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on Central Banking |
| By: | Thibaut Duprey; Yaz Terajima; Jing Yang |
| Abstract: | We draw on the Canadian experience to examine how monetary and macroprudential policies interact and possibly complement each other in achieving their respective price and financial stability objectives. |
| Keywords: | Financial stability; Monetary policy |
| JEL: | E3 E37 E5 E52 E58 E6 E61 G0 G01 G2 G21 G28 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-18 |
| By: | Christoffel, Kai; Farkas, Mátyás |
| Abstract: | This paper investigates the implications of a potential loss of credibility in the central bank’s ability to bring inflation back to target in the medium-term (”de-anchoring”). We propose a monetary policy framework in which the central bank accounts for de-anchoring risks using a regime-switching model. First, we derive the optimal monetary policy strategy, which balances the trade-off between the welfare costs of a stronger response to inflation and the benefits of preserving the central bank’s credibility. Next, we apply this framework in a medium-scale regime-switching DSGE model and develop a method to assess de-anchoring risks in real time. Using the post-COVID inflation episode in the euro area as a case study, we find that an explicit ”looking-through” strategy would have only modestly increased de-anchoring risks. These findings highlight the importance of monitoring de-anchoring risks in monetary policy design. JEL Classification: D83, D84, E10 |
| Keywords: | DSGE estimation, inflation de-anchoring, regime switching |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253082 |
| By: | Benoit Mojon; Phurichai Rungcharoenkitkul; Dora Xia |
| Abstract: | This paper introduces a new Monetary Policy Condition Index (MCI) that integrates conventional and unconventional monetary policy tools into a unified measure. The MCI is a weighted average of short-term interest rate and central bank balance sheet size, improving upon the shadow rate by capturing balance sheet policy effects away from the effective lower bound. We estimate the MCI's weight and its dynamic relationships with output, inflation and financial conditions using a Bayesian Vector Autoregression (BVAR) framework. Results suggest that large balance sheet policies have exerted a significant accommodative influence on monetary policy conditions, including away from the effective lower bound. Through historical decomposition and counterfactual exercises, the MCI provides new insights into unconventional policy's effectiveness and unintended consequences. The framework can flexibly accommodate numerous extensions, including possibly higher neutral balance sheet under ample reserve system. |
| Keywords: | monetary policy, monetary policy conditions, financial conditions, unconventional monetary policy, central bank balance sheet, ample reserves system |
| JEL: | E51 E52 E58 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1281 |
| By: | Martin Feldkircher; Christos A. Makridis |
| Abstract: | This paper studies how the linguistic features of central bank communication affect household economic sentiment. Linking central bank speeches from 29 countries to individual-level data from the Gallup World Poll (2006-2023), we examine whether speech complexity--captured through sentiment, tone, length, and readability--is associated with public perceptions of the economy and labor market. We find that longer and more syntactically complex speeches are consistently linked to lower economic confidence and less favorable views of the job climate. Positive sentiment in modal (i.e., policy-relevant) sentences is associated with more optimistic household outlooks. These effects are stronger among younger and college-educated respondents, suggesting differential processing of complex information. These findings underscore the importance of clarity and tone in central bank messaging and support the view that communication is a key behavioral channel of monetary policy transmission. |
| Keywords: | central bank communication, household expectations, sentiment analysis, monetary policy, public trust, global survey data |
| JEL: | E52 E58 D84 H63 C23 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-43 |
| By: | Delis, Manthos; Iosifidi, Maria |
| Abstract: | We develop a model of green lending to study its implications for monetary policy and environmental regulation. Banks finance firms’ brown and/or green projects. The costs of brown projects increase with rising regulatory stringency or when endogenous monetary policy affects the cost of funds. Both policies can elevate the equilibrium share of green lending, resulting in greener output. Our findings remain consistent when we introduce central banks with an explicit green objective (e.g., differential interest rates based on project type), forward-looking bank behavior, and adjustment costs. Additionally, we demonstrate the relative impacts of regulatory and monetary persistent regime changes. |
