|
on Central Banking |
| By: | Thiago Christiano Silva; Kei Moriya; Mr. Romain M Veyrune |
| Abstract: | This paper introduces a classification framework to analyze central bank communications across four dimensions: topic, communication stance, sentiment, and audience. Using a fine-tuned large language model trained on central bank documents, we classify individual sentences to transform policy language into systematic and quantifiable metrics on how central banks convey information to diverse stakeholders. Applied to a multilingual dataset of 74, 882 documents from 169 central banks spanning 1884 to 2025, this study delivers the most comprehensive empirical analysis of central bank communication to date. Monetary policy communication changes significantly with inflation targeting, as backward-looking exchange rate discussions give way to forward-looking statements on inflation, interest rates, and economic conditions. We develop a directional communication index that captures signals about future policy rate changes and unconventional measures, including forward guidance and balance sheet operations. This unified signal helps explain future movements in market rates. While tailoring messages to audiences is often asserted, we offer the first systematic quantification of this practice. Audience-specific risk communication has remained stable for decades, suggesting a structural and deliberate tone. Central banks adopt neutral, fact-based language with financial markets, build confidence with the public, and highlight risks to governments. During crises, however, this pattern shifts remarkably: confidence-building rises in communication to the financial sector and government, while risk signaling increases for other audiences. Forward-looking risk communication also predicts future market volatility, demonstrating that central bank language plays a dual role across monetary and financial stability channels. Together, these findings provide novel evidence that communication is an active policy tool for steering expectations and shaping economic and financial conditions. |
| Keywords: | Central bank communication; large language models; forward guidance; monetary policy; sentiment analysis |
| Date: | 2025–06–06 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/109 |
| By: | Braun, Ben; Düsterhöft, Maximilian |
| Abstract: | In contrast to the “quiet” politics of the pre-2008 period, macroeconomic policy has become “noisy”. This break raises a question: How do independent agencies designed for quiet politics react when a contentious public turns the volume up on them? Central banks provide an interesting case because while they are self-professed adherents to communicative transparency, individual case studies have documented their use of strategic silence as a defense mechanism against politicization. This paper provides a quantitative test of the theory that when faced with public contention on core monetary policy issues, central banks are likely to opt for strategic silence. We focus on the most contested of central bank policies: large-scale asset purchase programs or “quantitative easing” (QE). We examine four topics associated with particularly contested side effects of QE: house prices, exchange rates, corporate debt, and climate change. We hypothesize that an active QE program makes a central bank less likely to address these topics in public. We further expect that the strength—and, in the case of the exchange rate, the direction—of this effect varies depending on the precise composition of asset purchases and on countries' growth models. Using panel regression analysis on a dataset of more than 11, 000 speeches by 18 central banks, we find that as a group, central banks conducting QE programs exhibited strategic silence on house prices, exchange rates, and climate change. We also find support for three out of four country-specific hypotheses. These results point to significant technocratic agency in the de- and re-politicization of policy issues. |
| JEL: | F3 G3 |
| Date: | 2025–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128420 |
| By: | Galo Nuño |
| Abstract: | The natural interest rate is the real rate that would prevail in the long-run. The standard view in macroeconomics is that the natural rate depends exclusively on structural factors such as productivity growth and demographics. This paper challenges this view by discussing three alternative, and complementary, views: (i) that the natural rate depends on fiscal policy via the stock of risk-free assets; (ii) that it depends on monetary policy via the central bank in ation target; and (iii) that it depends on persistent supply shocks such as tariffs or wars. These three theories share the relevance of precautionary savings motives. We conclude by drawing some lessons for monetary policy design. |
| Keywords: | HANK model, monetary-fiscal interactions, deep learning, cost-push shocks |
| JEL: | E32 E58 E63 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11878 |
| By: | Olesya V. Grishchenko; Franck Moraux; Olga Pakulyak |
