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on Central Banking |
| By: | Kerstin Bernoth |
| Abstract: | This paper investigates the effectiveness of the European Central Bank’s (ECB) communication in shaping market expectations and real economic outcomes. Using a transformer-based large language model (LLM) fine-tuned to ECB communication, the tone of monetary policy statements from 2003 to 2025 is classified, constructing a novel ECB Communication Stance Indicator. This indicator contains forward-looking information beyond standard macro-financial variables. Identified communication shocks are distinct from monetary policy and central bank information shocks. A structural Bayesian VAR reveals that hawkish communication signals favorable economic prospects, raising output, equity prices, and inflation, but also increases bond market stress. These findings highlight communication as an independent and effective tool of monetary policy, while also underscoring the importance of carefully calibrating tone to balance market expectations, and financial stability. |
| Keywords: | Monetary Policy, Central Bank Communication, Text Sentiment, Transformerbased Large Language Model, Bayesian Vector Autoregression, Local Projections |
| JEL: | C32 E43 E47 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2137 |
| By: | Garriga, Ana Carolina; Rodriguez, Cesar M. |
| Abstract: | Central banks are often tasked with steering economies toward goals that exceed price stability, but the consequences of broader mandates are understudied. This paper focuses the case of central banks that have the explicit mandate of promoting both price stability and full employment (“dual mandates”). We explain how dual mandate adop- tion generates institutional constraints that increase inflation without delivering meaningful gains in employment. We test our theory using original data on central bank mandates in 176 countries from 1985 to 2023. The empirical analysis addresses challenges of staggered adoption and treatment heterogeneity through entropy balancing, and generalized synthetic control approaches focusing on countries with clean adoption patterns. We find that dual mandate adoption raises inflation by about eight percentage points relative to inflation-only mandates, with effects persisting over time. In contrast, we do not find systematic long-term employment benefits. These results suggest that broader central bank mandates may weaken the effectiveness of monetary policy and increase the risk of politicization. This has im- plications for debates over institutional design, delegation, and the limits of technocratic governance. |
| Keywords: | Central bank independence; Central banks; Dual mandate; Employment; Inflation; Mandates |
| JEL: | E31 E52 E58 |
| Date: | 2025–08–22 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125925 |
| By: | Karlye Dilts Stedman; Andrew Hanson |
| Abstract: | Using high frequency data, we find that spillovers to the U.S. yield curve from the European Central Bank increased following the Global Financial Crisis, and strengthened when the U.S. normalized policy out of sync with other advanced economies. These spillovers were amplified by a contemporaneous waning in the ”convenience” of Treasuries. This provides evidence for a portfolio balance channel of transmission that is time-varying based on the non-pecuniary characteristics of Treasuries. We rationalize these facts using a two-country model of preferred habitat investors, where time-varying price-elasticity of demand for Treasuries gives rise to time-varying spillovers. |
| Keywords: | treasuries; Convenience yield; monetary policy; international spillovers; quantitative easing; quantitative tightening; preferred habitat |
| JEL: | E44 E52 F42 G12 |
| Date: | 2025–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:101728 |
| By: | Koichiro Kamada (Faculty of Business and Commerce, Keio University) |
| Abstract: | This paper reviews the Bank of Japan’s (BOJ) monetary policy from the perspective of surprise observed in the foreign exchange market and investigates the potential of central bank’s surprising announcement as a policy tool to change people’s deflationary mindset. We propose a surprise measure that is based on the daily candlestick-chart data on the yen-dollar exchange rate and identify surprise that occurred in the Tokyo and New York markets. Using the identified surprise, we evaluate monetary policies of BOJ governors and compare them with those of Fed chairs. We present statistical evidence that shows that under the command of Governor Haruhiko Kuroda, the BOJ was strongly dependent on surprise policy in the course of the quantitative and qualitative monetary easing. We also show that the surprise generated during the Kuroda term succeeded in raising the trend inflation rate, but failed to steepen the slope of the Phillips curve and to enhance the pass-through of the foreign exchange rate. |
