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on Central Banking |
| By: | Emmanuel Caiazzo (University of Naples Parthenope.); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR.) |
| Abstract: | In this paper, we model a novel trade-off between price stability and financial stability in central banking. This trade-off arises from the interaction between the monetary policy interest rate, the central bank rescue interventions, and the degree of bank illiquidity. We characterize and compare the equilibrium outcomes, in terms of monetary policy, rescue policy, and bank investment decisions, that arise under a strict inflation-targeting mandate with those that instead emerge under a dual mandate, in which the central bank is required to account for both the costs of inflation and the costs associated with financial instability. Our analysis suggests that an inflation-targeting mandate may be advisable when the economy is subject to frequent and severe inflationary shocks that would require substantial policy rate adjustments, or when liquidity risks in the banking system are neither too high nor too low. Otherwise, a mandate that explicitly requires the central bank to take financial stability into account, even at the cost of relaxing strict inflation control, may be preferable. |
| Keywords: | Central banking; Inflation targeting; Financial stability; Rescue policies |
| JEL: | G01 G21 G28 |
| Date: | 2025–11–20 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:767 |
| By: | Catalin Dumitrescu |
| Abstract: | This study explores the potential impact of introducing a Central Bank Digital Currency (CBDC) on financial stability in an emerging dual-currency economy (Romania), where the domestic currency (RON) coexists with the euro. It develops an integrated analytical framework combining econometrics, machine learning, and behavioural modelling. CBDC adoption probabilities are estimated using XGBoost and logistic regression models trained on behavioural and macro-financial indicators rather than survey data. Liquidity stress simulations assess how banks would respond to deposit withdrawals resulting from CBDC adoption, while VAR, MSVAR, and SVAR models capture the macro-financial transmission of liquidity shocks into credit contraction and changes in monetary conditions. The findings indicate that CBDC uptake (co-circulating Digital RON and Digital EUR) would be moderate at issuance, amounting to around EUR 1 billion, primarily driven by digital readiness and trust in the central bank. The study concludes that a non-remunerated, capped CBDC, designed primarily as a means of payment rather than a store of value, can be introduced without compromising financial stability. In dual currency economies, differentiated holding limits for domestic and foreign digital currencies (e.g., Digital RON versus Digital Euro) are crucial to prevent uncontrolled euroisation and preserve monetary sovereignty. A prudent design with moderate caps, non remuneration, and macroprudential coordination can transform CBDC into a digital liquidity buffer and a complementary monetary policy instrument that enhances resilience and inclusion rather than destabilising the financial system. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.13384 |
| By: | Leef H. Dierks (Lübeck University of Applied Sciences, Germany) |
| Abstract: | Climate change, political measures to reduce greenhouse gas emissions and the transition to a carbon-neutral economy have a significant economic impact. In addition to a dampening effect on aggregate demand and supply, the internalisation of negative externalities will likely in-crease production costs and – in the case of a pass-through to consumers – ultimately the in-flation rate. To the extent that this affects the (SEACEN member) central bank’s objectives of price and financial stability, climate-fuelled economic developments might impact monetary policy – with several central banks resorting to a Green Monetary Policy. This paper identifies its common elements and argues that event though fiscal policies are first best, monetary poli-cy adapts where climate risks impair price and/or financial stability over the policy horizon. Monetary policy has a subsidiary role that operates through its mandate; where climate risks affect inflation and transmission, instruments may be adapted without replacing fiscal policy. The greatest contribution SEACEN member central banks can make to the green transfor-mation, however, is to ensure price stability. |
| Keywords: | green monetary policy, green finance, financial stability, market neutrality, tilting |
| JEL: | E31 E42 E52 E58 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:sea:wpaper:wp58 |
| By: | Carlos Madeira |
| Abstract: | Using hand-collected data with biographical information on central bank governors and board members in over 200 countries, I obtain experience-based forecasts for GDP growth and inflation based on an adaptive learning model estimated from their lifetime macroeconomic data. I show life experience influences the monetary policy rates, even after accounting for other macroeconomics observables in the empirical Taylor rule. The role of personal experience is lower in advanced economies and for central bankers with treasury experience. Furthermore, life experience influences the tone of speeches for monetary policy, financial stability and climate concerns. Weather disasters experience reduces climate concerns and NGFS membership. |
