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on Central Banking |
| By: | Klose, Jens; Barry, Mamdou-Lamine; Bruns, Brenton Joey; Kandemir, Sinem; Smirnov, Victor; Tillmann, Peter |
| JEL: | E58 E52 E44 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325365 |
| By: | Tereza Vesela (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & The Czech Academy of Sciences, Institute of Information Theory and Automation); Jaromir Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & The Czech Academy of Sciences, Institute of Information Theory and Automation) |
| Abstract: | To estimate the impact of disagreement about expected inflation on the transmission of monetary policy in the Czech Republic, this article makes three novel contributions to the literature. First, we reconstruct a series of inflation expectations and calculate their disagreement from qualitative expectations of future price developments back to 2001. We document the limited anchoring of expectations despite consistently low inflation close to or below the inflation target. Second, we infer monetary policy shocks from high-frequency financial data, bringing a novel perspective on the policy of the Czech National Bank. Third, using smooth-transition local projections, we find that when disagreement about future inflation is high, the transmission of unanticipated monetary policy surprises is weakened: inflation and inflation expectations display muted or even counterintuitive (positive) responses to policy tightening. This suggests that in such environments, policy surprises are interpreted less as changes in the stance of policy and more as signals about underlying economic conditions, consistent with the signalling effect of monetary policy highlighted in recent literature. Our findings suggest that unanticipated monetary policy is more effective when disagreement is low, implying that clear communication strategies and, where needed, stronger policy reactions to inflation can play a role in improving transmission. Our results have profound implications for the formulation and implementation of monetary policy in small open economies where central banks in practice consider interest rate differentials vis-Ã -vis main central banks in their policy decisions. |
| Keywords: | Inflation Expectations; Monetary Policy Transmission; Disagreement; High-Frequency Identification; Regime-Switching Models; Local Projections |
| JEL: | E31 E52 E58 C32 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2025_19 |
| By: | Chadha, J. S.; Corrado, G.; Corrado, L.; Buratta, I. D. L. |
| Abstract: | We investigate whether macroprudential policies support broader economic stability, particularly the welfare of households. For this purpose, we develop a New Keynesian business cycle model with agents subject to credit constraints and asset price fluctuations. The model differentiates between savers, who own firms and banks, and borrowers. The commercial bank sets the loan rate as a function of risk, specifically the value of housing collateral. We use occasionally binding constraints to capture nonlinearities arising from the zero lower bound (ZLB) on the policy interest rate and the borrowing constraint faced by borrower households. We examine two macroprudential tools: a countercyclical loan-to-value (LTV) ratio and a bank reserve requirement. We find that macroprudential tools significantly reduce the volatility of consumption and lending cycles and decrease both the expected frequency and severity of ZLB episodes. More generally, by attenuating the variance of the business cycle, particularly for borrower households, macroprudential tools reduce the need for monetary policy interventions. |
| JEL: | E32 E44 E51 E58 E62 |
| Date: | 2025–09–13 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2561 |
| By: | Gareis, Johannes; Minasian, Ryan |
| Abstract: | In this paper, we examine how different household consumption items respond to monetary policy shocks in the euro area. Specifically, we classify household consumption along two key dimensions: durability and essentiality. Our findings reveal pronounced heterogeneity in responses across these dimensions. First, durable items are highly sensitive to monetary policy shocks, whereas non-durable items exhibit weaker responses. Second, non-essential items react more strongly than essential items. Finally, we demonstrate that durability and essentiality each independently shape the sensitivity of household consumption to monetary policy shocks, with durable non-essential items being most strongly affected. JEL Classification: E21, E52, E44, E32, C23 |
| Keywords: | durability, essentiality, household consumption, monetary policy shocks, monetary policy transmission |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253127 |
| By: | Lea Best; Benjamin Born; Manuel Menkhoff |
