary aggregate M1, which supports the quantity theory of money. Second, we show that over 2002-2021, 98% of the increase in M1 is explained by the growth of the monetary base, which, in turn, is explained by the growth of central bank transfers to the treasury and state-owned enterprises. These transfers account for 91% of the growth of M1 over the period 2002-2021. |
| Keywords: | Inflation, Money Demand, Fiscal Dominance, Ethiopia |
| JEL: | E31 E50 E62 E65 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:udt:wpecon:2025_05 |
| By: | Dimitrios Kanelis; Pierre L. Siklos |
| Abstract: | We combine modern methods from Speech Emotion Recognition and Natural Language Processing with high-frequency financial data to precisely analyze how the vocal emotions and language of ECB President Mario Draghi affect the yields and yield spreads of major euro area economies. This novel approach to central bank communication reveals that vocal and verbal emotions significantly impact the yield curve, with effects varying in magnitude and direction. Our results reveal an important asymmetry in yield changes with positive signals raising German, French, and Spanish yields, while negative cues increase Italian yields. Our analysis of bond spreads and equity markets indicates that positive communication influences the risk-free yield component, whereas negative communication affects the risk premium. Additionally, our study contributes by constructing a synchronized dataset for voice and language analysis. |
| Keywords: | artificial intelligence, asset prices, communication, ECB, high-frequency data, speech emotion recognition |
| JEL: | E50 E58 G12 G14 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-25 |
| By: | Philip Coyle (University of Wisconsin-Madison, Department of Economics (Email: pcoyle@wisc.edu)); Naoki Maezono (Graduate School of Public Policy, University of Tokyo (Email: m7046ranpo464@g.ecc.u-tokyo.ac.jp)); Taisuke Nakata (Faculty of Economics and Graduate School of Public Policy, University of Tokyo (Email: taisuke.nakata@e.u-tokyo.ac.jp)); Sebastian Schmidt (European Central Bank, Monetary Policy Research Division, (Email: sebas-tian.schmidt@ecb.int)) |
| Abstract: | We analyze the so-called deflationary equilibrium of the New Keynesian model with an interest rate lower bound when the future course of the economy is uncertain. In the deflationary equilibrium, we find that the rate of inflation is higher at the risky steady state-which takes uncertainty into account-than at the deterministic steady state- which abstracts away from uncertainty. The rate of inflation at the risky steady state can be positive if the target rate set by the central bank is positive. Our theory is consistent with the Japanese experience in the 2010s when the rate of inflation was on average positive while the interest rate lower bound was binding. |
| Keywords: | Effective Lower Bound, Deflationary Equilibrium, Liquidity Trap, Risky Steady State, Uncertainty |
| JEL: | E32 E52 E61 E62 E63 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-01 |
| By: | Ṣebnem Kalemli-Özcan; Can Soylu; Muhammed A. Yildirim |
| Abstract: | We develop a novel framework to study the interaction between monetary policy and trade. Our New Keynesian open economy model incorporates international production networks, sectoral heterogeneity in price rigidities, and trade distortions. We decompose the general equilibrium response to trade shocks into distinct channels that account for demand shifts, policy effects, exchange rate adjustments, expectations, price stickiness, and input–output linkages. Tariffs act simultaneously as demand and supply shocks, leading to endogenous fragmentation through changes in trade and production network linkages. We show that the net impact of tariffs on domestic inflation, output, employment, and the dollar depends on the endogenous monetary policy response in both the tariff-imposing and tariff-exposed countries, within a global general equilibrium framework. Our quantitative exercise replicates the observed effects of the 2018 tariffs on the U.S. economy and predicts a 1.6 pp decline in U.S. output, a 0.8 pp rise in inflation, and a 4.8% appreciation of the dollar in response to a retaliatory trade war linked to tariffs announced on “Liberation Day.” Tariff threats, even in the absence of actual implementation, are self-defeating—leading to a 4.1% appreciation of the dollar, 0.6% deflation, and a 0.7 pp decline in output, as agents re-optimize in anticipation of future distortions. Dollar appreciates less or even can depreciate under retaliation, tariff threats, and increased global uncertainty. |
| JEL: | E0 F40 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33686 |
