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on Central Banking |
| By: | Altavilla, Carlo; Boucinha, Miguel; Burlon, Lorenzo; Adalid, Ramón; Fortes, Roberta; Maruhn, Franziska |
| Abstract: | This paper studies the effects of stablecoin adoption—crypto-assets designed to maintain a stable value relative to a reference asset—on bank intermediation and the transmission of monetary policy. Using evidence from the rapid expansion of stablecoins combined with confidential granular data on euro area banks and their individual borrowers, we document three main findings. First, stablecoin adoption induces a deposit-substitution mechanism, whereby funds shift from retail bank deposits to digital assets. This reallocation increases banks’ reliance on wholesale funding and can ultimately constrain their intermediation capacity. Second, we show that stablecoins alter the passthrough of policy rates to bank funding costs and lending conditions and potentially weaken the predictability of policy actions. These effects are nonlinear and depend critically on the scale of stablecoin adoption, their design features, and their regulatory treatment. Third, we document a potential risk associated with the growing prevalence of foreign-currency-denominated stablecoins. Their diffusion is likely to increase banks’ reliance on foreign-currency wholesale funding. We show that banks with greater exposure to this source of funding exhibit a weaker loan-supply response to domestic monetary policy shocks, indicating a weakening of monetary policy transmission and a potential erosion of monetary sovereignty. JEL Classification: E52, E44 |
| Keywords: | bank lending, deposit substitution, monetary transmission, stablecoins |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263199 |
| By: | Juliane Begenau; Vadim Elenev; Tim Landvoigt |
| Abstract: | This paper investigates financial stability risks arising from banks' interest rate exposure and uninsured deposit funding. We develop a model of heterogeneous banks featuring endogenous run risk to jointly analyze portfolio and funding choices. The model replicates key empirical patterns, including the concentration of uninsured deposits in larger banks. We analyze the impact of monetary policy rate hikes and evaluate the capacity of microprudential tools to mitigate bank fragility. Results demonstrate that tightening capital requirements significantly lowers run risk. Higher liquidity requirements targeting uninsured deposits efficiently reduce run risk, provided they are met exclusively with reserves. |
| JEL: | E41 E43 E44 E58 G11 G12 G21 G28 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34892 |
| By: | Stefan Durmeier (Charles University, Institute of Economic Studies, Prague, Czech Republic); Evzen Kocenda (Charles University, Institute of Economic Studies, Prague, Czech Republic; Mendel University, Faculty of Business and Economics, Brno, Czech Republic; CESifo, Munich, Germany; IOS, Regensburg, Germany) |
| Abstract: | The COVID-19 pandemic ended a long period of subdued inflation in Japan and renewed attention to the role of expectations in the transmission of monetary policy. This paper analyzes how Japanese households formed inflation expectations between 2006 and 2022, focusing on periods of unconventional monetary policy and the pandemic shock. Using a structural vector autoregressive framework with Bayesian estimation, we examine the joint role of global energy prices, broad money growth, long-term government bond yields, and the nominal effective exchange rate. We find that expectations rise in response to global energy prices, broad money supply growth, and past expectations, while they decline with higher long-term bond yields or an appreciation of the yen. During Quantitative and Qualitative Easing (QQE), launched by the Bank of Japan in 2013, the impact of money supply remained significant, but the effect of bond yields weakened and operated only with a delay. Importantly, the model suggests early warning signals of rising inflation from 2021 onward, with expected inflation shifting during the pandemic from near zero to around 0.5 percent per quarter. These findings highlight the importance of monitoring household surveys, the continued relevance of monetary aggregates, and the limits of interest-rate channels in managing inflation expectations in Japan, while also underscoring the role of financial intermediation and banks in transmitting shocks to the broader economy. |
| Keywords: | Inflation expectations; Monetary policy; Qualitative and Quantitative easing; Bank of Japan; Banks; COVID-19 Pandemic; Structural Vector Autoregression; Bayesian Estimation |
| JEL: | C51 C54 E31 E58 F41 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2026_01 |
| By: | Marijn A. Bolhuis; Rui Mano; Hedda Thorell |
| Abstract: | This paper studies the macroeconomic consequences of undermining central bank independence through politically motivated transitions of central bank governors. Leveraging a new panel dataset covering 132 central bank governor transitions in 28 advanced and emerging market economies since 2000, we document the timing, frequency, and political drivers of these leadership changes. Tenures of governors with politically motivated appointments are associated with higher and more volatile inflation, realized and expected. Professional forecasters also tend to expect such governors to be more dovish when responding to shifts in inflation. Using local projections in a difference-in[1]difference setting, we find that following the announcement of a politically motivated governor transition nominal and real short rates decline and expected and realized inflation rise. At the same time, GDP growth increases in the aftermath of such transitions, consistent with an expansionary short-run macroeconomic impulse. These effects are more pronounced when the incoming governor professes unorthodox views on monetary policy, suggesting that political interference in central bank leadership induces a temporary growth–inflation trade-off. Long-term inflation expectations only rise in the case of unorthodox governors with politically motivated appointments, suggesting costs to central bank credibility are much more pronounced in those cases. |