| Abstract: | The sensitivity of firms’ investment to interest rates is central to the transmission of monetary policy, yet direct firm-level evidence is scarce. We provide such evidence using the ifo Business Survey of German firms, combining hypothetical vignettes, open-ended questions, and rich firm-level information. The vignette design implies a semi-elasticity of investment to loan rates of 7 percent—a partial-equilibrium effect roughly half the total corporate investment response to monetary policy shocks. Adjustment is heterogeneous: many firms do not adjust, often citing cash buffers or a lack of profitable opportunities, while adjusters revise plans sharply. Responsiveness is dampened by sticky hurdle rates but amplified by financial constraints, labor shortages, and capital durability. Managers’ narratives about monetary policy transmission to investment emphasize the direct interest rate channel, rarely mentioning general-equilibrium channels, and many do not consider monetary policy changes. Local projections show the direct interest rate channel plays a first-order role in output dynamics after monetary policy shocks. |
| Keywords: | interest rates, firm investment, survey experiment, monetary policy, narratives, hurdle rates, aggregate investment |
| JEL: | D25 E43 E52 G31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12167 |
| By: | Giuzio, Margherita; Kapadia, Sujit; Kaufmann, Christoph; Storz, Manuela; Weistroffer, Christian |
| Abstract: | This paper examines the interplay between macroprudential policy, monetary policy and the non-bank financial intermediation (NBFI) sector, drawing on recent research and zooming in particularly on evidence from the euro area2. It documents the growth in the NBFI sector over the past two decades and its particular role in financing the real economy, assesses systemic risks that can emanate from the sector, considers how it interacts with monetary policy, and discusses the implications for macroprudential regulation. Firms are increasingly turning to capital markets for debt financing, with the NBFI sector thereby increasing its provision of credit to the real economy relative to banks. At the same time, the growth of market-based finance has been accompanied by increased liquidity and credit risk in the NBFI sector, together with pockets of high leverage. Monetary policy has also intersected with these dynamics. Recent episodes have shown that vulnerabilities in the NBFI sector can amplify market dynamics and create systemic risk in a highly interconnected financial system. Against this backdrop, the resilience of the NBFI sector should be strengthened, including from a macroprudential perspective, to support financial stability and the smooth transmission of monetary policy. Several open issues and challenges remain for future research and policy making. JEL Classification: G01, G23, G28 |
| Keywords: | financial regulation, financial stability, insurance corporations, investment funds, monetary policy, non-bank financial intermediation |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253130 |
| By: | Albertazzi, Ugo; Ponte Marques, Aurea; Abbondanza, Aurora; Travaglini, Giulia Leila |
| Abstract: | This paper presents the first causal evidence on how banks adjust their voluntary capital buffers (the capital headroom above the required level) in response to changes in capital requirements. Using granular euro area data and exploiting the threshold-based assignment of Other Systemically Important Institution (O-SII) buffers within a regression discontinuity design, we study the liability side of banks’ balance sheets, complementing the asset-focused literature on lending and risk-taking. This allows us to assess whether capital regulation is effective in enhancing bank resilience, arguably its main objective. We find that banks offset about half of higher capital requirements by cutting their voluntary buffers rather than raising new equity. The offsetting effect is more pronounced among banks with weaker balance sheets, particularly those with higher levels of non-performing loans. These results indicate that regulation aimed at strengthening resilience may be only partially effective, as banks use existing voluntary buffers when subject to higher requirements. JEL Classification: E44, E51, E58, G21, G28 |
| Keywords: | capital buffers, higher requirements, macroprudential policy, voluntary buffer |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253128 |
| By: | Neyer, Ulrike; Stempel, Daniel; Stevens, Alexandra |
| Abstract: | Households differ in their consumption baskets and inflation rates along the wealth and income distribution. We use German data to show that subsistence consumption is a main driver of these differences: the share of subsistence consumption in overall consumption is significantly higher for households at the lower end of the wealth and income distribution. We construct a price index for subsistence consumption and show that this price index exhibits larger volatility than the price indices constructed for the average consumption basket and the basket of households with average and high income. We then set up a Heterogeneous Agent New Keynesian (HANK) model that incorporates these facts to analyze the consequences of different consumption baskets and inflation heterogeneity for monetary policy transmission. We find that heterogeneous consumption baskets across households weaken monetary policy transmission. This is due to the heterogeneous responses of inflation rates to monetary policy shocks across households, larger labor supply heterogeneity, and a novel indirect transmission channel of monetary policy operating through the real value of subsistence consumption. |
