|
on Central Banking |
| By: | Jbir, Hamdi |
| Abstract: | This paper studies the impact of the Bank of England’s (BoE) governance on the effect of the interaction between monetary policy and macroprudential policy on financial stability, measured by the credit-to-GDP gap. We approximate macroprudential policy with financial stability publication sentiments. We construct monetary policy shocks and financial stability sentiment shocks following the approach of Romer and Romer [2004]. Local Projections estimates of Jordà [2005] show that the interaction between monetary policy shocks and financial stability sentiment shocks reduces the credit gap, regardless of whether the two shocks move in the same or opposite direc- tions. The decline in the credit gap is rather observed after the reorganisation of the BoE’s governance structure in 2011, particularly after the creation of the Financial Policy Committee within the BoE. Further extension suggests that monetary policy communication adds information to macroprudential policy communication that influences financial agents’ beliefs about UK systemic risk, when the two policy domains are under the central bank’s umbrella |
| Keywords: | Central bank governance, Financial stability, Monetary policy, Macroprudential policy |
| JEL: | E5 G0 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125437 |
| By: | Alexandra Piller (Study Center Gerzensee and University of Bern); Marc Schranz (University of Bern); Larissa Schwaller (University of Bern) |
| Abstract: | Identifying the causal effects of monetary policy is challenging due to the endogeneity of policy decisions. In recent years, high-frequency monetary policy surprises have become a popular identification strategy. To serve as a valid instrument, monetary policy surprises must be correlated with the true policy shock (relevant) while remaining uncorrelated with other shocks (exogenous). However, market-based monetary policy surprises around Federal Open Market Committee (FOMC) announcements often suffer from weak relevance and endogeneity concerns. This paper explores whether text analysis methods applied to central bank communication can help mitigate these concerns. We adopt two complementary approaches. First, to improve instrument relevance, we extend the dataset of monetary policy surprises from FOMC announcements to policy-relevant speeches by the Federal Reserve Board chair and vice chair. Second, using natural language processing techniques, we predict changes in market expectations from central bank communication, isolating the component of monetary policy surprises driven solely by communication. The resulting language-driven monetary policy surprises exhibit stronger instrument relevance, mitigate endogeneity concerns and produce impulse responses that align with standard macroeconomic theory. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:szg:worpap:2505 |
| By: | Ugo Albertazzi; Lorenzo Burlon; Tomas Jankauskas; Nicola Pavanini |
| Abstract: | After the Great Financial Crisis, the European Central Bank (ECB) extended its monetary policy toolbox to include the use of long-term loans to banks at interest rates close to zero or even negative. These central bank interventions were aimed at supporting the transmission of expansionary monetary policy and likely played a crucial role in bolstering the financial stability of the euro area, namely by reducing the chance of bank runs. However, quantitative evidence on the effects of these interventions on financial stability remains scant. In this post, we quantify the effectiveness of central bank lending programs in supporting financial stability through the lens of a novel structural model discussed in this paper. |
| Keywords: | central bank policies; bank runs; Imperfect Competition; structural estimation |
| JEL: | E44 E52 E58 G01 G21 L13 |
| Date: | 2025–10–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101970 |
| By: | Dimitris Korobilis; Leif Anders Thorsrud |
| Abstract: | From the perspective of flexible inflation targeting using a simple targeting rule, this paper introduces the Monetary Policy Deviation Error (MPDE) as a novel metric for assessing central bank performance and deliberations. The MPDE captures potentially time-varying shifts in the trade-off between stabilizing inflation and supporting real economic activity. Specifically, it quantifies the gap between the intended trade-off envisioned by policymakers and the trade-off realized through actual monetary policy outcomes. Under an optimal and unbiased monetary policy strategy, the MPDE should average to zero. Nonzero deviations indicate misalignment between the central bank’s stated objectives and the trade-offs actually achieved, suggesting that an alternative interest rate path would have better aligned outcomes with intentions. Applying the MPDE to evaluate the monetary policy strategies of Norges Bank and the Reserve Bank of New Zealand, we find posterior evidence supporting optimal policy alignment in the case of New Zealand. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bny:wpaper:0143 |
