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on Central Banking |
| By: | Michael Irwin; Matías Vieyra |
| Abstract: | This note examines how monetary policy responses to shelter inflation affect both the overall economy and different households. We find that the aggregate macroeconomic effects of responding to shelter inflation are modest, whereas the redistributive consequences across households are substantially larger. Renters and homeowners differ sharply in their preferences over whether the central bank should react to elevated shelter inflation. Finally, mortgage interest cost (MIC) inflation responds mechanically to changes in interest rates. As a result, a monetary policy that reacts to these inflation movements generates an endogenous feedback loop, producing undesirable oscillations in consumption and output. |
| Keywords: | Monetary policy; Monetary policy framework and transmission |
| JEL: | E2 E3 E4 E5 G5 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-5 |
| By: | Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden |
| Abstract: | We introduce a tractable model of the two-tier monetary system with heterogeneous agents and incomplete markets. We use this model to characterize the dynamics of bank lending under general fiscal and monetary policy and derive the welfare optimal level of Central Bank reserves and the optimal interest rate on reserves. We also identify a new risk channel of monetary policy. In the model, banks have a dual role as loan providers and money creators, and cannot fully diversify credit risk. Central Bank reserves are used to settle interbank claims and serve as a safe asset, thereby buffering risks for banks. We show how the Central Bank and the Treasury can implement any desired allocation by setting interest rates, issuing a particular amount of reserves, and imposing taxes, and show that uncoordinated policy responses to shocks by the Central Bank alone may cause sub-optimal outcomes and significant instability. |
| Keywords: | Central Bank reserves, interest rate on reserves, liquidity requirements, mone tary system, incomplete markets |
| JEL: | E42 E43 E50 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_765 |
| By: | Hannikainen, Lauri |
| Abstract: | Standard New Keynesian models treat aggregate total factor productivity as exogenous to monetary policy. This paper studies optimal monetary policy in the four-equation New Keynesian model of Baqaee, Farhi, and Sangani (2024), in which monetary expansions reallocate resources toward high-markup firms, reduce misallocation, and raise aggregate productivity. This endogenous productivity response flattens the Phillips curve and changes the optimal target criterion of a dual-mandate central bank. The resulting criterion is both forward- and backwardlooking. In my calibration, this criterion is closely approximated by a familiar New Keynesian target criterion adjusted only for the flatter Phillips curve. By contrast, applying a standard target criterion that ignores the effect of monetary policy on aggregate productivity leads the dual-mandate central bank to stabilize inflation too aggressively and generates excessive output fluctuations. |
| Keywords: | monetary policy, Phillips curve, aggregate productivity, misallocation, target criteria, firm heterogeneity |
| JEL: | E31 E52 E61 D24 D43 D61 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:343109 |
| By: | António Afonso; Leonardo Zorzi |
| Abstract: | In the aftermath of the 2007-2009 global financial crisis, a growing body of research questioned the conventional inflation-targeting framework that has long guided monetary policy, arguing that the inflation targets adopted by major central banks may have been set too low. We evaluate the likelihood that advanced economies will become constrained by the effective lower bound on nominal interest rates in the future. Therefore, using end-quarter data over the period 1999Q1 to 2025Q4, we develop a counterfactual framework that quantifies how this risk changes under alternative scenarios with higher average inflation. Using a vector autoregression model and an ARDL-ECM framework, we estimate the cumulative probability of hitting the Zero Lower Bound (ZLB), that is, the probability that policy rates reach the constraint at least once during the projection horizon. Our results indicate that Switzerland and Japan face the highest risk of encountering the ZLB, whereas Sweden, the Euro Area, the United States, and Canada exhibit an intermediate level of risk. By contrast, the United Kingdom and Norway appear to be the least vulnerable. These findings are broadly consistent with cross-country differences in average inflation and nominal interest rate levels. |
| Keywords: | inflation, inflation targeting, monetary policy, zero lower bound, VAR, ARDL |
| JEL: | E02 E31 E47 E52 E58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12920 |
| By: | Jonathan Witmer; Monica Jain |