| Keywords: | monetary policy, fiscal policy, experience effects, forecasting, learning, beliefs |
| JEL: | D83 D84 E37 E50 E60 E70 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1304 |
| By: | José García Revelo; Jean-Guillaume Sahuc; Grégory Levieuge |
| Abstract: | The European Central Bank and the Federal Reserve introduced new policy instruments and made changes to their operational frameworks to address the global financial crisis (2008) and the Covid-19 pandemic (2020). We study the macroeconomic effects of these monetary policy evolutions on both sides of the Atlantic Ocean by developing and estimating a tractable two-country dynamic stochastic general equilibrium model. We show that the euro area and the United States faced shocks of different natures, explaining some asynchronous monetary policy measures between 2008 and 2023. However, counterfactual exercises highlight that all conventional and unconventional policies implemented since 2008 have appropriately (i) supported economic growth and (ii) maintained inflation on track in both areas. The exception is the delayed reaction to the inflationary surge during 2021-2022. Furthermore, exchange rate shocks played a significant role in shaping the overall monetary conditions of the two economies. |
| Keywords: | Monetary Policy, Real Exchange Rate Dynamics, Two-Country DSGE Model, Bayesian Estimation, Counterfactual Exercises |
| JEL: | E32 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1018 |
| By: | Srichander Ramaswamy (The South East Asian Central Banks (SEACEN) Research and Training Centre) |
| Abstract: | Many central banks are assessing the benefits that a wholesale central bank digital currency (wCBDC) could bring to the financial system. This assessment is being driven by the rise of tokenised assets and the need for efficient and safe settlement assets in these markets. While wCBDCs can facilitate settlements on distributed ledger technology platforms for such assets, some central banks are of the view that existing systems (like the RTGS) can achieve similar outcomes through application programming interfaces without the need to introduce a new central bank liability. Beyond settlement of tokenised assets, wCBDC is also being seen having the potential in offering many benefits to cross-border payments by reducing settlement times and transaction costs. That is because existing arrangements employing correspondent banking models introduce frictions by having multiple intermediaries that introduce counterparty risk and longer settlement times. They are also costly as they need pre-funded nostro accounts. In theory, wCBDCs can eliminate the need for correspondent banks by allowing direct settlements between central banks, but this raises questions about central banks' willingness to assume correspondent roles. Alternative arrangements using automated market makers can also facilitate foreign exchange trading using wCBDCs, but their effectiveness and cost efficiency in less liquid currency pairs remain uncertain. The exploration of wCBDCs should, therefore, consider the existing capabilities of the financial system and the potential for private sector solutions to meet market needs effectively. |
| Keywords: | Central banks, digital currency, cross-border payment, correspondent bank, tokenisation, large value payments. |
| JEL: | E42 E58 G21 G28 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:sea:wpaper:wp57 |
| By: | Mrs. Marina Conesa Martinez; Elizabeth Kasekende; Ms. Nan Li; Adam Mugume; Samuel Musoke; Cedric I Okou; Mr. Andrea F Presbitero |
| Abstract: | This paper examines the effectiveness of monetary policy transmission in developing countries using loan-level data from Uganda’s credit registry. We analyze more than 632, 000 household loans issued by all commercial banks between 2017 and 2023, a period marked by significant policy rate fluctuations. We find that household credit, which accounts for over 50 percent of new loan accounts, responds to monetary policy: rate hikes are followed by higher lending rates and reduced loan size and maturity. Controlling for credit demand with time-varying borrower-group fixed effects, we find stronger transmission among banks with lower liquidity and capital, and those holding more government securities. The effects are more pronounced for fixed-rate loans than for floating-rate loans. In general, our results support the presence of a bank lending channel in Uganda, similar to what is observed in more advanced economies. |
| Keywords: | Monetary Policy Transmission; Credit Registry; Bank Lending Channel; Bank Credit; Developing Countries |
| Date: | 2025–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/242 |
| By: | Sylvérie Herbert; Paul Hubert; Mathias Lé |