| By: | Jie Cui (Dongbei University of Finance and Economics); Mamiza Haq (Newcastle University Business School); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Eric K. M. Tan (University of Queensland) |
| Abstract: | We investigate the impact of macroprudential policies on bank earnings management, analysing data from individual banks across 68 countries between 1996 and 2019. Our findings indicate that macroprudential policies exert differential effects on earnings quality and opportunistic earnings management. On average, tightening policies related to bank capital and loan supply result in an 8% reduction in earnings quality, while concurrently decreasing earnings management by approximately 2.5%. Moreover, the easing of macroprudential policies appears to have a more pronounced impact on earnings management than on earnings quality. The results remain robust to endogeneity checks and subsample analyses, and hold across various model specifications. Overall, our findings emphasize the importance of balanced macroprudential policies to at once address information asymmetries, regulatory arbitrage, and agency issues, and to promote financial stability. |
| Keywords: | macroprudential policies, opportunistic earnings management, earnings quality, cross-country analysis |
| JEL: | G02 G20 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2533 |
| By: | Chen, Yehning; Hasan, Iftekhar; Takalo, Tuomas |
| Abstract: | We study the effects of bank transparency on both banks' asset and liquidity risks, and ultimately, on banking sector stability and welfare. We show how enhanced bank transparency increases banks' vulnerability to excessive deposit outflows, but this threat of a liquidity crisis incentivizes banks to choose safer assets. We find that bank stability and welfare are a nonmonotonic function of transparency, and that they are maximized at an intermediate level of transparency, which is larger than the one preferred by banks but lower than what would result in excessive deposit outflows. Our model also suggests that bank transparency and deposit insurance are complementary policy tools, and that bank regulators should adjust disclosure requirements for banks procyclically |
| Keywords: | bank transparency, bank runs, asset risk taking, banking stability, deposit insurance |
| JEL: | G21 G28 D83 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:316423 |
| By: | Carlo Altavilla (European Central Bank (ECB)); Cecilia Melo Fernandes (International Monetary Fund (IMF)); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Alessandro Scopelliti (KU Leuven, Department Accounting, Finance and Insurance; University of Zurich - Department Finance) |
| Abstract: | We assess how regulatory changes in bail-inable liability requirements, aimed at ensuring orderly resolution processes and minimizing taxpayer-funded bailouts, affect bank bond holdings. Using confidential data on banks' securities portfolios, we find that the introduction of the Minimum Requirements for Eligible Liabilities prompts banks to increase their holdings of eligible bank bonds issued by other banks, compared to non-eligible bonds. Similarly, the Total Loss-Absorbency Capacity requirements encourage banks to invest in eligible subordinated debt issued by global systemically important banks. Our findings also reveal a within-country concentration of bank bond holdings, which may pose challenges to effective bail-in implementation. |
| Keywords: | bank bonds, regulatory changes, bail-inable debt, MREL, TLAC |
| JEL: | G01 G21 G28 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2538 |
| By: | Pablo Andrés Neumeyer; Juan Pablo Nicolini |
| Abstract: | We discuss the extent to which the Taylor principle can solve the indeterminacy of equilibria in economies in which the monetary authority follows an interest rate feedback rule. We first show that only the limiting behavior of the feedback rule matters, so identifying in the data if the Taylor principle holds cannot be achieved, above and beyond the arguments specified in Cochrane (2008). Second, we show that the competitive equilibrium under interest rate feedback rules is nominally determined if the Taylor principle holds and, in addition, two ad-hoc restrictions on equilibrium are satisfied. These require equilibrium inflation to be bounded and equilibria to be locally unique. Finally, we show that the Taylor principle is strongly time inconsistent, in a sense we make very precise. |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:udt:wpecon:2025_07 |
| By: | Lin William Cong; Simon Mayer |
