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on Central Banking |
| By: | Nina Biljanovska; Eduardo Espuny Diaz; Amir Kermani; Rui Mano |
| Abstract: | This paper examines how housing market overvaluation—measured by the price-to-rent ratio and its deviations from long-term trends—affects the transmission of monetary policy. Using U.S. metropolitan-level data and three measures of monetary policy shocks, we find that house prices respond more strongly to policy rate changes in overvalued markets. Examining buyer heterogeneity, we show that investor demand, proxied by non-owner-occupied purchases, declines more sharply after monetary tightening in these markets. These results are consistent with models of extrapolative beliefs and suggest that monetary policy can serve a stabilizing role during housing booms. |
| Keywords: | Monetary Policy; Overvalued Housing Markets; House Price Expectations |
| Date: | 2025–10–03 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/207 |
| By: | Coenen, Günter; Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka; Smets, Frank; Warne, Anders; Wouters, Raf |
| Abstract: | This chapter of the Research Handbook of Inflation (2025) reviews the evolution and current relevance of medium-scale New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models, which serve as part of the core analytical framework in central banks and academic macroeconomics. The chapter assesses their capacity to analyse inflation dynamics, monetary transmission mechanisms, and policy interventions. Despite their exclusion of crisis-specific features, canonical models such as Smets and Wouters (2007) continue to explain inflation and output dynamics in the euro area and the US, owing in part to the differentiated effects of cost-push and demand shocks and the mitigating role of monetary policy. The chapter traces advancements in the European Central Bank’s New Area-Wide Model (NAWM), highlighting extensions that incorporate financial frictions, effective lower bounds, and energy price shocks. These enhancements have strengthened the model’s forecasting performance and interpretative power, especially during periods of unconventional monetary policy and energy-driven inflation. DSGE models are shown to be particularly effective for policy counterfactuals, enabling real-time assessments of policy decisions relative to model-based optimal policy. A robustness analysis under alternative scenarios demonstrates how policy rules can be evaluated through a welfare lens, informing the design of resilient monetary frameworks. Finally, the chapter identifies key modelling challenges exposed by recent inflation episodes and advocates for richer supply-side structures and nonlinear dynamics to improve the models’ capacity to capture complex macroeconomic developments. JEL Classification: E31, E32, E52, E58, C63 |
| Keywords: | effective lower bound, forecast evaluation, inflation dynamics, optimal policy, policy counterfactuals |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253137 |
| By: | Taejin Park; Fernando Perez-Cruz; Hyun Song Shin |
| Abstract: | This paper explores the landscape of economic ideas as revealed in the machine learning embedding of a comprehensive dataset of central bank speeches. This dataset, maintained by the BIS, encompasses 19, 742 speeches delivered by almost 1, 000 officials from over 100 central banks over a period spanning three decades, from 1997 to 2025. As well as topic analysis of speeches at any moment in time, the evolution of the topics over time provides insights into how the focus of central bank thinking has been shaped by shifting policy challenges since 1997. Parsing the embedding both through topics and through time provides rich insights into how economic ideas have taken shape through communication practices of central banks worldwide. To demonstrate its utility, we have conducted a series of analyses that map the global landscape of monetary policy discourse. Furthermore, we construct a quantitative framework-referred to as the "space of central bankers' ideas"-which uncovers institutional patterns and highlights shifts in policy approaches over time. |
| Keywords: | central bank communication, central bank speeches, AI, topic modeling, embeddings |
| JEL: | E52 E58 C55 C38 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1299 |
| By: | Ricardo Alonzo Fernandez Salguero |
