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on Central Banking |
| By: | Dudley Cooke; Tatiana Damjanovic |
| Abstract: | This paper studies macroprudential policy in a small open economy with financial intermediation and nominal rigidity. Fluctuations in bank deposit rates - which depend on the focus of monetary policy - create liability-side volatility, destabilize net interest margins, and reduce output. A macroprudential policy which shifts bank funding away from deposits towards equity enhances domestic risk-sharing and mitigates volatility. Optimal macroprudential policy generates bank capital ratios that differ by up to 5 percentage points depending on whether monetary policy stabilizes domestic prices or the exchange rate. Relative to an unregulated economy, macroprudential policy raises welfare by between 0.4 percent and 0.9 percent of steady-stateconsumption. |
| JEL: | E52 F41 G11 G15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202601 |
| By: | Ms. Mitali Das; Jonathan Hambur; Klaus-Peter Hellwig; John A Spray |
| Abstract: | Macroeconomic models largely preclude a labor supply response to monetary policy shocks, and this view of monetary policy is reflected in explicit statements by major central banks. Our paper contributes to an emerging literature that challenges this view by providing evidence of a labor supply channel in monetary transmission. We study how Australian workers adjust labor supply in response to the Reserve Bank of Australia’s 2022–23 monetary policy tightening, exploiting administrative data covering the universe of employed workers. Because most Australian mortgages are floating-rate, higher policy rates quickly translate into higher mortgage repayments, allowing us to measure household exposure to the tightening using pre-tightening debt service ratios. We find that highly exposed individuals respond to higher interest payments by increasing labor supply, with sizable effects on employment probabilities, the number of jobs held, and labor earnings. The effects are strongest among those without children, consistent with childcare constraints limiting labor supply responses, but the discrepancy diminishes following a policy reform that increased the generosity of childcare subsidies, highlighting an interaction between fiscal policy and monetary transmission. Together, these findings provide causal evidence that liquidity pressures from higher mortgage repayments can transmit monetary policy to the labor market through house-hold labor supply decisions. |
| Keywords: | Monetary Policy; Labor Supply; Monetary Transmission; Fiscal-Monetary Interactions; Childcare Subsidy; Employment; Mortgage Markets |
| Date: | 2026–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/071 |
| By: | Piero Garcia (Banco Central de Reserva del Perú.); Jorge Pozo (Banco Central de Reserva del Perú.); Rafael Velarde (Banco Central de Reserva del Perú.) |
| Abstract: | This article analyzes the influence of monetary policy rate expectations on the daily reserve accumulation behavior of financial institutions in the Peruvian interbank money market. Using daily data from 39 institutions between January 2017 and September 2024, we show that expectations of policy rate hikes are associated with a faster pace of reserve build-up, while expectations of rate cuts are followed by a slower accumulation pattern. These findings suggest that reserve accumulation dynamics reflect not only liquidity needs driven by legal reserve requirements but also strategic responses to anticipated changes in the policy interest rate. Our empirical analysis, based on fixed-effects panel regressions, provides evidence on the existence of a significant effect of rate expectations on reserve build-up, providing valuable insights for commercial bank’s liquidity management strategies and the design of central bank open market operations. |
| Keywords: | reserve requirements, interbank market, monetary policy expectations |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbp:wpaper:2025-019 |
| By: | Julia Schmidt; Maéva Silvestrini; Urszula Szczerbowicz |
| Abstract: | This paper challenges the conventional wisdom that US monetary policy tightening attracts foreign capital through purchases of US Treasuries. Using bilateral data on US foreign assets and liabilities, we show that much of the observed capital inflows into the US is actually due to US investors repatriating funds from foreign equities. This highlights important heterogeneity between domestic and foreign investors. Extending the analysis to Central Bank Information shocks—monetary surprises conveying additional economic information—we document a distinct global portfolio rebalancing characterized by risk-on behavior, with US investors increasing foreign equity holdings and foreign investors shifting into US equities. |
| Keywords: | Monetary Policy, Spillovers, Capital Flows |
| JEL: | F44 E52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1040 |
| By: | Simone Lenzu |