| Keywords: | HANK model, inflation heterogeneity, inequality, monetary policy transmission, subsistence consumption |
| JEL: | E12 E21 E31 E32 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:dicedp:327105 |
| By: | YiLi Chien; Zhengyang Jiang; Matteo Leombroni; Hanno Lustig |
| Abstract: | We compute the cross-country transfers that result from unconventional monetary policy in the Eurozone. The ECB funds the expansion of its aggregate balance sheet mostly by issuing bank reserves and cash in core countries. The national central banks (NCBs) in periphery countries then borrow from the core NCBs at below-market rates to fund the asset purchases and bank lending. In addition, NCBs in the periphery lend more to their own banks at below market rates. To compute the cross-country transfers, we compare the resulting cross-country distribution of NCB income to a counterfactual scenario without the ECB and without non-marketable intra-Eurozone debt. We document significant and persistent transfers from the core to the periphery. |
| Keywords: | unconventional monetary policy; financial repression; monetary union; Target2 |
| JEL: | E42 E52 F33 G15 |
| Date: | 2025–09–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:101808 |
| By: | Toth, Mark |
| JEL: | E32 E52 R12 R21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325390 |
| By: | Masyayuki Okada (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: masayuki.okada@boj.or.jp)); Kazuhiro Teramoto (Graduate School of Economics, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo, Japan. 186-8603. (Email: k.teramoto@r.hit-u.ac.jp)) |
| Abstract: | This paper proposes a novel mechanism explaining why large firms exhibit stronger stock price responses to monetary policy surprises. Empirically, we show that endogeneity arising from the ex-post predictability of these surprises disproportionately affects large firms, leading to overestimated stock return responses. We develop an asset pricing model with granular-origin aggregate fluctuations and investors' imperfect knowledge of monetary policy rule parameters. The model demonstrates that belief revisions about the policy stance drive both monetary policy surprises and heterogeneous stock price responses through changes in the risk premium - even without investor heterogeneity or differential effects of policy shocks on firm fundamentals. |
| Keywords: | monetary policy surprises, stock returns, high-frequency identification, partial information, learning, granular-origin aggregate fluctuations |
| JEL: | E43 E44 E52 E58 G12 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-06 |
| By: | A. Hakan Kara; Alp Simsek |
| Abstract: | Türkiye's response to post-pandemic inflation is a cautionary tale of how political pressure for low interest rates can create macroeconomic instabilities. While central banks worldwide raised interest rates to combat inflation in 2021-2023, Turkish authorities pursued the opposite strategy: cutting real rates to deeply negative levels while implementing financial engineering tools, FX interventions, and financial repression to stabilize markets. The centerpiece was a novel FX-protected deposit scheme (KKM) that guaranteed depositors against currency depreciation, shifting exchange rate risk to the government balance sheet. We provide a detailed account of this policy experiment and develop a theoretical model focusing on how KKM functions and creates vulnerabilities. Our model reveals that pressure to keep interest rates below inflation-targeting levels can lead to an interconnected destabilizing sequence. Low rates generate inflation, current account deficits, and exchange rate depreciation. KKM provides partial stabilization by effectively raising rates for savers while maintaining low rates for borrowers. However, this creates growing contingent fiscal burdens and vulnerability to self-fulfilling currency and sovereign debt crises. This explains additional policies adopted including capital flow management, financial repression, and return to orthodox monetary policy. As central banks worldwide face renewed pressure to set lower policy rates, Türkiye's experience illustrates the consequences. |
| JEL: | E43 E52 E58 F31 F32 F41 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34287 |
| By: | Kagerer, Benedikt; Pancaro, Cosimo; Reghezza, Alessio; De Vito, Antonio |