| Abstract: | Central banks all over the world publicly provide varying degrees of information on future monetary policy underlying their projections. Such information ranges from very little information about the path, to publishing a path based on financial market interest rate expectations or an endogenous reaction function. The IMF, in their Article IV recommendations, has suggested that the Bank should provide more information about the policy rate path that is in the projections published in their Monetary Policy Report. This note discusses several ways the BoC could increase communication around future policy, leveraging methods other central banks have used, and discussing the pros and cons of each method for the BoC, keeping in mind that policy rate forecasts typically are not informative beyond 1 or 2 quarters. In doing so, it is important to recognize that most central bank projections are conditioned on market expectations or mathematic representations of policy reaction functions that may or may not reflect policymaker views. In this context, the Bank could consider providing more details on the inputs to GC policy deliberations, including policy recommendations of Bank staff and senior advisors. However, caution should be taken in providing more information about policy rate paths (especially beyond the near term), since such information could direct more public focus on a forecast that is not informative or could be misinterpreted by the public. |
| Keywords: | Monetary policy; Monetary policy framework and transmission; Monetary policy tools and implementation |
| JEL: | D83 E58 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-16 |
| By: | Bremer, Björn (Central European University); Baccaro, Lucio |
| Abstract: | Central bank decisions have become politically contested. In response, central banks communicate more with the public, since their effectiveness rests on public trust. Yet whether they reach ordinary citizens is largely unknown. We exploit the European Central Bank’s unexpected announcement of the Pandemic Emergency Purchase Programme (PEPP) during the fieldwork of a March 2020 survey in Germany and Italy. Our results show that the same decisive intervention was rewarded only where it aligned with the perceived national interest: in Italy, trust in the ECB rose, strongest among news-followers and the left; in Germany, trust in the ECB did not move at all, even as trust in national institutions surged. Preferences for central bank goal independence moved in neither country. Citizens thus notice exceptional monetary policy decisions, but their responses are mediated by national interests and discourses, with asymmetric consequences for a central bank that makes one policy for many publics. |
| Date: | 2026–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:zyvjh_v1 |
| By: | Nishaad Rao; Tao Wang |
| Abstract: | We use Canadian data to examine how monetary policy affects house prices and the consumer price index for rent (CPI-rent) through exogenous changes in the mortgage interest rates. Nationwide, tighter monetary policy lowers house prices but raises CPI-rent, likely due to higher user costs for landlords or greater relative demand for rental housing. City-level analysis shows that, in response to tighter monetary policy, house prices fall most in cities where supply is inelastic, while CPI-rent tends to rise in cities with lower proportions of households moving from renting to owning. |
| Keywords: | Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission |
| JEL: | E31 E52 R21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-2 |
| By: | Henry Dyer; Tomas Jankauskas |
| Abstract: | A long-standing body of research, inspired by Bernanke and Kuttner (2005), has documented the effects of Fed interest rate surprises on stock markets. While stock markets provide valuable information about the investor risk premium and dividend growth expectations, researchers have only recently developed more comprehensive tools to estimate the term structure of equity risk premia and dividend growth expectations across a broad range of maturities. In this post, we investigate the impact of monetary policy surprises (or shocks) on short- and long-term estimates of risk premia and growth expectations through the lens of the Giglio, Kelly, and Kozak (2024) model. |
| Keywords: | equity term structure; monetary policy surprises |
| JEL: | E44 E58 E52 |
| Date: | 2026–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103636 |
| By: | Ed Manuel; Christian K. Wolf |
| Abstract: | Recent applied work has used interacted local projections to study how the propagation of macroeconomic shocks changes with the policy regime. We characterize the estimand of such strategies and relate it to the policy shock literature. Our main result is a set of conditions on the regressors and underlying data-generating process under which those two approaches are equivalent in the nature of their estimand, with both identifying slices of the same space of policy dynamic causal effects. Since policy is inherently high-dimensional, however, the two approaches generically recover different slices of that space. For example, for monetary policy, standard shocks tend to deliver the effects of transitory policy rate changes, while looking across policy regimes instead isolates gradual, more forward guidance-like policy treatments. |