| By: | Cobham, David |
| Abstract: | This paper, prepared as a background chapter for an edited book, considers the changes in monetary policy frameworks (MPFs) over the first quarter of the 21st century. Section 1 presents the overall global and regional trends in monetary policy frameworks from 1999 to 2023. That analysis shows that the distribution of MPFs has changed rather less in recent years. However, the paper then turns to analyse in more detail the important changes within the two most widespread MPFs, inflation targeting and loosely structured discretion, over the period. Section 2 examines the rise in inflation targeting and the changes made within that framework by a number of mainly advanced economies, which have put more emphasis on output and employment but retained the primacy of the quantitative inflation target. Section 3 examines the changes in the monetary policy instruments commonly used within the loosely structured discretion framework, which have involved substantial improvements in effectiveness over time, typically associated with developments in money and bond markets, which facilitate switches to alternative MPFs. Overall, the paper highlights what amounts to a useful refocus from the choice of monetary policy framework to the operation of monetary policy. |
| Keywords: | monetary policy frameworks; inflation targets; exchange rate targets; loosely structured discretion; money markets; bond markets |
| JEL: | E42 E44 E52 F33 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124937 |
| By: | Suman Basu; Emine Boz; Gita Gopinath; Francisco Roch; Filiz Unsal |
| Abstract: | We develop a tractable small-open-economy framework to characterize the constrained e cient use of the monetary policy rate, foreign exchange (FX) intervention, capital controls, and domestic macroprudential measures. ‘e model features dominant currency pricing, positive premia on local currency debt arising from €nanciers’ portfolio constraints, and occasionally-binding external and domestic borrowing constraints. We characterize the conditions under which the traditional prescription—relying solely on the policy rate and exchange rate ƒexibility—remains su cient, even in the presence of externalities. By contrast, to manage noise trader ƒows into and out of the local currency debt market, FX intervention and in some cases capital inƒow taxes should be used instead of the traditional prescription. Moreover, if a country faces a mix of local currency premia and external borrowing constraints, we establish that certain regulations to limit FX mismatch may alleviate the external borrowing constraint but exacerbate the local currency premia. Finally, we show that capital controls may dominate domestic macroprudential measures in cases when external shocks trigger stress in domestic housing markets. |
| Keywords: | integrated policy framework, monetary policy, capital controls, foreign exchange intervention, macroprudential policies |
| JEL: | E58 F38 F41 G28 |
| URL: | https://d.repec.org/n?u=RePEc:udt:wpecon:2025-10 |
| By: | Vasco Curdia |
| Abstract: | The natural rate of interest is an elusive concept in theory and practice. However, it is essential for central banks’ calibration of the policy rate. Model consistent measures are often too extreme to be used in practice. On the other hand, empirical measures lack the full backing of theory to make them proper benchmarks. This paper proposes a medium-run measure of the natural rate that averages out some excessive fluctuations, while retaining enough connection to economic theory to make it optimal under certain circumstances. The discussion also provides a framework on how to evaluate and meaningfully address concerns by policymakers regarding the natural rate. The results suggest that a medium-run measure that concentrates on natural rate fluctuations in the range of two to five years ahead can be reasonable empirically and theoretically. |
| Keywords: | DSGE models; r-star; neutral rate; interest; central banks |
| JEL: | C32 E43 E52 E58 |
| Date: | 2025–10–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:101956 |
| By: | Santiago Camara; Jeanne Aublin |