| Abstract: | This paper investigates how unrealized losses on banks’ amortized cost securities affect monetary policy transmission to bank lending in the euro area. Leveraging the sharp increase in interest rates between 2022 and 2023 and using granular supervisory data on security holdings and loan-level credit register data, we show that a one percentage point increase in the share of unrealized losses on amortized cost securities amplifies the contractionary effect of monetary tightening on lending supply by approximately one percentage point. This effect is more pronounced for weakly capitalized and less liquid banks, and those relying more on uninsured deposits. We further document that banks respond to growing unrealized losses by raising capital and passing through interest rate increases to depositors via higher deposit betas. Importantly, banks that employ interest rate hedging strategies can fully offset the negative impact of unrealized losses on credit supply. The contraction in lending is particularly severe for smaller borrowing firms, highlighting the uneven economic consequences of hidden balance sheet fragilities during a tightening cycle. JEL Classification: E43, E52, G21, G32, M41 |
| Keywords: | amortized cost accounting, bank lending, monetary policy transmission, security holdings, unrealized losses |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253129 |
| By: | Semik, Sofia |
| JEL: | E52 H23 Q43 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325397 |
| By: | Chang Ma; Alessandro Rebucci; Sili Zhou |
| Abstract: | Chinese private portfolio equity outflows, though small compared to other Chinese outflows, are growing rapidly because of capital account liberalization and capital flight. Using granular stock-holding data on Qualified Domestic Institutional Investor (QDII) mutual funds, we identify a nascent financial channel of international transmission of Chinese monetary policy to world stocks. Event study analysis around monetary policy announcement days reveals that monetary policy tightening depresses returns of country equity indexes and individual U.S. stocks with QDII fund exposure relative to non-exposed stocks. The results are robust to controlling for the real transmission channel of Chinese monetary policy and other confounders. The effect is driven by smaller and less liquid firms, but not by China-concept stocks or those highly exposed to China's macroeconomic shocks. We also find that the results are driven by household portfolio rebalancing from more to less risky assets following the announcement. |
| JEL: | F30 G10 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34291 |
| By: | Daniel A. Dias; Sophia Scott |
| Abstract: | This paper shows that U.S. commercial banks' funding betas rise predictably with the length, magnitude, and direction of each monetary policy cycle: longer cycles and those with larger changes in the policy rate yield stronger pass-through in both tightening and loosening cycles, with modest asymmetry favoring slightly greater transmission during loosening cycles. Nondeposit liabilities consistently adjust more than deposits. Crucially, at the aggregate banking-system level and across banks grouped by size, this cycle-dependent relationship has remained remarkably stable over three decades, highlighting the durability and predictability of interest-rate transmission to banks' funding costs. |
| Keywords: | Bank funding betas; Deposit vs. nondeposit funding costs; Monetary policy cycles; Interest-rate transmission |
| JEL: | C22 E44 G21 |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-83 |
| By: | Jaemin Jeong; Eunseong Ma; Choongryul Yang |
| Abstract: | When do households listen to the Fed? We show the answer lies in a simple but powerful force: household attention to macroeconomic conditions. We develop a model where attention acts as a crucial gatekeeper for the pass-through of policy news to beliefs, and confirm its predictions using household survey data. We find that belief revisions to monetary policy surprises are concentrated among attentive individuals—particularly those with high financial stakes—and this effect strengthens dramatically during uncertain times. This implies the expectations channel is most potent when it matters most, suggesting policymakers should account for the time-varying and heterogeneous nature of public attention. |
| Keywords: | Inflation expectations; Monetary policy; Rational inattention; Behavioral macroeconomics |
| JEL: | D83 D84 E31 E52 |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-84 |
| By: | Magin, Jana; Neyer, Ulrike; Stevens, Alexandra |
| JEL: | E41 E42 C92 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325448 |
| By: | Frache, Serafin; Lluberas, Rodrigo; Pedemonte, Mathieu; Turén, Javier |