| JEL: | C22 E32 E61 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35615 |
| By: | Nikolay Hristov; Dominik Menno |
| Abstract: | We study how long-run inflation affects systemic bank-run risk in a medium-scale New Keynesian model with banks and endogenous financial panics. In the benchmark calibration, the bank-run probability more than doubles when annual trend inflation increases from zero to six percent. Higher trend inflation makes price-setting firms more forward-looking, thereby muting expected real-rate declines and amplifying the fall in asset prices during crises. The zero lower bound raises run risk only at low long-run inflation rates. Disinflationary transitions can sharply increase short-run risk, especially if a "cold turkey" disinflation is pursued. Finally, we discuss implications for monetary and macroprudential policy trade-offs. |
| Keywords: | long-run inflation, bank runs, financial panics, crisis probability |
| JEL: | E12 E23 E31 E32 E44 E52 G01 G21 G33 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12918 |
| By: | Daniela Hauser; Stefano Gnocchi; Laure Simon |
| Abstract: | This paper documents large heterogeneity in the cyclicality of expenditure items within aggregate consumption and shows that a substantial part of this heterogeneity can be explained by differences in the household time required to consume. Combining data from the American Time Use Survey and Personal Consumption Expenditures, we construct a set of consumption activities and establish new stylized facts. We show that in a recession consumption expenditures fall to a greater extent for those activities to which households reallocate a larger share of foregone market hours, suggesting that time and expenditures are substitutes. We develop a two-sector New Keynesian model that rationalizes these patterns. Disciplining the model with microeconomic estimates of the elasticity of substitution between time and expenditures and of price stickiness, we find that our model accounts for roughly forty percent of the impact expenditure response to monetary policy shocks. |
| Keywords: | Models and tools; Economic models; Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission |
| JEL: | D D1 D12 E E2 E21 E3 E32 E5 E52 J J2 J22 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-29 |
| By: | Christopher S. Sutherland |
| Abstract: | We consider two trade-offs inherent to extraordinary forward guidance (EFG): potency versus flexibility, and the credibility of forward guidance versus the credibility of inflation targeting. We argue that the form of EFG used by the Bank of Canada during the COVID‑19 pandemic balanced both trade-offs relatively well. We also draw three lessons from the Bank’s pandemic EFG experience. |
| Keywords: | Monetary policy; Monetary policy tools and implementation |
| JEL: | D83 D84 E37 E52 E58 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-1 |
| By: | Romain Baeriswyl |
| Abstract: | While money has evolved from natural commodities to digital tokens, the debate about the ideal money has remained the same throughout the ages. Historical controversies about the origin, nature, and double-spending of money offer valuable insights for navigating the new forms of money tokens such as cryptocurrencies, central bank digital currencies and stablecoins. |
| Keywords: | Natural law of money, State theory of money, Economic good theory of money, Credit theory of money, Double-spending of money |
| JEL: | E40 E42 E50 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-10 |
| By: | Lison Christiaens; Julien Hambuckers; Alain Hecq |
| Abstract: | This paper studies the presence of noncausal dynamics in standard macro-finance VAR models and asks whether they reflect genuine nonfundamentalness or omitted information available to economic agents but unobserved by the econometrician. To that end, we introduce a factor-filtering mixed causal-noncausal VARX approach designed to account for common macroeconomic information. We assess its performance in simulated settings, while showing also that the generalized covariance (GCov) estimator correctly recovers causal and noncausal dynamics when using several lags. Empirically, we revisit the well-known Stock-Watson monetary policy (S)VAR and show that the noncausal components detected in the baseline specification largely disappear once common factors are filtered out. Finally, we compare impulse responses from the filtered and original data to assess the transmission of monetary policy shocks and show that filtering further removes the price puzzle. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.28131 |