| Abstract: | This paper investigates when monetary policy announcements matter for asset price dynamics. We identify a fundamental heterogeneity in FOMC statements based on the underlying nature of information conveyed about future policy. Using a simple but novel classification, we identify meetings that convey substantial information about uncertainty surrounding future policy. These statements – one-third of the total – drive most, if not all, of the effects of monetary policy on long-term interest rates and account for a large fraction of their variation on these days. In contrast, directional statements about the policy stance – half of all meetings – have no effect on long-term rates but do affect short-term rates and stock prices. The strong effects on long-term rates stem from term premium adjustments rather than expected future short-term rates, consistent with investors’ updating their assessment of higher-order moments of future policy developments. Our classification resolves why policy announcements explain little variance in long-term rates despite driving their dynamics over time. |
| Keywords: | Monetary Policy Surprises, Term Structure, Identification, Policy Signals |
| JEL: | E43 E52 E58 G12 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1017 |
| By: | Mountford, Andrew |
| Abstract: | Restrictions on the contemporaneous effects matrix used to identify fundamental shocks in a structural VAR, also determine the mapping from the structural constant terms to the reduced form constant terms. In some models one will have priors about these structural constant terms and these should therefore be included in a Bayesian estimation procedure. We illustrate the significance of this using a standard 3 variable VAR estimated in Baumeister and Hamilton (2018). We show that imposing priors over the structural constant terms can lead to a more intuitive estimated monetary policy rule and a larger role for monetary policy in describing the evolution of the data, particularly for inflation. |
| Keywords: | Vector Autoregressions, Historical Decompositions, Monetary Policy |
| JEL: | C32 E00 E50 |
| Date: | 2025–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126806 |
| By: | Martin Brown (Study Center Gerzensee and University of St. Gallen); Daniel Hoechle (University of Applied Sciences and Arts Northwestern Switzerland); Lizet Alejandra Perez Cortes (University of St. Gallen); Markus Schmid (University of St. Gallen, Swiss Finance Institute (SFI), and European Corporate Governance Institute (ECGI)) |
| Abstract: | This paper studies the transmission of monetary policy to household consumption through wealth effects in a small open economy. As a natural experiment, we exploit the 2015 Swiss franc shock, triggered by the Swiss National Bank’s unexpected removal of the euro exchange rate floor. Using granular administrative data from a retail bank, we document substantial consumption responses by households with portfolio exposures to the policy shock. We show that a 1% valuation loss on financial assets is associated with a 0.7% reduction in total spending in the quarter following the shock. This effect is driven by large-ticket spending rather than out-of-pocket spending, attenuates rapidly over time, and depends strongly on the magnitude of the valuation loss. Our results provide direct evidence of a sizeable, immediate, and short-lived wealth channel of monetary policy. They underscore the role of exchange-rate-induced asset revaluations in shaping consumption dynamics in open economies. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:szg:worpap:2506 |
| By: | Lewis, Vivien; Puangjit, Sirikorn |
| Abstract: | Geopolitical risk (GPR) shocks that trigger the imposition of sanctions tend to lower output and raise inflation in the sanctioned country. We develop a three-equation small open economy New Keynesian model where GPR shocks are modeled as negative productivity shocks and sanctions manifest as import tariffs in response to GPR increases. We calibrate the GPR process, sanction rule, and interest rate rule to match the observed dynamics of the GPR index, output, inflation, and the policy rate in Russian data. The sanction response to GPR allows the resulting model to capture the empirical impulse responses well. Additionally, we find that Russia's monetary policy rule is more accommodative than prescribed by the standard Taylor rule. While this may reflect policy preferences, recent theoretical results indicate that such a policy stance may be optimal when sanctions act as cost-push shocks that shift the Phillips Curve. |
| Keywords: | geopolitical risk, monetary policy, New Keynesian model, sanctions |
| JEL: | E31 E32 E58 F42 F51 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:331886 |
| By: | Iñaki Aldasoro; Ajit Desai |
| Abstract: | Using prompt-based experiments with ChatGPT’s reasoning model, we evaluate whether a generative artificial intelligence (AI) agent can perform high-level intraday liquidity management in a wholesale payment system. We simulate payment scenarios with liquidity shocks and competing priorities to test the agent’s ability to maintain precautionary liquidity buffers, dynamically prioritize payments under tight constraints, and optimize the trade-off between settlement speed and liquidity usage. Our results show that even without domain-specific training, the AI agent closely replicates key prudential cash-management practices, issuing calibrated recommendations that preserve liquidity while minimizing delays. These findings suggest that routine cash-management tasks could be automated using general-purpose large language models, potentially reducing operational costs and improving intraday liquidity efficiency. We conclude with a discussion of the regulatory and policy safeguards that central banks and supervisors may need to consider in an era of AI-driven payment operations. |