| Abstract: | This paper offers a synthesis of the empirical literature on the effects of monetary policy. Using the findings from an extensive collection of meta-analyses, it evaluates the effectiveness of conventional and unconventional monetary policy instruments on key macroeconomic variables such as output, inflation, capital flows, and the exchange rate. The aggregated evidence reveals a systematic gap between the effects reported in primary studies and the actual magnitude of these effects, once corrected for publication bias and methodological heterogeneity. The findings suggest that, while monetary policy is a relevant tool, its power to modulate the business cycle has been consistently overestimated in the literature. Contextual factors - such as the degree of financial development, the exchange rate regime, central bank independence, and crisis conditions - that modulate the transmission of monetary policy are identified. In particular, it is found that publication bias systematically favors statistically significant results consistent with predominant theory, which artificially inflates the perception of effectiveness. By correcting these distortions, a picture of monetary policy emerges with more modest, uncertain effects and considerable lags, which has profound implications for macroeconomic theory and the practice of economic policy. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.19591 |
| By: | Dimitrios Anastasiou (Athens University of Economics and Business - Department of Business Administration); Apostolos G. Katsafados (Athens University of Economics and Business - Department of Accounting and Finance; Bank of Greece); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Christos Tzomakas (Athens University of Economics and Business) |
| Abstract: | Building on the methodology of Gorodnichenko et al. (2023), we reconstruct and propose a novel measure that quantifies the voice sentiment of the Chair of the Federal Reserve press conference responses and examine its impact on the stock price crash risk of U.S. banks. We find that a more positive vocal sentiment, indicative of happiness, significantly reduces banks' ex-ante crash risk, whereas negative emotions, such as sadness and anger, amplify it. Our findings suggest that, beyond the textual content of monetary policy statements, the emotional delivery of central bank communication plays a critical role in shaping financial stability outcomes. |
| Keywords: | US banks, Stock Price Crash Risk, Voice Sentiment, Financial Stability |
| JEL: | G01 G21 G41 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2572 |
| By: | William Ginn (Labcorp, Coburg University of Applied Sciences); Jamel Saadaoui (University Paris 8); Evangelos Salachas (University of the Aegean) |
| Abstract: | This paper examines how U.S. monetary policy shocks influence asset price bubbles under different inflation regimes. Using data from 1998–2023, we show that the transmission of policy is neither constant nor time-invariant. Standard local projection (LP) estimates suggest modest average effects, but including the COVID-19 period reveals that these relationships weaken. Employing time-varying local projections (TVP-LP), we document sharp shifts in transmission during the Global Financial Crisis and the pandemic, motivating a nonlinear approach. Nonlinear VAR-LP estimates uncover clear asymmetries: in high-inflation states, monetary tightening deflates bubbles by raising financing costs and constraining risk-taking; in low-inflation states, the same shocks amplify bubbles by raising expected inflation, narrowing credit spreads, and boosting equity returns. We interpret this inversion as evidence of a state-contingent speculative signaling channel, whereby tightening is perceived as a signal of stronger demand or implicit accommodation, encouraging further speculation. This mechanism highlights that safeguarding financial stability requires more than interest rate adjustments alone—it demands explicit attention to the inflationary environment and investor perceptions. |
| Keywords: | Financial stability, asset prices, booms and busts, local projections |
| JEL: | E |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:inf:wpaper:2025.17 |
| By: | William Bergman (Loyola University) |
| Abstract: | This paper examines the Federal Reserve's current financial losses—unprecedented in scale—and the questionable accounting practices it uses to downplay their impact. It argues that the Fed's self-defined accounting standards, particularly the creation of a "deferred asset" to mask negative equity, obscure the fiscal consequences for the U.S. government and taxpayers. The analysis connects today's losses to longstanding institutional practices, notably the Fed's flawed cost-recovery accounting for its Fedwire payment system. These issues first emerged in the late 1990s and early 2000s, when the author, then a Fed staffer, challenged the internal logic used to claim that Fedwire guaranteed payments and still avoided subsidies. The paper includes as an appendix the original 2002 draft, "Fedwire: A Subsidy That Fully Recovers Its Cost?", which helped reveal the moral hazard and accounting inconsistencies that contributed to the 2008 crisis and continue to shape central bank risk and governance today. |
