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on Central Banking |
| By: | Rubén Fernández-Fuertes |
| Abstract: | I develop a multi-agent LLM framework that processes Federal Reserve communications to construct narrative monetary policy surprises. By analyzing Beige Books and Minutes released before each FOMC meeting, the system generates conditional expectations that yield less noisy surprises than market-based measures. These surprises produce theoretically consistent impulse responses where contractionary shocks generate persistent disinflationary effects and enable profitable yield curve trading strategies that outperform alternatives. By directly extracting expectations rather than cleaning surprises ex post, this approach demonstrates how multi-agent LLMs can implement narrative identification at scale without contamination in high-frequency measures. |
| Keywords: | Monetary Policy Shocks, Central Bank Communication, Large Language Models, FOMC, Federal Reserve, Natural Language Processing, High-Frequency Identification, Term Structure |
| JEL: | E52 E58 E43 G14 C45 C55 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp25257 |
| By: | Luigi Bocola; Alessandro Dovis; Kasper Jørgensen; Rishabh Kirpalani |
| Abstract: | Policymakers often cite the risk that inflation expectations might “de-anchor” as a key reason for responding forcefully to inflationary shocks. We develop a model to analyze this trade-off and to quantify the benefits of stable long-run inflation expectations. In our framework, households and firms are imperfectly informed about the central bank’s objective and learn from its policy choices. Recognizing this interaction, the central bank raises interest rates more aggressively after adverse supply shocks and accepts short-run output costs to secure more stable inflation expectations. The strength of this reputation channel depends on how sensitive long-run inflation expectations are to surprises in interest rates. Using high-frequency identification, we estimate these elasticities for emerging and advanced economies and find large negative values for Brazil. We fit our model to these findings and use it to quantify how reputation building motives affect monetary policy decisions, and the role of central bank's credibility in promoting macroeconomic stability. |
| JEL: | E52 E58 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34436 |
| By: | Anahit Matinyan (Central Bank of Armenia); Ardash Kilejian (Central Bank of Armenia); Gevorg Minasyan (Central Bank of Armenia); Aleksandr Shirkhanyan (Central Bank of Armenia) |
| Abstract: | Central banks increasingly rely on communication to anchor inflation expectations, yet evidence from developing economies is limited. This paper uses a randomized survey experiment in Armenia to examine how central bank communication affects inflation perceptions and expectations. The experiment tests three treatments: actual inflation, the Central Bank of Armenia’s (CBA) 4 percent target, and an unrelated numerical cue. Information on actual inflation improves perceptions and expectations, aligning them with observed inflation, while the CBA’s target influences expectations indirectly through perceptions. In contrast, the irrelevant numerical cue has no effect, underscoring the role of context and informational relevance. Comparing results with similar survey data from Armenia’s high-inflation episode in 2023 shows that target communication is more effective when inflation is elevated. Taken together, these findings offer new evidence on the effectiveness of central bank communication, emphasizing the importance of informational relevance and its dependence on the prevailing inflationary environment. The paper also contributes to the literature by showing how personal inflation experiences – anchored in salient “marker products†– shape perceptions and expectations in a developing economy context. |
| Keywords: | Monetary Policy, Inflation Expectations, Inflation Perceptions, Central Bank Communication, Randomized Controlled Trial, Anchoring |
| JEL: | E31 E52 D84 C93 E58 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ara:wpaper:wp-2025-02 |
| By: | Antoine Camous; Dmitry Matveev |
| Abstract: | In a multi-sector economy, conventional monetary policy alone is insufficient for achieving optimal economic stabilization. We examine whether a central bank can leverage private information about economic conditions to enhance policy effectiveness and improve outcomes. Our normative analysis emphasizes that the central bank should refrain from manipulating private beliefs and, if disclosure is optimal, should communicate information truthfully. However, such a communication policy is generally not credible, as even a benevolent policymaker faces sequential incentives to influence the beliefs of price-setting firms to reduce price dispersion and its negative welfare effects. In the absence of commitment, reputation becomes crucial in shaping these incentives. Specifically, a policymaker who strategically discloses information may secure significant stabilization gains during her term, but at the cost of long-term economic inefficiency. |
| Keywords: | Strategic Communication, Monetary Policy, Credibility, Reputation, Bayesian Learning |
| JEL: | D82 E52 E58 E61 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1013 |
| By: | Arce, Fernando; Bengui, Julien; Bianchi, Javier |