| Keywords: | deflationary mindset, monetary policy surprise, exchange rate, candlestick chart, trend inflation |
| JEL: | C54 C58 E52 E58 G15 |
| Date: | 2025–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:dp2025-015 |
| By: | Wentong Chen; Mr. Fazurin Jamaludin; Florian Misch; Alex Pienkowski; Mengxue Wang; Zeju Zhu |
| Abstract: | This paper studies domestic monetary policy transmission in European countries with a significant share of lending and deposits in foreign currency, referred to as ‘euroized economies’. We find that the impact of domestic monetary policy shocks on both inflation and GDP diminishes with the degree of euroization across countries: the effects are twice as high in non-euroized countries compared to countries in our sample with the highest level of euroization. We further examine the exchange rate, credit and interest rate transmission channels, which are typically less effective in euroized economies. We show that domestic monetary policy has at best limited effects on the exchange rate. In addition, during the post-pandemic monetary tightening episodes, an increase in foreign-currency loans often softened the decline in overall credit growth, and rates of foreign-currency loans have followed the ECB policy rate rather than the domestic ones. By contrast, our analysis suggests that the pass-through to interest rates of domestic currency loans is similar across countries with different levels of euroization. |
| Keywords: | Monetary policy transmission; Euroization; Emerging markets |
| Date: | 2025–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/177 |
| By: | Barmes, David; Claeys, Irene; Dikau, Simon; Pereira da Silva, Luiz Awazu |
| Abstract: | Negative supply shocks caused by climate change and interconnected crises may increasingly fuel persistent inflationary pressures. Responding to these shocks with standard monetary tightening would involve significant trade-offs, including impacts on economic output, financial stability, fiscal space, income equality and the green transition. While flexible inflation-targeting (FIT) regimes have faced supply shocks in the past, central banks may encounter new challenges in assessing and responding to these trade-offs, particularly when it comes to long-term macroeconomic stability. Consequently, this report proposes the case for adaptive inflation targeting (or ‘adaptive-IT’), which aims to equip central banks with a framework, analysis and toolkit that enables them to better navigate these supply-side disruptions. The report reviews existing literature on climate change and price stability, considers the risk posed by more persistent climate-related inflationary pressure and explores the trade-offs, challenges and implications for monetary policy. It proposes a shift from flexible inflation targeting to adaptive inflation targeting. This would prepare central banks to navigate supply-side headwinds while enabling fiscal policymakers to take a proactive role in preventing and mitigating negative supply shocks. |
| JEL: | F3 G3 L81 |
| Date: | 2024–12–09 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129331 |
| By: | Michael D. Bordo (Rutgers University, Hoover Institution, and NBER); John H. Cochrane (Hoover Institution and NBER); Jonathan S. Hartley (Stanford University and Hoover Institution) |
| Abstract: | John B. Taylor is one of the greatest macroeconomists of the late 20th and early 21st centuries. This paper surveys his seminal contributions to monetary theory, policy rules, and macroeconomic modeling. Taylor’s work on rational expectations, staggered contracts, and the development of the Taylor Rule transformed the theory and practice of monetary policy. Through scholarship, policy engagement, and public service, Taylor has profoundly influenced academic research and central banking practice, establishing rules-based policy as a central paradigm in macroeconomics |
| Keywords: | Monetary Policy, Central Banks, Policy Objectives, International Monetary Arrangements and Institutions |
| JEL: | E52 E58 E61 F33 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:pri:cepsud:346 |
| By: | Fiona Xiao Jingyi; Lili Liu |