| Abstract: | We model the competition between digital forms of fiat money and private digital money (PDM). Countries strategically digitize their fiat money — upgrading existing or launching new payment systems (including CBDCs) — to enhance adoption and counter PDM competition. A pecking order emerges: less dominant currencies digitize earlier, reflecting a first-mover advantage; dominant currencies delay digitization until they face competition; the weakest currencies forgo digitization. Delayed digitization allows PDM to gain dominance, eventually weakening fiat money’s role. We also highlight how geopolitical considerations, stablecoins, and interoperability between fiat and private digital money shape the digitization of money and monetary competition. |
| JEL: | E50 E58 F30 G18 G50 O33 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33593 |
| By: | Alin Marius Andries (Alexandru Ioan Cuza University of Iasi; Romanian Academy - Institute for Economic Forecasting); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Nicu Sprincean (Faculty of Economics and Business Administration, Alexandru Ioan Cuza University of Iași; National Institute for Economic Research, Romanian Academy) |
| Abstract: | We examine the relationship between climate-related financial policies (CRFPs) and banks' systemic risk. Using a sample of 458 banks in 47 countries over the period 2000-2020, we document that more stringent CRFPs are detrimental to overall financial stability and contribute to increased system-wide distress. These findings raise the possibility that overly stringent green finance policies could lead to a disorderly transition. In addition, measures that restrict banks' exposure to carbon-intensive counterparties, both directly and indirectly, may lead to less lending to the real economy and higher lending rates. The latter increase, in turn, could lead to significant credit losses, reduced bank profitability and other spillover effects with the potential to undermine systemic resilience. However, the implementation and ratification of the Paris Agreement, more robust adaptation strategies to cope with climate shocks and a higher incidence of natural disasters and a larger number of people affected by extreme climate events may counteract the amplifying effects of CRFPs on systemic risk. Moreover, banks with stronger environmental, social, and governance (ESG) commitments experience less systemic distress when exposed to green financial policies. Our findings have critical policy implications for public authorities formulating green financial policies to achieve the goals of the Paris Agreement. |
| Keywords: | systemic risk, climate change, climate-related financial policy |
| JEL: | G21 G32 Q54 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2530 |
| By: | Tomohiro Hirano; Joseph E. Stiglitz |
| Abstract: | This paper analyses the impact of credit expansions arising from increases in collateral values or lower interest rate policies on long-run productivity and economic growth in a two-sector endogenous growth economy with credit frictions, with the driver of growth lying in one sector (manufacturing) but not in the other (real estate). We show that it is not so much aggregate credit expansion that matters for long-run productivity and economic growth but sectoral credit expansions. Credit expansions associated mainly with relaxation of real estate financing (capital investment financing) will be productivity-and growth-retarding (enhancing). Without financial regulations, low interest rates and more expansionary monetary policy may so encourage land speculation using leverage that productive capital investment and economic growth are decreased. Unlike in standard macroeconomic models, in ours, the equilibrium price of land will be finite even if the safe rate of interest is less than the rate of output growth. |
| JEL: | E44 O11 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33661 |
| By: | Carola Binder; Cody Couture; Abhiprerna Smit |
| Abstract: | This paper examines partisanship in public perceptions of the Federal Reserve. In all years from 2001 through 2023, trust in the Federal Reserve was highest for respondents of the same party as the President. The partisan effects were larger than other demographic differences in trust, but do not explain the large partisan gap in inflation expectations in those years. We conducted a new survey-based information experiment before and after the Presidential inauguration in 2025, and found a changed pattern: Republicans continued to have lower trust in the Fed than did Democrats, even after a Republican President was elected and took office. Yet, Republicans had much lower inflation expectations than Democrats. Responses to open-ended survey questions point to tariffs and President Trump himself as most salient to consumers when considering how inflation will evolve. |
| JEL: | E02 E03 E30 E5 E51 E58 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33684 |