| Abstract: | In this paper, we revisit the scope for macroprudential policy in production economies with pecuniary externalities and collateral constraints. We study competitive equilibria and constrained-efficient equilibria and examine the extent to which the gap between the two depends on the production structure and the policy instruments available to the planner. We argue that macroprudential policy is desirable regardless of whether the competitive equilibrium features more or less borrowing than the constrained-efficient equilibrium. In our quantitative analysis, macroprudential taxes on borrowing turn out to be larger when the government has access to ex-post stabilization policies. |
| Keywords: | Macroprudential policy;Overborrowing;Underborrowing |
| JEL: | E58 F31 F32 F34 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14343 |
| By: | Gabriel Montes-Rojas; Fernando Toledo; Nicol\'as Bertholet; Kevin Corfield |
| Abstract: | We study optimal monetary policy when a central bank maximizes a quantile utility objective rather than expected utility. In our framework, the central bank's risk attitude is indexed by the quantile index level, providing a transparent mapping between hawkish/dovish stances and attention to adverse macroeconomic realizations. We formulate the infinite-horizon problem using a Bellman equation with the quantile operator. Implementing an Euler-equation approach, we derive Taylor-rule-type reaction functions. Using an indirect inference approach, we derive a central bank risk aversion implicit quantile index. An empirical implementation for the US is outlined based on reduced-form laws of motion with conditional heteroskedasticity, enabling estimation of the new monetary policy rule and its dependence on the Fed risk attitudes. The results reveal that the Fed has mostly a dovish-type behavior but with some periods of hawkish attitudes. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.24362 |
| By: | Nicolas Fanta (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | We ask whether ECB communication outside monetary policy meeting days moves the EUR/USD exchange rate within minutes. We build an event study on one-minute prices and a Reuters-based corpus of 1, 868 statements coded as dovish, neutral, or hawkish from 2008 to 2016. Identification combines strict exclusion windows for macro and central bank confounders, time-of-day–matched controls, and Monte Carlo resampling to test sensitivity. We also open four splits that theory suggests may matter: President, conventional versus unconventional topics, Purdah versus outside the pre-meeting window, and the regime before and during the zero lower bound. Across the full sample and every split, price responses are small and short-lived. Cumulative abnormal returns remain within a few basis points by t=+20, and scattered significant minutes are not sequential. Volatility reacts only modestly. After intraday seasonality adjustment in the matched-difference design, dovish items are associated with a brief decline in volatility in the first half hour, while neutral and hawkish items are statistically similar to controls. The contribution is twofold. First, we provide a comprehensive intraday assessment of ECB communication outside meeting days for the EUR/USD market over a consistently coded 2008–2016 window. Second, we deliver a transparent identification template for high-frequency communication research by combining time-of-day–matched controls with systematic resampling. Together, the results indicate that such communication does not generate lasting directional moves; any impact appears as small and short-lived changes in realised volatility. |
| Keywords: | central bank communication, monetary policy, ECB, exchange rates, AI, event study |
| JEL: | E52 E58 F31 C55 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2025_23 |
| By: | Gáti, Laura; Handlan, Amy |
| Abstract: | We model how a central bank communicates its noisy forecasts (forward guidance) while taking into account its own uncertainty (confidence) and the public’s perception of the bank’s uncertainty (reputation for confidence). This creates a mismatch between the public and central bank’s interpretation of the bank announcement which induces the bank to communicate with partial transparency and deliberate imprecision. Moreover, with higher confidence (lower reputation) announcements are more precise. With text data from internal Fed documents and newspapers, we find communication patterns are largely consistent with the model except the Fed’s communication strategy underreacts to reputation compared to the model. JEL Classification: E52, E58, C49 |
| Keywords: | cheap talk, communication, forward guidance, reputation, text analysis |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253141 |
| By: | unal, umut |
