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on Central Banking |
| By: | Adina-Elena Fudulache (EUROPEAN CENTRAL BANK AND GOETHE UNIVERSITY FRANKFURT); María del Carmen Castillo Lozoya (BANCO DE ESPAÑA) |
| Abstract: | We exploit banks’ early repayments of targeted longer-term refinancing operations (TLTRO) following the program’s recalibration in October 2022 as a laboratory to uncover demand drivers of central bank liquidity. We formulate and estimate a discrete-time hazard model to early exit from TLTRO to identify what bank (country) characteristics drive a sticky, prolonged demand for central bank (long-term) operations as opposed to an early exit from such facilities. We also examine whether the more liquidity-risk exposed banks during the TLTRO phasing out period had a higher probability of becoming “liquidity dependent” on the ECB when exiting (Acharya et al., 2023). Finally, we discuss the policy implications of our findings, particularly in the context of the recent review of the ECB’s operational framework. |
| Keywords: | monetary policy normalisation, TLTRO, demand-driven operational frameworks, discrete-time hazard models |
| JEL: | E52 E58 G21 C41 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2548 |
| By: | Andrew Martinez; Tara Sinclair |
| Abstract: | Recent advances in high-frequency identification of monetary policy shocks reveal that measures are contaminated by information and news effects. We contribute to this literature by incorporating the intermittent release of central bank projections, i.e. the Summary of Economic Projections (SEP). We develop a theoretical framework showing that forecast releases amplify monetary policy surprises by providing additional information beyond what is conveyed through interest rate decisions alone and by anchoring expectations during non-release meetings. We confirm empirically that monetary policy surprises following SEP releases are typically 1.5 to 2 times larger than those without releases. To identify the information channel, we construct novel SEP surprise measures using a Bloomberg survey of market expectations about Federal Reserve projections. SEP surprises explain about 30 percent of the variation in monetary policy surprises during SEP meetings and account for essentially all of the differences between SEP and non-SEP meetings. Finally, to validate that SEP surprises contain economically meaningful information, we show that individual forecasters update their expectations of core PCE inflation in response to both common and their own idiosyncratic SEP surprises. |
| Keywords: | Monetary Policy Shocks; High Frequency Identification; Empirical Monetary Economics |
| JEL: | E52 E58 E31 E32 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:gwc:wpaper:2025-013 |
| By: | Marijn A. Bolhuis; Mr. Francesco Grigoli; Marcin Kolasa; Mr. Roland Meeks; Mr. Andrea F Presbitero; Zhao Zhang |
| Abstract: | Emerging markets have shown remarkable resilience during risk-off episodes in recent years. While favorable external conditions—good luck—contributed to this resilience, improvements in policy frameworks—good policies—played a critical role in bolstering the capacity of emerging markets to withstand the adverse consequences of these events. Improvements in monetary policy implementation and credibility have reduced reliance on foreign exchange (FX) interventions and capital flow management measures, and stricter macroprudential regulation also contributed to less FX interventions. Also, central banks have become less sensitive to fiscal interference and hold sway over domestic borrowing conditions. Looking ahead, countries with robust frameworks face easier policy trade-offs and are better positioned to navigate risk-off episodes. In contrast, economies with weaker frameworks risk de-anchoring inflation expectations and larger output losses if monetary tightening is delayed, especially when persistent price pressures emerge. In these settings, FX interventions offer only temporary relief and are less necessary when policy frameworks are sound. |
| Keywords: | Emerging markets; Risk-off shocks; Monetary policy; FX interventions |
| Date: | 2025–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/256 |
| By: | David Worms |
| Abstract: | I document that high-frequency euro area monetary policy surprises – measured as changes in risk-free rates around the Eurosystem‘s policy announcements – are not exogenous to information regarding macroeconomic news and financial market developments that pre-date the announcements. More specifically, around 20% of the variation of surprises can be explained by pre-dated information. I show that the violation of the exogeneity of conventional surprise measures introduces a considerable bias into estimates on the effects of monetary policy on euro area macroeconomic outcomes. |
| Keywords: | High-Frequency Identification; Macro News; Monetary Policy |
| JEL: | E43 E52 E58 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:850 |
| By: | Engin Kara |
