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on Central Banking |
| By: | Lang, Jan Hannes; Rusnák, Marek; Herbst, Tobias |
| Abstract: | We examine the differential impact of monetary policy and macroprudential policy on bank lending rates in the euro area, using granular corporate loan-level data for the period 2019-2023. We find three results: First, consistent with the predictions of a stylized theoretical model of bank lending rates, monetary policy exerts an order of magnitude larger impact on lending rates than macroprudential policy. Second, the effectiveness of monetary policy transmission weakens when interest rates are close to or below zero. Third, the impact of macroprudential policy on lending rates increases when banks have limited capital headroom above capital buffer requirements, indicating cautious lending behavior when banks get close to regulatory constraints. Our findings have important policy implications for the joint conduct of monetary and macroprudential policy. JEL Classification: G21, G28, E43, E52 |
| Keywords: | bank capitalization, credit supply, interest rate pass-through, loan-level data |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253057 |
| By: | Fabio Milani |
| Abstract: | This paper estimates a New Keynesian model with a nonlinearity in the monetary policy rule to capture the practice of inflation targeting with target zones or tolerance bands. Private-sector agents form subjective expectations, update their beliefs over time using a perceived model of the economy, and are subject to shifts in sentiment. The model is estimated using data on realized macroeconomic variables and survey data on expectations for four inflation-targeting economies: Australia, Canada, New Zealand, and Sweden. The results show that central banks do not treat target bands as zones of inaction. Their policy reactions when inflation falls within the band are comparable to or even exceed the reactions when inflation moves outside the band, and they always satisfy the Taylor principle. Private-sector expectations respond similarly to structural and sentiment shocks regardless of the inflation regime. In all cases, the data favor the simpler specification in which agents form expectations based on linear perceived laws of motion, without accounting for the nonlinearity induced by monetary policy. |
| Keywords: | inflation targeting, tolerance bands, target ranges, survey expectations, learning, nonlinear monetary policy rules |
| JEL: | E31 E32 E52 E58 E70 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11910 |
| By: | Sally Auld |
| Keywords: | central banks; monetary policy transmission; communications; forward guidance; transparency; trust |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbaacp:acp2024-03 |
| By: | Tiff Macklem; Jill Vardy |
| Abstract: | Central bank communications have undergone profound changes over the past two decades as central banks greatly enhanced their transparency and openness in order to support their monetary policy objectives. It has become widely accepted that clear communication by central banks is important in order to enhance credibility, improve monetary policy effectiveness and reinforce accountability. Some key lessons have emerged, notably the following seven: (i) public support of inflation targeting objectives and means is essential; (ii) central bank mandates must be focused and achievable; (iii) credibility is enhanced when central banks acknowledge uncertainty; (iv) crises require a different style of communicating; (v) public demand for information has increased; (vi) central banks must deploy new ways of reaching audiences; and (vii) central banks need to listen to a wide range of stakeholders. Central bank performance is judged by results and economic outcomes, but success is more likely if central banks clearly communicate to help citizens navigate the broader economic forces at work and understand how policies affect them. These efforts improve policy decisions, reinforce legitimacy and cement public trust. |
| Keywords: | central banks; monetary policy frameworks; communications; uncertainty; transparency; credibility; trust |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbaacp:acp2024-02 |
| By: | Jaanika Meriküll; Matthias Rottner |
| Abstract: | This paper studies the distributional effects of monetary policy and its dependence on inflation. We document a novel dependency in the earnings heterogeneity channel of monetary policy using high-frequency, administrative tax data from eurozone member Estonia. Monetary policy shocks substantially influence earnings inequality during high-inflation periods, with weaker effects during low-inflation periods. Extending our dataset with granular MPC estimates, we show that earnings heterogeneity amplifies the aggregate MPC and consumption response. In high-inflation periods, consumption and inequality respond more, even though the aggregate MPC may be lower. We rationalise our findings with a nonlinear tractable HANK model featuring inflation dependencies. |
| Keywords: | monetary policy, labour income inequality, inflation, state dependency, earnings heterogeneity channel, aggregate MPC |
| JEL: | E52 D31 J31 J63 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1271 |
| By: | Valeriu Nalban; Luis-Felipe Zanna |
