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on Central Banking |
| By: | Stournaras, Yannis |
| Abstract: | This paper revisits the evolving mandates of central banks in light of recent economic disruptions and structural shifts. Drawing on historical lessons from the Great Inflation and the Global Financial Crisis, it highlights the importance of price stability and central bank independence as foundational principles. The analysis focuses on the European Central Bank's (ECB) updated monetary policy strategy, emphasizing its mediumterm orientation, symmetric inflation target, and enhanced responsiveness to uncertainty. The paper also explores the broader role of central banks in supporting financial stability and addressing emerging challenges such as climate risk, digitalization, and geopolitical fragmentation. It argues that while central banks must remain anchored in their primary objective of price stability, their mandates should adapt to reinforce resilience and support sustainable growth. The conclusion calls for deeper institutional integration in the euro area to amplify the effectiveness of monetary policy and strengthen the international role of the euro. |
| Keywords: | Central Bank Mandates, Price Stability, Monetary Policy Strategy, Financial Stability, Institutional Integration in the Euro Area |
| JEL: | E52 E58 E61 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iedlwp:336684 |
| By: | Santiago Camara (McGill University) |
| Abstract: | This paper examines the sign-dependent international spillovers of Federal Reserve and European Central Bank monetary policy shocks. Using a consistent high-frequency identification of pure monetary policy shocks across 44 advanced and non-advanced economies and the methodology of Caravello and Martinez-Bruera, 2024, we documentstrong asymmetries in international transmission. Linear specifications mask these effects: contractionary shocks generate large and significant deteriorations in financialconditions, economic activity, and international trade abroad, while expansionary shocks yield little to no measurable improvement. Our results are robust across samples, identification strategies, and the framework proposed by Ben Zeev et al., 2023. |
| Keywords: | Federal Reserve; European Central Bank; monetary policy spillovers; international transmission; sign-dependent asymmetry |
| JEL: | E52 F41 F42 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:386 |
| By: | Kristin Forbes; Jongrim Ha; M. Ayhan Kose |
| Abstract: | Business cycles are increasingly driven by global shocks, rather than the domestic demand shocks prominent in earlier decades, posing challenges for central banks seeking to meet domestic mandates and communicate their policy decisions. This paper analyzes the evolving influence and characteristics of global and domestic shocks in advanced economies from 1970-2024 using a new FAVAR model that decomposes movements in interest rates, inflation, and output growth into four global shocks (demand, supply, oil, and monetary policy) and three domestic shocks (demand, supply, and monetary policy). We find that the role of global shocks has increased sharply over time and that their characteristics differ from those of domestic shocks across multiple dimensions. Compared to domestic shocks, global shocks have a larger supply component, higher variance, more persistent effects on inflation, and are more asymmetric (contributing more to tightening than to easing phases of monetary policy). As global supply shocks have become more prominent, central banks have also been less willing to “look through” their effects on inflation than for comparable domestic shocks. The distinct characteristics and rising influence of global shocks—particularly global supply shocks—have significant implications for modeling monetary policy and designing central bank frameworks. |
| JEL: | E31 E32 E52 F41 F42 F44 F47 F62 G15 Q43 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34806 |
| By: | Viral V. Acharya; Guillaume Plantin; Olivier Wang |
| Abstract: | We develop a New Keynesian model with financial frictions to study how corporate capital structure shapes static and dynamic monetary policy tradeoffs through the supply side. Ex post, when corporate leverage is high, monetary tightening contracts both demand and supply. As a result, the Phillips curve is highly non-linear and state-dependent, and the “natural rate” Rⁿ ensuring price stability increases with corporate leverage. Yet the tradeoff between inflation targeting and tightening supply constraints implies that the optimal ex-post policy is to set a rate Rᵒᵖᵗ |
| JEL: | E31 E32 E43 E44 E52 E58 E61 G32 G38 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34798 |
| By: | Alessandro Franconi; Lucas Hack |
| Abstract: | We estimate the macroeconomic effects of U.S. imports tariff shocks using several tariff measurement and identification approaches. Tariff shocks reduce output but increase consumer prices. Monetary policy partially accommodates these shocks with a policy easing. To quantify the dependence on systematic monetary policy, we use empirically identified monetary policy shocks to construct counterfactuals that are robust against model misspecification and the Lucas critique. When monetary policy strictly stabilizes inflation, the output contraction at the trough is 36% larger than in the baseline. In contrast, strict output stabilization implies a peak inflation effect that almost doubles, compared to the baseline. |
| Keywords: | Tariffs, Trade, Imports, Monetary Policy, Counterfactuals |
| JEL: | C32 E31 E32 E52 F14 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1035 |