| Abstract: | I identify the natural rate of inflation: the threshold where signal-to-noise crosses unity. Extending Lucas (1972), I show that when inflation falls below sectoral volatility, firms cannot distinguish aggregate from idiosyncratic shocks. Sticky-price firms rationally filter out competitor price movements, creating endogenous stability. When inflation exceeds the natural rate, filtering ceases, coordination increases, and inflation becomes self-reinforcing. Using six million UK micro-price observations, I estimatethis threshold at 1.9%. Crossing it triggers a regime shift: price dispersion falls 10%, inflation persistence jumps from near-zero to 0.44, and monetary policy loses traction. These findings validate 2% targets as the limit of self-correction. |
| Keywords: | inflation targeting, strategic pricing, behavioural thresholds, sectoral volatility, monetary policy, price complementarity |
| JEL: | E31 E52 E58 D21 L13 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12306 |
| By: | boughabi, houssam |
| Abstract: | This research paper looks at the different economic factors that affect foreign investments in Zimbabwe, specifically the interaction between foreign investment and inflation changes. It delves into how central bank policy, in the face of erratic inflation, can affect the duration and the change of investment patterns in a macroeconomic environment full of uncertainties. The model presented in this paper embodies the interaction among inflation thresholds, money supply reactions, and capital inflows, thus depicting the scenarios of macroeconomic fragility due to late policy adjustments to structural shocks. The empirical analysis reveals an optimal inflation threshold of A*=3.02, beyond which real investment begins to decouple from monetary policy, and a neutral policy coefficient of a*=0.0000, indicating the complete erosion of policy traction under hyperinflation. These results suggest that Zimbabwe’s monetary authorities faced a regime in which stabilization efforts were rendered ineffective, emphasizing the importance of credibility restoration for regaining investment responsiveness. The findings pinpoint the issues of achieving a perfect equilibrium between inflation control and investment stimulation in a market environment with price instability. |
| Keywords: | Inflation threshold, Foreign investment, Monetary policy, Economic fragility, Zimbabwe. |
| JEL: | E31 E52 F21 O55 |
| Date: | 2025–11–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126785 |
| By: | Emilio Ocampo; Nicolás Cachanosky |
| Abstract: | This paper investigates a puzzle in the behavior of the money supply in Ecuador after it formally adopted the US dollar as its currency in January 2000. Modern open economy macroeconom-ics (MOEM) predicts that in a small open economy under an official dollarization regime, the money supply is endogenous to movements in the balance of payments. However, Ecuador’s monetary and balance of payment statistics suggest otherwise. This incongruity has led some authors to claim that MOEM does not hold in Ecuador. We challenge this claim and argue that three factors can explain the apparent puzzle: a) monetary data misspecification, b) measure-ment errors in foreign trade flows, and c) an exogenous expansion of its balance sheet of the Central Bank of Ecuador’s (CBE) during the period 2009-2014 to finance government deficits. We conclude that Ecuador’s experience under dollarization is consistent with a key prediction of MOEM: inflation convergence. However, it also shows that the constraints that in theory an official dollarization places on fiscal profligacy and monetary activism can be overcome by creative spendthrift politicians. Finally, we highlight the challenge of measuring cash in econo-mies that are dollarized or are part of a currency union and the need to consider the institutional and regulatory framework adopted for the central bank after dollarization to understand the monetary dynamics of an officially dollarized economy. |
| Keywords: | money supply; dollarization |
| JEL: | E42 E59 O54 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cem:doctra:898 |
| By: | Ekaterina Shabalina |
| Abstract: | This paper studies how tax progressivity affects monetary policy. Through the lens of a heterogeneous agent model with nominal rigidities it shows that, firstly, higher tax progressivity increases natural rate due to a lower demand for precautionary savings. Secondly, the effect of tax progressivity on the potency of monetary policy is small with a higher progressivity implying a slightly better inflation-output trade-off. Distributional effects of monetary policy, however, are amplified with a higher tax progressivity. |
| Keywords: | tax progressivity; monetary policy transmission; natural rate of interest; heterogeneous agents |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbaacp:acp2025-03 |
| By: | Greg Kaplan |
| Abstract: | I summarize insights from heterogeneous-agent New Keynesian (HANK) models on the interaction between fiscal and monetary policy, with a focus on the macroeconomic experience of the early 2020s. I highlight three features of HANK economies—heterogeneous marginal propensities to consume, the failure of Ricardian equivalence, and an upward-sloping steady-state asset supply curve—that alter how fiscal and monetary forces interact relative to representative-agent models. I discuss two domains of policy: the effects of fiscal stimulus on inflation and the price level, and the fiscal consequences of changes in nominal interest rates. I illustrate these mechanisms in the context of the Covid pandemic by presenting simuluations from the calibrated HANK model in Kaplan and Miyahara (2025), which evaluates counterfactual scenarios for the United States for output, inflation, and the price level under alternative policy responses. The analysis underscores that monetary and fiscal policy are inescapably intertwined, and that HANK models provide a useful framework for quantifying these interactions. |