| Keywords: | Green lending; Green monetary policy; Environmental regulation |
| JEL: | E44 E52 G21 Q50 |
| Date: | 2025–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125118 |
| By: | Volha Audzei; Jan Bruha; Ivan Sutoris |
| Abstract: | In this paper, we study domestic and foreign monetary policy transmission in a small open economy in which firms can decide to hold foreign currency loans (FCLs). In a workhorse two-country DSGE model, firms borrow in advance to cover production costs and choose the share of FCLs based on interest rate differentials and expected exchange rate movements. In this framework, we further examine how FCL holdings affect the transmission of exogenous shocks and monetary policy. The results indicate that FCLs impact the effectiveness of domestic policy depending on the shock type: they strengthen monetary policy transmission in response to domestic shocks, while weakening it in response to asymmetric foreign and exchange rate shocks. Symmetric global supply shocks reduce domestic policy efficacy, requiring higher rates to curb inflation but causing larger output losses. In contrast, global demand shocks allow for less aggressive domestic policy responses under large FCL holdings. |
| Keywords: | Cost channel of monetary policy, dynamic stochastic general equilibrium models, foreign currency loans, small open economy |
| JEL: | E32 E44 E52 F41 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2025/10 |
| By: | Carola Binder |
| Abstract: | In recent years, central bankers’ speeches and other forms of communication have become pedagogical in nature, aiming to shape public knowledge, beliefs, expectations, and attitudes. With the shift toward expectations management as a monetary policy tool, central banks’ educational role has become a central component of their monetary policymaking, and central bank communication with the public has become a rapidly-growing area of research. I argue that this research is closely related, both thematically and methodologically, to the field of educational psychology. I discuss insights from educational psychology research that could guide central bank communication research—including insights about the challenges and pitfalls that both fields share. |
| JEL: | D83 D84 E03 E30 E5 E58 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34002 |
| By: | Boris Hofmann; Xiaorui Tang; Feng Zhu |
| Abstract: | This paper examines the sentiments of central banks and the media regarding central bank digital currencies across 15 major global economies. Leveraging large language models, we develop jurisdiction-level central bank digital currency sentiment indices derived from central bank publications and news articles on a daily basis. Our findings reveal significant divergences between central bank and media sentiments, with notable variations over time and across jurisdictions. Analyzing the interplay between these sentiments, we observe that central bank sentiment tends to exert a stronger influence on media sentiment than the reverse. Additionally, we identify substantial cross-border sentiment spillovers, where sentiment in leading economies shapes sentiment in other regions. Through an event study approach, we demonstrate that cryptocurrency and equity markets primarily respond to shifts in central bank sentiments. Specifically, more positive central bank sentiments on central bank digital currency are associated with negative impacts on cryptocurrency market returns and the stock performance of banking and payment-related firms. |
| Keywords: | Central bank digital currency (CBDC), central bank communication, media sentiment, large language model (LLM), financial market |
| JEL: | E58 G12 G18 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1279 |
| By: | Francisco Rivadeneyra; Scott Hendry; Alejandro García |
| Abstract: | A well-functioning monetary system is characterized by public and private forms of money that exchange at par as value flows freely between them. A relevant retail public money—whether in the form of cash, a central bank digital currency or both—is a necessary component of such a monetary system. |
| Keywords: | Central bank research; Digital currencies and fintech; Payment clearing and settlement systems |
| JEL: | E4 E42 E5 E50 E58 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-11 |
| By: | Bartels, Bernhard; Eichengreen, Barry; Schumacher, Julian; Weder di Mauro, Beatrice |