| Abstract: | Forecasting central bank policy decisions remains a persistent challenge for investors, financial institutions, and policymakers due to the wide-reaching impact of monetary actions. In particular, anticipating shifts in the U.S. federal funds rate is vital for risk management and trading strategies. Traditional methods relying only on structured macroeconomic indicators often fall short in capturing the forward-looking cues embedded in central bank communications. This study examines whether predictive accuracy can be enhanced by integrating structured data with unstructured textual signals from Federal Reserve communications. We adopt a multi-modal framework, comparing traditional machine learning models, transformer-based language models, and deep learning architectures in both unimodal and hybrid settings. Our results show that hybrid models consistently outperform unimodal baselines. The best performance is achieved by combining TF-IDF features of FOMC texts with economic indicators in an XGBoost classifier, reaching a test AUC of 0.83. FinBERT-based sentiment features marginally improve ranking but perform worse in classification, especially under class imbalance. SHAP analysis reveals that sparse, interpretable features align more closely with policy-relevant signals. These findings underscore the importance of integrating textual and structured signals transparently. For monetary policy forecasting, simpler hybrid models can offer both accuracy and interpretability, delivering actionable insights for researchers and decision-makers. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.22763 |
| By: | Bearce, David H.; Garriga, Ana Carolina |
| Abstract: | This research note reconsiders the question of whether central bank independence (CBI) and fixed exchange rates (FIX) function as substitutes or complements. We argue that these monetary institutions have neither served as substitutes nor performed as complements for either inflation control or exchange rate stability. In terms of their substitutability, our statistical evidence shows that while CBI has been used for inflation control, FIX has been more directed towards exchange rate stability using updated datasets with these monetary institutions measured both on a de jure and de facto basis with nearly global country/year coverage from 1970 to 2020. In terms of their complementarity, our results also demonstrate that CBI was not more effective at reducing inflation when paired with greater FIX and FIX was not more effective at promoting exchange rate stability when paired with greater CBI. If anything, both are less effective when paired with the other monetary institution. These results suggest a “third generation” framework for studying CBI and FIX together with a focus on macroeconomic objectives beyond just domestic price stability. |
| Keywords: | central banks; central bank independence; exchange rate regimes; inflation; exchange rate stability |
| JEL: | E02 E31 E42 E43 E58 F31 |
| Date: | 2025–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125748 |
| By: | Kenji Miyazaki |
| Abstract: | This paper argues and analytically demonstrates that, in a fully analytical Two-Agent New Keynesian model with Rotemberg-type nominal rigidities, monetary transmission is amplified if and only if two conditions hold: first, the heterogeneity-induced IS-slope effect dominates; second, the price-stickiness channel is active. We also show when amplification weakens or disappears, most notably under pure wage stickiness, where the price channel shuts down and the heterogeneity-driven term vanishes. The framework features household heterogeneity between savers and hand-to-mouth households and adheres strictly to microeconomic foundations while avoiding restrictive assumptions on relative wages or labor supply across types that are common in prior analytical work. The closed-form solution makes transparent how price stickiness, wage stickiness, and the share of hand-to-mouth households jointly shape amplification. We further derive a modified aggregate welfare loss function that quantifies how heterogeneity, operating through distributional effects from firm profits, re-weights the relative importance of stabilizing inflation. Overall, the tractable yet micro-founded analytical framework clarifies the interaction between household heterogeneity and nominal rigidities and pinpoints the precise conditions under which monetary policy gains or loses traction. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.12073 |
| By: | Garriga, Ana Carolina; Gavin, Michael A. |
