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on Central Banking |
| By: | Rajeswari Sengupta (Indira Gandhi Institute of Development Research; Institute of Economic Growth) |
| Abstract: | This paper traces the evolution of monetary policy in India and the institutional, intellectual, and macroeconomic forces that culminated in the adoption of flexible inflation targeting (FIT) in 2015. It documents the transition from a regime of fiscal dominance and quantitative controls to a market-based, interest rate-driven framework, highlighting key reforms in financial markets, liquidity management, and central bank autonomy. The paper shows how persistent inflation in the post-Global Financial Crisis period exposed the limitations of the Multiple Indicator Approach and created the conditions for a shift toward a rule-based framework with a clear nominal anchor. It also evaluates the post-FIT experience, noting improvements in inflation outcomes, expectations anchoring, and policy transparency, while emphasizing continuing constraints from fiscal dominance, and exchange rate management. |
| Keywords: | Inflation targeting, Monetary policy framework, Central Bank credibility, Inflation expectations, Emerging economies |
| JEL: | E52 E58 E31 E42 E61 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2026-005 |
| By: | Domenech Palacios, Mar; Ehrmann, Michael; Ferrari Minesso, Massimo; Mehl, Arnaud; Comazzi, Fabio |
| Abstract: | We revisit the debate on the effectiveness of central bank communication on exchange rates, contrasting a skeptical view, which holds that communication neither moves exchange rates nor influences them in the desired direction, with an optimistic view that it does. Using nearly 100 official ECB statements on exchange rates made during its monetary policy press conferences since 2002, we show that the ECB tends to mention the exchange rate when the real effective exchange rate deviates from its equilibrium value, whereas journalists’ questions are mainly responsive to the nominal exchange rate. Studying the effects of these mentions, our findings by and large support the skeptical view: after controlling for monetary policy shocks, exchange rate communication has limited immediate effects on the euro exchange rate, which fade quickly. Effectiveness is particularly limited when interest rates are at their effective lower bound. JEL Classification: E52, E58, F31, O24 |
| Keywords: | central bank communication, exchange rates, high frequency identification, natural language processing |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263229 |
| By: | Shutao Cao (Department of Economics, Trent University); Yahong Zhang (Department of Economics, University of Windsor) |
| Abstract: | We build a two-agent New Keynesian (TANK) model, augmented with the central bank balance sheet and government budget constraint, to quantify macroeconomic effects of the fiscal and monetary stimulus measures in Canada during the COVID-19 pandemic. The model is calibrated to the Canadian economy, and shock processes are estimated. The model closely replicates the observed dynamics of the economy over the pandemic period. Counterfactual experiments reveal that transfer payments played a key role in cushioning the initial contraction by supporting the consumption of hand-to-mouth (HtM) households, while forward guidance and quantitative easing strengthen these effects through the investment channel and by forestalling a severe deflationary episode. At the same time, the prolonged maintenance of low policy interest rate, in conjunction with large-scale fiscal transfers, contributed substantially to the post-pandemic surge in inflation. We show that an earlier normalization of monetary policy would have significantly reduced post-pandemic inflation at only modest cost to output, suggesting that a more gradual tightening path could have reduced the need for the aggressive interest rate increases that followed. |
| Keywords: | fiscal policy, monetary policy, inflation, pandemic |
| JEL: | E31 E52 E58 E62 E63 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:wis:wpaper:2602 |
| By: | Aariya Sen (Assistant Professor (Economics), Faculty-in- Charge, Placement and Internship Cell, School of Business, Indian Institute of Technology Guwahati, Guwahati, Assam, India- 781039) |
| Abstract: | The effectiveness of monetary policy transmission to the macroeconomy is contingent on numerous factors. Policy uncertainty is often considered a major deterrent to smooth monetary policy transmission, which inflicts the pain of frequent changes in expectations by the market players. In this study, I analyze the impact of a perceived monetary policy uncertainty (MPU) index for India, constructed based on news-paper data, on financial markets as well as on monetary policy transmission. The computed MPU index exhibits a negative correlation with the sentiment in Monetary Policy Committee minutes, where higher positive sentiment on the minutes moves along with a lower MPU. The empirical examination using wavelet transformation and spillovers showed that MPU has had significant spillovers in Indian financial markets and is widely correlated to business cycle movements. Finally, the analysis documenting the transmission to the real economy shows that a state of high uncertainty dampens monetary policy transmission and adversely affects consumer confidence, sovereign risk, investment inflows and balance of trade. The results underscore the need for effective communication from the Central Bank and the need to manage expectations in the financial markets through forward guidance, transparency, and accountability. |