| Abstract: | I develop a framework analyzing how artificial intelligence (AI) reshapes monetary policy through three interrelated channels: cyclical transmission, structural transition, and financial stability. In the short run, AI can alter inflation dynamics by changing how supply and demand disturbances map into prices—through shifts in production technologies, pricing behavior, cost pass-through, and expectations—even when conventional measures of economic slack are unchanged. Over longer horizons, AI may shift the natural benchmarks around which policy is calibrated, including potential output and the natural rate of interest. For financial stability, AI may improve credit allocation and risk assessment, but can also heighten systemic vulnerabilities through inflated expectation-driven asset valuations and model monocultures. A particular risk arises at the intersection of these channels: if AI initially depresses realized efficiency through adoption frictions while simultaneously fueling elevated asset valuations, the economy may face cost-push inflation and financial fragility at once—an AI-specific stagflation risk that the interest rate instrument alone is ill-suited to address. I argue that AI does not call for a redefinition of central banks’ objectives, but it does require a recalibration of existing frameworks: its diffusion blurs the distinction between cyclical fluctuations and structural shifts, raising the value of cost-side diagnostics and robust policy strategies over exclusive reliance on reduced-form inflation-gap relationships. |
| Keywords: | artificial intelligence; monetary policy; inflation; financial stability |
| JEL: | O33 E52 E58 E31 E32 E44 |
| Date: | 2026–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103050 |
| By: | Greitens, Jan |
| Abstract: | This paper contributes to current debates surrounding the digital euro and US stablecoins by unpacking the present day relevance of two important episodes in monetary history: Prussia's effort in the 18th century to implement a uniform coinage standard across the Holy Roman Empire, and the 19th century Currency School Banking School debate. While the ECB presents the digital euro as a conservative measure designed to preserve the existing two tier system and the euro as a currency anchor, Prussia's failed reform efforts show that political will must be accompanied by political clout for a monetary standard to become widely accepted. Meanwhile, the US is promoting stablecoins backed by government debt in order to foster innovation and extend the dominance of the dollar. Based on a close reading of Hayek, this paper critiques currency competition as a justification for stablecoins. The risk of a fragmented monetary system no longer amenable to central bank control is also discussed with reference to the Currency School Banking School debate, which discloses the perennial importance of balancing stability with elasticity while alsoavoiding fragmentation. In this way Prussian and British historical experience with monetary system reform sheds valuable light on the parameters that policymakers should consider when devising or assessing proposals for digital money, as a failure could lead to uncertainty and the fragmentation of the monetary system or excessive rigidity in the money supply. |
| Keywords: | Digital Euro, Monetary Anchor, Gresham's Law, Currency Competition, Stablecoins |
| JEL: | E42 E58 N13 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ibfpps:340050 |
| By: | Giovanni Di Bartolomeo; Francesco Ferlaino; Carolina Serpieri |
| Abstract: | This paper studies why inflation inattention varies across households and over time, and how such variation shapes monetary transmission. We propose a behavioral mechanism, grounded in reference dependence and relative consumption, through which inflation inattention depends on the consumption gap between asset holders and non-asset holders. Consistent with this intuition, U.S. data suggest a negative reduced-form relationship between the consumption gap and inflation inattention. Motivated by this pattern, we develop a Two-Agent New Keynesian model with imperfect information in which asset holders endogenously reduce inattention when the consumption gap widens. The mechanism improves the accuracy of inflation expectations and inflation stabilization after cost-push shocks, but at the cost of a deeper contraction in real activity and lower welfare in inefficient steady states. |
| Keywords: | behavioral macroeconomics; inflation; inattention; expectations; consumption gap; monetary policy. |
| JEL: | E31 E52 E58 E71 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:sap:wpaper:wp280 |
| By: | Stefan Tanevski |
| Abstract: | This paper asks how institutional stock-market integration reshapes the transmission of monetary policy through asset prices in small open economies. Motivated by the persistent segmentation of Western Balkan capital markets, we develop a two-stage counterfactual transmission framework to identify how stock-exchange consolidation would alter the elasticity of market valuations to monetary shocks. First, a synthetic-control simulation constructs a counterfactual integrated Western Balkan stock exchange comprising Bosnia and Herzegovina, North Macedonia, and Serbia, benchmarked to the Baltic OMX merger, thereby quantifying the structural valuation gains of institutional integration. Second, we identify exogenous monetary-policy innovations using a Taylor-rule framework augmented with inflation and output forecasts and reserve adjustments. These shocks are then embedded within a Local-Projections estimator \`a la Jord\`a (2005) to trace the dynamic responses of market capitalisation under fragmented and integrated market regimes. The results point to a systematic amplification of monetary-policy transmission through the asset-price channel once markets are unified. Following a policy tightening of about 100 basis points, equity valuations fall roughly twice as strongly under integration than under fragmented markets. Additionally, we find that integration alters the sensitivity of monetary transmission itself: the initial pass-through intensifies, but its marginal responsiveness to further integration declines over time, signalling the consolidation of a new steady-state regime. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.18330 |