| Abstract: | A large literature explores how loan conditionalities and policy recommendations embedded in International Monetary Fund lending programs influence country behavior and policy choices. We argue that the IMF’s influence extends beyond these intentional efforts. This paper shows that the growth in the IMF’s lending capacity has failed to keep pace with financial globalization, and that this has incentivized emerging and developing economies to strengthen their domestic institutions for financial stability, particularly, their central bank’s capabilities to act as a lender of last resort. We conceptualize this as influence by omission, whereby the IMF shapes behavior not through direct engagement but through its declining ability to serve as an effective financial backstop. Using original data coding central bank lender of last resort powers for 60 developing countries between 1994 and 2020, we find that countries with relatively limited access to IMF resources are significantly more likely to strengthen their central banks’ lender of last resort authority. This finding is robust across a range of model specifications, instrumental variable analyses, and dynamic estimations. An event study of countries’ response to the Covid shock reveals that countries with stronger lending of last resort capabilities were much more likely to manage the crisis without drawing on IMF resources. Importantly, this effect is specific to lender of last resort powers and does not extend to other aspects of central bank governance such as independence or transparency, suggesting that distinct international and domestic incentives shape different reform trajectories. |
| Keywords: | Central Banks, Domestic Reforms, Financial Stability, International Monetary Fund, Lender of Last Resort |
| JEL: | E58 E61 F33 F34 F55 G15 G28 H12 H81 |
| Date: | 2025–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125739 |
| By: | Okan Akarsu; Mehmet Selman Colak; Hatice Karahan; Huzeyfe Torun |
| Abstract: | This study examines the impact of monetary policy surprises on credit usage, borrowing costs, default probabilities, and foreign-currency (FX) trading behavior, emphasizing heterogeneity by firm size, leverage, export orientation, and sector. Using a comprehensive administrative dataset linking firm-level balance sheets, employment, firm–bank credit records, and FX transactions, we document four main results: (1) unexpected tightening reduces borrowing, raises loan rates, and increases default risk, with markedly stronger effects for SMEs and highly leveraged firms than for large and less-leveraged firms; (2) export-oriented firms are relatively resilient, consistent with diversified foreign-currency revenues and broader funding options; (3) sectoral responses are uneven—construction is most responsive, services are intermediate, and industry is least affected; and (4) policy surprises reallocate FX flows—following unexpected tightening, firms (especially SMEs and non-exporters) reduce FX purchases and increase FX sales, while exporters adjust less. Collectively, the findings underscore systematic variation in firms’ responses to monetary policy shaped by size, financial structure, export orientation, and sectoral characteristics. |
| Keywords: | Monetary policy transmission, Monetary policy surprises, Credit, Firm heterogeneity |
| JEL: | E12 E24 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2514 |
| By: | Grodecka-Messi, Anna (Financial Stability Department, Central Bank of Sweden); Zhang, Xin (Research Department, Central Bank of Sweden) |
| Abstract: | Private money creation lies at the heart of currency competition due to seigniorage rents that are an important contributor to banks’ franchise values. However, it undermines the role of central bank in money provision and has been historically a contentious issue. As shifting from private to public money may come at a cost of bank disintermediation and affect economic growth, such a swap should be well-planned to minimize its costs. In this paper, we study the transition from private to public money in a historical context. The 1897 banking law in Sweden granted the banknote monopoly to the Swedish central bank. To facilitate the shift, the central bank provided preferential liquidity support to formerly note-issuing private banks. Drawing on newly digitized monthly archival data, we show that this liquidity provision played a critical role in shaping private banks’ performances during the transition. Once the support started being withdrawn, affected banks experienced a 23% drop in profitability. No signs of bank disintermediation are found. |
| Keywords: | Money and Banking; Inside Money; Outside Money; Bank Profitability; Bank Lending; Banknote Monopoly |
| JEL: | E42 E50 G21 G28 N23 |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0454 |
| By: | Umberto Collodel |