| Keywords: | Central bank independence; political interference; central bank governors; monetary policy credibility; inflation dynamics |
| Date: | 2026–03–06 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/040 |
| By: | Juan Camilo Laborde Vera (Universidad de los Andes) |
| Abstract: | How does the current account respond to a monetary policy shock? The answer to this perennial question is theoretically ambiguous and empirical evidence is particularly scarce in emerging markets due to challenges in identifying exogenous policy variation. I construct a novel dataset of monetary policy shocks using analysts’ forecasts of policy rate decisions for an unbalanced panel of five emerging market economies in Latin America during 1999-2024. I estimate impulse response functions using local projections and find that a monetary tightening shock leads to a “J curve” pattern in the current account: a short-run contraction followed by a medium-run expansion. The response is heterogeneous in the cross-section and depends on the strength of the exchange rate appreciation resulting from the monetary contraction and the country’s export-import structure. The panel estimation results show that exports and imports exhibit a hump-shaped pattern and decline by 4.5 and 5.9 per cent, respectively, as a result of a one-percentage-point policy tightening shock. The results are robust to using alternative measures of high-frequency monetary shocks. |
| Keywords: | Monetary Policy, Local Projections, Monetary Policy Shocks, Current Account Adjustment, International Macroeconomics |
| JEL: | E52 F32 F41 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:col:000089:022354 |
| By: | Cassim, Lucius; Mallick, Debdulal |
| Abstract: | We investigate whether public debt in least developed countries (LDCs) is serviced through fiscal adjustments or by triggering inflation. Using time series data from LDCs for the 1980-2023 period and employing the Bayesian structural vector auto-regressive model, we estimate the response of public liabilities to positive surplus shocks. We find support for the latter hypothesis of the Fiscal Theory of Price Level that these countries are characterized by non-Ricardian fiscal regimes. One important implication of our findings is that the conventional monetary policy may not be effective in stabilizing inflation in these countries. In contrast, when we replicate the same exercise for developed countries, we find support for the former hypothesis. We further explore the role of institutional development in explaining the fiscal (in)discipline in LDCs. |
| Keywords: | Non-Ricardian fiscal regime; Fiscal theory of price level; Bayesian SVAR; Central bank; Monetary policy; Least developed countries; Institutions. |
| JEL: | C11 C32 E02 E58 E62 E63 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127592 |
| By: | Alex Ilek; Nimrod Cohen |
| Abstract: | We propose a semi-structural DSGE model for the Israeli economy, as a small open economy, which contains a financial friction in the household sector credit market. Such a friction is reflected in a positive relationship between households' leverage ratio and their interest rate (credit spread) on debt, as evident in the Israeli data. Our main purpose is to evaluate the implications of such a friction on the implementation of monetary policy and macroprudential policy. Our two main findings are: First, it is important that the monetary policy will react also to developments in the credit market, such as credit spread widening, to increase effectiveness in achieving its main goals of stabilizing inflation and real activity. Second, macroprudential policy may increase the sensitivity of households' credit spread to their leverage. Thus, this policy can mitigate or even prevent over-borrowing and reduce the risk of a debt deleveraging crisis. Moreover, in a case of demand weakness and debt deleveraging, in addition to accommodative monetary policy, the macroprudential policy may contribute to stimulating demand due to a corresponding reduction in credit spread. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.11013 |
| By: | Wataru Takahashi (Research Institute for Economics and Business Administration, Kobe University, JAPAN); Taiji Inui (ISO/TC68, ISO20022 Payments & Securities SEG, and Citron Systems, JAPAN) |
| Abstract: | Central Bank Digital Currencies (CBDCs) are planned in many countries (central banks) and implemented in some countries. CBDCs issued as legal tender by central banks must guarantee both security and anonymity. This paper discusses network infrastructure requirements for securely transmitting digital assets having value themselves like CBDCs. For this purpose, a method to implement an infrastructure to securely transmit CBDCs using Public Key Infrastructure (PKI) is discussed. |
| Keywords: | CBDC; ADCC; Central bank; Two-tier system; PKI; DLT; CA; Digital device |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2026-06 |
| By: | Federico Favaretto and Donato Masciandaro |