| Keywords: | Monetary Policy Uncertainty, Monetary Policy Transmission, Financial Markets, Central Bank Communication, Sentiment Analysis, Asymmetry, Wavelet Analysis |
| JEL: | E43 E44 E52 E58 G14 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:mad:wpaper:2026-297 |
| By: | Vaishali Garga (Federal Reserve Bank of Boston); Benjamin Gryzb (Federal Reserve Bank of Boston); Rajeswari Sengupata (Indira Gandhi Institute of Development Research) |
| Abstract: | We examine whether India's adoption of inflation targeting in 2015 aligned central bank communication with policy actions---a key determinant of credibility in emerging markets. Text analysis reveals the Reserve Bank of India's (RBI) communication shifted toward emphasizing inflation stabilization. Yet standard Taylor rules show no increase in responsiveness to realized inflation. This misalignment disappears when we estimate forward-looking reaction functions using the RBI's internal forecasts. The post-2015 response to expected inflation is strong and significant. Our findings show that conventional backward-looking rules can mischaracterize monetary policy conduct in emerging markets where policy responds to forecasts rather than realized outcomes. |
| Keywords: | Commitment, Communication, Credibility, Emerging markets, Forecasts, Forward-looking, Inflation targeting, Monetary policy, Reserve Bank of India, Taylor rule |
| JEL: | E43 E52 E58 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2026-003 |
| By: | Zeqin Liu (School of Statistics, Shanxi University of Finance and Economics, Taiyuan, Shanxi 030006, China); Zongwu Cai (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA); Ying Fang (The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China and Department of Statistics & Data Science, School of Economics, Xiamen University, Xiamen, Fujian 361005, China) |
| Abstract: | Expectation management is a critical yet challenging task for central banks, particularly within the Chinese context of dual-track regulation and multi-objective constraints. This paper investigates the transmission efficacy of the People's Bank of China's (PBoC) forward guidance by proposing an LLM-powered analytical framework. First, we employ adaptive semantic segmentation to partition communication texts based on genuine meaning shifts. Second, we apply tense-by-topic tagging to precisely separate forward-looking signals from retrospective ones and isolate monetary policy stances from macroeconomic assessments and other auxiliary themes. Third, we further decompose these forward-looking policy stance units into granular signals regarding overall tone, quantity tools, price tools, and targeted objectives, and subsequently classify these signals as accommodative, neutral, or tight. Based on this granular data, we construct three specialized indices: forward-looking net policy intention (NPSf), quantity-price signal divergence (QPSD), and multi-objective communication dispersion (MDI). Controlling for actual policy operations and macroeconomic variables, we employ local projections to identify the dynamic effects and friction mechanisms of expectation management. Empirical results reveal that forward-looking monetary policy communication is the cornerstone of expectation management, whereas retrospective statements have been fully priced in by the market. Specifically, the credit channel functions effectively; forward-looking intentions drive substantive adjustments in credit growth, real financing costs, and risk premiums. Conversely, transmission through interest rate expectations and asset price channels remains limited. Further analysis demonstrates that price-quantity signal divergence systematically weakens transmission across all channels. Moreover, multi-objective communication triggers an overshooting response in both short-term money market benchmarks and credit risk premiums, while objectively dampening the pricing sensitivity of equity assets. We suggest that central bank expectation management should prioritize strengthening forward-looking path guidance, supported by highly coordinated price-quantity signals and clearly defined dominant objectives, to enhance policy efficacy. |
| Keywords: | Expectation Management; Large Language Models; Forward Guidance; Dual-Track Monetary Policy; Multiple Policy Objectives; Local Projections |
| JEL: | E52 G12 C55 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:kan:wpaper:202613 |
| By: | Benjamin Knox; Annette Vissing-Jorgensen |
| Abstract: | We survey and extend work on the Federal Reserve’s effect on the stock market, focusing on three empirical findings: The effect of monetary policy surprises in a narrow window around announcements from the Federal Open Market Committee (FOMC), the pre-FOMC announcement drift, and the FOMC cycle in stock returns. We discuss the magnitude of the Fed’s impact (directional effects or effects on average stock returns), the types of shocks coming from the Fed (pure monetary policy shocks, reaction function news, or information about the Fed’s view of the economy), and the asset pricing channels through which effects emerge (an equity premia for news from the Fed, or changes to yields, equity premia, or expected dividends). We also consider the information transmission (communication) channels. The Fed’s effect on the stock market is large, even for average stock returns earned over periods of several decades. Fed-induced changes to both yields and equity premia play substantial roles, with less direct evidence available regarding cash flows. For stocks, reaction function news appears to be more important than Fed information effects. Communication flows outside announcements windows are important. |
| Keywords: | asset pricing; monetary policy transmission; Federal Open Market Committee (FOMC); monetary policy communication; risk premiums |