| Keywords: | Digital currencies and fintech; Financial institutions; Financial services; Financial system regulation and policies; Payment clearing and settlement systems |
| JEL: | A12 C7 D83 E42 E58 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-35 |
| By: | Bing Zhu; Dorinth van Dijk; Dennis Bonam; Gavin Goy |
| Abstract: | The effectiveness of unconventional monetary policies (UMPs) and their international spillovers to global asset prices and capital flows have dominated policy discussions. This paper is the first to document the effect of UMP on global commercial real estate (CRE) markets. Even though the size of CRE as asset class is substantial, the subject has received very limited interest in research studying the effect of monetary policy. We empirically find that a domestic UMP significantly impacts US CRE pricing through credit supply. We additionally document persistent price effects on foreign non-US CRE markets. This effect largely stems from global CRE market spillovers. In fact, global CRE market spillovers are found to amplify the original domestic UMP effect on US CRE prices. We aim to enrich our empirical findings with a two-country DSGE-model that includes CRE pricing. |
| Keywords: | commercial real estate; International Spillovers; Quantitative Easing; Unconventional Monetary Policy |
| JEL: | R3 |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:arz:wpaper:eres2025_180 |
| By: | Buchholz, Manuel; Löffler, Axel; Sigel, Patrick |
| Abstract: | A key element of the Basel III reforms are stricter capital requirements, which have been im- plemented with varying degrees of stringency across jurisdictions. We examine the impact of these requirements on bank profitability in the US and Europe between 2019 and 2024. We find no evidence that higher capital ratios or requirements negatively affect profitability. However, our results indicate that international differences in capital requirements can influence the profitability of banks that operate globally: Since capital requirements in a jurisdiction apply only to domestic banks and foreign subsidiaries, foreign banks operating through cross-border or branch-based activities may gain a competitive advantage. Nevertheless, the effect appears to be limited to the subsample of German significant institutions (SIs). Moreover, our analysis of policy scenarios based on the estimated spillover effects suggests that lowering capital requirements is not an effective strategy for improving bank profitability and could even be detrimental if reciprocated by foreign jurisdictions. |
| Keywords: | Bank capital, capital requirements, bank profitability |
| JEL: | G15 G21 G28 G32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:331885 |
| By: | Serkan Arslanalp; Barry Eichengreen; Chima Simpson-Bell |
| Abstract: | We document some underappreciated aspects of the recent evolution of the international reserve system. These include the growing share of gold in global central bank reserves, the continuing emergence of nontraditional reserve currencies, and the stalling share of renminbi in reserves. These trends are consistent with our findings in our earlier papers. In addition we look to the future, pondering the potential implications of dollar-linked stablecoins, the expansion of the BRICS grouping of countries and their de- dollarization plans, the development of blockchain-based platforms such as Project mBridge for the direct exchange of central bank digital currencies, and questions about the dollar’s safe-haven status. |
| JEL: | F0 F33 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34478 |
| By: | boughabi, houssam |
| Abstract: | The paper explains how inflation, monetary policy, and fiscal interventions interacted in Ghana from 2005 to 2014. A discrete-time macroeconomic model with money supply, taxation, household consumption, GDP per capita, and price adjustments as variables has been developed. The paper uses FIGARCH and GARCH models to investigate the volatility of inflation to decide if it has long-memory properties. The empirical findings show that the fractional differencing parameter $d = 0$ (Hurst exponent $H = 0.5$), which means that there is no persistent long-range dependence in inflation volatility. Hence, a standard GARCH(1, 1) model is sufficient to describe short-term volatility dynamics, and shocks to conditional variance occur immediately but subside rapidly. Besides that, the research determines a monetary-fiscal neutrality threshold, which highlights the equilibrium where income growth balances the inflationary pressures; this threshold is assessed macroeconomically into general prices and compared to actual general prices to evaluate its validity. The results indicate that inflation in Ghana during this period is mainly of short-memory nature, thus reaffirming the role of short-term monetary and fiscal operations in price stabilization, and confirming the successful validation of the macroeconomic neutrality threshold linking income growth and price stability. |