| Abstract: | This paper studies the spillovers of European Central Bank (ECB) interest rate shocks into the Canadian economy and compares them with those of the U.S. Federal Reserve (Fed). We combine a VAR model and local projection regressions with identification strategies that explicitly purge information effects around policy announcements. We find that an ECB rate hike leads to a depreciation of the Canadian dollar and a sharp contraction in economic activity. The main transmission channel is international trade: ECB shocks trigger a decline in oil prices and exports, while leaving domestic financial conditions largely unaffected. By contrast, Fed shocks tighten Canadian financial conditions significantly, with more limited effects on trade flows. These findings show that Canada is exposed to foreign monetary policy both directly and indirectly, through its integration in global financial and trade markets. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.13578 |
| By: | Pavlina R. Tcherneva; Eric Tymoigne |
| Abstract: | This paper evaluates the relationship between monetary and fiscal policy and the relative effectiveness of macroeconomic stabilization through the lens of Modern Money Theory (MMT). We articulate previously-neglected aspects of monetary sovereignty to offer a new interpretation of the Bernanke Doctrine that emerged in the wake of the 2008 Global Financial crisis. This Doctrine validated key MMT precepts and paved the way for fiscal policy activism in response to COVID19. The paper argues that fiscal and monetary policy coordination is not new or rare. It is an intrinsic feature of sovereign monetary regimes, allowing for more effective policy responses to financial crises or pandemics. To the extent that monetary policy is able to stabilize an unstable economy, it is largely due to its fiscal components. This recognition also calls for a rethinking of fiscal policy. Originally issued as EDI Working Paper No. 08, 2022. |
| Keywords: | Modern Money Theory; MMT; Bernanke; Great Financial Crisis; history of money; monetary systems; monetary sovereignty; tax-driven money; consolidated government; government debt and deficit; quantitative easing; fiscal components of monetary policy; nonstandard Open Market Operations; COVID fiscal relief |
| JEL: | E12 E58 E61 H62 H63 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1064 |
| By: | Saba, Danladi Ndayezhin |
| Abstract: | This paper constructs a GVAR model that allows us to compare the propagation of interest rate shocks from AEs on the one hand and EMEs on the other to Small Open Economies (SOEs) of Mexico, Indonesia, Nigeria, and Turkey (MINT). We also explore the relative effect of these shocks on MINT compared to BRICS. We find that MINT countries generally responded to both AEs and EMEs' interest rate shocks, with EMEs exerting a stronger effect. Considering the MINT countries individually, we observed considerable differences in their response patterns, pointing towards heterogeneity. Finally, we also documented that while a shock to AEs and EMEs' interest rates boosts real GDP for MINT countries, the effect on BRICS is beggar-thy-neighbor. |
| Keywords: | International monetary policy; Spillovers; Advanced economies; Small open economies; MINT countries; Global VAR model |
| JEL: | E0 E5 E52 |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126271 |
| By: | Tanweer Akram; Mahima Yadav |
| Abstract: | This paper econometrically models the dynamics of Swedish government bond (SGB) yields. It examines whether the short-term interest rate has a decisive influence on long-term SGB yields, after controlling for other macroeconomic and financial variables, such as consumer price inflation, the growth of industrial production, the stock price index, the exchange rate of the Swedish krona, and the balance sheet of Sweden’s central bank, Sveriges Riksbank. It applies an autoregressive distributive lag (ARDL) approach using monthly data to model SGB yields across the Treasury yield curve. The results of the estimated models show that the short-term interest rate has a marked influence on the long-term SGB yield. Such findings reaffirm John Maynard Keynes’s view that the central bank’s monetary policy affects long-term government bond yields through the current short-term interest rate. It also shows that the interest rate behavior observed in Sweden is in concordance with empirical patterns discerned in previous studies related to government bond yields in both advanced countries and emerging markets. |
| Keywords: | Swedish Government Bonds; Bond Yields; Short-term Interest Rate; Inflation; Sveriges Riksbank; Sweden |
| JEL: | E43 E50 E58 E60 G10 G12 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1048 |
| By: | Laura Lisset Montiel-Orozco |