| Abstract: | This chapter, using a political economy approach, uncovers the relationships between populism, on the one side, and monetary and banking policies, on the other side. The analysis is based on three assumptions. First, both monetary and banking policies can produce redistributive effects. Second, political consensus can be associated with redistribution. Third, populists, being politicians, are myopic players, hence heavily influenced by citizens’ financial and group heterogeneities. Given these assumptions, two different models are studied. Concerning monetary policies, a nexus between populism and central bank (in)dependence (CBI) can emerge where the populist aim to influence the monetary policy design after a macroeconomic shock that requires public bailouts. Regarding banking policy, our chapter defines populism as Democratic Rioting, in which citizens are assumed to be heavily influenced in their policy choice by psychological group dynamics. This explains why populist consensus emerges and may deliver different policy choices depending on non-banking news such as public welfare choices and immigration. |
| Keywords: | Populism, Political Economics, Monetary Policy, Banking Policy, Inequality, Central Bank Independence, Behavioural economics |
| JEL: | D72 D78 E31 E52 E58 E62 E71 P16 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp26267 |
| By: | Barauskaitė Griškevičienė, Kristina; Brand, Claus; Nguyen, Anh Dinh Minh |
| Abstract: | We analyze the sources of the pandemic-era inflation surge in the euro area using a Bayesian vector autoregression (BVAR) model. By applying narrative, sign, zero, and inequality restrictions, this study is the first that jointly analyzes the inflationary effects of energy and non-energy supply and policy and non-policy demand factors, including fiscal policy, conventional and unconventional monetary policy. Factoring in that energy price dynamics also responded to aggregate demand conditions, we find that the pandemic-era inflation surge in the euro area was driven by a combination of supply and demand factors. Energy-related supply side constraints, even if less important than often estimated, were a key factor in the run up of inflation. Fiscal and monetary policies were accommodative but not the dominant drivers. JEL Classification: C11, C32, E31, E52 |
| Keywords: | energy supply, fiscal policy, inflation, monetary policy, pandemic |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263201 |
| By: | Pablo Aguilar (BANCO DE ESPAÑA AND ECB); Rubén Domínguez-Díaz (BANCO DE ESPAÑA); José-Elías Gallegos (BANCO DE ESPAÑA); Javier Quintana (BANCO DE ESPAÑA) |
| Abstract: | We analyze how production networks transmit foreign price shocks and reshape monetary policy trade-offs in an open-economy New Keynesian model with domestic and international input–output linkages. Analytically, we show that closing the output gap does not generally stabilize domestic inflation, as sector-level terms-of-trade movements and trade imbalances become additional drivers of inflation dynamics. Quantitatively, we study an international energy price shock in a model calibrated to major euro area countries and their trade partners. We find that production networks significantly amplify the cumulative headline inflation response and substantially worsen monetary policy trade-offs, as measured by the sacrifice ratio. |
| Keywords: | open economy, production networks, New Keynesian, monetary policy |
| JEL: | E31 E32 E52 E70 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2607 |
| By: | Felipe Alves; Giovanni L. Violante |
| Abstract: | As the economy emerges from a crisis, macroeconomic policy confronts a dilemma: a protracted stimulus can foster a more inclusive labor market recovery, yet risks igniting inflation that ultimately undermines workers’ welfare through real income erosion. This tension amplifies in the presence of the ZLB and aggregate capacity constraints. We embed this insight into a quantitative model of the US economy. We study how monetary and fiscal policies managed this inflation-inclusion trade-off after the pandemic, contrasting actual outcomes with counterfactual scenarios. Our experiments yield five findings: (i) the trade-off was unusually difficult because policy was squeezed between these two constraints; (ii) inflationary pressures arose from the joint deployment of prolonged monetary and fiscal stimulus; either policy alone would have produced milder price dynamics; (iii) either inclusive fiscal policy or inclusive monetary policy in isolation would have been sufficient to contain the negative labor market hysteresis at the bottom of the distribution; (iv) inclusive fiscal policy combined with a more traditionally inflation-focused central bank would have achieved higher welfare for the vast majority of households; (v) welfare effects reflect mostly corrections of incomplete-market inefficiencies rather than gains from aggregate stabilization. |
| JEL: | E21 E24 E31 E32 J24 J30 J64 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34894 |
| By: | Benk, Szilárd; Gillman, Max |
| Abstract: | This study examines how U.S. monetary policy shocks influence global asset prices by tracing their effects through real oil prices and the excess stock returns of oil-exporting nations. We show that expansionary U.S. monetary policy raises real oil prices, which in turn increase excess stock premiums in countries dependent on oil exports. These resource-driven wealth effects intensify geopolitical dynamics between the United States and major oil-exporting economies. Building on structural VAR frameworks that incorporate global oil market fundamentals, we augment the model with U.S. monetary variables, including money supply, inflation expectations, and measures of monetary policy uncertainty. Our results provide robust evidence that monetary-policy-induced oil price shocks elevate excess stock returns in oil-exporting nations, thereby identifying a new transmission channel through which U.S. policy actions shape international financial and strategic outcomes. |
