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on Central Banking |
| By: | Angelos Athanasopoulos (Central Bank of Ireland); Donato Masciandaro (Bocconi University); Davide Romelli (Trinity College Dublin) |
| Abstract: | This paper provides novel evidence of the long‐run effects of reforms in central bank independence on inflation. Using instrumental‐variable local projections, we show that improvements in central bank independence have a much larger impact on inflation in the long run compared to the short run. Contrary to most of the previous literature, we also find that these long‐run effects are larger in developing countries. Our results are robust to alternative local projection designs, including doubly robust and difference‐in‐differences specifications. Finally, we provide evidence that reforms that strengthen central bank independence also reduce inflation persistence, reinforcing the effectiveness of monetary policy. |
| Keywords: | central bank design; central bank independence; inflation; persistence; central bank reforms |
| JEL: | E5 E31 E52 E58 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep2026 |
| By: | Gara Afonso; Jun-Davinci Choi; Gonzalo Cisternas; Will Riordan |
| Abstract: | In the first two posts of this three-part series, we discussed private market participants that are active in repo markets for profit-making motives. Central banks are also active repo market participants, but their reasons often differ from those of private participants. In today’s post, we discuss how central banks use repos to manage liquidity in the financial system and implement monetary policy. |
| Keywords: | central bank repos; Federal Reserve; standing repo operations (SRPs); overnight reverse repo (ON RRP) |
| JEL: | E52 E58 G1 N10 |
| Date: | 2026–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103858 |
| By: | Kaetlynd McRae |
| Abstract: | What happens after Governing Council sets the target for the policy interest rate? Setting the target rate is the most visible part of monetary policy, but it is only the first step in transmitting the rate decision to the Canadian economy. This paper explains how the Bank of Canada uses its monetary policy implementation framework (MPI) to ensure that the rate decision is reflected in financial markets by keeping short-term interest rates close to the target policy rate. |
| Keywords: | Financial markets and funds management; Funds management; Monetary policy; Monetary policy framework and transmission; Monetary policy tools and implementation; Money and payments; Payment and financial market infrastructures |
| JEL: | E E4 E41 E42 E5 E51 E52 E58 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-45 |
| By: | Krustev, Georgi |
| Abstract: | Leveraging the unique setting of unilateral euroisation, this paper examines the spillover effects of euro area monetary policy on Montenegro and Kosovo. Through the lens of a structural VAR model with block exogeneity, it shows that euro area monetary policy shocks can significantly influence output and inflation in these economies, albeit with a delayed response, while contributing only modestly to their overall business cycle fluctuations. JEL Classification: C11, C32, E52 |
| Keywords: | block exogeneity, monetary transmission, structural VAR |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263293 |
| By: | Jarociński, Marek; Karadi, Peter |
| Abstract: | High-frequency interest rate surprises around Fed announcements do not identify monetary policy (MP) shocks if markets are imperfectly informed. Instead, they can also reflect central bank information (CBI) shocks, when the Fed assesses the economy differently, and Fed-response-to-news (FRN) shocks, when markets misperceive the policy rule. The literature treats these as competing explanations; we show they are distinct, and jointly identify all three from the co-movement of interest rate and equity surprises, their predictability from public news, and heteroskedasticity between FOMC and non-FOMC communication. CBI effects are robust at daily and monthly frequencies; FRN matters only daily. Purging both strengthens monetary policy estimates. JEL Classification: E31, E32, E52 |
| Keywords: | Fed chair speeches, high-frequency identification, local projection, monetary policy shock, structural vector autoregression |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263292 |
| By: | Francesco D’Acunto; Dimitris Georgarakos; Geoff Kenny; Michael Weber |
| Abstract: | Standard macroeconomic theories assume that representative or heterogeneous agents share a common model of how the economy operates. Yet evidence shows that households hold heterogeneous subjective models---distinct beliefs about how macroeconomic variables interact. As a result, identical shocks or policies may elicit different responses from otherwise similar households. We test this hypothesis by measuring subjective models and investigating their role in the transmission of monetary policy to consumption embedding randomized controlled experiment in a large-scale, multi-country survey. Consumers who believe that monetary tightening primarily operates through its effects on borrowing or savings rates plan to reduce consumption more in response to randomly assigned rate increase scenarios. By contrast, those who think about inflation or general equilibrium effects adjust consumption less. These differences are not explained by demographics, financial characteristics, including mortgage holdings and mortgage type, or country-level factors. Households' actual consumption responses to endogenous policy-rate changes exhibit broadly similar patterns. Our findings stress that heterogeneity in subjective models is an overlooked determinant of monetary policy transmission. |