| Abstract: | Unprecedented balance sheet expansion in recent years has resulted in heightened financial risk for central banks, reflected initially in higher profits and subsequently in significant losses. Combining data on central bank balance sheets with market data on asset prices, we provide evidence on the evolution and determinants of financial risk-taking by 18 advanced economy central banks. Based on the estimated Value at Risk (VaR), we document that average central bank balance sheet risk increased to about 3 percent of GDP. Central banks took more risk in periods of low policy rates, less expansionary fiscal policies, and more favorable growth prospects. Less independent central banks were more risk averse than their more independent peers, contrary to the fiscal dominance view. JEL Classification: E52, E58, E63, G32 |
| Keywords: | central bank independence, central bank profitability, monetary-fiscal interactions, monetary policy |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253079 |
| By: | Sangyup Choi (Yonsei University); Kimoon Jeong (University of Virginia); Jiseob Kim (Yonsei University) |
| Abstract: | Despite extensive research, there is little consensus on whether common monetary policy generates systematically asymmetric effects within the euro area. We argue that this ambiguity arises from failing to account for heterogeneity in local cyclical conditions at the time of policy changes, which leads state-dependent responses to obscure underlying cross-country differences. To address this, we construct a measure of country-specific monetary policy that internalizes local cyclical conditions. This adjustment reveals systematic asymmetries in policy transmission between core and periphery euro area countries that conventional methods overlook. We find that macroeconomic and financial variables respond more strongly in periphery countries. In contrast, credit and housing booms are largely absent in core countries. This differential response is consistent with the bank lending channel of monetary policy: banks in periphery countries ease mortgage lending standards following an expansionary shock, while those in core countries tighten them. Cross-border banking flow patterns further corroborate the importance of credit supply in explaining regional heterogeneity. |
| Keywords: | Monetary Union; Country-specific monetary policy gap; Mortgage credit; Bank lending survey; Cross-border banking flows. |
| JEL: | E21 E32 E44 F52 G21 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2025rwp-256 |
| By: | Stéphane Auray (ESC [Rennes] - ESC Rennes School of Business); Michael B Devereux (Vancouver school of economics, University of British Columbia - UBC - University of British Columbia [Canada]); Aurélien Eyquem (UNIL - Université de Lausanne = University of Lausanne) |
| Abstract: | This paper shows that the outcome of trade wars for tariffs and welfare will be affected by the monetary policy regime. The key message is that trade policy interacts with monetary policy in a way that magnifies the welfare costs of discretionary monetary policy in an international setting. If countries follow monetary policies of flexible inflation targeting, trade wars are relatively mild, with low equilibrium tariffs and small welfare costs. Discretionary monetary policies imply much higher tariffs, high inflation rates, and substantially larger welfare costs. We quantify the effects of a global trade war among major economies using estimates of trade elasticities, economic size, net foreign assets, and trade openness. We find large welfare benefits of an inflation targeting monetary policy for all countries. |
| Keywords: | Protectionism, Trade wars, Inflation targeting, Discretionary monetary policy, Trade imbalances F30, F40, F41 |
| Date: | 2025–07–08 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05151249 |
| By: | Quineche, Ricardo; Zapata, Juan |
| Abstract: | This paper develops a pressure decomposition of inflation as the net outcome of two competing forces: inflationary pressure, defined by the frequency and magnitude of price increases, and deflationary pressure, determined by corresponding price decreases. Using 245 PCE sub-indices spanning 1959-2024, we construct an exact bottom-up inflation measure that transparently maps sectoral pricing decisions into macroeconomic aggregates. Our decomposition reveals fundamental asymmetries in inflation formation: inflationary pressure exhibits dramatic variation (2.35%-12.68%) while deflationary pressure remains remarkably stable (0.72%-5.18%), indicating inflation episodes are primarily driven by surges in upward pricing momentum rather than retreats of downward movements. Historical analysis shows distinct