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on Central Banking |
| By: | Rubio, Margarita (University of Nottingham); Yao, Fang (Central Bank of Ireland) |
| Abstract: | This paper examines loan-to-value (LTV) policy as a macroprudential tool and its interactions with monetary policy in an inflationary environment. The combination of inflation shocks and collateral constraints introduces additional trade-offs for policymakers, emphasizing the need for coordination between macroprudential and monetary policies. Using a DSGE model with collateral constraints, we evaluate the implications of an optimized LTV rule for a welfare-based loss function that incorporates economic and financial stability. Our core finding indicates that, under inflation shocks, policy coordination reduces welfare-based losses compared to a non-coordination regime. In particular, the LTV rule is active (responding to cyclical factors, e.g. house prices) when monetary policy responds weakly to inflation shocks, but the LTV rule becomes passive (only responding to structural factors) when monetary policy chooses to be hawkish towards inflation. |
| Keywords: | LTV policy, Monetary Policy, macroprudential policy coordination, collateral constraints, financial friction, cost-push shocks. |
| JEL: | E32 E44 E58 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:wpaper:1/rt/25 |
| By: | Jorge Mourato; Madalena Borges; Francisco Gaspar; Hugo Nogueira |
| Abstract: | This paper analyses the use of collateral for the Eurosystem’s credit operations by Portuguese counterparties for the period 1999-2023, with a particular focus in the period following the implementation of the Basel III regulatory framework. It identifies an increasing mobilisation of non-marketable assets and covered bonds by banks amid the introduction of Basel III as a new international banking regulatory framework and changes in the ESCF. The analysis also looks beyond the collateral pools of banks and quantifies the liquidity potential of unencumbered assets held by a subset of major Portuguese banks from a monetary policy perspective. Moreover, it presents for the first time the collateral pool of Portuguese banks from a regulatory-LCR perspective and concludes that the composition of HQLA vs. non-HQLA in the collateral pool of Portuguese banks changes significantly around periods of large changes in central bank credit exposure. Finally, this paper identifies signs of money market and bond issuance revival in the context of normalization of the ECB’s monetary policy and after the successful conclusion of Portugal’s adjustment programme, through which the country strengthened its banking system and regained market access. |
| JEL: | E44 E51 E52 E58 E59 G32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:o202501 |
| By: | Richard H. Clarida |
| Abstract: | This paper examines the 2021-2022 global inflation surge and the belated but aggressive monetary policy response to it by advanced economy central banks. Drawing on body of recent empirical research, it identifies three primary drivers of the global inflation surge: supply shocks from pandemic disruptions and Russia’s invasion of Ukraine, accommodative fiscal and monetary policies that responded to the economic dislocation caused by pandemic, and a demand shift toward goods relative to services, that exacerbated supply chain pressures. Advanced economy central banks were initially slow to react but ultimately raised rates aggressively and succeeded, with help from a reversal of the initial supply shocks which contributed to the initial inflation surge, in returning inflation to “2 point something” were confident enough in the prospects for further disinflation to began cutting interest rates by the summer of 2024. The paper explores benefits and costs of proposals to make forward guidance on the policy rate and the balance sheet more robust and considers the benefits and costs of incorporating scenario analysis into the communication toolkit. |
| JEL: | E31 E4 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33885 |
| By: | Leek, Lauren Caroline (European University Institute) |
| Abstract: | It has been well-established that central bank policy agendas are shaped by the spread of ideas, individual governors’ agency and economic and political pressures. However, in the case of the European Central Bank (ECB) the influence of the multi-level set-up of the Eurosystem consisting of both the ECB and National Central Banks (NCBs) is often not considered. How does this peculiar institutional setup shape the agenda? This study argues that NCBs act as intermediaries, channeling national and public priorities to the ECB level. Using a transformer model, alongside sequence and cross-sectional time-series analyses of ECB and NCB speeches from 1997 to 2024, I find that the ECB agenda and issue-responsiveness vis-a-vis `new' topics are driven primarily by NCBs. By revealing how NCBs shape what and when the ECB talks about certain topics, I also contribute more broadly to implications of the multi-level structure of the EU as well as how independent central banks and international organisations respond to outside pressures. |
| Date: | 2025–05–27 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:pb24v_v1 |
| By: | Allan Dizioli |
| Abstract: | This paper examines the challenges of formulating monetary policy in the face of heightened uncertainty. We develop a framework to assess the optimal monetary policy path under uncertainty, focusing on four key dimensions: the expectation formation process, inflation persistence, the measurement of the neutral interest rate, and the slope of the Phillips curve. Our framework provides a flexible tool for policymakers to address uncertainty and enhance decision-making in pursuit of economic stability. This framework is helpful to improve the risk management approach to monetary policy by showing how scenarios can quantify different sources of uncertainty faced by the ECB and give market participants an idea of how the ECB would react if those scenarios materialize. |
| Keywords: | DSGE; inflation dynamics; optimal monetary policy; forecasting and simulation; bayesian estimation |
| Date: | 2025–05–30 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/107 |
| By: | Costa, André |
| Abstract: | This paper considers the role of savings as that of managing the tradeoff between the amount consumed of present varieties and the investment into improving the quality of varieties in the future. Under this framework, it is shown that the rates of interest, inflation and economic growth are equal and derived from the same phenomenon: innovation. Consequently, this leads to a monetary policy recommendation, namely to attempt to bind the rates of inflation and interest to the directly observable real rate of economic growth. |
| Keywords: | Growth theory |
| JEL: | E20 E21 E22 E4 E40 E43 E50 E52 |