| Abstract: | We analyze evolution of inflation expectations in the euro area (EA) using a novel measure of inflation expectations implied by the French nominal and inflation-indexed bonds. Overall, we find that EA inflation expectations have been relatively well anchored in the 2004 -- 2019 sample but have been somewhat sensitive to the incoming macroeconomic news and monetary policy shocks in the sample that includes the COVID-19 pandemic. Our results are robust with respect to the use of different inflation-indexed securities data, such as the EA inflation-linked swaps. |
| Keywords: | Obligations Assimilables du Trésor; OAT; French inflation-indexed bonds; Nominal- indexed bond spreads; Inflation swaps; Inflation expectations; Macroeconomic news; Monetary policy shocks; Euro area; Inflation anchoring; Stability |
| JEL: | D84 E31 E37 E52 E58 |
| Date: | 2025–06–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-41 |
| By: | Muñoz, Manuel A. (Bank of England); Smets, Frank (Bank for International Settlements, Ghent University and CEPR) |
| Abstract: | We reconcile theory and recent evidence on the benefits of building releasable bank capital buffers when there is headroom for doing so by building a quantitative macro-banking model that provides a rationale for static bank capital requirements and dynamic capital buffers due to externalities arising from bank risk failure and collateral constraints. Optimal dynamic capital buffers gradually build in response to expected upward shifts in bank net interest margins. In the absence of pecuniary externalities due to collateral constraints, such capital buffers are ineffective. The model also captures previous empirical findings such as the negative effect of a capital requirement tightening on short-term lending and the optimality of setting static bank capital requirements at relatively conservative levels. We present an application of our quantitative analysis in the form of a simple framework for calibrating the so-called ‘positive neutral counter-cyclical capital buffer’ (PN-CCyB). |
| Keywords: | Macroprudential policy; pecuniary externalities; borrowing limits; bank default risk; bank lending spread |
| JEL: | E44 G21 |
| Date: | 2025–05–30 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1128 |
| By: | Andriantomanga, Zo; Kishor, N. Kundan; Kumar, Labesh |
| Abstract: | This paper examines whether a uniform monetary policy can effectively address diverse state-level economic conditions within the United States. Using quarterly data from 1989-2017 for 33 states, we construct state-level optimal interest rates based on a Taylor rule framework that incorporates local inflation and unemployment gaps. We document significant and persistent deviations between these state-implied rates and the actual federal funds rate, with hierarchical clustering analysis revealing systematic regional patterns in monetary policy misalignment. Using a local projection approach, we find that a one percentage point positive deviation shock reduces headline inflation by 0.6 percentage points and increases unemployment rates, with effects most pronounced for non-tradable sectors. Critically, responses to state-specific deviation shocks are substantially larger and more persistent than responses to aggregate deviation shocks, demonstrating that cross-sectional heterogeneity is essential for understanding monetary policy's regional impacts. Our findings remain robust to alternative specifications, including output gaps, interest rate smoothing, and accounting for unconventional monetary policy. |
| Keywords: | Taylor rule, monetary policy, interest rates, regional business cycles |
| JEL: | E43 E52 R11 |
| Date: | 2025–05–14 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124748 |
| By: | Boehnert, Lukas (University of Oxford); de Ferra, Sergio (University of Oxford); Mitman, Kurt (Stockholm University); Romei, Federica (University of Oxford) |
| Abstract: | We investigate how the composition of expenditure shapes the transmission of monetary policy in a currency union. European Monetary Union data reveal three facts: (1) higher inequality countries have larger service expenditure shares; (2) monetary policy has a weaker output impact in these high-service-share, high-inequality countries; and (3) monetary policy induces systematic trade flows between high- and low-service-share countries. We develop a New Keynesian model with non-homothetic preferences and heterogeneous sectoral income that rationalizes these facts. Pro-cyclical inequality, driven by wealthier households' greater income exposure to services, buffers poorer households' consumption to contractionary shocks, dampening overall policy transmission. Our findings suggest that accounting for cross-country differences in consumption and income distributions is essential for understanding common monetary policy. |
| Keywords: | currency union, monetary policy, inequality |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17950 |
| By: | Minnie Zhu; Yuhan Liu; Simon Gong |