pressure regimes across major macroeconomic episodes: the Great Inflation featured extreme inflationary pressure volatility, the Great Moderation achieved balanced dynamics, the 2008-2009 crisis uniquely witnessed deflationary pressure dominance creating deflation risk, while COVID-19 saw dramatic inflationary pressure resurgence. We reassess the price puzzle using Bayesian local projections with alternative monetary policy shock identifications. Conventional narrative shocks generate sustained inflationary pressure increases with minimal deflationary response, while informationally robust shocks resolve the puzzle completely through both increased deflationary pressure and reduced inflationary pressure, with the deflationary channel providing the dominant contribution consistent with demand-channel transmission. Extensive robustness checks across specifications and estimation methods confirm these findings while revealing the diagnostic value of pressure decomposition for evaluating shock quality. Results demonstrate that the price puzzle reflects informational frictions rather than genuine economic phenomena, and suggest successful monetary policy operates through managing pressure balance with important implications for real-time policy diagnosis and central bank communication. |
| Keywords: | Inflation decomposition, price puzzle, monetary policy transmission, pressure dynamics |
| JEL: | E31 E52 E58 C43 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:322269 |
| By: | van der Kwaak, Christiaan (University of Groningen) |
| Abstract: | In this paper, we investigate the long-run effects from central bank bond purchases onfinancial stability within a New Keynesian DSGE model with financial frictions. Banks havea portfolio choice between safe government bonds and risky corporate securities, and aresubject to limited liability. Bond purchases by the central bank induce banks to shift fromsafe bonds to risky securities, thereby increasing the probability of insolvency, everythingelse equal. However, bond purchases also lead to capital gains on banks’ existing assets, which reduces banks’ reliance on deposits. Moreover, a lower return on banks’ assets (asa result of the bond purchases by the central bank) decrease banks’ profitability, therebydecreasing depositors’ willingness to let banks operate with high leverage ratios. Our keyconclusion is that bond purchases also enhance financial stability in the long-run. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024013-eef |
| By: | Elfsbacka-Schmöller, Michaela; Goldfayn-Frank, Olga; Schmidt, Tobias |
| Abstract: | This paper provides novel empirical evidence on the impact of monetary policy on innovation investment using unique firm-level data. First, we document the effect of a large, systematic monetary tightening (ECB rate increases from 0% to 4.5% during 2022-23), with average firm-level innovation cuts of 20%. These cuts persist over the medium term, indicating a sustained innovation slowdown. Second, we use the survey to identify elasticities of innovation expenditure to exogenous policy rate changes. Responses to hikes and cuts are significant and largely symmetric at the baseline rate (4.5%), though we detect potential state-dependent asymmetry due to the extensive margin. The financing channel emerges as one of the transmission channels, with more pronounced effects in firms with higher shares of bank loans and variable-rate loans. Crucially, we show that monetary policy transmits via aggregate demand, with stronger responses in firms with pessimistic demand expectations. Forward guidance provides substantial additional stimulus by reducing uncertainty about future rates, suggesting long-term, supply-side effects of announcements. These results challenge monetary long-run neutrality and are suggestive of policy endogeneity of R∗ operating through innovation-driven technology growth. JEL Classification: E52, E22, E24, D22 |
| Keywords: | endogenous growth, forward guidance, monetary policy transmission, R&D, R∗ |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253080 |
| By: | Aguilar, José; Quineche, Ricardo |