| By: | Vivien Czofa; Tibor Szendrei; Katalin Varga |
| Abstract: | This paper employs a Threshold Bayesian Vector Autoregression (TBVAR) to estimate the regime-dependent macroeconomic effects of capital regulation in Hungary. Using the Factor-based Index of Systemic Stress (FISS) as the threshold variable, the model identifies normal and stress regimes consistent with the occasionally binding constraints literature. The TBVAR offers a practical multivariate alternative to Growth-at-Risk for data-constrained economies. Generalised impulse responses reveal a pronounced asymmetry: releasing regulatory capital during stress raises GDP growth at the peak, with effects persisting for roughly twenty months, while the cost of accumulating capital in the normal regime is economically negligible. These findings are robust to alternative Cholesky orderings, sample periods, and credit variable definitions, providing direct empirical support for the countercyclical operation of the capital buffer. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.14307 |
| By: | Rakesh Arora; Umar Faruqui; Scott Hendry; Dinesh Shah; André Usche; Mark Byrne; Caroline Cook; Kevin Fraites; Wally Forsyth; Alex Caridia; Chris Meston; Teresa Venturino; Devon Read; Chadrick Buffel; Anne Boulanger; Sylvie Lacombe; Marsha Loraas |
| Abstract: | Project Samara was a limited, real world experiment designed to evaluate the use of distributed ledger technology (DLT) and wholesale central bank digital money (W CAD) in Canadian capital markets. The project involved the issuance of a single tokenized bond by Export Development Canada to a closed investor group, with RBC Capital Markets and TD Securities acting as joint lead managers. Settlement was conducted in central bank money issued by the Bank of Canada through a purpose built DLT platform integrating a securities ledger and a cash ledger to support end to end market processes. The experiment assessed whether DLT could improve efficiency, reduce settlement risk through atomic settlement, and enhance settlement finality and transaction speed. Project Samara showed that DLT based issuance and settlement of real financial instruments is technically feasible and can improve data integrity and reduce counterparty and settlement risk. These benefits were partly offset by increased system complexity, governance and liquidity costs, and new operational risks, as well as legal and regulatory frictions stemming from the need to reconcile decentralized ledger designs with existing centralized market roles. Given its narrow scope and experimental design, the findings are preliminary and illustrative, but they provide useful insights for future research and policy discussions on tokenization and DLT based financial market infrastructure. |
| Keywords: | Financial markets and funds management; Funds management; Market structure; Money and payments; Digital assets and fintech; Payment and financial market infrastructures |
| JEL: | E42 E58 G28 O33 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-8 |
| By: | Felipe Alves; William Beaudoin; Hélène Desgagnés; Wei Dong; Jan David Schneider; Eugene Trostin; Argyn Toktamyssov; Hannes Twieling |
| Abstract: | This paper presents Bank of Canada staff’s current assessment of the US and Canadian neutral rates of interest. The neutral rate is where the Bank expects the policy rate would settle once output is at its long-run potential level and inflation is at target, after the effects of all cyclical shocks have dissipated (Mendes 2014). The Bank does not target the neutral rate, but this is an important input for its economic projections. We assess the Canadian nominal neutral rate to be in the range of 2.25% to 3.25%, unchanged from our assessment in 2025. We assess the US nominal neutral rate to be in the range of 2.50% to 3.50%, somewhat higher than the range of 2.25% to 3.25% reported in the 2025 assessment. In Canada, lower long-term population growth offsets higher long-term productivity growth. In the US, the revision is explained by a stronger outlook for potential output growth. |
| Keywords: | Monetary policy; Monetary policy framework and transmission |
| JEL: | E43 E52 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-21 |
| By: | Jongrim Ha; Haroon Mumtaz; Franz Ruch |