| Abstract: | This paper investigates the impact of monetary policy surprises on U.S. Treasury bond yields and the implications for portfolio managers. Based on the supply and demand model, traditional economic theories suggest that Federal Reserve bond purchases should increase bond prices and decrease yields. However, New Keynesian models challenge this view, proposing that bond prices should not necessarily rise due to future expectations influencing investor behavior. By analyzing the effects of monetary policy surprises within narrow windows around Federal Open Market Committee (FOMC) announcements, this study aims to isolate the true impact of these surprises on bond yields. The research covers Treasury bonds of various maturities--3 months, 1 year, 10 years, and 30 years--and utilizes cross-sectional regression analysis. The findings reveal that financial crises significantly decrease short-term yields, while no obvious evidence of factors that might affect long-term yields. This paper provides insights into how monetary policy influences bond yields and offers practical implications for portfolio management, particularly during quantitative easing and financial crises. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.07226 |
| By: | Edward Nelson |
| Abstract: | This paper examines the place that a "look-through" approach to price shocks has acquired in inflation-targeting frameworks. The "look-through" approach reflects the fact that, in the event of a shock that is likely (on impact) to put a sizable share of consumer prices under upward pressure, one option available to the central bank is to accommodate the initial price rise. In doing so, it can also attempt to ensure that future inflation rates, and inflation expectations, are insulated from the shock. Although the policy of "looking through" has achieved considerable acceptance, its origins are not widely understood. The analysis provided here indicates that key aspects of the "look-through" approach were aired in U.S. public discourse in 1973−1974, when the appropriate response to the first oil shock was being considered. The approach was subsequently refined in the course of several countries' experiences of price shocks from the mid-1970s to the early 1990s, with the specific "look through" terminology emerging at the end of this period. The connection between the "look-through" approach and the notion of inflation expectations being anchored by the central bank is also considered. |
| Keywords: | Monetary policy strategy; Inflation targeting; Look-through approach |
| JEL: | E52 E58 |
| Date: | 2025–05–29 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-37 |
| By: | Hyeon-seung Huh (Yonsei University); David Kim (University of Sydney) |
| Abstract: | The use of sign restrictions to identify monetary policy shocks in structural vector autoregression (SVAR) models has garnered significant attention in recent years. In this context, we revisit two influential studies—Uhlig (2005) and Arias et al. (2019)—which offer conflicting conclusions regarding the output effects of contractionary monetary policy shocks. Our analysis seeks to uncover the underlying causes of these discrepancies and evaluate the sensitivity of the results to alternative model specifications. Specifically, we examine four key factors: (i) the influence of rotation priors on posterior inference in sign-restricted SVAR models, (ii) the robustness of findings when employing an alternative algorithm to generate large sets of responses, (iii) the sensitivity of results to variations in identifying restrictions, and (iv) the robustness of conclusions to changes in the monetary policy equation and the inclusion of the Great Moderation. |
| Keywords: | Sign restrictions, Rotation matrix, monetary policy shocks, Structural vectorvautoregression, Baumeister and Hamilton critique |
| JEL: | C32 C51 E32 E52 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2025rwp-245 |
| By: | Campiglio, Emanuele; Deyris, Jérôme; Romelli, Davide; Scalisi, Ginevra |
| Abstract: | We study climate-related central bank communication using a novel dataset containing 35, 487 speeches delivered by 131 central banks from 1986 to 2023. We employ natural language processing techniques to identify and trace the evolution of key climate-related narratives centred around (i) green finance, and (ii) climate-related financial risks. We find that central bank public communication strategies are primarily driven by underlying institutional factors, rather than exposure to climate-related risks. We then study the impact of climate-related communication on financial market dynamics through both a portfolio and a firm-level analysis. We find that equity returns of ‘green’ firms outperform those of ‘dirty’ firms when central banks engage more frequently and intensely with climate-related topics. |
| Keywords: | central banking; climate change; low-carbon transition; central bank communication; climate-related risks; green finance; text analysis; topic modelling; asset pricing |
| JEL: | E44 E58 Q54 Z13 |
| Date: | 2025–01–21 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128518 |
| By: | Broer, Tobias (Paris School of Economics); Kramer, John (University of Copenhagen); Mitman, Kurt (Stockholm University) |