| Keywords: | heterogeneous agents; HANK; monetary policy; fiscal policy; fiscal-monetary interactions; fiscal theory of the price level |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbaacp:acp2025-02 |
| By: | Francesco De Sinopoli; Leo Ferraris; Claudia Meroni |
| Abstract: | In an insightful paper entitled Some Unpleasant Monetarist Arithmetic, Sargent and Wallace (1981) have argued that, when monetary and fiscal policy are not coordinated, inflation can get out of control if the monetary authority does not impose discipline on the fiscal authority. This paper shows that discipline can be reciprocal if the policy interaction is repeated and the rationality of the authorities is fully taken into account through the equilibrium concept. |
| Keywords: | Policy coordination, chicken game, forward induction |
| JEL: | C72 E31 E52 E63 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:562 |
| By: | Giovanni Sciacovelli |
| Abstract: | This paper studies the role of adjustable-rate mortgages (ARMs) in monetary policy transmission within the Euro Area. Conventional wisdom holds that ARMs are relevant per se. This study finds that the presence of liquidity-constrained households strongly influences their impact. Using Euro Area survey data, I document that transmission is stronger in countries that exhibit both high ARM shares and sizable shares of liquidity-constrained households. To interpret this finding, I develop a heterogeneous-agent model featuring: (i) heterogeneity in marginal propensities to consume (MPCs), (ii) agents making both housing and mortgage choices, and (iii) a fraction of households with ARMs. In the model, MPCs determine the extent to which changes in mortgage payments translate into changes in consumption, making ARMs an important transmission vehicle only when paired with high MPCs. These results highlight that accounting for household heterogeneity in MPCs is essential to assess the strength of transmission through ARMs. |
| Keywords: | Adjustable-rate mortgages; Euro Area; household heterogeneity; marginal propensity to consume; monetary policy |
| Date: | 2025–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/257 |
| By: | Matthias Burgert; Matthieu Darracq Pariès; Luigi Durand; Mario Gonzalez; Romanos Priftis; Oke Röhe; Matthias Rottner; Edgar Silgado-Gómez; Nikolai Stähler; Janos Varga |
| Abstract: | This paper presents a novel model comparison to examine the challenges posed by changes in carbon-intensive energy prices for monetary policy. The employed environmental monetary models have a detailed multi-sector structure. The comparison assesses the effects of both a temporary and a permanent energy price increase with a particular focus on the euro area and the United States. Temporary and permanent price shocks are both inflationary. However, the inflationary impact of the permanent shock depends on the underlying model assumptions and monetary policy response. The analysis also establishes that these models share large commonalities in their quantitative and qualitative results, while also pointing out cross-country differences. |
| Keywords: | climate change, monetary policy, multi-sector models, model comparison, DSGE models |
| JEL: | C54 E52 H23 Q43 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1313 |
| By: | Carlos Giraldo (Fondo Latinoamericano de Reservas - FLAR); Iader Giraldo-Salazar (Fondo Latinoamericano de Reservas - FLAR); Jose E. Gomez-Gonzalez (Department of Finance, Information Systems, and Economics, City University of New York – Lehman College); Jorge M Uribe (Universitat Oberta de Catalunya) |
| Abstract: | This paper analyzes the cyclicality of bank capital ratios in emerging and low-income economies over the period 2004–2024, with particular attention to developments following the introduction of Basel III. Using a panel of 1, 185 banks across 122 countries, we study how economic growth affects banks’ capital ratios and whether this relationship varies across regions, income groups, and levels of capitalization. Unlike risk-weighted measures, leverage-based capital ratios provide a clearer assessment of banks’ capacity to absorb shocks and support credit supply during downturns. Our findings indicate that prior to 2014, capital ratios were broadly procyclical, but in the last decade this relationship has weakened or reversed in many emerging economies. Banks with higher capital buffers exhibit the strongest countercyclical behavior, reflecting an enhanced ability to sustain lending under adverse conditions, while banks operating near regulatory minima remain largely acyclical, constrained by regulatory requirements. Regional heterogeneity is pronounced, with Latin America, developing Asia, and the Middle East showing the most substantial improvements. The results suggest that the principles underlying modern macroprudential regulation, particularly the accumulation of countercyclical capital in expansions to support lending in downturns, are increasingly influencing bank behavior, even in jurisdictions where Basel III has not been fully implemented. |