| Abstract: | We develop a new dynamic factor model with stochastic volatility to quantify inflation tail risk across a large cross section of countries. The framework accommodates unbalanced panels and mixed-frequency data, allowing estimation of the full predictive distribution of inflation for over 200 economies over 1971-2023. Inflation risk - defined as the probability that inflation exceeds 5 percent over a twelve-month horizon - declined during the Great Moderation but rose sharply following the COVID-19 pandemic, with the global probability surpassing 50 percent from early 2021 through 2023. Exploiting the joint predictive distribution of inflation and real activity, we document a brief surge in global stagflation risk in late 2021. While inflation risk responds to both structural demand and supply shocks, it tends to decline during monetary policy tightening cycles. Cross-country evidence further shows that economies with greater trade and financial openness, stronger monetary policy frameworks, and fixed exchange rate regimes face systematically lower inflation risk, while commodity-exporting countries exhibit higher tail exposures. Overall, the results under-score the importance of monitoring inflation risks alongside inflation forecasts and highlight the role of institutions in mitigating macroeconomic tail vulnerabilities. |
| Keywords: | monetary policy, risk, FAVAR, stochastic volatility |
| JEL: | C32 E44 E52 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-72 |
| By: | Joshua Brault; Maryam Haghighi; Jing Yang |
| Abstract: | Recent advances in artificial intelligence (AI) have revived expectations of transformative productivity gains and large-scale labour-market disruption. Yet despite rapid improvements in AI capabilities, aggregate productivity growth in advanced economies remains subdued, and widespread job displacement has not materialized. This divergence between technological promise and measured outcomes—the “AI productivity paradox”—poses important challenges for policy. This article synthesizes emerging empirical evidence on AI’s effects on labour markets and productivity. Near-term impacts are concentrated in within-occupation task restructuring and early-career hiring, while causal micro-level studies document sizable productivity gains (15–60 percent) that have yet to appear in aggregate statistics because of diffusion lags, organizational adjustment costs, and measurement limitations. We then examine the macroeconomic implications for potential output (Y*) and inflation dynamics. While AI is likely to boost potential output and exert disinflationary pressures over the long run, the effect on inflation during transition is much less certain. For monetary policy, the central challenge is distinguishing structural adjustment from cyclical weakness in real time. We argue that effective policy during the AI transition should exhibit measured flexibility. |
| Keywords: | Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission; Structural challenges; Digitalization and productivity |
| JEL: | E24 E31 E50 E52 E58 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-4 |
| By: | Jean-Sébastien Fontaine; Neil Maru; Sofia Tchamova |
| Abstract: | The CORRA benchmark interest rate experienced sustained pressures in Canada around the Fall of 2025. The growing imbalance between repo lenders and borrowers meant that funding markets increasingly relied on Canadian banks’ balance sheets to absorb this funding gap. The Bank of Canada’s adjustments to its term repo operations, together with an eventual reduction in the imbalance between lenders and borrowers, both contributed to relieve pressures. The episode highlights that pressures on the CORRA benchmark can emerge from the interaction of client borrowing behavior and dealer balance sheet constraints, even if the level of settlement balances is in a range deemed sufficient to meet the requirement of the payment system and the precautionary demand of its members. |
| Keywords: | Financial markets and funds management; Market functioning; Monetary policy; Monetary policy tools and implementation |
| JEL: | E52 G23 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-15 |
| By: | James Chapman; Ajit Desai; Maryam Haghighi; James (Jim) C. MacGee |
| Abstract: | Rapid advances in artificial intelligence (AI)—including machine learning, natural language processing, and generative AI—are expanding the ability to extract meaningful insights from non-traditional data sources such as text, speeches, images, and real-time transactions, thereby strengthening policy analysis and operational decision-making. These tools also enable more sophisticated analytical approaches to the study of economic dynamics while creating opportunities to improve efficiency across institutional processes and operations. This paper documents the growing use of non-traditional data and AI at the Bank of Canada and their contribution to deeper insight and operational effectiveness. The experience highlights critical considerations for accelerating the responsible integration of AI into central banking functions, including evolving ways of working and career paths, fostering a robust ecosystem for innovation, and addressing emerging risks. A successful AI strategy must balance innovation with trust, transparency, security, reproducibility, sound model governance, data residency, and effective operational risk management. |
| Keywords: | Financial system; Financial stability and systemic risk; Monetary policy; Monetary policy tools and implementation; Money and payments; Payment and financial market infrastructures |