| JEL: | D15 D91 E21 E43 E52 E71 G51 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35831 |
| By: | Christopher J. Neely |
| Abstract: | Monetary policy has been the primary tool of macroeconomic management since the 1970s. As a result, the effects of monetary shocks became an important area of policy research. In the 1980s, event studies showed that U.S. monetary-aggregate announcements strongly affected asset prices, although no single model readily explained the responses. Greater central-bank transparency in the 1980s and 1990s increased interest in measuring monetary policy's effects on financial and macroeconomic variables. In the 1990s, researchers predominantly used vector autoregressions (VARs) to estimate the effects of monetary shocks. This work raised questions about why monetary shocks explained little output variation and sometimes implied theoretically implausible price responses. Increasing Fed transparency allowed researchers to make substantial progress in measuring surprises from high-frequency interest-rate changes. The 2007-2009 Global Financial Crisis further intensified interest in monetary shocks. Subsequent research has examined dimensionality and time variation, information content, predictability, explanatory power, policy horizons, and information sets. Researchers have proposed many measures, but their relationships are often unclear. This paper reviews the literature on monetary shocks, their motivations, their construction, and the inference drawn from them. |
| Keywords: | monetary policy shocks; central-bank information effects; federal funds target; forward guidance; high-frequency identification; structural vector autoregressions; external instruments |
| JEL: | E52 E58 E44 C32 C36 G12 |
| Date: | 2026–09–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:103833 |
| By: | Tatjana Dahlhaus (Bank of Canada); Madan Ghosh (Carleton University); Yena Joo (Bank of Canada); Stephen Murchison (Bank of Canada); Genevieve Nelson (Bank of England); Rachit Lumb (Bank of Canada); Jonathan Swarbrick (University of St Andrews); Alexander Ueberfeldt (Bank of Canada); Raven Wheesk (Bank of Canada); Yinxi Xie (Indiana University, Bloomington); Yang Zhang (Bank of Canada) |
| Abstract: | Climate change presents significant macroeconomic challenges, particularly for small open economies deeply integrated into global trade and energy markets. Focusing on Canada, we analyze the macroeconomic implications of the transition to a low-carbon economy, paying attention to global and domestic spillovers. On the domestic side, we introduce Energy-ToTEM (E-ToTEM), an extension of the Bank of Canada’s Terms-of-Trade Economic Model (ToTEM), which captures energy sector dynamics, substitution effects, and policy interactions. To account for international forces, we use a global, multi-sector, multi-region general equilibrium model, allowing us to assess international climate policy transmission and global demand implications for Canada. Our results indicate that, under the net-zero scenario, global carbon prices rise persistently through 2050. By 2050, world gross domestic product (GDP) is about 8% lower and Canadian GDP about 7% lower relative to a no-policy benchmark, while inflation rises modestly under the historical monetary policy rule. Monetary policy faces a clear trade-off: strict inflation targeting would deepen the Canadian output loss to about 7.5%, whereas a more accommodative stance would limit it to around 5.5%, at the cost of inflation about 1 percentage point above target. Overall, our findings highlight the importance of accounting for both global spillovers and monetary policy when evaluating the macroeconomic consequences of the transition to net zero. |
| Keywords: | macroeconomic simulations; transition to net-zero; climate policies; scenario analysis |
| JEL: | E27 E52 Q43 Q58 |
| Date: | 2026–09–29 |
| URL: | https://d.repec.org/n?u=RePEc:san:econdp:2604 |
| By: | International Monetary Fund |
| Abstract: | This paper informs the Executive Board about recent developments in central bank digital currency (CBDC), and summarizes the key messages and findings from the third wave of CBDC virtual Handbook chapters published in November 2025. Both retail (rCBDC) and wholesale (wCBDC) CBDC explorations are advancing, with wholesale projects gaining prominence. Countries are in various stages of CBDC development, ranging from near-term issuance to pausing rCBDC efforts due to limited domestic needs. This set of six Handbook chapters covers macro-financial topics including the implications of rCBDCs for (1) financial stability and (2) payments competition; legal and regulatory themes such as (3) selected legal considerations and (4) financial integrity. It draws lessons from (5) payment ecosystem resilience in fragile and conflict-affected states for CBDC, and also sheds light on the emerging area of (6) tokenized reserves. The Handbook, financially supported by the Government of Japan, provides technical frameworks and guidance for policymakers especially in emerging markets, to assess CBDC’s potential and tradeoffs. It is not intended to evaluate CBDC’s overall appropriateness, which is left to policymakers given domestic circumstances. |