| Abstract: | Negative oil supply shocks since the 1980s have increased German inflation and reduced aggregate economic activity. Using 45 years of high-frequency German administrative data, we find that these shocks disproportionally harm low-income individuals: their earnings growth falls by two percentage points two years after a 10-percent exogenous oil price rise, while high-income individuals are largely unaffected. Job-finding probabilities for low-income workers also decline significantly. This contrasts with the distributional effects of monetary policy shocks, which, while also stronger at the bottom, primarily impact job-separation probabilities. To understand the role of monetary policy in shaping these outcomes, we analyze counterfactual scenarios of policy non-response. Because the actual policy response to oil shocks involves an initial rate rise followed by a fall, a fully anticipated non-response (McKay-Wolf, 2023) leaves the oil shock's aggregate and distributional effects little changed. When monetary policy repeatedly surprises by not reacting (Sims-Zha, 2006), in contrast, the implied initial monetary loosening dominates, boosting activity, inflation, and particularly employment prospects for low-income individuals. |
| Keywords: | monetary policy, inequality, Oil shocks, counterfactual |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17949 |
| By: | Fiorella De Fiore; Damiano Sandri; James Yetman |
| Abstract: | A novel international survey across 29 advanced and emerging market economies reveals that household inflation expectations remain elevated, despite inflation rates approaching targets. Perceptions of significant price hikes post-pandemic tend to feed into higher household inflation expectations, pointing to the risk of a lasting impact of temporary inflation bursts. Households with greater knowledge of central banks and their price stability mandates report lower inflation expectations. Therefore, central bank communications can help improve the public's understanding of central banks and foster the anchoring of inflation expectations. |
| Date: | 2025–06–16 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:104 |
| By: | Dimitris Korobilis |
| Abstract: | I introduce a high-dimensional Bayesian vector autoregressive (BVAR) framework designed to estimate the effects of conventional monetary policy shocks. The model captures structural shocks as latent factors, enabling computationally efficient estimation in high-dimensional settings through a straightforward Gibbs sampler. By incorporating time variation in the effects of monetary policy while maintaining tractability, the methodology offers a flexible and scalable approach to empirical macroeconomic analysis using BVARs, well-suited to handle data irregularities observed in recent times. Applied to the U.S. economy, I identify monetary shocks using a combination of high-frequency surprises and sign restrictions, yielding results that are robust across a wide range of specification choices. The findings indicate that the Federal Reserve's influence on disaggregated consumer prices fluctuated significantly during the 2022-24 high-inflation period, shedding new light on the evolving dynamics of monetary policy transmission. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.06649 |
| By: | Marco Jacopo Lombardi; Cristina Manea; Andreas Schrimpf |
| Abstract: | We construct a new financial conditions index for the United States based on a dynamic factor model applied to a broad set of financial prices and yields. The resulting two latent factors capture, respectively, the general level of safe interest rates and an overall measure of perceived and priced financial risk. Analysing the interaction between these factors and the macroeconomy, we find that: (i) both factors are affected significantly by monetary policy; (ii) positive shifts in both factors lead to a persistent contraction in economic activity; (iii) relative to the safe interest rates factor, the risk–related factor exhibits stronger predictive power for economic activity. Our results are consistent with both the demand and the credit channels of monetary policy being at work, and emphasize that isolating movements in safe interest rates from shifts in perceived financial risk is essential to accurately assess the transmission of financial conditions to economic activity. |
| Keywords: | financial conditions, monetary policy, financial accelerator, dynamic factor model |
| JEL: | C38 E52 G10 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1272 |
| By: | Pudner, Damian |
| Abstract: | The existing monetary framework of the Bank of England fails to manage supply-side shocks and financial crises effectively, which leads to economic volatility and potential policy errors. Targeting the growth path of nominal GDP would provide a more stable and predictable macroeconomic environment by focusing on total nominal spending rather than a rigid inflation target. Nominal GDP targeting reduces policy uncertainty by minimising discretionary decision-making, improving transparency, and better anchoring expectations for businesses and financial markets. Establishing a nominal GDP futures market could provide real-time guidance for policymakers, while enhanced data collection and market communication would facilitate a smooth transition. By stabilising total nominal spending, nominal GDP targeting supports long-term economic stability, reducing volatility in output and employment while ensuring a more growth-friendly policy framework. The Bank of England's failure to anticipate inflationary trends has undermined trust in its decision-making. A transparent and predictable nominal GDP-based framework would rebuild confidence in monetary policy. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ieadps:314036 |