| Abstract: | Motivated by the dominant role of the US dollar, we explore how monetary policy (MP) shocks in the United States can affect a small open economy through the expectation channel. We combine data from a panel survey of firms' expectations in Uruguay with granular information about firms' debt position. We show that a contractionary MP shock in the United States reduces firms' inflation and cost expectations in Uruguay. This result contrasts with the effect of this shock on the Uruguayan economy. We study mechanisms related to how firms and managers experience in different monetary policy regimes can explain the results and discuss their implications. |
| Keywords: | Firms’ expectations;Global financial cycle;Monetary policy spillovers |
| JEL: | E31 E58 F41 D84 E71 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14286 |
| By: | Eduardo Amaral; Rafael Guerra; Ilhyock Shim; Alexandre Tombini |
| Abstract: | Global factors shaped financial conditions in Latin America in 2025, with exchange rate appreciations against the US dollar loosening conditions in most countries. Short-run monetary policy transmission in the region operates through financial conditions. In general, monetary easing leads to looser financial conditions and faster short-term output growth. Measurement of overall financial conditions depends on the methodologies and assumptions used to construct financial conditions indices (FCIs). Understanding these differences helps central banks to use FCIs as an input to monetary policy. |
| Date: | 2025–09–29 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:113 |
| By: | Manuel Gonzalez-Astudillo; Diego Vilán |
| Abstract: | A challenge for conducting monetary policy in a currency union is the diverse economic conditions among member states. Such disparities can drive natural interest rates apart, thereby undermining the stabilizing role of a unified monetary policy. To assess the stance of monetary policy across Eurozone-19 countries, we estimate their natural rates of interest (r∗) and inflation trends (π∗) to construct a measure of the country-level neutral nominal interest rates (r∗ + π∗) over 1999-2025, using a semistructural model that jointly characterizes the trend and cyclical components of key macroeconomic variables such as output, unemployment, inflation, 10-year government bond yields, and the common policy interest rate. Our setup improves upon those in the existing literature by allowing both a short-run interest rate gap—driven by the (shadow) policy rate—and a long-run interest rate gap—driven by the country-specific 10-year government bond yields—to affect and reflect economic conditions. We also impose cointegration between the dynamics of the country-specific latent variables and common counterparts to incorporate co-movements across the euro area economies. Our results show that the stance of monetary policy is homogeneous across the countries in our sample, but that a relatively highly degree of heterogeneity emerges at key historical turning points. |
| Keywords: | Common monetary policy challenges; Euro area economies; Interest rate gap; Neutral interest rate; Sovereign debt risk |
| JEL: | C32 E32 E42 E52 |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-87 |
| By: | Colin Weiss |
| Abstract: | I examine how governments have managed their holdings of gold and dollar reserves in recent decades, a period when gold’s share of aggregate international reserves rose and the dollar’s share fell. Using data on central banks’ reserve currency composition and official sector purchases of U.S. assets, I argue that gold reserve accumulation is generally not associated with de-dollarization of international reserves at the country level, except in a few prominent cases. Instead, gold purchases are more consistent with most countries pursuing a modest diversification of international reserves that does not solely target a reduced dollar share. My evidence suggests that this characterization also applies to gold reserve accumulation in 2022 and 2023. Finally, I show that, while gold’s importance as a store of value for the official sector has grown since 2000, its use as a unit of account and a medium of exchange remains limited. |
| Keywords: | International Reserves; Gold; Dollar |
| JEL: | F30 F31 F33 |
| Date: | 2025–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1420 |
| By: | Francesco Caloia; Madi Mangan; Mauro Mastrogiacomo |
| Abstract: | This paper investigates how changes in credit availability influence house prices. We show that increases in household credit triggered by a relaxation of lending standards lead to higher transaction prices, higher shares and amounts of overbidding transactions and lower property sale times in the housing market. The impact on prices increases throughout the housing boom due to a higher take-up of credit by households. Also, it is stronger in locations with tighter housing supply and lower affordability, among liquidity constrained but credit-unconstrained buyers, as well as for more expensive properties. The findings support the credit-driven household demand hypothesis and highlight that mac roprudential policy contains systemic risk not only by reducing household leverage, but also by curbing house price growth over the cycle. |