| Abstract: | This working paper contrasts the neo-Keynesian and post-Keynesian theories of monetary policy for an open economy, highlighting the irrelevance of the orthodox theory and the explanatory capacity of heterodoxy for an emerging economy such as Mexico. It focuses on the role of the central bank and the case of the Mexican currency during the economic recovery after the Great Lockout. In the first section, we criticize two proposals of the 3-Equation New-Keynesian model, concluding that, implicitly, both models reaffirm the extreme neutrality of money and the exchange rate in both the short and the long runs. In contrast, we analyze the post-Keynesian exchange rate model proposed by John T. Harvey (2009). In addition, we rely on the fundamentals of the heterodox school of thought such as the financial instability hypothesis of Hyman Minsky (1994) and the relevance of capital flows for the determination of the exchange rate and its implications for economic growth and prices by Jan Kregel (2008). Finally, the erratic behavior of the excessive appreciation of the Mexican Super Peso against the dollar after the recovery of the COVID-19 crisis and in the context of global risk is presented. |
| Keywords: | Monetary Policy; New Keynesian Economics; post-Keynesian Economics; Foreign Exchange Rate; Mexico |
| JEL: | E31 E52 E10 E12 F31 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1057 |
| By: | Tarron Khemraj |
| Abstract: | The Guyana government, from 2015 to 2021, accumulated a large overdraft on its central bank account. It owed this overdraft to a binding debt ceiling limit and fractious political environment that prevented an increase in the ceiling, allowing for the auctioning of Treasury bills to create the liquidity reflux necessary to refill the account. This paper studies the macroeconomic effects of reflux (one-sided sales of Treasury bills) and broken or incomplete reflux (base money expansion) by focusing on domestic inflation, the foreign exchange (FX) rate, and the quantity of FX traded in the local market. The empirical results suggest that the inflation rate is largely driven by foreign price and oil shocks. Nevertheless, the broken reflux adversely affected the local FX market by increasing the demand for foreign currencies, marginally depreciating the exchange rate, and slightly increasing the inflation rate. The latter finding has important implications for the enormous post-2020 budget spending since the discovery of offshore oil. However, reflux was found to have a stabilizing effect on the demand for FX and inflation. Granger predictability tests provide strong evidence that the government spends first from its central bank account before reflux occurs. Finally, the paper discusses a few novel institutional features of Guyana which resemble the monetary circuit framework (with government) of neo-chartalists. |
| Keywords: | neo-chartalism; fiscal-monetary nexus; government account overdraft; inflation; excess liquidity |
| JEL: | B52 E42 E51 E58 F41 H62 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1050 |
| By: | Filip Zahradka (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper investigates the effectiveness of macroprudential policy across different phases of macro-financial cycles. Utilizing a panel threshold vector autoregression (PT-VAR) model, the study evaluates the asymmetric impacts of capital-based and borrower-based regulatory tools under varying conditions. The empirical analysis covers 43 countries from 2004 to 2023 and incorporates key macro-financial indicators such as real GDP, policy interest rates, credit-to-GDP ratio, house prices, inflation, and exchange rates. The results can be summarized in three key findings. First, the effects of macroprudential tightening differ substantially between below- and above-threshold regimes, underscoring the importance of the phase of the macro-financial cycles. Second, capital-based measures are particularly effective during below-threshold phases, curbing credit growth, house prices, and inflation, though they are associated with a relatively significant decline in real GDP growth. Third, borrower-based measures are most effective during above-threshold phases of the business cycle, where they help to contain house prices and inflation pressures, while having only muted effects on real GDP growth. These findings emphasize the critical role of timing and instrument choice in macroprudential policy design and contribute to the growing literature by providing robust evidence on the cyclical nature of policy effectiveness, offering important insights for regulatory strategy. |
| Keywords: | Macroprudential policy, Macro-financial cycles, Panel threshold VAR, Systemic risk |
| JEL: | C33 E32 E44 E58 G21 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2025_20 |
| By: | Francesco Zezza |