| Abstract: | Despite being an emerging economy, Peru has achieved superior post-pandemic disinflation compared to major developed economies, making its regional inflation dynamics globally instructive for monetary policy design. This study investigates Lima's suitability as Peru's inflation-targeting anchor by analyzing regional spillovers across nine economic regions using monthly CPI data (2002-2024). Employing both Diebold-Yilmaz time-domain and Baruník-Křehlík frequency-domain frameworks, we quantify the direction, magnitude, and persistence of inflation transmission. Results reveal strong regional interdependence (73.60% total spillover index) with Lima as the dominant net transmitter (23.94 percentage points). However, frequency decomposition uncovers striking cyclical heterogeneity: Lima receives short-run shocks from food-producing regions but dominates long-run transmission (44.70% vs. 28.99% frequency spillover index). Rolling-window analysis during COVID-19 shows temporary spillover disruption (connectivity declining from 75% to 68%) followed by recovery during 2022's inflationary surge. Robustness checks across specifications, granular city-level data, and three-band frequency segmentation confirm Lima's structural centrality at lower frequencies. These findings validate the Central Reserve Bank's Lima-centered approach for long-run targeting while revealing asymmetric frequency-dependent spillovers. The presence of short-run regional shocks suggests integrating upstream agricultural signals could enhance near-term forecasting and policy responsiveness. |
| Keywords: | Inflation spillovers, Regional inflation dynamics, Baruník-Křehlík framework, Diebold-Yilmaz methodology, Frequency-domain analysis |
| JEL: | E31 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:322270 |
| By: | Karlis Vilerts (Latvijas Banka); Sofia Anyfantaki (European Central Bank); Konstantins Benkovskis (Latvijas Banka); Sebastian Bredl (Deutsche Bundesbank); Massimo Giovannini (Bank of Malta); Florian Matthias Horky (Narodna banka Slovenska); Vanessa Kunzmann (Deutsche Bundesbank); Tibor Lalinsky (Narodna banka Slovenska); Athanasios Lampousis (Bank of Greece); Elizaveta Lukmanova (Central Bank of Ireland); Filippos Petroulakis (Bank of Greece); Klavs Zutis (Latvijas Banka) |
| Abstract: | Does the maturity of the relevant risk-free rate influence the strength of monetary policy pass-through to interest rates on new loans? To address this question, we present novel empirical evidence on lending practices across all euro area countries, using AnaCredit data covering nearly seven million new loans issued to non-financial corporations in 2022-2023. We document substantial variation in (a) the prevalence of fixed- vs floating-rate loans, (b) rate fixation periods, and (c) reference rates. This variation results in lending rates being exposed to different segments of the risk-free rate yield curve which, in turn, influence their sensitivity to monetary policy changes. We show that loans linked to shorter-maturity risk-free rates experience more pronounced monetary pass-through. Importantly, this effect is not purely mechanical, as part of the effect is offset by adjustments in the premium, revealing previously less-explored heterogeneity in the pass-through to lending rates. |
| Keywords: | Lending Rates, Interest Rate Pass-Through, Fixed-Rate Loans, Floating-Rate Loans |
| JEL: | E52 E43 G21 E58 |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202504 |
| By: | Bindseil, Ulrich; Mäkeler, Hendrik; Pihl, Christopher |
| Abstract: | Central bank collateral frameworks and the liquidity transformation they allow for play important roles for financing long term economic projects (and thereby economic growth) while preserving financial stability. To shed light on early central bank collateral frameworks, this note analyses a document of the Riksens ständers lånebank of 1682 which pledges real estate to serve as collateral for a loan of the Riksbank to the farmer Olof Olofsson. A transcription and translation are provided and the document is analyzed in the context of the 17th century operations, balance sheet, and mandate of the Riksens ständers lånebank and the related literature. We recall the role of central bank credit to private debtors in early central banking, and that, contrary to some prominent views, government financing was more the exception than the rule as key reason to establish and operate central banks before 1700. We also derive lessons for today's central bank collateral frameworks and their role in liquidity transformation. |
| Keywords: | Central bank collateral, early central banking, central bank operations |
| JEL: | E32 E5 N23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ibfpps:323592 |
| By: | Athanasopoulos, Angelos; Fraccaroli, Nicolo; Kern, Andreas; Romelli, Davide |
| Abstract: | This paper studies the impact of central bank independence on sovereign borrowing, using an index that captures institutional constraints on central bank lending to the government across 155 countries from 1972 to 2023. The findings show that tighter lending to the executive significantly reduces sovereign interest rates and raises the debt-to-gross domestic product ratio in developing countries. These effects reflect the executive’s improved ability to borrow at lower costs under greater central bank independence. The results are robust to multiple tests, but there are no significant effects in advanced economies. From a policy perspective, the results highlight the key role of independent central banks as catalysts for reducing governments’ borrowing costs and enhancing the government’s borrowing capacity. |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11179 |