| Keywords: | US monetary policy shocks; real oil prices; SVAR; oil exporting nations; excess premiums; US money supply and inflation expectations |
| JEL: | E31 E51 Q43 |
| Date: | 2026–01–04 |
| URL: | https://d.repec.org/n?u=RePEc:cvh:coecwp:2026/01 |
| By: | Schilling, Linda |
| Abstract: | This paper studies why lender-of-last-resort support can fail to stop bank runs. In a nominal bank-run model with equity and multiple banks, I show that delayed Emergency Liquidity Assistance (ELA) shifts losses onto patient depositors and can trigger panic-driven withdrawals, even with sound assets and unlimited central-bank liquidity. The mechanism is a crisis-contingent, economy-wide inflation tax that insures early withdrawals while taxing those who stay, and redistributes resources across banks through the price level. The results highlight that ELA timing and fiscal design are critical for stability and can make regulatory interventions destabilizing rather than stabilizing. |
| Keywords: | Lender of Last Resort, Emergency Liquidity Assistance, financial regu- lation, bank runs, policy effectiveness, bank resolution |
| JEL: | E50 G3 G33 G38 |
| Date: | 2026–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128236 |
| By: | Ondrej Kusenda (National Bank of Slovakia); Michal Marencak (National Bank of Slovakia) |
| Abstract: | During the 2022-2023 inflation surge, the gap between households’ inflation expectations and realized inflation in Slovakia widened from 7 to 17 p.p., contradicting the view that greater attention to inflation might mitigate the upward bias. Using LASSO and other machine-learning variableselection techniques, we find that movements in food prices which rose faster than headline inflation are strongly associated with the upward bias increase. This evidence highlights selective attention in expectation formation and suggests that, when sectoral price dynamics greatly exceed aggregate inflation, central banks might assign those sectors greater weight in their inflation target. |
| JEL: | C14 C38 C52 D83 D84 E31 E52 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1124 |
| By: | Bahaj, Saleem; Reis, Ricardo |
| Abstract: | While the USD dominates cross-border transactions today, a few other currencies are also used internationally. This paper shows that central bank policies that reduce the volatility of borrowing costs for foreign firms in domestic currency can trigger a jumpstart of the currency’s international status, because firms’ choices of the currency of their working capital complement their sales invoicing. Empirically, the creation of swap lines by the People’s Bank of China between 2009 and 2018 supports this theoretical claim. Signing a swap line with a country is associated with an increase in the probability that the country would use the RMB at all by 12%, and a four-fold increase in the value of the country’s RMB payments. |
| Keywords: | lender of last resort; internationalization; dollar dominance |
| JEL: | E44 E58 F33 F41 G15 |
| Date: | 2026–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128001 |
| By: | Ali, Amjad; Anjum, Rana Muhammad Adil; Irfan, Muhammad |
| Abstract: | This study investigates the impact of different exchange rate regimes on financial stability across both developed and developing countries from 2005 and 2023. Exchange rate policy is a critical component of a nation's macroeconomic framework, influencing key financial indicators and institutional dynamics. Employing a mixed-methods approach, data sources are the International Monetary Fund, World Bank, and Bank for International Settlements. The regression analysis reveals that developed economies tend to perform better under floating exchange rate regimes, owing to stronger institutional frameworks and greater policy flexibility. Furthermore, the study highlights the significant influence of regime type on financial indicators such as inflation, foreign reserves, and current account balances. It underscores the importance of institutional strength, credible monetary policy, and effective governance in the successful implementation of exchange rate regimes. These findings offer valuable insights for policymakers in tailoring exchange rate strategies to national economic contexts. The study recommends that countries align their regime choices with local economic conditions, reinforced by disciplined macroeconomic management and enhanced transparency. |
| Keywords: | Exchange Rate Regimes, Financial Stability, Monetary Policy, Inflation Volatility |
| JEL: | E4 E5 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127533 |
| By: | Angus K. Foulis; Jonathon Hazell; Atif R. Mian; Belinda Tracey |
| Abstract: | This paper estimates how rate cuts increase consumption, via debt and asset prices. Using administrative UK data on mortgages and consumption, we exploit the expiry of fixed-rate mortgages to construct six million household-level natural experiments. A 1pp reduction in mortgage rates raises consumption by 3% in the following 6 months. Using plausibly exogenous variation in how house prices respond to rate cuts, we show that consumption increases mostly because households borrow against higher house prices; lower debt service after rate cuts matters less. These results suggest that in large part, monetary policy affects consumption through asset prices and borrowing |
| JEL: | E0 E20 G5 G51 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34911 |