| By: | Christopher D. Cotton; Vaishali Garga |
| Abstract: | The real effects of monetary policy depend on price stickiness. Existing studies that measure aggregate stickiness using US consumer price index microdata hold the consumption basket fixed. This yields a lower level of stickiness in 2024 compared with 1978. We show instead that stickiness is unchanged. Although individual products now change prices more frequently, the effect is largely offset by shifts in consumer spending, notably toward services with stickier prices. These consumption-basket shifts reduce the estimated decline in monetary non neutrality by 25 percentage points, suggesting that monetary policy remains far more effective than methods used in existing studies imply. |
| Keywords: | Frequency of price changes; size of price changes; price stickiness; price distribution; monetary non-neutrality; consumer price index; expenditure weights |
| JEL: | E31 E52 E58 |
| Date: | 2026–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:103045 |
| By: | Olivier De Jonghe; Daniel Lewis |
| Abstract: | We propose a new model in which relationship-specific effects or shocks are identified in a bipartite network under mild covariance restrictions, generalizing the influential Abowd et al. (1999) framework. For example, separate demand shocks are identified for each bank from which a firm borrows. We show how previous approaches break down when confronted with such heterogeneity, while our novel identification strategy yields a simple estimator that is consistent and asymptotically normal, under weaker network density assumptions than previous approaches. The methodology performs well in empirically-calibrated simulations. We apply our approach to identify relationship-level credit demand and supply shocks for thousands of firms and banks across nine Euro-area countries and three distinct economic episodes. We formally reject the Abowd et al. (1999) assumptions in nearly every country-period and show that within-firm/bank shock variation is of comparable scale to between firm/bank variation. We document considerable bias in Abowd et al. (1999) style estimates and associated regressions, while finding significant deleterious effects of the post-2022 monetary contraction on exposed firms. We highlight novel heterogeneity in the transmission of monetary policy. |
| Date: | 2026–04–16 |
| URL: | https://d.repec.org/n?u=RePEc:azt:cemmap:06/26 |
| By: | Carola Binder; Dimitris Georgarakos; Pei Kuang; Li Tang |
| Abstract: | We study how consumer expectations respond to monetary policy announcements using a two-wave survey experiment around the September 2025 FOMC meeting. We compare three commonly used approaches to identifying causal effects on expectations: hypothetical ("vignette’’) scenarios, randomized control trials, and event studies. All three identification strategies yield qualitatively similar results: a rate cut reduces short- and long-run inflation expectations, raises expectations of economic activity, and lowers unemployment expectations. The estimated magnitudes are similar across the randomized controlled trial and event-study approaches, but relatively larger for vignette-based measures. Within-respondent comparisons further show that individuals who revise their expectations more in response to vignette scenarios also exhibit larger revisions following actual policy announcements and experimental information treatments. |
| JEL: | D83 D84 E31 E52 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35090 |
| By: | Ana Maria Herrera; Elena Pesavento; Alessia Scudiero |
| Abstract: | We propose a clustered local projection (clustered LP) method to estimate impulse response functions in a class of time-varying models where parameter variation is linked to a low-dimensional matrix of observables. We show that the clustered LP recovers the conditional average response when the driving variables are exogenous and a weighted average of the conditional marginal effects when they are endogenous. We propose an iterative estimation method that first classifies the data using k-means, estimates impulse response functions via GMM, and evaluates differences across clustered LP estimates. Our Monte Carlo simulations illustrate the ability of clustered LP to approximate the conditional average response function. We employ our technique to examine how uncertainty influences the transmission of a contractionary monetary policy shock to the 5- and 10-year U.S. nominal Treasury yields. Our estimation results suggest macroeconomic and monetary policy uncertainty operate through complementary but distinct channels: the former primarily amplifies the risk compensation embedded in the term premium, while the latter governs the speed and persistence with which markets revise their expectations about the future rate path following a monetary policy shock. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.18778 |