| Keywords: | Central bank digital currency; CBDC Virtual Handbook; macro-financial implications; competition; legal considerations; financial integrity; fragile and conflict-affected states; tokenized reserves; IMF staff; payment system resilience; IMF policy; transparency policy; IMF Policy; Central Bank digital currencies; Financial sector stability; Anti-money laundering and combating the financing of terrorism (AML/CFT); International reserves; Global; South America; Central America; Caribbean; Southeast Asia; Pacific Islands; Africa |
| Date: | 2025–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfpps:2025/041 |
| By: | International Monetary Fund |
| Abstract: | The Integrated Policy Framework (IPF) assists IMF staff in providing advice on the joint use of foreign exchange intervention (FXI), macroprudential measures (MPMs), and capital flow management measures (CFMs), alongside standard monetary and fiscal policies. This note provides overarching considerations in applying the IPF to low-income countries (LICs), building on previous Fund advice. |
| Keywords: | IMF staff; IMF policy; Policy consideration; Ipf friction; transparency policy; IMF Policy paper; Exchange rates; Currency markets; Exchange rate arrangements; Global |
| Date: | 2026–05–06 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfpps:2026/014 |
| By: | Dean Corbae; Pablo D'Erasmo |
| Abstract: | We develop a simple model of banking industry dynamics to study the relation between market structure and financial stability. Motivated by data, we analyze an environment where a small number of dominant (nonatomistic) banks strategically interact with a large number of small (atomistic) banks. A nontrivial endogenous bank size distribution arises out of entry and exit in response to aggregate and regional shocks to borrowers’ production technologies and banks’ idiosyncratic deposit inflows. Since the model has nonatomistic banks that generate granular spillovers from idiosyncratic shocks and pose systemic risk, we use the model to study the implications of too-big-to-fail policies. |
| Keywords: | Macroprudential policy; bank size distribution; industry dynamics with imperfect competition |
| JEL: | E44 G21 L11 |
| Date: | 2026–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:103867 |
| By: | Donald Coletti; Martin Kuncl; Martin Harding; Dmitry Matveev; Tolga Özden; Yang Zhang |
| Abstract: | Prima is the Bank of Canada’s new model for projection and policy analysis. It builds on the economic foundations of earlier Bank models, adding detail on how sectoral pressures affect production costs and their pass-through to consumer prices. |
| Keywords: | Models and tools; Econometric, statistical and computational methods; Monetary policy; Inflation dynamics and pressures; Real economy and forecasting |
| JEL: | C C4 C43 C8 C82 E E3 E30 E31 E37 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-47 |
| By: | Ricardo Hausmann (Harvard's Growth Lab); Kishan Shah (Center for International Development at Harvard University); Tim O'Brien (Center for International Development at Harvard University); Martina Cometti (Harvard's Growth Lab); Yomna Mohei Eldin (Harvard's Growth Lab); Lucila Venturi; Ricardo Villasmil (Harvard's Growth Lab); Pablo Andrés Neumeyer |
| Abstract: | This research note diagnoses the causes behind Malawi’s foreign exchange constraint and identifies options for addressing the problem. Malawi is currently experiencing a severe and prolonged macroeconomic crisis, characterized by declining per capita income, crippling foreign exchange shortages, high inflation, and a rapidly growing (domestic) debt burden. Multi-faceted macroeconomic reforms are needed (see Growth Lab’s previous report, “Malawi’s Path out of Poverty and Toward Prosperity”). However, we find that relaxing extreme foreign exchange shortages by achieving a market-clearing rate could be achieved relatively quickly. The gains of this reform would be large, and the risks would be limited if the exchange rate realignment is matched with consistent monetary and fiscal policy. This note explains this path. Excess money creation is the cause of both the high and increasing parallel market premium for foreign exchange and high inflation in Malawi today. Since 2020, the monetary base has expanded by a factor of four as the government has relied on the Reserve Bank of Malawi (RBM) to finance its large fiscal deficits. This has resulted in an increasing supply of Kwacha “chasing” a limited supply of dollars, which has caused a rising parallel market premium for foreign exchange. Much of the economy has, in practice, already shifted to the parallel rate, which means that the pass-through of a devaluation of the official rate on inflation would be limited. Previous one-off devaluations failed to address the parallel market premium because they did not align the path of the