| Keywords: | House prices; Household debt; Macroprudential policy; credit; |
| JEL: | G21 G28 G51 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:842 |
| By: | Nobuhiro Abe (Bank of Japan); Yuto Ishikuro (Bank of Japan); Koki Nakayama (Bank of Japan); Yutaro Takano (Bank of Japan) |
| Abstract: | Do heterogeneity and competition among banks matter for the macroeconomy? To address this question, we develop a Heterogeneous Bank New Keynesian (HBANK) model that incorporates oligopolistic competition among banks in both loan and deposit markets into an otherwise canonical New Keynesian model. We calibrate model parameters for the cost structure and demand for loans and deposits using data of the 170 largest banks in the U.S. Differences in the parameter values reflect differences among banks in the size of duration risk they take, markups of loan rates, and markdowns of deposit rates. Based on simulation exercises, we show that aggregate lending becomes more responsive to monetary and productivity shocks in our HBANK model than in a Representative Bank New Keynesian model (RBANK), primarily because of heterogeneity in duration risk and the responsiveness of loan markups among banks. |
| Keywords: | banking, business cycles |
| JEL: | E32 E43 E44 E52 G21 |
| Date: | 2025–09–29 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp25e09 |
| By: | Engin Kara |
| Abstract: | How firms respond to uncertainty determines economic policy effectiveness. Using Brexit as a natural experiment, I document that flexible price-setters—those most responsive to monetary policy—paradoxically reduce adjustment more than sticky firms under uncertainty. This ‘curse of flexibility’ reverses menu cost models’ foundational prediction that flexibility amplifies responses. Under uncertainty, resetting prices exposes firms to symmetric shocks, while maintaining current prices provides partial insulation. Flexible-price firms can afford to exploit this differential exposure by waiting; sticky-price firms cannot. This creates a policy challenge: uncertainty weakens monetary transmission when needed most, as flexible firms—the most responsive channel—become more cautious during crises. |
| Keywords: | menu costs, price stickiness, uncertainty, state-dependent pricing, heterogeneous firms, monetary policy transmission |
| JEL: | E31 D83 E52 D21 L11 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12166 |
| By: | Den Haan, Wouter J.; Ferrari, Alessandro; Mazelis, Falk; Ristiniemi, Annukka |
| Abstract: | We develop a model in which agents face unemployment risk, but also age and eventually retire. We study the impact of different retirement schemes on life-cycle consumption and the monetary transmission mechanism. Agents save because of a fall in income upon retirement, changes along the life-cycle wage profile, and unemployment risk. Changes in retirement policies affect the distribution of available assets (bonds) among the middle aged and the young, which in turn can have a strong impact on the ability of the young to insure themselves against unemployment risk. Interestingly, it is possible that an increase in retirement benefits leads to higher consumption levels during sustained unemployment spells even though the associated increase in taxes reduces unemployment benefits. The reason is that this policy induces the middle aged to save less which leaves more of the available asset supply to the young. A reduction in the interest rate has a bigger impact on those for whom labor market conditions improve the most and – due to a larger negative income effect – has a smaller impact on those who save more. In terms of the aggregate impact of monetary-policy shocks, our paper confirms conventional wisdom that the expansion is magnified in the presence of incomplete markets, since it is then accompanied by a fall in precautionary savings. The novel aspect of our analysis is that the extent of the incompleteness, i.e., the ability of those subject to unemployment risk to insure themselves, is endogenous. Specifically, it is reduced as the young (middle-aged) hold a larger (smaller) fraction of the available asset supply and this distribution is not only affected by retirement policies, but also by government bond supply and the life-cycle wage profile. Thus, understanding the distribution of assets across different age cohorts is not only important for understanding life-cycle consumption patterns, but also business cycles. JEL Classification: E43, E52, E21, E24 |
| Keywords: | aging, monetary-policy shocks, New-Keynesian model, precautionary savings, unemployment risk |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253125 |
| By: | Cristina Badarau (University of Bordeaux); Corentin Roussel (University of Strasbourg) |