| JEL: | E52 G10 G12 |
| Date: | 2026–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103197 |
| By: | José E. Gutiérrez (BANCO DE ESPAÑA); Enric Martorell (BANCO DE ESPAÑA); Mariya Melnychuk (BANCO DE ESPAÑA) |
| Abstract: | This paper examines the deposit channel of monetary policy during the fastest and most intense tightening cycle of the euro era. Using the Banco de España’s Central Credit Register and regional variation in deposit market concentration, we show that the limited pass-through of policy rates to deposit rates produces heterogeneous effects on bank credit supply and risk-taking. Following the tightening cycle, banks operating in more concentrated deposit markets reduced credit more sharply to riskier firms. For newly originated loans, this contraction was accompanied by higher interest rates and improved realized returns. We document a novel dimension of the deposit channel: it compels banks to actively optimize their risk-return trade-off. Our results show that preserving deposit franchise value leads banks to prioritize prudence, reversing the “search-for-yield” dynamic observed during the zero-lower-bound era. |
| Keywords: | monetary policy, deposit channel, bank risk-taking, market concentration |
| JEL: | E52 E58 G21 G28 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2615 |
| By: | Ryan Niladri Banerjee; Lena Boneva; Gabor Pinter; Vladyslav Sushko |
| Abstract: | Carry trade activity can shape the exchange rate response to monetary policy. Significant short positions of carry traders in funding currencies amplify the impact of policy tightening. This amplification arises from the unwinding of leveraged carry trade positions accumulated prior to the policy announcement, creating a state-dependent monetary policy transmission to the exchange rate. The currency trading strategies of hedge funds and other leveraged investors can play a key role in shaping the exchange rate response to monetary policy and therefore warrant careful monitoring. |
| Date: | 2026–05–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:124 |
| By: | Martin Bruns; Helmut Luetkepohl; James McNeil (University of East Anglia, School of Economics; DIW Berlin and Freie Universitat Berlin; Department of Economics, Dalhousie University) |
| Abstract: | Several recent studies consider a set of proxies to identify different monetary policy shocks for different regions in the world. We show that the way the proxies are used to identify the monetary policy shocks may lead to correlated shocks and dubious structural analysis and we demonstrate how to overcome the problem of correlated shocks. We illustrate that, if correlated shocks are used in applied studies, key statistics of interest such as impulse responses and forecast error variance decompositions can be severely distorted and we consider bench- mark studies on monetary policy in the euro area (EA), the US and the UK to demonstrate the problems. |
| Keywords: | Structural vector autoregression; proxy VAR; GMM; correlated structural shocks |
| Date: | 2026–05–05 |
| URL: | https://d.repec.org/n?u=RePEc:dal:wpaper:daleconwp2026-01 |
| By: | J. Scott Davis; Pon Sagnanert |
| Abstract: | The purchasing power parity theory of exchange rates is easily understood: A basket of goods should have the same price in different markets when that price is expressed in a common currency. However, the relationship between market-determined exchange rates and inflation shocks is not always straightforward. In the short run, central bank transparency can become an important determinant. |
| Keywords: | exchange rates; international economics; inflation; monetary policy |
| Date: | 2024–09–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:98757 |
| By: | Meri Papavangjeli (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & Joint Vienna Institute); Lorena Skufi (Bank of Albania & Metropolitan University of Tirana); Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This study investigates the relationship between lending standards and credit dynamics in Albania. Using a unique bank-level dataset from the Bank Lending Standards Survey, we differentiate between newly issued domestic-currency and foreign-currency loans to non-financial corporations. We construct a quantitative index of lending standards using detailed bank-level and macro-financial data. The analysis reveals that tightening internal credit criteria, driven by macroeconomic uncertainty, regulatory constraints, or risk aversion, significantly reduces new business lending, weakening bank–firm relationships. In addition, we assess the role of monetary and macroprudential policies, finding that policy changes affect domestic-currency and foreign-currency credit differently, amplifying the impact of supply-side tightening. Firms face limited ability to offset these constraints through alternative lenders, reflecting low substitutability in the Albanian credit market. The effects of tightening are persistent and intensify during economic stress, yielding important implications for monetary transmission, macroprudential policy effectiveness, financial stability, and crisis resilience in small, bank-based economies. |
| Keywords: | Corporate credit growth; lending standards; credit supply shocks; bank lending behavior; firm financing |
| JEL: | E44 G21 G32 C33 E51 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2026_05 |
| By: | Bernhard Reinsberg |