| Abstract: | This study estimates Turkey’s monetary policy reaction function over 2005–2025 using quarterly data and a suite of OLS, ARDL, and ECM specifications. The results reveal pronounced interest-rate smoothing and a sub-Taylor inflation semi-elasticity, while output gaps, unemployment indicators, and real exchange rate pressures contribute little explanatory power once persistence is controlled. Rolling regressions uncover regime dependence. Responsiveness was moderate under early inflation targeting, strengthened during the 2018 crisis tightening, collapsed under the post-2021 heterodox easing, and has only partially recovered with the return to orthodoxy after mid-2023. Formal stability diagnostics, including CUSUM, Quandt–Andrews, Chow, and Bai–Perron procedures, locate structural breaks clustered around 2018 and 2021, delineating three regimes: pre-2018 experimentation, crisis-induced orthodoxy from 2018 to 2021, and post-2021 heterodoxy. Across specifications, the long-run response to inflation remains below one for one and the speed of error correction is slow, implying weak tethering to a rule-like anchor. Policy implications are direct. Durable disinflation requires a transparent reaction function with more than unit inflation pass-through, faster adjustment, and institutional commitments that prevent episodic reversals and rebuild credibility. |
| Keywords: | Taylor Rule, VAR, ARDL, ECM |
| JEL: | E31 E5 E52 E58 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126223 |
| By: | Joerg Bibow |
| Abstract: | For the past hundred years or more, payments have been primarily associated with banking, and banking as we know it today--being the result of many centuries of evolution--features a bundling of (at least) three main lines of business: lending, deposit-taking, and payment services. In the past 15 years or so, banks have come under severe competition as providers of payment services. Will "banking on payments" become outmoded and payments untethered from banking, or will payments still have a place in the future of banking? This paper sets out to explore this question and to address the following two related issues. First, what are the likely consequences (especially for the financing of growth and the provision of liquidity in the form of bank deposits) of the apparent "unbundling" of the traditional connections in banking between lending, deposit-taking, and payment services? Second, what are the implications of the evolution (or revolution) of money, payments, and banking for public policy, monetary theory, and the theory of monetary policy? |
| Keywords: | banking; money; payments; financial intermediation; bank regulation; monetary policy |
| JEL: | B22 E12 E42 E58 G21 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1091 |
| By: | Garriga, Ana Carolina |
| Abstract: | This paper investigates the existence and extent of a gender gap in satisfaction with the Bank of England’s performance in controlling inflation. Descriptive data and previous research report gender gaps in attitudes towards monetary institutions and outcomes. Much of this research, however, disregards potential biases arising from women’s lower propensity to express an opinion, and to answer “don’t know” instead. Using the Bank of England’s Inflation Attitudes survey (2001-2025), and modelling selection into substantive answers, I find a statistically significant –yet, substantively small and not persistent– gender gap in satisfaction with the Bank of England. This gender gap remains after controlling for inflation perception and monetary knowledge. I also find that women do not overestimate inflation, and they do not seem to “punish” more harshly the Bank for high inflation or deflation. Therefore, variance in this gender gap can be attributed to a different propensity to report more “extreme” opinions, and to different reactions to high inflation or deflation. These findings highlight gendered dimensions for the understanding of monetary institutions and finance, contributing to the literature on satisfaction with the performance of institutions. |
| Keywords: | Bank of England; central banks; gender gap; inflation; public opinion; satisfaction |
| JEL: | E03 E39 E58 E59 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126113 |
| By: | Lala AlAsadi; Oluwasegun Bewaji; Aayush Gugnani; Tarush Gupta; Ronald Heijmans |
| Abstract: | This paper investigates the volatility dynamics of USD-backed stablecoins, challenging the assumption of inherent stability. Using a multi-level econometric framework, including GARCH, SVAR, and TVP-VAR models, we analyze how stablecoins respond to macro-financial shocks such as monetary policy changes, market uncertainty, and crypto volatility. Results show that USDC and TUSD are highly sensitive to external disturbances, while USDT and DAI remain relatively resilient. Stablecoins primarily absorb volatility but become more connected to systemic risk during crises. Frequency-domain analysis reveals short-term spillovers dominate during stress events, with long-term integration increasing post-2021. The findings highlight the heterogeneous nature of stablecoins and their growing ties to traditional finance, underscoring the need for tailored regulation and ongoing monitoring to mitigate systemic vulnerabilities. |
| Keywords: | stablecoins; volatility; financial markets; monetary policy |
| JEL: | F31 G14 E42 E58 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:846 |
| By: | Kaito Takano; Masanori Hirano; Kei Nakagawa |