| By: | Salvatore Federico; Andrea Modena; Luca Regis |
| Abstract: | In this paper, we examine how dividend taxes (and bans) and capital requirements that vary with the state of the economy influence a bank’s optimal capital buffers and shareholder value. In the model, the bank distributes dividends and issues costly equity to maximise shareholder value, while its assets generate stochastic income under time varying macroeconomic conditions. We solve the bank’s stochastic control problem and derive the distribution of its capital buffers in closed form. Imposing dividend taxes (or bans) in bad macroeconomic states generates an intertemporal trade-off, as it encourages capital buffers accumulation in those states but promotes dividend payouts in the good ones. Furthermore, the policy undermines financial stability by reducing the bank’s value and weakening its incentives to recapitalise in both good and bad states. Coordinating dividend taxes with counter-cyclical capital requirements can mitigate value losses and ease the trade-off, but it also exacerbates disincentives for recapitalisation. |
| Keywords: | Capital requirements; dividend bans; dividend taxes; policy coordination; stochastic optimal control |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:cca:wpaper:746 |
| By: | Pedersen, Michael |
| Abstract: | Climate change poses significant challenges to economic stability, particularly in vulnerable regions such as Latin America and the Caribbean (LAC). This paper examines the macroeconomic and monetary policy implications of climate risks in the region, focusing on both physical and transition risks. Physical risks, including extreme weather events and long-term climate shifts, disrupt productivity, infrastructure, and supply chains, intensifying inflationary pressures and hindering economic growth. Transition risks, driven by the shift to a low-carbon economy, impact key industries and labor markets, while also creating opportunities for green investments and innovation. The study explores how climate change disrupts the traditional monetary policy transmission mechanism, requiring central banks to adapt their frameworks and tools. It emphasizes the crucial role of central banks in integrating climate risks into monetary policy, promoting sustainable finance, and collaborating with fiscal authorities to enhance climate resilience. The findings highlight the importance of robust data collection, policy coordination, and regional cooperation to address these challenges effectively. By tailoring monetary policies to the LAC region’s distinct socio-economic and environmental context, central banks can play a key role in mitigating climate-related disruptions and fostering sustainable growth. |
| Date: | 2025–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:ecr:col037:81906 |
| By: | Anyfantaki, Sofia; Benkovskis, Konstantins; Kunzmann, Vanessa; Lalinsky, Tibor; Petroulakis, Filippos; Zutis, Klavs; Vilerts, Kārlis; Bredl, Sebastian; Giovannini, Massimo; Horky, Florian Matthias; Lampousis, Athanasios; Lukmanova, Elizaveta |
| Abstract: | Does the maturity of the relevant risk-free rate influence the strength of monetary policy pass-through to interest rates on new loans? To address this question, we present novel empirical evidence on lending practices across all euro area countries, using AnaCredit data covering nearly seven million new loans issued to non-financial corporations in 2022–2023. We document substantial variation in (a) the prevalence of fixed- vs floating-rate loans, (b) rate fixation periods, and (c) reference rates. This variation results in lending rates being exposed to different segments of the risk-free rate yield curve which, in turn, influence their sensitivity to monetary policy changes. We show that loans linked to shorter-maturity risk-free rates experience more pronounced monetary pass-through. Importantly, this effect is not purely mechanical, as part of the effect is offset by adjustments in the premium, revealing previously less-explored heterogeneity in the pass-through to lending rates. JEL Classification: E52, E43, G21, E58 |
| Keywords: | fixed-rate loans, floating-rate loans, interest rate pass-through, lending rates |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253078 |
| By: | Jorge Braga Ferreira |