| Keywords: | Inflation volatility, statistical modelling, monetary transmission, threshold modeling, Ghanaian economy |
| JEL: | C32 E31 E37 E44 O55 |
| Date: | 2025–10–29 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126757 |
| By: | Artta, Katja (Research Department, Central Bank of Sweden); Nessén, Marianne (Monetary Policy Department, Central Bank of Sweden); Vredin, Anders (Monetary Policy Department, Central Bank of Sweden); Savoia, Ettore (Research Department, Central Bank of Sweden) |
| Abstract: | We examine how central bank foreign exchange (FX) operations affect nominal exchange rates by exploiting two large operations by Sveriges Riksbank: foreign currency purchases during 2021–2022 and domestic Swedish krona (SEK) purchases—that is, FX forward sales— during 2023–2024. Using daily data and local projections, we identify unanticipated operation shocks to the SEK against the euro (EUR) and the U.S. dollar (USD). On average, we observe sign consistency—depreciation during FX purchases and appreciation during SEK purchases. Three main results emerge: (i) effects unfold gradually but fade quickly, becoming statistically insignificant after about ten trading days; (ii) they are regimedependent, with FX purchases inducing larger depreciations and domestic currency purchase yielding smaller, delayed appreciations; and (iii) FX purchases generate long-run (11-60 days) currency-specific effects, with a stronger SEK depreciation against the EUR relative to the USD. However, results are more uniform across currencies in the short run (1–10 days) and throughout the domestic currency purchase period. |
| Keywords: | Foreign exchange operations; Local Projections; exchange rates |
| JEL: | E58 F31 F33 |
| Date: | 2025–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0456 |
| By: | Markus Brunnermeier; Jonathan Payne |
| Abstract: | This paper examines how digital payment ledgers operated by BigTech platforms and central banks can expand uncollateralized credit. However, policymakers face a trilemma-no system can simultaneously achieve efficient credit enforcement, limit rent extraction, and preserve user privacy. Monopolistic platforms enforce repayment but compromise privacy and extract rents; public or privacy-respecting ledgers protect users but weaken enforcement; platform co-opetition or programmable public ledgers balance enforcement and rents, but only by reducing privacy. |
| Keywords: | ledgers, platform money, CBDC, currency competition, private currencies, industrial organisation of payments, platforms, big tech, trilemma |
| JEL: | E42 E51 G23 L51 O31 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1306 |
| By: | Takushi Kurozumi; Yu Sugioka; Willem Van Zandweghe |
| Abstract: | Research in labor economics has documented evidence of labor market monopsony. Nevertheless, macroeconomic studies routinely consider households' wage-setting under monopolistic competition. We introduce firms' wage-setting under monopsonistic competition in an otherwise standard sticky-price model. This substantially alters the implications for wage dynamics, welfare, and policy. Compared to its counterpart model with monopolistic wage-setting, our model indicates that the wage Phillips curve includes the wage markdown as its main driver and has a steeper slope generated by strategic substitutability in wage-setting, and that the second-order approximation to households' utility functions is of the same form but with a smaller welfare weight on wage growth variability. Consequently, a welfare-maximizing policy features stabilizing inflation rather than wage growth. |
| Keywords: | labor market monopsony; wage markdown; strategic substitutability; staggered wage-setting; timeless-perspective policy; inflation stabilization |
| JEL: | E24 E52 J42 |
| Date: | 2025–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:102125 |
| By: | Singh, Anuj Pratap (Central Bank of Ireland); Yao, Fang (Central Bank of Ireland) |
| Abstract: | We examine key borrower level outcomes transmitted through Ireland’s 2023 recalibration of the loan-to-income (LTI) limit for first-time buyers (FTBs), which increased the cap from 3.5 to 4. Employing identifying assumptions and propensity score matching on granular mortgage data, we compare the exposed FTBs (the treatment group) and second/subsequent buyers (SSBs, the control group) using a difference-in-differences design. Our findings show that the LTI easing led to an increase in credit for borrowers who were likely most affected by the limit, but this additional credit was used differently in Greater Dublin Area versus the Rest of the Country. Moreover, the LTI allowances (lending above the LTI limit) played an important role in facilitating access for lower-income borrowers before the easing, and we provide evidence that in the new framework, these borrowers are being facilitated credit as a result of the higher LTI limit, in line with the intended policy outcome. |
| Keywords: | Macroprudential measures, LTI, LTV, mortgage, house price, leverage, borrower liquidity. |
| JEL: | G21 G28 G51 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:wpaper:13/rt/25 |