| Abstract: | This paper develops a novel method to simulate financial market reactions to European Central Bank (ECB) press conferences using a Large Language Model (LLM). We create a behavioral, agent-based simulation of 30 synthetic traders, each with distinct risk preferences, cognitive biases, and interpretive styles. These agents forecast Euro interest rate swap levels at 3-month, 2-year, and 10-year maturities, with the variation across forecasts serving as a measure of market uncertainty or disagreement. We evaluate three prompting strategies, naive, few-shot (enriched with historical data), and an advanced iterative 'LLM-as-a-Judge' framework, to assess the effect of prompt design on predictive performance. Even the naive approach generates a strong correlation (roughly 0.5) between synthetic disagreement and actual market outcomes, particularly for longer-term maturities. The LLM-as-a-Judge framework further improves accuracy at the first iteration. These results demonstrate that LLM-driven simulations can capture interpretive uncertainty beyond traditional measures, providing central banks with a practical tool to anticipate market reactions, refine communication strategies, and enhance financial stability. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.13635 |
| By: | Ren\'eee Men\'endez; Viktor Winschel |
| Abstract: | We develop a monetary macro accounting theory (MoMaT) and its software specification for a consistent national accounting. In our money theory money functions primarily as a medium of payment for obligations and debts, not as a medium of exchange, originating from the temporal misalignment where producers pay suppliers before receiving revenue. MoMaT applies the legal principles of Separation and Abstraction to model debt, contracts, property rights, and money to understand their nature. Monetary systems according to our approach operate at three interconnected levels: micro (division of labor), meso (banking for risk-sharing), and macro (GDP sharing, money issuance). Critical to money theory are macro debt relations, hence the model focuses not on the circulation of money but on debt vortices: the ongoing creation and resolution of financial obligations. The Bill of Exchange (BoE) acts as a unifying contractual instrument, linking debt processes and monetary issuance across fiat and gold-based systems. A multi-level BoE framework enables liquidity exchange, investments, and endorsements, designed for potential implementation in blockchain smart contracts and AI automation to improve borrowing transparency. Mathematical rigor can be ensured through category theory and sheaf theory for invariances between economic levels and homology theory for monetary policy foundations. Open Games can structure macroeconomic analysis with multi-agent models, making MoMaT applicable to blockchain economic theory, monetary policy, and supply chain finance. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.21651 |
| By: | Kerry Loaiza-Marín (Department of Economic Research, Central Bank of Costa Rica); Jose Pablo Barquero-Romero (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | This work shows that the credit channel is a potential determinant of the effectiveness of monetary policy in Costa Rica. Monetary policy decisions can be transmitted on economic activity not only through changes in interest rates, but also by impacting the availability and terms of bank loans. Microdata is used that cover the universe of new loans granted by financial entities monthly and it is observed that the impact of changes in the monetary policy rate is asymmetric, and that said asymmetry depends on the decision that commercial banks make about whether allocate resources to grant credit or place it in securities. Particularly, it is identified that the credit channel has a high probability of being activated when the proportion of securities with respect to credit held by banking entities is around 21, 8%. When the credit channel is inactive, an increase of 100 basis points (b.p.) in the monetary policy rate (MPR) is associated with a response in the interannual rate of variation of the Monthly Economic Activity Index (IMAE) of -0, 24 percentage points. (p.p.) twelve months after the change. With the channel active, this response is -2, 61 p.p. Given this, the cyclical and financial conditions of the local economy are fundamental to understanding the effectiveness of monetary policy. ***Resumen: Este trabajo muestra que el canal de crédito es un potencial determinante de la efectividad de la política monetaria en Costa Rica. Las decisiones de política monetaria pueden transmitirse sobre la actividad económica no solamente mediante cambios en las tasas de interés, sino también al impactar la disponibilidad y los términos de los préstamos bancarios. Se utilizan microdatos que cubren el universo de préstamos nuevos otorgados por las entidades financieras con frecuencia mensual y se observa que el impacto de cambios en la tasa de política monetaria es asimétrico, y que dicha asimetría depende de la decisión que tomen los bancos comerciales sobre si destinar recursos a otorgar crédito o bien colocarlo en títulos valores. Particularmente, se identifica que el canal de crédito tiene alta probabilidad de activarse cuando la proporción de títulos valores con respecto al crédito que mantienen las entidades bancarias se ubica en torno a 21, 8 %. Cuando el canal crediticio está inactivo, un incremento de 100 puntos base (p.b.) en la tasa de política monetaria (TPM) se asocia con una respuesta de la tasa de variación interanual del Índice Mensual de Actividad Económica (IMAE) de -0, 24 puntos porcentuales (p.p.) doce meses después del cambio. Con el canal activo, esta respuesta es de -2, 61 p.p. Ante ello, las condiciones cíclicas y financieras de la economía local son fundamentales para entender la efectividad de la política monetaria. |