| By: | Lang, Jan Hannes; Menno, Dominik |
| Abstract: | Under which conditions do usability constraints for regulatory capital buffers emerge? To answer this question, we build a non-linear structural banking sector model with a minimum capital requirement that banks are not allowed to breach, and a capital buffer requirement (CBR) that banks can breach but if they do so potential stigma applies. We prove that even very low stigma costs induce large buffer usability constraints, i.e. when faced with losses banks will deleverage significantly to avoid that their capital ratio falls below the CBR. Our findings imply that non-releasble regulatory capital buffers are unlikely to fully achieve their macro stabilisation goal to support aggregate loan supply when the banking system faces losses. JEL Classification: D21, E44, E51, G21, G28 |
| Keywords: | bank capital requirements, buffer usability, capital buffers, loan supply, macroprudential policy |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263188 |
| By: | Leahy, John Vincent; Ranošová, Tereza |
| Abstract: | We exploit cross-sectional variation in the response of US states to a monetary policy shock to study how the impact of monetary policy varies with the share of married women who work. We find that the economy's response is more muted the lower the share of married women employed before the shock. We argue that a plausible explanation is a shielded demand response by households, insured by the "added worker effect". When women are only weakly attached to the labor market, they can flexibly enter and exit to supplement household income in times of need, providing a powerful insurance mechanism against aggregate shocks. We provide three additional pieces of evidence. First, monetary policy shocks have a stronger effect in states where married women are more firmly attached to the labor market (making fewer transitions in and out). Second, following an increase in the federal funds rate, married women themselves are comparatively more likely to be employed (and to enter employment) in states where the share of married women working pre- shock is low. Third, in contrast to employment, wages of married women fall more in states where married women have worked less, consistent with a differential labor supply response to the shock. |
| Keywords: | Added-worker effect, intrahousehold insurance, monetary policy |
| JEL: | J21 J11 E24 E52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:336748 |
| By: | Luca Benati |
| Abstract: | Evidence since the XIX century shows that whereas the demand for M1 is uniformly stable (Benati, Lucas, Nicolini, and Weber, 2021), the demand for broader aggregates is stable under monetary regimes making inflation strongly mean-reverting–such as the Gold Standard and inflation-targeting–but it became temporarily unstable during the Great Inflation. A simple extension of the Sidrauski model rationalizes these findings. The crucial mechanism hinges on the different impact of inflation on the demand for broad money, compared to that for M1. This implies that when inflation is highly persistent broad money demand becomes disconnected from both the demand for M1, and nominal interest rates. This evidence suggests that the post-Goldfeld (1973, 1976) consensus that money demand is unstable due to velocity shocks and financial innovation is incorrect. In fact, the only thing that matters for the stability of the demand for broad money is inflation persistence. I illustrate several implications of these findings, from identifying shocks to the natural rate of interest to estimating the natural rate and long-horizon inflation expectations, and identifying disequilibria in house and stock prices. |
| Keywords: | Lucas critique; monetary regimes; inflation persistence; money demand;natural rate of interest. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2601 |
| By: | Marcin Bielecki (University of Warsaw; Narodowy Bank Polski); Michał Brzoza-Brzezina (SGH Warsaw School of Economics; Narodowy Bank Polski); Marcin Kolasa (SGH Warsaw School of Economics; International Monetary Fund) |
| Abstract: | How do business cycles redistribute between generations, what are the redistribution channels and what role is played by monetary policy? We construct a New-Keynesian life-cycle model and estimate it for the United States. Business cycles redistribute significantly: fluctuations impact welfare of some cohorts by an equivalent of 30% of annual consumption. These first-order effects do not net out over a typical life cycle: some cohorts have been much less lucky than others. Life cycle aspects also amplify second-order costs of fluctuations. Monetary policy shocks are highly redistributive and, hence play an over-proportional role in driving redistribution: they are responsible for over 20% of its total amount. Systematic monetary policy has a quantitatively significant impact on redistribution as well: policy that responds strongly to inflation and output can substantially increase intergenerational redistribution. |
| Keywords: | Business Cycles, Welfare Redistribution, Monetary Policy, Life-cycle Model |
| JEL: | E24 E32 E47 E52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:war:wpaper:2026-2 |
| By: | McLeay, Michael; Tenreyro, Silvana; von dem Berge, Lukas |