| Abstract: | Since the Global Financial Crisis, money has been undergoing transformational changes. Cryptocurrencies like Bitcoin and the lesser-known stablecoins, powered by blockchain technology, have grown rapidly, allowing people to undertake financial transactions globally without central intermediaries. In addition, many countries have explored central bank digital currencies, which are digital representations of fiat monies controlled by national central banks. While descriptive studies on these money innovations abound, systematic analysis of their drivers is lacking. This paper offers the first systematic analysis of the conditions under which societies adopt these money innovations. Based on an original cross-country dataset capturing the extent to which money innovations have been deployed, regression analysis shows limited overlap in the significant drivers of these money innovations, aside from fundamental country characteristics including level of development, population size, and (to a lesser extent) regime type. Cryptocurrency use appears to be driven by macro-financial instability and lack of access to bank finance. In contrast, CBDC adoption by states appears to be driven by exposure to sanctions and previous experimentation with CBDC projects. While confirming the role of financial inclusion for cryptocurrency adoption, the findings partly challenge the official discourse of financial inclusion as a key motivation for CBDC adoption. |
| Keywords: | Digital money, cryptocurrency, central bank digital currency (CBDC), money innovations, cross-country analysis |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cbr:cbrwps:wpt202601 |
| By: | Corinne Salter; Daniel Villar Vallenas |
| Abstract: | Inflation expectations are understood to play a crucial role in inflation dynamics and in the conduct of monetary policy. Recently, there has also been a renewed interest in the relationship between inflation expectations and wages. |
| Date: | 2026–04–13 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:103191 |
| By: | Abidi, Nordine; Gambacorta, Leonardo; Kok, Christoffer; Miquel-Flores, Ixart; Madio, Leonardo; Partida, Alberto |
| Abstract: | Investment in cybersecurity in an interconnected banking system has public-good proper- ties: positive externalities can generate systemic underinvestment. Using confidential supervi- sory data from the European Central Bank, we first identify “laggard” European banks that underinvest relative to their cyber-risk profiles, and then examine how supervisory scrutiny af- fects their incentives to invest. We exploit the 2024 ECB Cyber Resilience Stress Test (CyRST) as a quasi-natural experiment. In a difference-in-differences design, we find that following the CyRST announcement, laggard banks increased cybersecurity investment by about 80% rel- ative to their peers. The response is stronger among laggards subject to high-intensity su- pervisory oversight, consistent with scrutiny exerting a disciplining effect. Overall, the results suggest that targeted supervisory scrutiny may help mitigate underinvestment incentives and strengthen banks’ operational risk management. JEL Classification: G21, G28, G32, L86, K23 |
| Keywords: | bank supervision, cyber risk, IT investment, stress test |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263222 |
| By: | Oprica, Silviu; Bobeică, Gabriel |
| Abstract: | We empirically analyse the role of judgement in assigning overall scores by the euro area supervisors as part of the yearly Supervisory Review and Evaluation Process (SREP), which evaluates banks’ risks and sets supervisory actions. We also analyse its role in shaping the drivers of the Pillar 2 capital requirement (P2R) that banks must fulfil. We find that supervisors actively adjust the weight of the components of the overall score to reflect qualitative information, thereby smoothing fluctuations in the final assessment. The analysis reveals a common supervisory judgement channel, which could reflect shared priorities and concerns, such as systemic vulnerabilities or macroeconomic conditions. We also show that certain risks, such as credit risk, can play a decisive role in the overall assessment of a bank’s viability. These findings underpin the critical role of judgement in adapting supervisory frameworks to evolving risks and systemic conditions, providing flexibility at both the individual and system-wide levels. JEL Classification: G21, G28, C23, E58 |
| Keywords: | overall SREP score, panel data, Pillar 2 capital requirements (P2R), supervisory judgement, Supervisory Review and Evaluation Process (SREP) |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263233 |
| By: | Perazzi, Elena |
| Abstract: | The forward-guidance puzzle refers to the implausibly large effects of anticipated future interest rate changes on current output and inflation, as predicted by standard New Keynesian models. In this paper, we analyze both theoretically and numerically the nonlinear model that underlies the canonical linearized framework, explicitly tracking the full distribution of prices across firms. We show that large output expansions arise only under extreme and economically implausible circumstances: firms that are unable to reset prices are forced to sell below marginal cost while satisfying unbounded demand, thereby accumulating arbitrarily large losses. When we modify the model so that non-reoptimizing firms can at least set prices equal to marginal cost, output and inflation remain bounded and moderate. However, under this modification not all forward-guidance announcements are feasible in equilibrium. Our results identify a neglected microeconomic assumption as the root cause of the forward-guidance puzzle and clarify the limits of New Keynesian models in the analysis of large or persistent monetary shocks. |
| Keywords: | Forward Guidance; Nonlinear New Keynesian model; Equilibrium Feasibility |
| JEL: | E4 E5 E6 |
| Date: | 2026–02–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128045 |