| By: | Ms. Ebru Sonbul Iskender; Katharine Seal; Ana Carvalho |
| Abstract: | The Basel capital framework has evolved since the introduction of Pillar 2 in Basel II. Basel III enhanced capital quality and quantity, adding macroprudential buffers such as the capital conservation buffer, the countercyclical capital buffer, and systemic risk buffers for global and domestic systemically important banks to strengthen banking resilience post-global financial crisis. Pillar 2 remains crucial for addressing bank-specific risks and vulnerabilities beyond Pillar 1, relying on supervisory judgment and banks’ internal capital adequacy assessments. Emerging and developing economies should adapt the Basel framework to local contexts, often maintaining higher capital requirements because of macroeconomic volatility and structural weaknesses. In developing the architecture of capital adequacy, jurisdictions need to focus on the appropriate mix and the sequencing of Pillar 2 add-ons and Basel III capital buffers tailored to their specific circumstances. Effective implementation requires strong supervisory powers, good data quality, and a tailored mix of Pillar 2 add-ons and Basel III buffers. |
| Keywords: | Basel Framework; Pillar 2 capital add-ons; capital buffers; risk-based supervision; emerging market and developing economies; credit cycle; capital requirement; bank capital; countercyclical capital buffer; establishing capital threshold; capital assessment; Countercyclical capital buffers; Capital adequacy requirements; Basel III; Global systemically important banks; Credit; Global |
| Date: | 2026–04–08 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imftnm:2026/002 |
| By: | Bo Li; Mr. Tommaso Mancini-Griffoli; Mr. Marcello Miccoli; Brandon Joel Tan; Ms. Longmei Zhang |
| Abstract: | Payment stablecoins are privately issued digital money with the potential to enhance payment efficiency, foster innovation, and improve financial inclusion. At the same time, they are vulnerable to runs and associated welfare losses. One way to lower run risk is to require stablecoin issuers to hold safe assets. But doing so may lower issuers’ profitability and thus their incentive to provide stablecoins, hampering payment innovation and product variety. This paper offers a theoretical framework to navigate the tradeoff between maintaining stability and incentivizing issuance. Based on the Diamond and Dybvig (1983) model of bank runs, the paper shows that an unregulated private equilibrium is suboptimal. Stablecoin issuers hold risky assets to maximize profits, increasing run risk. A social planner can improve the equilibrium by requiring the backing of stablecoins with a safe asset (such as central bank reserves in a narrow bank setting), and creating conditions for other sources of revenue for issuers (such as central bank reserves remuneration or policies for payment data utilization). The model offers a baseline for the ongoing policy discussion while identifying considerations for further study. |
| Keywords: | Stablecoins; reserve backing; digital money; Stablecoin issuer; stablecoin issuer; payment innovation; payment efficiency; issuers' profitability; International reserves; Bank deposits; Commercial banks; Financial statements; Global |
| Date: | 2026–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/074 |
| By: | Joel P. Flynn; George Nikolakoudis; Karthik A. Sastry |
| Abstract: | We build a general equilibrium model in which firms endogenously choose whether to target prices or quantities. We characterize how these choices of organizational targets depend on firms' uncertainty about microeconomic and macroeconomic factors. In equilibrium, the transmission of both nominal and real shocks hinges on firms' organizational targets. For example, under otherwise identical microfoundations, money is neutral under quantity targets and non-neutral under price targets. We further characterize how targets shape firms' strategic interactions and prove that the macroeconomic uncertainty that arises from each choice of targets reinforces incentives to choose that target. That is, choices of organizational targets are strategic complements. For this reason, monetary policy aimed at stabilization can backfire by inducing a regime shift that renders it ineffective. A simple quantification suggests that incentives over organizational targets can vary markedly at business-cycle frequencies and help explain the state-dependent pass-through of monetary shocks to prices and output. |
| JEL: | E0 E3 E40 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35099 |
| By: | Hyeongwoo Kim; Ren Zhang; Shuwei Zhang |
| Abstract: | The labor market effects of government employment shocks in the United States have varied markedly across the postwar period. Using a Bayesian structural VAR with max-share identification, we document three distinct regimes: before the Volcker disinflation, public hiring crowded in private employment, raised real wages, and reduced unemployment; during the Great Moderation, the same shocks became contractionary; and after the Global Financial Crisis, their effects were largely muted. We account for these changes with a New Keynesian DSGE model featuring public employment, alternative monetary--fiscal regimes, and a maturity structure of government debt. The model shows that while monetary--fiscal coordination holds in both the pre-Volcker and post-GFC periods, debt maturity differs sharply across them. Longer debt maturity weakens fiscal transmission even under passive monetary policy, whereas aggressive anti‑inflationary policy renders government employment shocks contractionary regardless of debt maturity. |