| Abstract: | This study evaluates the impact of the ECB’s Corporate Sector Purchase Programme (CSPP) on corporate bond spreads at issuance, as measured by Option-Adjusted Spreads (OAS), and on subsequent changes in firms' capital structures, as proxied by year-on-year changes in the debt ratio. Using a sample of 1, 275 Eurozone corporate bonds issued between 2015:Q1 and 2018:Q4, we estimate a two-stage empirical model to evaluate. In the first stage, we find that the initial association between CSPP eligibility and lower spreads disappears once firm- and bond-level characteristics are controlled for, suggesting that observed differences reflect issuer and instrument features rather than programme eligibility. While the CSPP’s effect does not vary systematically by firm or bond characteristics, the results indicate broader market effects, likely driven by the programme’s signaling power and perceived credibility, which extended beyond the impact of direct bond purchases. In the second stage, we assess changes in leverage following the issuance of bonds. CSPP eligibility did not seem to affect the debt ratio in the issuance year. However, longer-maturity eligible bonds are associated with delayed increases in leverage, as firms expanded their debt ratios in the year following issuance. This pattern suggests that improved financing conditions under the programme may have encouraged firms to raise additional debt at a later stage. |
| Keywords: | ECB, CSPP, unconventional monetary policy, bond yields, corporate capital structure, corporate financing. |
| JEL: | C23 E52 E58 G12 G32 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03902025 |
| By: | van der Kwaak, Christiaan (University of Groningen) |
| Abstract: | In this paper, we study the long-run impact of the central bank lending at low-interest rates to banks in times of financial crisis. While the provision of such funding mitigates the impact of financial crises ex post, we find that it increases bank risk taking ex ante, and therefore increases the likelihood of financial crises. Despite more frequent crises, however, the long-run impact on the macroeconomy is beneficial, as the positive effect from low interest-rate funding mitigates the contraction of credit at the height of a crisis. The long-run impact on the macroeconomy, however, is quantitatively small. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024014-eef |
| By: | Michael D. Bordo; John V. Duca; Barry E. Jones |
| Abstract: | The rise of U.S. inflation in 2021 and 2022 and its partial subsiding have sparked debates about the relative role of supply and demand factors. The initial surge surprised many macroeconomists despite the unprecedented jump in money growth in 2020-21. We find that the relationship between consumption and the theoretically based Divisia M3 measure of money (velocity) can be well modeled both in the short- and long-runs. We use the estimated long-run relationship to calculate the deviation of actual velocity from its long-run equilibrium and incorporate it into a P-Star framework. Our model of velocity significantly improves the performance of the P-Star model relative to using a one-sided HP filter to calculate trend velocity as, for example, used by Belongia and Ireland (2015, 2017). We also include a global supply pressures index in the model and find that recent movements in U.S. inflation largely owed to aggregate demand driven macroeconomic factors that are tracked by Divisia money with a smaller role played by supply factors. |
| JEL: | E41 E51 E52 E58 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34017 |
| By: | Michael Plante; Alexander W. Richter; Sarah Zubairy |
| Abstract: | This paper revisits the relationship between federal debt and interest rates, which is a key input for assessments of fiscal sustainability. Estimating this relationship is challenging due to confounding effects from business cycle dynamics and changes in monetary policy. A common approach is to regress long-term forward interest rates on long-term projections of federal debt. We show that issues regarding nonstationarity have become far more pronounced over the last 20 years, significantly biasing the recent estimates based on this methodology. Estimating the model in first differences addresses these concerns. We find that a 1 percentage point increase in the debt-to-GDP ratio raises the 5-year-ahead, 5-year Treasury rate by about 3 basis points, which is statistically and economically significant and highly robust. Roughly three-quarters of the increase in interest rates reflects term premia rather than expected short-term real rates. |
| JEL: | E43 E63 H63 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34018 |