| Abstract: | With the monetary policy lower bound a re-emerging concern in some locations, we present new insights on the impact of negative policy rates. We develop a new theoretical model to match the empirical evidence on their effects. The model features a heterogeneous, oligopolistic banking sector where loan pricing is determined in part by the availability of deposit funding and in part by wholesale funding. The use of non-deposit funding ensures that the bank lending channel of negative rates remains active. We explore the impact of the policy on different types of banks: High-deposit banks may experience a fall in interest margins and profitability, which can result in reduced lending. But this is more than compensated for by greater lending from low-deposit banks. We embed this banking sector in an open-economy macroeconomic model, featuring exchange-rate and capital market transmission channels, which continue to work as normal when rates are negative. These non-bank channels, combined with general equilibrium effects and an active bank lending channel, mean that the transmission of negative rates is only somewhat weaker than the transmission of conventional policy. |
| JEL: | J1 |
| Date: | 2026–02–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130299 |
| By: | Jennie Bai; Murillo Campello; Pradeep Muthukrishnan |
| Abstract: | Leveraging regulatory data on fund flows within bank holding companies (BHCs), we characterize internal loans as a critical funding source for commercial banks. Although recorded as bank liabilities, parent-to-bank internal loans function as contingent support that resembles capital. We show that internal-loan funded banks do not hoard liquidity; instead, they originate larger and longer-maturity loans at lower spreads, initiate more relationships with marginal borrowers, and retain larger shares in syndicated deals. Internal-loan-funded lending is followed by higher short-run profits but higher future nonperforming loan ratios. We further show that organizational structure shapes internal lending: in BHCs with both bank and nonbank operations, nonbank affiliates crowd out internal lending to banks and discipline banks’ use of internal funds, and these BHCs exhibit higher overall performance. To identify our tests, we exploit the passage of the Gramm–Leach–Bliley Act and the announcement of the Basel III Accord, using instrumental variables and discontinuity-design approaches. Our findings highlight an equity-like internal debt channel that shapes monetary policy transmission, risk-taking, and the role of organizational structure in banking. |
| JEL: | G21 G23 G28 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34801 |
| By: | Joseph Abadi; Jesús Fernández-Villaverde; Daniel Sanches |
| Abstract: | We present a micro-founded monetary model of the world economy to study international currency competition. Our model features "unipolar'' equilibria, with a single dominant international currency, and "multipolar'' equilibria, in which multiple currencies circulate internationally. Long-run equilibria are highly history-dependent and tend towards the emergence of a dominant currency. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt, but large economies have a natural advantage in ensuring the dominance of their currencies. We calibrate the model to assess the quantitative importance of these mechanisms and study the international monetary system's dynamics under several counterfactual scenarios. |
| JEL: | E42 E58 G21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34817 |
| By: | Sangyup Choi (Yonsei University); Junghyuk Lee (Bank of Korea) |
| Abstract: | Leveraging Korea's unique jeonse system-a lump-sum lease arrangement that enables inference of intrinsic housing values-and urban district-level monthly-frequency data, this paper proposes a novel method to decompose housing price fluctuations into supply, residential demand, and speculative demand shocks. We find speculative demand accounts for nearly 50% of cumulative housing price growth in Korea and over 60%in the Seoul metropolitan area. Importantly, housing booms driven by residential demand increase regional consumption, employment, and output ("good booms"), while those driven by speculation reduce them ("bad booms"). Using comprehensive quarterly individual panel data, we show that only speculative demand shocks trigger excessive household leverage, creating a debt overhang that explains these differential aggregate effects. While monetary easing significantly amplifies speculative demand, an equivalent tightening fails to produce a comparable contraction. Conversely, macroprudential tools-such as lower loan-to-value limits-curb speculative surges more effectively, yet they also risk dampening residential demand. |
| Keywords: | House prices; Good booms and bad booms; High-frequency identification; Sign-restriction approach; Jeonse; Debt overhang; Policy mix |
| JEL: | E50 G10 R30 R21 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2026rwp-275 |
| By: | Brenzel-Weiss, Janosch; Koeniger, Winfried; Valladares-Esteban, Arnau |
| Abstract: | We calibrate a lifecycle portfolio-choice model of homeowners facing uninsurable income risk to show that tax deductions for mortgage interest payments and voluntary pension contributions have sizable effects on household portfolios and macroprudential risks. The deductions reduce the after-tax cost of debt and increase the after-tax return of pension savings so that the mortgage incidence increases and portfolios shift from home equity and liquid assets towards pension savings. Because the consumption responses to a house-price decline are heterogeneous, the distribution of household debt shapes the quantitative effect of the tax deductions on the homeowners' resilience after a house price bust. |
| Keywords: | Mortgage amortization, Tax incentives, Household consumption, Portfolio choice, Housing busts, Economic stability, Macroprudential policy |
| JEL: | D14 D15 D31 E21 G11 G21 H24 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfswop:336755 |