| Abstract: | This paper examines whether a Counter-Cyclical Buffer (CCyB) indexed to carbon-intensive credits, i.e., a carbon-intensive CCyB, is consistent with the banking stability objectives of financial regulators when unregulated banks operate in credit markets. To do so, we assess the consistency of the carbon-intensive CCyB regulation through the lens of a general equilibrium model that encompasses polluting and non-polluting firms (i.e., green and brown firms, respectively), as well as traditional and shadow banks (i.e., regulated and unregulated banks, respectively). We find that a carbon-intensive CCyB regulation is not the most suitable for financial regulators when there are no asymmetric leakages between green and brown loans for traditional and shadow banks. However, a strict emissions tax applied to the production of brown firms favors the adoption of a carbon-intensive CCyB regulation by financial regulators. Moreover, a carbon-intensive CCyB could be suitable when traditional banks are more involved in the green credit market than in the brown one. This last result highlights the need for regulators to carefully coordinate their green policies to avoid jeopardizing the stability of the banking system. |
| Keywords: | Counter-cyclical capital buffers, carbon-intensive credits, shadow banks, General Equilibrium Model |
| JEL: | E G Q |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:inf:wpaper:2025.14 |
| By: | Matthew Baron; Luc Laeven; Julien Pénasse; Yevhenii Usenko |
| Abstract: | We study the mechanisms driving bank losses across historical banking crises in 46 economies and the effectiveness of policy interventions in restoring bank capitalization. We find that bank stocks experience large, permanent declines at the onset of crises. These losses predict commensurate long-term declines in banks’ earnings and dividends, rather than elevated future equity returns. Bank losses are primarily driven by write-downs of nonperforming assets, not asset sales during panics. Forceful liquidity-based interventions during crises predict only small, temporary increases in bank market value. Overall, these results suggest that bank losses during crises are not primarily due to temporary price dislocations. Early liquidity interventions can avert banking crises, but only under specific conditions. Once large bank equity declines have occurred, policy responses have historically failed to prevent persistent undercapitalization in the banking sector. |
| JEL: | G01 G21 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34288 |
| By: | Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Wei Ma (Center for Economic Research, Shandong University, Jinan, 250100, China) |
| Abstract: | We develop a monetary endogenous growth overlapping generations model characterized by investment adjustment costs as a negative function of productive government expenditures, and an inflation-targeting central bank. We show that growth dynamics arise, otherwise not possible in a standard monetary endogenous growth model with a money growth-rule and an exogenous adjustment cost parameter. Furthermore, hinging crucially on the strength of the response of the adjustment cost to productive public spending, single or multiple equilibria emerge, with the high-growth (low-growth) equilibrium in the latter case being stable (unstable), but locally indeterminate (locally determinate). |
| Keywords: | Supply Investment adjustment costs, endogenous growth, inflation-targeting, growth dynamics |
| JEL: | E22 E58 O42 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202537 |
| By: | Peter Bofinger |
| Abstract: | The paper discusses the functions and the potential of stablecoins as an innovative payment system: Stablecoins constitute a new payment object which can be used for a direct exchange on the infrastructures provided by blockchains and crypto exchanges. For the discussion of stablecoins It is important to distinguish between bond-based and bank-based stablecoins: While the former use bank deposits as collateral, the latter use short-term treasuries. Bond-based stablecoins have an attractive business model. They enable direct international.payments, i.e. without an intermediary, based on a safe transaction asset. Market dynamics reveal significant network effects: the system is characterized by the US dollar as the dominant currency denomination, a duopoly of two issuers, and a small number of blockchains. In the last few years, the dominant issuers have demonstrated resilience even during periods of economic shocks. The macroeconomic effects of bank-based stablecoins are limited, since they cannot create loans. However, bond-based stablecoins can create money by purchasing government bonds. While bank-based stablecoins create financial stability risks by interconnecting banks and stablecoin issuers, bond-based stablecoins do not present this risk. The Digital Euro is not an alternative to stablecoins: Its use is limited to the euro area, it is designed for retail payments and it only allows asset holdings for private households. |
| Keywords: | crypto currencies, blockchain, stablecoins. Digital Euro, cyrpto exchanges |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:imk:studie:100-2025 |