| Keywords: | Federal Reserve, Central bank accounting, Fedwire, daylight overdrafts, Payment systems, financial crisis, monetary policy, financial regulation |
| JEL: | E0 E58 E42 G28 H83 L50 |
| Date: | 2024–07–30 |
| URL: | https://d.repec.org/n?u=RePEc:thk:wpaper:inetwp237 |
| By: | Maximilian Boeck (Friedrich-Alexander-Universität Erlangen-Nürnberg); Christian Glocker (WIFO) |
| Abstract: | We examine how labor market institutions shape monetary policy transmission in euro area countries. A theoretical model suggests that higher union density flattens the Phillips curve, amplifying output responses while dampening the inflation effects of monetary shocks. This is empirically confirmed using an interacted panelVAR. In contrast, benefit replacement rates and employment protection legislation have a limited impact. Our findings point to a structural, not cyclical, driver of monetary policy effectiveness, highlighting the importance of labor market features. In a monetary union, such heterogeneity can lead to inefficient inflation and output differentials across member states. |
| Keywords: | Monetary policy, Labor market institutions, Euro area, Interacted panel VAR |
| Date: | 2025–10–15 |
| URL: | https://d.repec.org/n?u=RePEc:wfo:wpaper:y:2025:i:713 |
| By: | Gregorio Impavido |
| Abstract: | This paper assesses the relative contribution of domestic and external factors to headline inflation in Kazakhstan. We confirm earlier results that inflation is primarily imported, and we provide novel details on the sources of imported inflation and its transmission channels. We find that domestic factors like fiscal policy and more recently utility tariff increases are the key determinants of domestic inflationary pressures. We provide new information on the likely determinants of inflation expectations through which domestic and external factors affect inflation. We find that monetary policy has only been partially successful at containing domestic and external pressures with insufficient liquidity sterilization, likely contributing to weakening of the interest rate transmission channel. Finally, we find that shocks are highly persistent and bringing back inflation to its target is likely to be a difficult and long process for the Central Bank. |
| Keywords: | Inflation determinants; domestic factors; external factors; monetary policy; fiscal policy; inflation expectationsl SUR |
| Date: | 2025–10–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/209 |
| By: | Drago Bergholt; Øistein Røisland; Tommy Sveen; Ragnar Torvik |
| Abstract: | There is a common view that if monetary and fiscal policy are to be used together for macroeconomic stabilization, they should pull in the same direction. We challenge this view by analyzing the optimal policy mix in a small open economy. We show that when the economy is hit by inflation shocks or exchange rate shocks, monetary and fiscal policy should pull in opposite directions. This policy mix makes more effective use of the exchange rate channel of monetary policy, allowing inflation to be reduced after a shock with lower costs in terms of unemployment. Only in the case of demand shocks, or if there are significant costs associated with the active use of the interest rate, should monetary and fiscal policy pull in the same direction. We then consider automatic stabilizers. As we show, for demand shocks, automatic stabilizers imply that monetary and fiscal policy pull in the same direction. For inflation and exchange rate shocks, on the other hand, automatic stabilizers imply that the two policy instruments pull in opposite directions. These policy interactions are all consistent with our results on the optimal policy mix. Strong automatic stabilizers could therefore serve as a substitute for optimal discretionary fiscal policy in open economies. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bny:wpaper:0141 |
| By: | Flavio Angelini (University of Perugia); Stefano Herzel (DEF, University of Rome "Tor Vergata"); Marco Nicolosi (Università La Sapienza) |
| Abstract: | We adopt an affine short-rate model for the contemporaneous evolution of the term structures based on EURIBOR and on eSTR. The model is based on the observation that the risk-free rate follows a constant trajectory and moves only at deterministic times (depending on the European Central Bank meetings). We calibrate the model using Kalman filtering on a panel of term structure zero rates and compare its performances to the dynamic version of the Nelson-Siegel model, both in- and out-of-sample. The model is able to reproduce some common features of the term structure dynamics, such as the “snake” shaped term structure volatility and the fact that the volatility increases in periods containing the meeting dates. We analyze the sensitivity of the eSTR term structure to variations in monetary policy expectations and apply the model to estimate the level and the probability distribution of the future rates, and to show how to compute the fallback risk of a on-going contract in case EURIBOR would be replaced by eSTR. |