| Abstract: | Weather-related shocks are of a supply-side nature and therefore present significant challenges for monetary policy. Using a Quarterly Projection Model (QPM) framework, this paper provides an overview of weather-relevant analytical exercises that help to understand the propagation channels of these shocks, the policy trade-offs they imply, and the ensuing implications for the conduct of monetary policy. The exercises highlight the important role of economic characteristics and frictions, such as the weight of food expenditures in the consumption basket, the GDP share of the agriculture sector, the degree of imports substituting for the damaged domestic agricultural supply, the extent of inflation expectations’ anchoring and central bank credibility, and the specific characteristics of the monetary policy framework, including the degree of exchange rate flexibility and the definition of the price stability objective. Overall, the extent of these characteristics and frictions in developing countries render them more vulnerable and constitute bigger challenges in monetary policy conduct relative to developed economies. |
| Keywords: | Monetary Policy; Weather Shocks; Quarterly Projection Model; Transmission Mechanism; Developing Countries |
| Date: | 2025–05–23 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/095 |
| By: | Jonathan Witmer |
| Abstract: | This paper analyzes the optimal quantity of central bank reserves in an economy where reserves and other financial assets provide liquidity benefits. Using a static model, I derive a constrained Friedman rule that characterizes the socially optimal level of reserves, demonstrating that this quantity is neither necessarily large nor small but depends on the marginal benefits of reserves relative to alternative safe assets. The model highlights how the supply of government and private-sector liquid assets influences demand for reserves and the size of a central bank balance sheet. I calibrate and estimate the model to determine the optimal amount of central bank holdings in the United States. I extend the analysis to account for shadow banking, where non-bank intermediaries create short-term liquid assets but generate monitoring costs and externalities. The presence of shadow banking alters the optimal balance of reserves and other assets, potentially constraining optimal balance sheet policy. The results offer new insights into the debate over the size of central bank balance sheets and the interaction between public and private liquidity provision. |
| Keywords: | Monetary policy implementation; Financial institutions; Financial markets; Financial system regulation and policies |
| JEL: | E41 E42 E58 G21 G28 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-15 |
| By: | Michael Stutchbury |
| Keywords: | monetary policy frameworks; central bank independence; communications; transparency; forward guidance |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbaacp:acp2024-06 |
| By: | Jonathan J Adams (Department of Economics, University of Florida); Philip Barrett (International Monetary Fund) |
| Abstract: | Empirical monetary policy shocks (EMPS) contain information about monetary policy both today and in the future. We define the term structure of monetary policy news as the marginal impact of an EMPS on the policy residual at each horizon. Policy news at different horizons has different effects, so knowing the term structure is necessary in order to use an EMPS to evaluate theory. We develop an IV method to estimate this term structure. We find that most EMPS in the literature convey more information about policy in future than in the present, but there is substantial heterogeneity. We use the estimated term structures to construct synthetic forward guidance and surprise shocks, and estimate their macroeconomic effects. Surprise interest rate hikes exhibit an "output puzzle", but forward guidance about future rate increases is deeply contractionary. |
| JEL: | E32 E43 E52 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:ufl:wpaper:001017 |
| By: | Bruno Albuquerque; Mr. Eugenio M Cerutti; Nanyu Chen; Melih Firat |
| Abstract: | The growing role of nonbanks in corporate credit intermediation raises important but underexplored questions about how both monetary policy (MP) and macroprudential policies (MaPP) affect lending and the real economy. Using syndicated loan data, we examine the joint impact of MP and MaPP shocks on credit supply to nonfinancial firms. Our findings show that nonbanks act as shock absorbers, cushioning firms—particularly those with existing nonbank relationships—from policy tightening. We also find that these shocks drive credit away from weaker banks toward nonbanks, raising concerns about credit quality. Finally, we provide evidence that MaPPs on banks can lead them, especially weaker banks, to shift lending to nonbanks and away from nonfinancial corporations. This allows nonbanks to expand their role in corporate credit markets. Overall, our findings highlight that tighter MP and MaPP may unintentionally push credit intermediation into a sector largely outside the regulatory perimeter, posing new financial stability risks. |
| Keywords: | Housing booms; Housing busts; Credit booms; Macroprudential policies |
| Date: | 2025–05–23 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/096 |
| By: | Michael McMahon |
| Abstract: | Interest and attention on central bank communication has grown substantially in the last three decades. Alongside this change, there has been a lot of work to understand the effects of such communication and to guide central banks on how to communicate. This paper is a personal assessment of some of the main lessons that I have taken from this work. It necessarily draws heavily on the lessons from my own work (as these are issues that I have thought most deeply about), but I also try to draw out the views of others in those areas. In addition, I discuss other non-comprehensive, important areas that I haven't worked on (yet) but I think the research has shown important insights from which useful lessons for central banks can be learned. |