| Abstract: | Accurately forecasting central bank policy decisions, particularly those of the Federal Open Market Committee(FOMC) has become increasingly important amid heightened economic uncertainty. While prior studies have used monetary policy texts to predict rate changes, most rely on static classification models that overlook the deliberative nature of policymaking. This study proposes a novel framework that structurally imitates the FOMC's collective decision-making process by modeling multiple large language models(LLMs) as interacting agents. Each agent begins with a distinct initial belief and produces a prediction based on both qualitative policy texts and quantitative macroeconomic indicators. Through iterative rounds, agents revise their predictions by observing the outputs of others, simulating deliberation and consensus formation. To enhance interpretability, we introduce a latent variable representing each agent's underlying belief(e.g., hawkish or dovish), and we theoretically demonstrate how this belief mediates the perception of input information and interaction dynamics. Empirical results show that this debate-based approach significantly outperforms standard LLMs-based baselines in prediction accuracy. Furthermore, the explicit modeling of beliefs provides insights into how individual perspectives and social influence shape collective policy forecasts. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.02469 |
| By: | Arce, Fernando; Bengui, Julien; Bianchi, Javier |
| Abstract: | We propose a macroprudential theory of foreign reserve accumulation that can rationalize the secular trends in public and private international capital flows. In middle-income countries, the increase in international reserves has been associated with elevated private capital inflows, both in the aggregate and in the cross-section, and economies with a more open capital account have accumulated more reserves. We present an open economy model of financial crises that is consistent with these features. We show that optimal reserve management policy leans against the wind, raising gross private borrowing while improving the net foreign asset position and reducing exposure to crises. |
| Keywords: | Macroprudential policy;International reserves;Financial Crises;Gross capital flows |
| JEL: | E58 F31 F32 F34 F51 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14336 |
| By: | Nicolas M. Burotto |
| Abstract: | The author develops a dynamic macroeconomic model of a small open economy to identify two key vulnerabilities that prevent emerging markets from fully integrating into global markets: high financial integration costs and their low position in the international monetary hierarchy. These vulnerabilities make them susceptible to financial traps, jeopardize debt sustainability, and increase volatility. He shows that the weak response of capital flows to interest rates further limits the ability of monetary policy to stabilize the system. As a result, these economies have restricted policy options and often resort to mimicking external monetary policy strategies in times of financial distress. |
| Keywords: | external debt sustainability; currency hierarchy; financial trap; balance of payments constraint; subordinated integration |
| JEL: | E12 E32 E44 F34 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1087 |
| By: | Mr. Giovanni Melina; Stefania Villa |
| Abstract: | This paper investigates the macroeconomic implications of the rising wave of investment in information and communication technology (ICT)—including AI-related hardware and software—in the U.S. economy. The analysis uses a structural macroeconomic model that treats ICT as a distinct type of capital and explores the degree to which ICT complements or substitutes for labor. The findings reveal three key insights. First, labor and ICT have historically been only moderately substitutable. Second, technological innovations that make it easier to turn ICT investment into productive capital act like demand shocks, boosting output and inflation. Third, given the uncertainty surrounding the interaction between AI-driven ICT capital and labor, the paper presents scenarios of possible trajectories for ICT investment under alternative assumptions. When ICT tends to complement labor, the economy experiences strong gains in output, but also inflationary pressure; the natural interest rate increases, requiring tighter monetary policy. Conversely, if ICT tends to replace labor, the same ICT investment path warrants a looser monetary policy stance. |
| Keywords: | Artificial Intelligence; Generative AI; ICT investment; Natural rate of interest; Monetary policy; DSGE modeling |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/224 |
| By: | Lekha S. Chakraborty; C. Prasanth |
| Abstract: | Using high-frequency macro data from a financially deregulated regime, this paper examines whether there is any evidence of financial crowding out in India. The macroeconomic channel through which financial crowding out occurs is the link between the fiscal deficit and the interest rate determination. The results revealed that the fiscal deficit does not significantly determine interest rates in the post-pandemic monetary policy stance in India. The long-term interest rates were strongly influenced by the short-term interest rates, a fact which reinforces that the term structure is operating in India. The results further revealed that long-term interest rates were also positively influenced by capital flows and inflation expectations, while inversely impacted by the money supply. These inferences have policy implications on the fiscal and monetary policy coordination in India, where it is crucial to analyze the effect of a high-interest-rate regime on public corporate investment. Our results showed that public infrastructure investment and rate of interest are significant determinants of private corporate investment. Our results counter the popular belief that deficits determine interest rates in the context of emerging economies and "crowd out" private corporate investment. |