official exchange rate with that of money growth. Meanwhile, cracking down on the parallel market without addressing underlying causes also will not work because actors in the economy desperate for foreign exchange will always try to find workarounds. This paper discusses options for achieving a market-clearing exchange rate to end inefficient foreign exchange rationing and bring foreign currency back into official channels. This requires an initial sharp devaluation to unify the official and parallel rates, followed by a consistent policy to prevent renewed misalignment. Two operational paths are discussed as options: a managed float, where the rate is determined daily by bilateral market transactions, or a rule-based managed crawl, which anchors the daily adjustment of the exchange rate to the path of domestic liquidity growth (see Table 1). A full float and an end to capital controls is not advisable in the current context. Foreign exchange reform is necessary but cannot fully succeed in isolation. Measures aimed at addressing the foreign exchange shortage can work in the short-term to relax this binding constraint on growth. But these measures alone cannot restore other macroeconomic balances. To achieve lower inflation, the Government of Malawi must reduce its primary deficit and limit the need for money printing. Furthermore, policymakers must manage the fiscal impact of devaluation and the transition of administered prices (such as fuel and fertilizer) from the overvalued official exchange rate. Failure to do so could result in a negative fiscal feedback loop, where devaluation necessitates more money printing. Macroprudential policy may also allow for a reduction in the domestic interest burden, and increased donor support would help enable macroeconomic stabilization and growth. In the long term, Malawi must diversify and grow its export sectors to generate more foreign exchange. Analysis discussing these necessary dimensions of overall macroeconomic reform are discussed in the three annexes, while the note focuses on the somewhat independent options that Malawi can use to meaningfully address the binding foreign exchange constraint that the economy currently faces. |
| Keywords: | Foreign exchange, macroeconomic crisis, Malawi |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:glh:wpfacu:274 |
| By: | Rafael Gonçalves; Ina Hajdini |
| Abstract: | Relying on a micro-level dataset of US firms' inflation expectations, we document that firms in industries with larger Domar weights and more flexible prices have more accurate inflation forecasts. To explain these patterns, we develop a rational inattention model of price-setting firms within a production network. In equilibrium, firms' inflation forecast accuracy depends on their attention to marginal costs, the comovement between their marginal cost and aggregate inflation, and the change in the marginal cost. When calibrated to US input-output data, the model replicates the cross-sectoral relationship between forecast accuracy, Domar weights, and price flexibility. Quantitatively, we find that production networks endogenously increase nominal rigidity. This channel accounts for about 30 percent of the networks' attenuation of the inflation response to monetary shocks, deepening the standard flattening of the Phillips curve from input-output linkages. |
| Keywords: | inflation expectations; rational inattention; production networks; inflation dynamics; monetary policy |
| JEL: | E31 E32 E71 |
| Date: | 2026–09–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:103851 |
| By: | Sami Diaf |
| Abstract: | Price stability remains a pillar in monetary policy practices and carries a special importance within monetary unions. Mainstream economics tried to leverage price stability using price indices and several metrics to shed light on specific dynamics and optimal macroeconomic levels. The wide availability of data led researchers to consider the study of systems using Random Matrix Theory, based on inner correlation patterns. This aims to enhance the multivariate analysis by removing noisy patterns from the signal and improve data quality for further inferences. This work considers the collection of monthly inflation indices in the Eurozone as a \textit{system} of prices to analyze its eigenvalues' statistical and asymptotic properties and uncover inner country-level insights. Results confirm the system cannot assumed to be randomly generated, and the data exhibit noise-dominated patterns, due to small and persistent variations at the country-level. The latter make the inter-country correlations more dynamic and the separation of the signal from the noise quiet difficult. Findings identified two countries as distorting inflation dynamics besides three other distinct, regional-based groups of countries. Variability sources might stem from economic episodes fueling inflation spikes in some countries, as well as methodological aspects used to ensure data quality and representativeness in the European Union. Despite being complex, the system demonstrates a certain stability, in terms of self-organization; while large monthly fluctuations cannot be considered as rare events, but part of the data-generating process. |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.35011 |