| Keywords: | central banks; monetary policy frameworks; communications; inflation expectations; education; uncertainty; trust |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbaacp:acp2024-01 |
| By: | Michael Smolyansky; Gustavo A. Suarez |
| Abstract: | When the Federal Reserve tightens monetary policy, do the prices of riskier assets fall relative to safer assets? Or, do investors interpret policy tightening as a signal that economic fundamentals are stronger than they previously believed, thus leading riskier assets to outperform? We present evidence that the latter of these two forces empirically dominates within the U.S. corporate bond market. Following an unanticipated monetary policy tightening, riskier corporate bonds outperform safer corporate bonds, demonstrating the importance of an informational, or non-monetary, component within monetary policy announcements. |
| Keywords: | Monetary policy; Corporate bonds; Non-monetary news; Federal Reserve information effect; Reaching for yield |
| JEL: | E40 E52 G12 G14 |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:100026 |
| By: | Acosta Henao, Miguel (Central Bank of Chile); Amado, María Alejandra (Bank of Spain); Pérez Reyna, David (Universidad de los Andes); Martí, Montserrat (Central Bank of Chile) |
| Abstract: | This paper investigates the granular transmission of U.S. monetary policy shocks to deviations from the uncovered interest rate parity (UIPDs) in emerging economies. Using a comprehensive dataset from Chile that accounts for firm-bank relationships and the time-variant characteristics of both firms and banks, we uncover several key findings: (1) Shocks to the federal funds rate (FFR) increase banks’ costs of foreign borrowing; (2) these higher credit costs disproportionately affect small firms, raising their UIPDs more than for large firms; (3) this size-differentiated impact stems from the relatively higher interest rates on domestic currency loans faced by small firms; (4) in contrast, interest rates on dollar-denominated loans respond homogeneously across all firms; (5) we find no differential effect on loan quantities, suggesting an active role of credit supply and demand. We rationalize these findings with a small open economy model of corporate default that incorporates heterogeneous firms borrowing from domestic banks in both foreign and domestic currencies. In our model, a higher FFR reduces the marginal cost of defaulting on domestic-currency debt for small firms more than for large firms |
| Keywords: | Uncovered interest rate parity; U.S. monetary policy; bank lending; firm financing; firm heterogeneity |
| JEL: | E43 E44 F30 F41 |
| Date: | 2025–06–04 |
| URL: | https://d.repec.org/n?u=RePEc:col:000089:021387 |
| By: | Huberto M. Ennis; Elizabeth C. Klee |
| Abstract: | We study transaction-level data of bank borrowings at the Federal Reserve's discount window from 2010 to 2019. We merge these data with quarterly information on bank balance sheets and income statements. To aid in the interpretation of our empirical analysis, we also develop a detailed model of the decision of banks to borrow from various sources, including the discount window. The objective is to contribute to a better understanding of the reasons why banks use the discount window during ``normal'' times---periods of relative calm in financial markets. Consistent with our model, we find that borrowing from the discount window is tightly linked to the composition of banks' balance sheets. Most importantly, banks holding less reserves tend to borrow more often (and more) from the Fed's discount window. Similarly, banks with more expensive and fragile liabilities, and less marketable collateral, are also more likely to borrow from the Fed. |
| Keywords: | Banking; Federal Reserve; Central bank; Liquidity |
| JEL: | E52 E58 G28 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:100037 |
| By: | Phillip An; Karlye Dilts Stedman; Amaze Lusompa |
| Abstract: | This paper investigates the utility of daily data in measuring high-frequency monetary policy surprises, comparing various announcement-day asset price changes with their intradaily (30-minute) counterparts. We find that both frequencies are similarly distributed and often highly correlated, particularly for longer-horizon measures. Testing daily surprises for systematic contamination from non-monetary policy news, we find no evidence to suggest that contemporaneous news releases bias their measurement. Empirical applications, including high-frequency passthrough to Treasury yields and proxy SVAR models, suggest that daily surprises produce results comparable to those obtained with intradaily data. Our findings suggest that while intradaily data remains invaluable for certain applications, daily data offers a practical and robust alternative for assessing monetary policy surprises, particularly when the event, or the reaction to it, extends beyond a narrow window, or when intradaily data is unavailable. |
| JEL: | E43 E44 E52 E58 G14 |
| Date: | 2025–05–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:100052 |
| By: | Frost, Jon; Rochet, Jean-Charles; Shin, Huyn Song; Verdier, Marianne |