| Abstract: | Following the Great Financial Crisis of 2008-9, there has been a shift in mainstream economic policy modeling toward "realism, " with dynamic stochastic general equilibrium (DSGE) models partly diverging from the representative agent framework, and large-scale, New-Keynesian structural models addressing real-financial interactions in greater detail. Still, the need for tractability of the former, and the lack of theoretical structure of the latter prevented the complete introduction of a modern--and complex--multi-sector/multi-asset financial system in policy models in use at central banks and treasuries. However, empirical models adopting the Stock-Flow Consistent (SFC) approach resolved most of these complications with a surge in the number of country models over the last few years. The present work lays out the main out-of-sample features of a quarterly SFC model of the Italian economy (MITA). |
| Keywords: | Empirical Stock-Flow Consistent Models; Monetary Policy; Fiscal Policy; Italy |
| JEL: | C54 E12 E17 E44 E58 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1063 |
| By: | Romain Baeriswyl; Pierrick Clerc; Camille Cornand |
| Abstract: | Modelling business cycle fluctuations and the nonneutrality of money is an ongoing challenge for macroeconomists. While the imperfect-information hypothesis developed by Phelps and Lucas in the 1970s had been abandoned in favour of the sticky-price hypothesis, a recent trend in the literature has put the imperfect-information hypothesis back on the agenda to explain business fluctuations and monetary nonneutrality. The success of this revival lies in the introduction of strategic uncertainty into a framework of heterogeneous information. The present paper presents this macroeconomic framework and provides a brief overview of recent advances in the literature. |
| Keywords: | Heterogeneous information, Strategic complementarities, Higher-order beliefs, Coordination, Beauty-contest, Monetary nonneutrality, Business cycle, Communication policy, Monetary policy |
| JEL: | C72 D83 E12 E32 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2025-16 |
| By: | Dirk Ehnts; Jussi Ora |
| Abstract: | In this paper, we discuss the balance sheet mechanics of the Swedish government. We examine spending, government bond purchases, and tax payments. As long as the Swedish central bank, which is created through Swedish laws, supports the Swedish central government, it cannot run out of money. The Swedish government therefore plays a large role in the Swedish economy. It can and should target full employment and price stability, bringing to bear its fiscal power. |
| Keywords: | Riksbank; Swedish crowns; public finance; money creation |
| JEL: | E62 B52 E12 |
| Date: | 2024–01 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1035 |
| By: | Rod Tyers (Economics Programme, University of Western Australia) |
| Abstract: | Motivation is offered for the scenario in which a large country, such as the US, imposing a general tariff, would make its citizens worse off. Notwithstanding revenue gains toward fiscal balance, standard theory anticipates contracting welfare. Incorporating monetary policy effects sees the potential for negative effects larger than the standard dead-weight efficiency losses if the monetary response is restrictive enough to target inflation. A global model is then used to simulate the effects a US general tariff, demonstrating that, while trading partners would be hurt by the tariff, the US economy would also contract, unless its own monetary policy were sufficiently expansionary to sustain the value of financial assets. Nonetheless, the tariff effects are also shown to be dwarfed by those of a proposed capital income tax break, which redirects investment to the US and would yield larger domestic gains and larger, more punitive, foreign losses. If trading partners retaliate in kind there is no welfare equilibrium under which the US adopts a general tariff only, though, under most criteria, the combination of tariffs and capital income tax relief turns out to be a dominant strategy for both the US and other regions. |
| Keywords: | general tariff, capital income tax break, monteary policy |
| JEL: | F3 F4 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:uwa:wpaper:25-08 |
| By: | Galiya Klinkova; Michael Grabinski |
| Abstract: | Business cycles (a periodic change of e.g. GDP over five to ten years) exist, but a proper explanation for it is still lacking. Here we extend the well-known NAIRU (non-accelerating inflation rate of unemployment) model, resulting in a set of differ-ential equations. However, the solution is marginal stable. Therefore we find a nat-ural sinusoidal oscillation of inflation and unemployment just as observed in busi-ness cycles. When speculation is present, the instability becomes more severe. So we present for the first time a mathematical explanation for business cycles. The steering of central banks by setting interest rates to keep inflation stable and low needs an overhaul. One has to distinguish between real monetary instability and the one caused naturally by business cycles. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.20000 |