| Keywords: | Bank Capital Ratios; Procyclicality; Countercyclical Capital Buffers; Emerging Markets; Macroprudential Regulation |
| JEL: | G21 E44 F36 |
| Date: | 2025–12–04 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:021826 |
| By: | David Romer |
| Abstract: | This paper begins by reviewing the social insurance perspective on pandemic fiscal policy advocated by Romer and Romer (2022). It goes on to expand on Romer and Romer's discussion of insights from the social insurance perspective into how fiscal policy should respond to other recessions. It then turns to the implications for monetary policy. It shows that in the case of social insurance, the natural baseline is not coordination with fiscal policy, but a hierarchy of decisions: social insurance actions should be chosen first, followed by choices about conventional monetary policy, potentially followed by some combination of unconventional monetary policy and general fiscal stimulus. There are good reasons for monetary policy to not directly support the social insurance role of fiscal policy, but there is room for some exceptions. |
| Keywords: | social insurance; fiscal policy; monetary policy; hazard pay; policy coordination |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbaacp:acp2025-04 |
| By: | Guerini, Mattia; Marin, Giovanni; Vona, Francesco |
| Abstract: | We study how monetary policy shapes firm level carbon emissions. Our identification strategy exploits the European Central Bank’s July 2012 move to the zero lower bound as a plausibly exogenous easing of credit supply, combined with rich administrative and survey data on French manufacturing firms from 2000–2019. Using a difference-in-differences design with debt-to-asset ratios as exposure, we find that financially constrained firms cut emissions by about 9.4% more than unconstrained ones. This effect primarily stems from improvements in energy efficiency, lower carbon intensity of energy, and general productivity improvements associated with capital deepening that outweighed modest scale effects. Small and medium firms drive these results, while large and EU ETS regulated firms show no significant response. On average, emissions fell by 3.3% per year, summing up to 5.3 million tonnes of CO2 saved. Despite the smaller marginal effects, total carbon savings due to the monetary easing are comparable to the savings from the EU ETS, highlighting the untargeted nature of the policy. |
| Keywords: | Climate Change, Environmental Economics and Policy |
| Date: | 2025–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:ags:feemwp:376272 |
| By: | Josef Schroth |
| Abstract: | Time-varying capital buffer requirements are a powerful tool that allow bank regulators to avoid severe financial stress without the cost of imposing very high levels of capital. However, this tool is only effective if banks understand how it is used. I present a model that banks and financial market participants can use to anticipate how time-varying capital buffer requirements change over time. |
| Keywords: | Business fluctuations and cycles; Credit and credit aggregates |
| JEL: | E E1 E13 E3 E32 E4 E44 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-27 |
| By: | Ryan Niladri Banerjee; Boris Hofmann; Ding Xuan Ng; Gabor Pinter |
| Abstract: | Non-bank financial institutions (NBFIs) have grown significantly in recent years, mainly driven by the growth of investment funds, including hedge funds. These changes reflect the role of bond markets, which have expanded on the back of surging government debt. The rise of NBFIs adds uncertainty to monetary policy transmission, as there could be dampening and amplifying effects. Investment funds appear to strengthen transmission while at the same time making it less stable. Greater uncertainty about transmission due to structural changes in the financial system reinforces the principle of a gradual policy approach while at the same time calling for flexibility in adjusting policy. |
| Date: | 2025–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:116 |
| By: | Omar Abdelrahman; Josef Schroth |
| Abstract: | When a bank holds a lot of safe assets, it is well situated to deal with funding stress. But when all banks hold a lot of safe assets, a pecuniary externality implies that their (wholesale) funding costs increase. This reduces banks’ ability to hold capital buffers and thus, paradoxically, increases the frequency of funding stress. |
| Keywords: | Business fluctuations and cycles; Credit and credit aggregates |
| JEL: | E4 E44 E6 G2 G21 G28 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-28 |
| By: | Brand, Claus; Goy, Gavin; Lemke, Wolfgang |