| Keywords: | Debt Maturity; Government Employment; Max-Share Identification; Policy Coordination; Time-varying Effectiveness |
| JEL: | E32 E61 E62 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2026-04 |
| By: | Guido Ascari; Andrea Colciago; Marco Membretti |
| Abstract: | Under monetary tightenings, employment at small, high-churn firms con-tracts more than at large incumbents, raising the employment share of large firms. A mixed-frequency BVAR on U.S. data (1983–2018) shows that tight-enings reduce firm entry and new-entrant hiring, severing inflows into small firms, while higher exit destroys small-firm employment. Large incumbents are comparatively insulated, rarely exiting and exhibiting weak sensitivity to entry conditions. This mechanism raises employment concentration, defining an em-ployment concentration channel of monetary policy. An estimated structural model with heterogeneous firms, endogenous entry and exit, and equilibrium unemployment matches this effect, showing that the concentration channel is quantitatively important in accounting for the empirical output-inflation trade-off. |
| Keywords: | Monetary policy; employment concentration; unemployment; heterogeneous firms; BVAR. |
| JEL: | E52 E32 C13 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:859 |
| By: | Filippin, Maria Elena (Central Bank of Ireland and Uppsala University) |
| Abstract: | This paper examines how household-targeted government policies influence financial market participation conditional on financial literacy, focusing on potential Central Bank Digital Currency (CBDC) adoption. Due to the lack of empirical CBDC data, I use the 2012 introduction of retail Treasury bonds in Italy as a proxy to study how financial literacy affects households’ likelihood to engage with a new government-backed retail instrument. Using the Bank of Italy’s Survey on Household Income and Wealth, I show that households with some but low financial literacy are more likely to participate in the Treasury bond market than other groups following the introduction of the new instrument. Based on these findings, I develop a theoretical model to study how financial literacy affects CBDC demand through portfolio choice - low-financially literate households with limited access to risky assets allocate more resources to CBDC, while high-financially literate households use risky assets to safeguard against income risk. |
| Keywords: | Central Bank Digital Currency, Financial literacy, Government policies, Market participation, Treasury bonds. |
| JEL: | E42 E58 G11 G18 G53 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:wpaper:05/rt/26 |
| By: | Filippin, Maria Elena (Central Bank of Ireland); Pelli, Michele (Central Bank of Ireland) |
| Abstract: | Trust is a central element of monetary and payment systems, and it plays a particularly important role when assessing the prospects for the digital euro. Ireland’s digitally advanced payment landscape provides useful context for understanding how households view the potential for digital euro adoption. Across the euro area, Irish respondents are the fourth most likely to report being willing to use the digital euro, with trust in the euro and institutions strongly associated with adoption intentions. While 90% of Irish respondents view the traditional form of physical euro positively, digital euro awareness remains below the euro area average (at 49%), highlighting the need for enhanced public communication as the project progresses. Digital euro awareness and adoption intentions within Ireland vary modestly across demographic groups, with men, older respondents, and the financially literate showing consistently higher awareness, willingness to adopt, and emphasis on key features such as security and business acceptance. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:stafin:2/si/26 |
| By: | Charles W. Calomiris; Matthew S. Jaremski |
| Abstract: | Financial crises remain a recurrent feature of modern economies despite evidence that many are predictable and preventable. This chapter discusses how financial instability often reflects a political equilibrium rather than purely technocratic shortcomings. Contrasting economic and political perspectives on regulation, the chapter emphasizes how policymakers shape financial rules in ways that favor politically-influential groups but result in financial vulnerability. Key mechanisms include restricted bank chartering, safety nets, credit subsidies, and sovereign borrowing. Political forces also shape crisis management. Delayed interventions, selective support, and constrained policy responses can deepen and prolong crises. Together, these dynamics help explain the persistent and foreseeable nature of financial instability across time, legal origins, political structures, and institutional contexts. Instead of seeing financial crises as arising from an unavoidable vulnerability to external shocks they are better seen as a mirror of the societies in which they occur, reflecting their political structures, vying constituencies, cultural preferences, and blind spots. |
| JEL: | E44 F34 G01 H12 N1 N2 P16 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35101 |