| Abstract: | We compare three competing digital payment instruments: bank deposits, private stablecoins and central bank digital currencies (CBDCs). A simple theoretical model integrates the theory of two-sided markets and payment economics to assess the benefits of interoperability through a retail fast payment system organised by the central bank. We show an equivalence result between such a fast payment system and a retail CBDC. We find that both can improve financial integration and increase trade volume, but also tend to reduce the market shares of incumbent intermediaries. |
| Keywords: | payments; CBDC; big tech; banks; stablecoins |
| JEL: | E42 E58 G21 L51 O31 |
| Date: | 2025–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130555 |
| By: | Ferrando, Annalisa; Mulier, Klaas; Ongena, Steven; Delis, Manthos |
| Abstract: | Monetary policy can have contrasting effects on economic inequality via distinct channels. We examine the effect working via the credit channel, whereby monetary policy induces heterogeneous access to credit for business owners based on their wealth. Using unique data on business loan applications from small firms, we find that monetary expansions increase the bank’s likelihood to approve loan applications, particularly so for low-wealth entrepreneurs, translating to higher future income and wealth. Survey data from 19 euro area countries on loan applications by SMEs confirms these findings, and shows that the effect transmits especially via weakly capitalized and less liquid banks. JEL Classification: E51, E52, D63 |
| Keywords: | bank credit, business loans, entrepreneurs’ private wealth, monetary policy |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253058 |
| By: | Ryuichiro Izumi; Weng Fei Leong; Balázs Zélity (Department of Economics, Wesleyan University) |
| Abstract: | Capital controls are often discussed as a potential tool to stabilize macroeconomic fluctuations. However, empirical studies typically find that their use does not systematically respond to the business cycle. This paper revisits the cyclicality of capital inflow controls by considering two possibilities: governments may respond only when output deviations become sufficiently large, and their responses may vary with the underlying macroeconomic policy stance. Using quarterly panel data for 45 advanced and emerging economies from 2000 to 2015, we find that inflow controls are employed countercyclically, but only in response to large output fluctuations. Moreover, the propensity to tighten inflow controls during booms is significantly amplified in countries that pursue more countercyclical fiscal and monetary policies. These findings help reconcile the gap between theoretical expectations and existing empirical findings, suggesting the importance of accounting for threshold effects and macro-policy stance in evaluating capital flow management and incorporating adjustment frictions into theoretical models. |
| Keywords: | capital controls, macroprudential policy, international capital flows |
| JEL: | F32 F33 F41 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:wes:weswpa:2025-006 |
| By: | Vyacheslav Fos; Nancy R. Xu |
| Abstract: | Using 472 FOMC meetings (1969–2019) and the exogenous rotation of voting rights among Reserve Bank presidents, we identify meetings where local economic conditions in voting districts significantly affect the Federal funds target rate (FFR), while those in non-voting districts show no effect. This voting-group effect persists after controlling for national conditions and Greenbook forecasts, implying that actual FFR decisions plausibly deviated from what average information and expectations would have suggested. Distortions are sizable, persistent, and priced into futures and Treasury markets prior to FOMC meetings. We demonstrate these findings using both components of the Fed’s dual mandate: inflation and unemployment rates. |
| JEL: | D7 E5 E58 G10 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33762 |
| By: | Francesco Ferlaino |
| Abstract: | This study examines how different types of financial frictions influence household wealth and consumption inequality in response to a contractionary monetary policy shock. The analysis considers two key frictions: those affecting production firms and those related to household borrowing, both incorporated into a HANK model. The results suggest that frictions in the productive sector have a stronger impact on wealth inequality, whereas frictions in household borrowing lead to greater consumption dispersion relative to the counterfactual scenario. This divergence primarily arises from dynamics around the zero-wealth threshold, particularly the behavior of the household borrowing spread. |
| Keywords: | Heterogeneous agents; financial frictions; monetary policy; New Keynesian models; inequalities |
| JEL: | E12 E21 E44 E52 G51 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:sap:wpaper:wp263 |
| By: | Rashad Ahmed; Iñaki Aldasoro |
| Abstract: | This paper examines the impact of dollar-backed stablecoin flows on short-term US Treasury yields using daily data from 2021 to 2025. Estimates from instrumented local projection regressions suggest that a 2-standard deviation inflow into stablecoins lowers 3-month Treasury yields by 2-2.5 basis points within 10 days, with limited to no spillover effects on longer tenors. We also find evidence of asymmetric effects: stablecoin outflows raise yields by two to three times as much as inflows lower them. Decomposing the yield impact by issuer shows that USDT (Tether) has the largest contribution followed by USDC (Circle), consistent with their relative size. Our results highlight stablecoins' growing footprint in safe asset markets, with implications for monetary policy transmission, stablecoin reserve transparency, and financial stability. |