| By: | Jan Kakes; Tom Hudepohl; Casper de Haes |
| Abstract: | We estimate to what extent the Eurosystem’s Corporate Sector Purchase Programme (CSPP) impacted the price of securities that were actually bought, or their close substitutes, more than the price of other securities. For own bond purchases we do not find significant local supply effects, which is in line with the Eurosystem’s market neutrality principle of asset purchases. We do, however, find significant local supply effects caused by the purchases of substitute bonds defined by similar maturities; we estimate that these effects reduce bond yields by about 40-45 basis points. Such local supply effects are more pronounced for bonds that were eligible under the CSPP than for non-eligible bonds, for bonds that have been issued more than a year ago and for bonds with relatively low credit ratings. |
| Keywords: | monetary policy; quantitative easing; preferred habitat; |
| JEL: | C26 E43 E52 E58 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:837 |
| By: | Orphanides, Athanasios |
| Abstract: | The ECB can fulfil its mandate better and contribute to a stronger Europe by adopting sensible rules instead of relying on discretionary decision-making. A simple rule for the policy rate can promote systematic monetary policy and protect against significant policy errors. Ending the reliance on credit rating agencies for determining the collateral eligibility of government debt can improve the functioning of government bond markets and lower financing costs for governments. With sensible rules, the ECB can secure price stability and avoid unwarranted fragility in government bond markets. Alleviating fiscal stress can free fiscal resources for public investment aimed at boosting productivity, greening the economy and strengthening European defense. Within its mandate, the ECB can serve Europe better than in the past. |
| Keywords: | ECB, policy rules, forward guidance, fiscal stress, collateral framework |
| JEL: | E52 E58 E61 H63 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:319651 |
| By: | Moreno, Guadalupe |
| Abstract: | Money, capitalist market societies' paramount contract, relies on the belief in its enduring value. However, we still know surprisingly little about the social foundations that sustain that belief. How is our collective trust in the enduring value of money socially built, and what happens if people lose such trust? What if a society convinces itself that policymakers cannot guarantee that the value of money will persist over time? In this paper, I use Argentina as a monetary laboratory to study how almost eighty uninterrupted years of high inflation and successive currency crises led to a social trauma that crystalized in the emergence of a distrust narrative: a strong popular belief that neither the state nor the local financial system will be able to preserve the value of the national currency or the worth of savings over time. By analyzing the production and reproduction of this narrative and its longlasting effects on the Argentine economy, I show how rooted distrust in a currency fosters a myriad of practices aimed at protecting savings, which impose severe limits on monetary governance. I emphasize that when state authorities lose control of collective expectations and negative monetary imaginaries take off, a vicious cycle unfolds in which instability, inflation, and devaluation reinforce each other. |
| Abstract: | Geld als Fundament kapitalistischer Marktwirtschaften beruht auf dem Glauben an seinen dauerhaften Wert. Allerdings wissen wir immer noch erstaunlich wenig über die sozialen Grundlagen, die diesen Glauben stützen. Wie baut sich unser kollektives Vertrauen in den dauerhaften Wert des Geldes auf, und was passiert, wenn Menschen dieses Vertrauen verlieren? Was geschieht, wenn eine Gesellschaft zu dem Schluss kommt, dass die Politik nicht in der Lage ist, den bleibenden Wert des Geldes über die Zeit hinweg zu sichern? In diesem Discussion Paper nutze ich Argentinien als "monetäres Labor", um zu untersuchen, wie fast achtzig Jahre ununterbrochener hoher Inflation und aufeinanderfolgender Währungskrisen zu einem sozialen Trauma geführt haben. So bildete sich Misstrauensnarrativ heraus, eine starke Überzeugung in der Bevölkerung, dass weder der Staat noch das lokale Finanzsystem in der Lage sein werden, den Wert der nationalen Währung oder der Ersparnisse über die Zeit hinweg zu bewahren. Durch eine Analyse der Produktion und Reproduktion dieses Narrativs und seiner lang anhaltenden Auswirkungen auf die argentinische Wirtschaft zeige ich, wie tief verwurzeltes Misstrauen in eine Währung eine Vielzahl von Praktiken fördert, die auf den Schutz von Ersparnissen abzielen und die Geldpolitik stark einschränken. Wenn die Behörden die Kontrolle über die kollektiven Erwartungen verlieren und sich negative monetäre Vorstellungen in der Gesellschaft ausbreiten, entfaltet sich ein Teufelskreis, in dem sich Instabilität, Inflation und Abwertung gegenseitig verstärken. |
| Keywords: | central bank, civil society, financial crisis, governance, money, trust, Finanzkrise, Geld, Regierungsführung, Vertrauen, Zentralbank, Zivilgesellschaft |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:mpifgd:319606 |