| Keywords: | fiscal deficit; interest rate determination; asymmetric vector autoregressive model; financial crowding out |
| JEL: | E62 C32 H6 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1085 |
| By: | Yuji Sakurai |
| Abstract: | This paper presents a comprehensive framework for determining haircuts on collateral used in central bank operations, quantifying residual uncollateralized exposures, and validating haircut models using machine learning. First, it introduces four haircut model types tailored to asset characteristics—marketable or non-marketable—and data availability. It proposes a novel model for setting haircuts in data-limited environment using a satallite cross-country model. Key principles guiding haircut calibration include non-procyclicality, data-drivenness, conservatism, and the avoidance of arbitrage gaps. The paper details model inputs such as Value-at-Risk (VaR) percentiles, volatility measures, and time to liquidation. Second, it proposes a quantitative framework for estimating expected uncollateralized exposures that remain after haircut application, emphasizing their importance in stress scenarios. Illustrative simulations using dynamic Nelson-Siegel yield curve models demonstrate how volatility impacts exposure. Third, the paper explores the use of Variational Autoencoders (VAEs) to simulate stress scenarios for bond yields. Trained on U.S. Treasury data, VAEs capture realistic yield curve distributions, offering an altenative tool for validating VaR-based haircuts. Although interpretability and explainability remain concerns, machine learning models enhance risk assessment by uncovering potential model vulnerabilities. |
| Keywords: | Haircuts; Uncollateralized Exposure; Machine Learning |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/225 |
| By: | Antoine Camous; Alejandro Van der Ghote |
| Abstract: | Historical accounts of financial crises emphasize the joint contribution of extrapolative beliefs and leveraged risk-taking to financial instability. This paper proposes a simple macro-finance framework to evaluate these views. We find a novel interplay between non-rational extrapolation and investment risk-taking that amplifies financial instability relative to a rational expectation benchmark. Furthermore, the analysis provides guidance on the design of cyclical policy interventions. Specifically, relative to a rational expectations benchmark, extrapolative expectations command tighter financial regulation, irrespective of whether the regulator shares these expectations. |
| Keywords: | Non-Rational Expectations, Financial Stability and Regulation |
| JEL: | E44 E71 G01 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1009 |
| By: | Strachman, Eduardo; Souza Fraga, Jefferson; Guidorzzi Girotto, Vitor |
| Abstract: | This chapter redefines monetary and fiscal policies through the lens of public goods, arguing that their non rival and economy wide benefits require coordinated management to foster inclusive economic growth and employment. Drawing on post Keynesian theory, it shows how money, as a social technology, and fiscal policy, through infrastructure and investment programmes, shape expectations, stimulate private investment, and enhance welfare. Integrating theoretical insights with historical and contemporary evidence, including the COVID 19 policy response, the chapter underscores the importance of strategic coordination to overcome uncertainty, stabilize long term investment and strengthen macroeconomic resilience. It challenges conventional approaches that treat policies in isolation, advocating instead their design as complementary instruments for sustainable development and shared prosperity. |
| Keywords: | Fiscal policy; Infrastructure investment; Monetary policy; Policy coordination; Post Keynesian economics; Public goods. |
| JEL: | E50 E60 H11 H41 H60 |
| Date: | 2025–07–19 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126340 |
| By: | Itskhoki, Oleg; Mukhin, Dmitry |
| Abstract: | Trade wars and financial sanctions are again becoming an increasingly common part of the international economic landscape, and the dynamics of the exchange rate are often used in real time to evaluate the effectiveness of sanctions and policy responses. We show that sanctions limiting a country’s exports or freezing its assets depreciate the exchange rate, while sanctions limiting imports appreciate it, even when both types of policies have exactly the same effect on real allocations, including household welfare and government fiscal revenues. Beyond the direct effect from sanctions, increased precautionary savings in foreign currency also depreciate the exchange rate when they are not offset by the sale of official reserves or financial repression of foreign-currency savings. We show that the dynamics of the ruble exchange rate following Russia’s invasion of Ukraine in February 2022 are quantitatively consistent with the combined effects of these forces calibrated to the observed sanctions and government policies. We evaluate the associated welfare, fiscal and inflationary consequences for both Russia and the coalition of Western countries. |
| Keywords: | trade sanctions; financial sanctions; financial repression; FX market |
| JEL: | E50 F31 F32 F41 F51 |
| Date: | 2025–10–25 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129422 |