| Keywords: | Affine Short-Rate Models, Bond Yields, Deterministic Jump Times, Fallback Risk, eSTR Transition |
| JEL: | C5 C6 E4 E5 |
| Date: | 2024–10–07 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:613 |
| By: | Matthias Burgert; Giulio Cornelli; Burcu Erik; Benoit Mojon; Daniel Rees; Matthias Rottner |
| Abstract: | This paper introduces the BIS Multisector Model (BIS-MS), a dynamic stochastic general equilibrium (DSGE) model for analyzing macroeconomic dynamics in a multi-sector production network. The model can be calibrated to match the input-output data of more than 80 economies, enabling a detailed exploration of sectoral interdependencies and cross-industry shock transmission. By incorporating nominal rigidities at the sectoral level, the model can also be used to evaluate alternative monetary policy strategies. The paper demonstrates the model's capabilities by analyzing temporary and permanent energy price shocks under different monetary policy frameworks. In doing so, it illustrates the critical role of the country-specific production networks in shaping macroeconomic outcomes. The accompanying model toolbox equips policymakers and researchers with an easy-to-access platform for flexible scenario analysis. |
| Keywords: | multisector model, DSGE model, monetary policy, production network, climate change |
| JEL: | C54 E52 H23 Q43 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1297 |
| By: | Małgorzata Olszak (UW - Uniwersytet Warszawski [Polska] = University of Warsaw [Poland] = Université de Varsovie [Pologne]); Christophe Godlewski (LARGE - Laboratoire de Recherche en Gestion et Economie - UNISTRA - Université de Strasbourg); Iwona Kowalska (UW - Uniwersytet Warszawski [Polska] = University of Warsaw [Poland] = Université de Varsovie [Pologne]); Agnieszka Paciorek (UW - Uniwersytet Warszawski [Polska] = University of Warsaw [Poland] = Université de Varsovie [Pologne]) |
| Abstract: | Abstract In this study, we investigate the effects of macroprudential policies on banks' net interest margins (NIMs) using 3000 banks in 28 European Union countries from 1996 to 2019. Macroprudential tightening results in an immediate 2 basis point (bp) decrease in the NIMs, an increase in interest income (IIEA) of 7 bp, and an increase in interest expense (IEEA) of almost 10 bp. But the last two decline by 10.5 and 10.1 bp respectively 1–2 years later. The effect depends on the instrument type and varies based on the capital ratio and credit risk, but holds in high- and low-rate environments. |
| Keywords: | Low-rate JEL Classification E44, E58, G21, G28, Risk, Capital, Macroprudential policy instruments, Net interest margin, Net interest margin Macroprudential policy instruments Capital Risk Low-rate JEL Classification E44 E58 G21 G28 |
| Date: | 2025–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05298459 |
| By: | Yongheng Hu |
| Abstract: | In this paper, we model USD-CNY bilateral exchange rate fluctuations as a general stochastic process and incorporate monetary policy shock to examine how bilateral exchange rate fluctuations affect the Revealed Comparative Advantage (RCA) index. Numerical simulations indicate that as the mean of bilateral exchange rate fluctuations increases, i.e., currency devaluation, the RCA index rises. Moreover, smaller bilateral exchange rate fluctuations after the policy shock cause the RCA index to gradually converge toward its mean level. For the empirical analysis, we select the USD-CNY bilateral exchange rate and provincial manufacturing industry export competitiveness data in China from 2008 to 2021. We find that in the short term, when exchange rate fluctuations stabilize within a range less than 0.2 RMB depreciation will effectively boost export competitiveness. Then, the 8.11 exchange rate policy reversed the previous linear trend of the CNY, stabilizing it within a narrow fluctuation range over the long term. This policy leads to a gradual convergence of provincial RCA indices toward a relatively high level, which is commensurate with our numerical simulations, and indirectly enhances provincial export competitiveness. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.15169 |
| By: | Juan Passadore; Giovanni Sciacovelli; Ms. Filiz D Unsal; Carlos van Hombeeck |