| JEL: | C45 C55 C88 L23 M15 O33 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-17 |
| By: | Amina Enkhbold; Serdar Kabaca |
| Abstract: | This note finds evidence of a positive and nonlinear relationship between mortgage interest costs (MIC) and rental inflation: the impact of MIC on rents is small when population growth is near its historical norm, but significantly stronger during periods of rapid population growth. This pattern is consistent with a nonlinear Phillips curve, where cost pressures are more likely to feed into higher prices when demand is elevated. |
| Keywords: | Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission |
| JEL: | E31 E32 E52 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-14 |
| By: | Bruno Feunou; Jean-Sébastien Fontaine; Rishi Vala |
| Abstract: | This paper introduces CLONE (Classification Of News), a method that decomposes asset price movements into four types of macroeconomic news—aggregate demand, productivity, inflation, and monetary policy—based on joint changes in prices of stocks, bonds, and inflation swaps. CLONE’s simplicity and forward-looking focus enable the identification of real-time economic signals that are critical for understanding market behavior and guiding policy decisions. We show that from 2004 to 2024 aggregate demand news historically dominated daily variation in asset prices, while inflation and monetary policy news have gained importance since 2021. We validate our method against sign-restricted VAR models and apply it to major U.S. macroeconomic data releases, providing insights into how market participants interpret and react to forward-looking information. We discuss several benefits of our approach relative to the standard sign restriction method. |
| Keywords: | Models and tools; Econometric, statistical and computational methods; Monetary policy; Monetary policy framework and transmission |
| JEL: | E32 E44 G12 G14 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-7 |
| By: | Wang, Kaiwei |
| Abstract: | This paper asks whether innovations in Federal Open Market Committee (FOMC) statement language explain high-frequency movements in the U.S. Treasury yield curve beyond conventional monetary-policy surprises. The analysis covers 211 scheduled statement releases from March 2000 through July 2026 and uses 30-minute asset-price changes from the Federal Reserve Bank of San Francisco U.S. Monetary Policy Event-Study Database. A transparent text-as-data pipeline classifies sentences as hawkish, dovish, or neutral using word- and character-level TF-IDF features with multinomial logistic regression. The meeting-level innovation score measures the net stance of language added to, removed from, or replaced relative to the preceding scheduled policy statement. Baseline regressions control for the futures-implied current-meeting surprise (MP1) and simultaneous Summary of Economic Projections releases; an expanded specification adds the next-meeting path surprise (MP2). Inference combines HC3 covariance estimates, a meeting-clustered maturity system, permutation and wild-bootstrap tests, multiplicity corrections, equivalence tests, minimum detectable effects, leave-one-year-out prediction, and resampling of the labeled text corpus. The estimated coefficients are small at all six Treasury maturities: 0.001, 0.121, 0.132, 0.119, -0.013, and 0.072 basis points per one-standard-deviation hawkish innovation at three months, six months, two years, five years, ten years, and thirty years. Every 95 percent confidence interval includes zero, and a joint six-maturity test yields p = 0.439. Adding MP2 does not materially change the estimates; the text score does not improve out-of-year prediction, and no result in the predeclared robustness family survives multiplicity adjustment. Equivalence tests reject average effects outside plus or minus 1 basis point at every maturity. Under this design, scalar statement hawkishness provides little incremental average information for Treasury-yield reactions once market-based policy surprises are controlled for, although smaller, state-dependent, or multidimensional communication effects remain plausible. |
| Keywords: | FOMC communication; monetary policy surprises; Treasury yield curve; text as data; high-frequency event study; equivalence testing |
| JEL: | E43 E52 E58 G12 G14 |
| Date: | 2026–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:130358 |
| By: | Ean Lay, Sam; Phon, Sophat; Som, Vuddneath; Lum, Sothearak |