| Keywords: | stablecoins, treasury securities, money market funds, safe assets |
| JEL: | E42 E43 G12 G23 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1270 |
| By: | Stefano Fasani; Valeria Patella; Giuseppe Pagano Giorgianni; Lorenza Rossi |
| Abstract: | This paper investigates the macroeconomic effects of a belief distortion shock—an unexpected increase in the wedge between household and professional forecaster inflation expectations. Using survey and macro data alongside machine-learning techniques, we identify this shock and examine its effects within and outside the ZLB, while conditioning on the degree of inflation disagreement. The shock increases unemployment during normal times, whereas it reduces it in the ZLB, when the monetary stance is accommodative. Inflation disagreement instead dampens the expansionary effects of the shock. A New Keynesian model with belief distortion shocks replicates these dynamics and reproduces the inflation disagreement empirical patterns. |
| Keywords: | Inflation, Belief Distortion Shock, Inflation Disagreement, Households Expectation, Machine Learning, Local Projections, New Keynesian model, Monetary Policy, ZLB |
| JEL: | E31 C22 D84 C32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:lan:wpaper:423478673 |
| By: | Alejandro Ferrer (BANCO DE ESPAÑA); Ana Molina (BANCO DE ESPAÑA) |
| Abstract: | In a liquidity stress scenario, banks may need to urgently monetise assets to meet deposit outflows. This can be done by either selling the assets or using them as collateral in financing operations. In a context of crisis, executing these financing transactions with private counterparties may be constrained, making the transactions with the central bank particularly relevant. The sale of assets classified at amortised cost will result in the materialisation of any accumulated unrealised losses, adversely affecting the banks’ profitability. Alternatively, central bank financing prevents the materialisation of unrealised losses, which, however, limit the amount of financing that can be obtained through this mechanism, as it is based on the market value of the collateral provided. In this case, the increase in interest expenses associated with the funds obtained from the central bank will also impact the bank’s profitability. All these negative effects on profitability ultimately affect solvency and can exacerbate the initial liquidity crisis. Thus, there is a link between liquidity stress and solvency deterioration in which unrealised losses play a significant role. Drawing on Spanish banking system data, we examine this connection in various simulation exercises, looking at its nature and strength under each mechanism (asset sale and pledge). The data show a growing weight of government debt classified at amortised cost on the balance sheets of Spanish banks in recent years, as well as an increase in the associated unrealised losses during the period of rising interest rates, especially in 2022, and in 2023. |
| Keywords: | government debt, debt held at amortised cost, unrealised losses, LCR, liquidity stress, central bank liquidity facilities |
| JEL: | E43 G17 G21 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:bde:opaper:2509e |
| By: | Petrella Ivan (Department of Economics, Social Studies, Applied Mathematics and Statistics, and Collegio Carlo Alberto, University of Turin; University of Warwick and CEPR); Santoro Emiliano (Catholic University of Milan); Winkelmann Yannik (University of Tubingen) |
| Abstract: | Using UK consumer price microdata, we report that aggregate price flexibility varies substantially over time and induces significant non-linearity in inflation. In a regime of high flexibility, the half-life of inflation drops by 50% and its volatility rises considerably. Such asymmetry arises naturally from state-dependent pricing, for which we find ample evidence in the data, particularly following the Great Recession. Neglecting this property may lead to a systematic underprediction of inflation, as seen in the post-Pandemic inflation surge. Tracking real-time movements in price flexibility is crucial for assessing inflation dynamics and to inform monetary policy decisions. |
| Keywords: | Inflation, Price flexibility, Monetary policy, Ss models |
| JEL: | E30 E31 E37 C22 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:tur:wpapnw:099 |
| By: | Ranim Assi; Zacharias Maniadis; Sotiris Georganas |
| Abstract: | Consumers’ perceptions of current inflation play a key role in understanding household consumption and investment decisions as well as the impact of monetary policies. Evidence from countries with low or moderate inflation shows that people’s perception of inflation often diverges significantly and systematically from official inflation rates. We examine the relationship between actual and perceived inflation in a hyperinflation environment. Our experimental results show that, opposite to low inflation, hyperinflation is greatly underestimated in people’s perceptions. Moreover the accuracy of inflation perceptions, as inflation rises, exhibits an inverse-U shape, which confirms our novel, preregistered “perception accuracy inversion hypothesis”. |
| Keywords: | inflation, hyperinflation, expectations |
| JEL: | E7 C9 |
| Date: | 2025–05–23 |
| URL: | https://d.repec.org/n?u=RePEc:ucy:cypeua:01-2025 |