| Abstract: | We present an Open Economy HANK model with relevant features for Low-Income Countries (LICs): hand-to-mouth households and a subsistence consumption for tradable goods. With the model calibrated for a representative LIC, we illustrate our broader framework with a shock to external prices. The shock causes a consumption-led recession, an increase in inflation and a drop in real wages. Consumption inequality rises: poor households cannot insure against the shock, unlike richer households who can tap into their wealth. Monetary policy is unable to substantively improve poorer households’ welfare, due to offsetting effects on real wages and labor demand. Simulations of the effects of alternative monetary policy responses on inequality yield similar findings. In this setting, fiscal transfers are a more effective tool for redistribution across households. |
| Keywords: | Monetary Policy; Inequality; Open Economy HANK; Low-income Countries |
| Date: | 2025–10–03 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/204 |
| By: | Luis Araujo; Leo Ferraris; Marco Mantovani; Daniela Puzzello |
| Abstract: | Sovereign digital currencies are about to be launched in several countries. A key feature of this intangible counterpart of cash is its traceability. Using a microfounded monetary model, we show that traceability can be exploited to incentivize liquidity transfers among traders, thus stimulating production and trade. We empirically test the theoretical prediction through a controlled laboratory experiment. We find that sovereign digital currency stimulates production and trade, provided that the authorities actively help promote its acceptability. |
| Keywords: | digital currency, cash, monetary policy, laboratory experiment |
| JEL: | E40 C90 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:557 |
| By: | Syngjoo Choi; Bongseop Kim; Young-Sik Kim; Ohik Kwon; Soeun Park |
| Abstract: | To overcome the lack of data in predicting the payment preference for central bank digital currency (CBDC), we conducted a discrete choice experiment that varied the attributes of payment methods among over 3, 500 participants in Korea. We identified key attributes, such as the discount rate and the issuance form, that shape the demand for payment methods. The predicted usage shares of existing payment methods closely align with their actual usage patterns in Korea, which lends credible support for the external validity of our experimental design. Building on this validation, we further predict that CBDC, when introduced, will be preferred over cash and mobile fast payment but less preferred than credit and debit cards, with its adoption rate as the most preferred payment method ranging 19−27% of respondents. |
| Keywords: | payment preference, retail CBDC, discrete choice experiment |
| JEL: | E40 E50 C90 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1296 |
| By: | Michael D. Bordo; Oliver Bush; Ryland Thomas |
| Abstract: | This narrative paper provides a detailed account of the Great Inflation in the United Kingdom from 1961 to 1997, serving as a companion to the analytical account of fiscal policy presented in Bordo, Bush, and Thomas (2025). We discuss the background fundamentals in place at the outset of the Great Inflation and document the distinct phases of inflation, the unique features of the UK’s experience relative to other advanced economies, and the interplay between fiscal, monetary, and incomes policies. By placing the UK’s inflationary episodes within their institutional and historical context, this paper offers a qualitative perspective that complements the quantitative analysis of the main paper and informs ongoing debates about the causes and consequences of persistent inflation. |
| JEL: | N10 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34363 |
| By: | Giuseppe Gurrado; Donato Masciandaro |
| Abstract: | In the ongoing race between new digital currencies, a crucial factor for success will be their relative ability to gain acceptance as a medium of exchange, shaping the demand for money. Focusing on the emerging competition between stablecoins and CBDCs, this analysis offers quantitative insights into which of the two is gaining more attention among different audiences, exploring both academic and public interest in recent years. The growth rates of academic publications on stablecoins and CBDCs, after alternating periods of predominance, now appear to converge, even though research on CBDCs remains higher in absolute terms. However, beyond academia, public attention confirms the possibility of stablecoins catching up. The observed cycles of attention for the two digital currencies highlight the importance of specific events, as well as the relevance of contextual and country-specific factors. |
| Keywords: | Central Bank Digital Currencies, Cryptocurrencies, Stablecoin, Money Demand, Social Networks |
| JEL: | B22 C91 E41 E42 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp25254 |