| Abstract: | This study assesses whether the central Bank in Cambodia’s (NBC) cash circulation system can support its goals of expanding riel use and sustaining trust as Bakong scales. While functional, the system faces gaps in rural access, data, analytics, and public education. Comparative evidence suggests current infrastructure is insufficient for de‑dollarization at the pace NBC projects. Theoretically, the review shows that currency substitution depends on governance capacity, not macroeconomic conditions alone; extends lifecycle models to integrate digital and physical currency governance; and provides a case of CBDC deployment preceding mature cash systems. Practically, comparator cases highlight lessons in data use (U.S.), resilience (Sweden), rural access (Brazil), and counterfeit defence (South Africa). Scenario analysis indicates riel circulation could reach mid‑thirties by 2034 under current policy, or half under sustained reform. Cambodia’s position—building infrastructure deliberately rather than inheriting legacy systems—offers a unique advantage for monetary sovereignty. |
| Keywords: | Central Bank, Sovereignty, Banking System |
| JEL: | B30 B4 B40 B5 G1 G15 K0 K00 |
| Date: | 2026–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:130364 |
| By: | Yucheng Yang; Tao Zha |
| Abstract: | Every SVAR result is conditional on two choices: the restrictions that identify the shock and the variables on which they operate. The literature disciplines the first; the second is chosen by hand. We develop a Bayesian methodology that constructs information sets, uses an out-of-sample criterion, and retains the largest system it admits. Under recursive identification, output rises with housing production rather than household credit alone. For monetary policy, an anchor-free joint Bayesian proxy SVAR with multiple instruments strengthens the credit spread channel. A core system augmented with the selected corporate spread identifies expected default risk as a potent transmission margin. |
| JEL: | C11 C32 C52 C55 E44 E52 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35604 |
| By: | Thomas Michael Pugh; Tao Wang; Taylor Webley |
| Abstract: | Mortgage debt represents over 70% of all Canadian household financial liabilities, and the performance of these debts is critical to the health of the financial system. We explore the relationships between mortgage arrears and key macroeconomic fundamentals such as labour market variables, interest rates, house prices and inflation. We then develop a framework to assess future household mortgage stress. |
| Keywords: | Financial system; Financial stability and systemic risk; Household and business credit; Models and tools; Econometric, statistical and computational methods; Monetary policy; Real economy and forecasting |
| JEL: | E37 G51 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-12 |
| By: | Nocciola, Luca; Scaglioni, Samuele |
| Abstract: | We analyze the Probability of Default (PD) of non-financial corporations in Europe using Random Forests (RF) and assess implications for stress testing the banking sector. To this end, we exploit data on firms’ financial statements (Orbis) and banks’ credit registry (Anacredit). We show that RF displays stronger risk sensitivity than logistic regression in stress testing, shedding new light on the non-linear effect of scenario severity on PD. Moreover, we show how RF-based PD can be used in a network of banks and firms to stress test the banking sector through loan exposures as a key transmission channel of adverse scenarios. A granular inspection of banks’ riskiness indices derived from this network sheds light also on RF’s superior ability in capturing non-linearity thanks to its capability in identifying “tail banks”. Our work is relevant for central banks and banking supervisors alike. JEL Classification: C53, C55, C58, G17, G21 |
| Keywords: | banking supervision, corporate exposures, credit risk, financial stability, random forests |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263277 |
| By: | Manuel Gonzalez-Astudillo; Jean-Philippe Laforte; Antoine Lepetit |
| Abstract: | Potential output and the natural rate of unemployment are commonly estimated through trend-cycle decompositions, where they are identified as underlying trends reflecting slow-moving supply factors. In this paper, we extend this framework to accommodate the possibility that cyclical disturbances affect trends endogenously through "scarring" effects. Two major changes occur relative to standard specifications. First, a significant share of business-cycle fluctuations is absorbed by endogenous movements in the trends rather than shifts in the cycle. Second, the estimated cycle--relieved of explaining the persistence in real variables--tracks inflation developments more closely, including through a steeper Phillips curve. While this steeper slope implies a strong co-movement between inflation and real activity in response to cyclical shocks, such strong co-movement is rarely apparent in the data. Consequently, the estimation shows a shift toward more sizable changes in the purely supply-driven components of the trends, mirrored by smaller innovations in the cycle process. In turn, this rebalancing entails different historical paths for the activity gaps, carrying important implications for the conduct of monetary policy. |
| Keywords: | potential output; natural rates; unobserved components model; Bayesian analysis; scarring |