| Abstract: | Using a novel macro-finance model we infer jointly the equilibrium real interest rate r*, trend inflation, interest rate expectations, and bond risk premia for the United States. In the model r* plays a dual macro-finance role: as the benchmark real interest rate that closes the output gap and as the time-varying long-run real interest rate that determines the level of the yield curve. Our estimated r* declines over the last decade, with estimation uncertainty being relatively contained. We show that both macro and financial information is important to infer r*. Accounting for the secular decline in interest rates renders term premia more stable than those based on stationary yield curve models. A previous version of this paper by the same authors entitled “Natural rate chimera and bond pricing reality” has been published as ECB Working Paper No 2612. JEL Classification: E43, C32, E52, C11, G12 |
| Keywords: | arbitrage-free Nelson-Siegel term structure model, Bayesian estimation, equilibrium real rate, natural interest rate, term premia |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253160 |
| By: | José E. Bosca; Javier Ferri; Margarita Rubio |
| Abstract: | We study the macroeconomic and welfare consequences of bond preference convergence within a monetary union. Using a two-country DSGE model calibrated to Germany and Spain, we compare two scenarios: convergence toward Spanish bond preferences and convergence toward German bond preferences. The direction of convergence proves decisive. When preferences shift toward those of Spain, union-wide private debt expands, long-run GDP declines, and macro-financial volatility rises, though inflation volatility falls. Welfare increases for the union as a whole in this scenario, with Germany gaining the most and Spain benefiting more modestly. By contrast, convergence toward German bond preferences reduces union-wide private debt and output volatility, but generates only moderate welfare gains for Germany and significant welfare losses for Spain. These results highlight that financial convergence does not yield uniform benefits. Its consequences depend on both the direction of convergence and its distributional effects across countries and households. The findings also point to a trade-off between welfare and stability, underscoring the need for macroprudential tools and fiscal arrangements to manage the risks associated with deeper convergence in bond preferences. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:fda:fdaddt:2025-12 |
| By: | Karsten Chipeniuk; Marcin Kolasa; Jesper Lindé; Elvis Ludvich; Melanie Quigg |
| Keywords: | quantitative easing; negative policy rates; effective lower bound; open-economy model |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbaacp:acp2025-07 |
| By: | Christina D Romer |
| Keywords: | fiscal-monetary interactions; policy coordination; central bank independence; fiscal consolidation |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbaacp:acp2025-01 |
| By: | Angelini, Elena; Darracq Pariès, Matthieu; Haertel, Thomas; Lalik, Magdalena; Aldama, Pierre; Brázdik, František; Damjanović, Milan; Fantino, Davide; Sanchez, Pablo Garcia; Guarda, Paolo; Kearney, Ide; Mociunaite, Laura; Saliba, Maria Christine; Sun, Yiqiao; Tóth, Máté Barnabás; Stoevsky, Grigor; Van der Veken, Wouter; Virbickas, Ernestas; Bulligan, Guido; Castro, Gabriela; Feješ, Martin; Grejcz, Kacper; Hertel, Katarzyna; Imbrasas, Darius; Kontny, Markus; Krebs, Bob; Opmane, Ieva; Rapa, Abigail Marie; Sariola, Mikko; Sequeira, Ana; Duarte, Rubén Veiga; Viertola, Hannu; Vondra, Klaus |
| Abstract: | This report provides a comprehensive overview of the models and tools used for macroeconomic projections within the European System of Central Banks (ESCB). These include semi-structural models, dynamic stochastic general equilibrium (DSGE) models, time series models and specialised satellite models tailored to particular questions or country-specific aspects. Each type of model has its own strengths and weaknesses and can help answer different questions. The models should therefore be seen as complementary rather than mutually exclusive. Semi-structural models are commonly used to produce baseline projection exercises, since they offer the flexibility to combine expert judgement with empirical data and have enough complexity and structure to provide a good representation of the economy. DSGE models, valued for their internal consistency and strong theoretical foundations, are another core forecasting tool used by some central banks, particularly to analyse counterfactuals. Time series models tend to be better suited to forecasting the short term, while scenario analysis and special events may require satellite models, extensions of existing models or even the development of new models tailored to the question at hand. The report also addresses the challenges to macroeconomic projections posed by data quality, including revisions and missing data, and describes the methods implemented to mitigate their effects. The report identifies “quick wins” to improve the projection process by enhancing the transparency and comparability of results through standardised reporting frameworks and better measurement of the judgement integrated in forecasts. The findings highlight the fundamental role of macroeconomic models in underpinning the ESCB’s projection exercises and ensuring that the Governing Council’s assessments and deliberations rest on coherent, granular and credible analysis of both demand-side and supply-side dynamics. JEL Classification: C30, C53, C54, E52 |
| Keywords: | economic models, forecasting, macroeconometrics, monetary policy |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2025381 |