| Keywords: | Time Series Models, Money Supply, Credit, Smooth Transition SVAR, VAR de transición suave, Crédito, Oferta de dinero, Modelos de series de tiempo |
| JEL: | C32 E51 E52 E58 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:apk:doctra:2504 |
| By: | Yoseph Getachew; Richard Kima; Nyemwererai Matshaka |
| Abstract: | This paper develops a two-agent worker-capitalist heterogeneous household monetary Schumpeterian growth model to examine the effects of R&D and monetary policies on economic growth and inequality. The model is then calibrated to the South African economy, an upper-middle-income African country infamous for its consistently high level of inequality. A higher nominal interest rate reduces innovation and economic growth but help to mitigate inequality. However, the reduction in consumption inequality comes from a disproportionate decline in the capitalists' condition. |
| Keywords: | Economic growth, Inequality, Monetary policy, Research (Technological innovations) |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2025-55 |
| By: | Nicholas Gray; Finn Lattimore; Kate McLoughlin; Callan Windsor |
| Abstract: | In a world of increasing policy uncertainty, central banks are relying more on soft information sources to complement traditional economic statistics and model-based forecasts. One valuable source of soft information comes from intelligence gathered through central bank liaison programs -- structured programs in which central bank staff regularly talk with firms to gather insights. This paper introduces a new text analytics and retrieval tool that efficiently processes, organises, and analyses liaison intelligence gathered from firms using modern natural language processing techniques. The textual dataset spans 25 years, integrates new information as soon as it becomes available, and covers a wide range of business sizes and industries. The tool uses both traditional text analysis techniques and powerful language models to provide analysts and researchers with three key capabilities: (1) quickly querying the entire history of business liaison meeting notes; (2) zooming in on particular topics to examine their frequency (topic exposure) and analysing the associated tone and uncertainty of the discussion; and (3) extracting precise numerical values from the text, such as firms' reported figures for wages and prices growth. We demonstrate how these capabilities are useful for assessing economic conditions by generating text-based indicators of wages growth and incorporating them into a nowcasting model. We find that adding these text-based features to current best-in-class predictive models, combined with the use of machine learning methods designed to handle many predictors, significantly improves the performance of nowcasts for wages growth. Predictive gains are driven by a small number of features, indicating a sparse signal in contrast to other predictive problems in macroeconomics, where the signal is typically dense. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.18505 |
| By: | Maksym Homeniuk (National Bank of Ukraine) |
| Abstract: | This paper estimates Ukraine's inflation attention threshold using a text-based proxy derived from the relative frequency of the word "inflation" in parliamentary speeches. During a relatively stable macroeconomic period between 2017 and 2022, the estimated threshold is approximately 9-10 percent. This finding aligns with results obtained using Google Trends data, where attention increased just prior to inflation reaching double-digit levels. Crucially, the parliamentary proxy also facilitates estimation for another stable period preceding the global financial crisis (2002-2007). The remarkably similar threshold estimates across both stable periods suggest that attention dynamics in Ukraine exhibit structural consistency under non-crisis conditions. These findings underscore the value of parliamentary speech analysis as a robust tool for tracking inflation salience in contexts with limited data availability. |
| Keywords: | inflation; attention; parliamentary speeches; threshold regression; monetary policy |
| JEL: | C82 D83 E31 E52 E71 |
| Date: | 2025–09–02 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp14-2025 |