| JEL: | C32 C34 E32 |
| Date: | 2026–06–29 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103589 |
| By: | Yanis Belkacem; Fabienne Schneider; Adrian Walton |
| Abstract: | We develop an approach to quantify transaction costs in the repo market using OTC transaction data, where quoted bid-ask spreads are not observable. By estimating effective spreads at the level of individual trades, we construct a novel metric to evaluate intermediation costs across different segments of the market. Effective spreads function as a high-frequency gauge of market conditions and functioning. They are particularly informative about balance sheet pressures, as reflected in recurring year-end spikes and elevated levels during the early stages of the COVID-19 pandemic. They offer complementary information to cash market spreads and provide a useful tool for further analysis of monetary policy transmission and the behavior of market participants. |
| Keywords: | Financial markets and funds management; Financial system; Financial institutions and intermediation; Financial stability and systemic risk |
| JEL: | G10 G12 G20 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-10 |
| By: | Martino, Edoardo; Parchimowicz, Katarzyna |
| Abstract: | We investigate the hurdles to the effective implementation of sustainable banking regulation. We argue that existing approaches rest on an implicit assumption of verifiable asset quality, which is inconsistent with the informational structure of banking. Accordingly, we develop an analytical framework centred on structural asset opacity and information asymmetry: banks operate through opaque balance sheets and possess superior information about asset quality relative to both markets and supervisors. This opacity generates moral hazard in the asset classification when regulatory incentives tied to 'green' or 'brown' labels induce strategic misrepresentation and adverse selection. We recast the main regulatory tools proposed in the literature. The analysis shows that incorporating sustainability objectives into prudential requirements, particularly capital regulation, is prone to distortion under conditions of unverifiable information, while supervisory tools remain constrained by their reliance on bank-generated data. We advance an alternative approach based on mandatory contractual mechanisms embedded in lending relationships. Properly designed and supervised, these private law tools operate as sorting devices that differentiate between green and brown activities without requiring full information about asset quality. |
| Keywords: | bank capital, green transition, information asymmetry, bank supervision, regulatory private law |
| JEL: | G21 K22 K23 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:lawfin:342485 |
| By: | Haskel, Jonathan; Martin, Josh; Brandt, Lennart |
| Abstract: | In recent years UK inflation has risen to levels not seen for decades and then fallen back. What caused this? We estimate a version of the Bernanke and Blanchard (2023) inflation model for the UK using quarterly data from 1990 to 2024. It is a semi-structural model that explains wage growth, price inflation, and short- and long-run inflation expectations, as functions of labour market tightness, shocks to energy and food prices, supply chain disruptions, and labour productivity. The estimated parameters are similar to those for the US, although the UK appears to have stickier wage and price inflation and more persistent effects of food price shocks. UK inflation in 2021 is explained by supply chain disruptions and energy price shocks, and in 2022 and 2023 also by food price shocks and labour market tightness. Inflation expectations have been more well-anchored than predicted by the model. Illustrative projections suggest inflation is ‘sticky’ and so may take time to return sustainably to target. |
| Keywords: | inflation; wages; monetary policy; Beveridge curve; inflation expectations |
| JEL: | E31 E37 E52 |
| Date: | 2025–09–24 |
| URL: | https://d.repec.org/n?u=RePEc:eoe:escoed:escoe-dp-2025-12 |
| By: | Alexander Borodin; Matteo Ghilardi; Tommy Lee; Victoria Petrenko |
| Abstract: | This paper develops a quarterly projection model for Korea with an integrated fiscal block, enabling analysis of monetary-fiscal interactions. The model is validated through historical decompositions and forecast evaluation. Scenario analysis comparing dynamics with and without debt-stabilizing fiscal rules reveals a fundamental trade-off: rules generate short-run procyclicality but prevent permanent debt drift. Without rules, temporary nominal GDP movements cause lasting debt-to-GDP changes. For Korea, facing age-related spending pressures, a medium-term fiscal framework could safeguard sustainability. |
| Keywords: | Quarterly projection model; fiscal rules; fiscal anchor; monetary-fiscal interactions; debt sustainability; Korea |
| Date: | 2026–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/172 |