| Date: | 2025–06–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124966 |
| By: | Goncharenko, Roman (Central Bank of Ireland); Lukamanova, Elizaveta (Central Bank of Ireland) |
| Abstract: | This letter investigates the pass-through of monetary policy to interest rates on new loans, using granular loan-level data from Ireland’s Central Credit Register during the period of sharp monetary tightening in 2022–2023. Pass-through varied significantly across lenders and loan types. Non-bank lenders (NBLs) exhibited the strongest pass-through, while banks and credit unions showed weaker effects. Overall, business and asset financing experienced higher pass-through than personal loans and home mortgages. Despite sharp rate hikes in 2022–2023, overall pass-through remained modest due to banks’ and credit unions’ dominance. These results highlight lender composition’s role in monetary transmission and NBLs’ growing influence in specific loan segments. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:ecolet:1/el/25 |
| By: | Byrne, David (Central Bank of Ireland); Goodhead, Robert (Central Bank of Ireland); McMahon, Michael (Central Bank of Ireland); Naylor, Matthew (Central Bank of Ireland); Parle, Conor (Central Bank of Ireland) |
| Abstract: | The ECB’s communication strategy has changed in recent years, driven first by reforms from the 2021 Strategy Review and then by the post-pandemic inflation surge. Its communication has shifted rapidly from forward guidance to giving detailed information on its reaction function and its evaluation of data. Focusing on the Monetary Policy Statement, which is delivered at ECB press conferences, we examine these changes through the dimensions of temporal orientation and textual complexity. We find that the reforms led communication to be less semantically complex and to have fewer references to the past, reflecting reduced emphasis on evaluating data. However, as inflation rose and the ECB became “data-dependent”, its discussions of past data became more detailed again. While communication remained less semantically complex, it became more conceptually complex. This suggests a trade-off: giving more information on data and the reaction function may result in more conceptually complex communication. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:ecolet:2/el/25 |
| By: | Fatih Kansoy; Dominykas Stasiulaitis |
| Abstract: | The rapid growth of sustainable investing—now exceeding $35 trillion globally—has transformed financial markets, yet the implications for monetary policy transmis sion remain unexplored. While extensive literature documents heterogeneous firm responses to monetary policy through traditional channels like size and leverage, whether environmental, social, and governance (ESG) characteristics create distinct transmission mechanisms is unknown. Using high-frequency identification around 160 Federal Reserve announcements (2005-2025), we uncover an asymmetric pattern: high-ESG firms gain 1.6 basis points protection from contractionary target surprises yet suffer 2.6 basis points greater sensitivity to forward guidance shocks. This asymmetry persists within industries and intensifies with investor climate awareness. Remarkably, the Paris Agreement inverted these relationships—before December 2015, high-ESG firms were more vulnerable to contractionary policy within industries; afterward, they gained protection, a 186 basis point reversal. We develop a two-period model featuring heterogeneous investors with sustainability preferences that quantitatively matches these patterns. The model reveals how ESG investors’ non-pecuniary utility creates differential demand elasticities, simultaneously protecting green firms from imme diate rate changes while amplifying forward guidance vulnerability through their longer investment horizons. These findings establish environmental characteristics as a new dimension of monetary policy non-neutrality, with profound implications as sustainable finance continues expanding. |
| Date: | 2025–06–02 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1082 |
| By: | Yu Awaya; Jihwan Do; Makoto Watanabe |
| Abstract: | We construct a model of bubbles where an asset can be used as collateral primarily due to higher-order uncertainty: while both a lender and a borrower know that the intrinsic value of the asset is low, they may still believe that a “greater fool” exists who will purchase it at a much higher price. We show that such bubbles can lead to inefficient overinvestment under certain conditions. Using this framework, we also examine the impacts of macroprudential policies, as well as other regulatory measures such as interest rate hikes and the resolution of uncertainty. |
| Keywords: | collateral, higher-order uncertainty, speculative bubbles |
| JEL: | D82 D83 D84 E44 E52 G12 G14 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11894 |
| By: | Vyacheslav Fos; Tommaso Tamburelli; Nancy R. Xu |
| Abstract: | When Federal Reserve districts experience high inflation or low unemployment but lack voting rights to influence FOMC decisions, credit extended to commercial banks through the Discount Window (DW) declines. Our identification strategy is based on the exogenous rotation of voting rights among Reserve Banks and on within borrower-time and district-time variation in DW loans and Federal Home Loan Bank (FHLB) loans, implying that factors related to changes in macroeconomic conditions, local credit demand, or borrower characteristics do not drive the results. The effect on bank funding sources translates into changes in the composition of loans extended by commercial banks. |
| JEL: | D7 E5 E51 E58 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33853 |
| By: | Emiliano Carlevaro (School of Economics and Public Policy of Economics, University of Adelaide); Qazi Haque (School of Economics and Public Policy of Economics, University of Adelaide); Leandro Magnusson (Department of Economics, University of Western Australia) |
| Abstract: | This paper revisits the U.S. fiscal-monetary policy mix using econometric methods that are robust to weak identification and sensitive to structural changes. We find that the pre-Volcker period was predominantly characterised by a passive monetary-passive fiscal regime, consistent with indeterminacy and the presence of self-fulfilling inflationary expectations. However, we cannot rule out the possibility of a passive monetary-active fiscal configuration during the 1960s and 1970s, in line with the Fiscal Theory of the Price Level. In contrast, the post-Volcker period exhibits strong evidence of an active monetary-passive fiscal regime, reflecting greater inflation control and fiscal discipline. |
| Keywords: | Fiscal-monetary interactions, weak identification |
| JEL: | E63 E61 C63 E32 E31 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:uwa:wpaper:25-05 |
| By: | Laurent Clerc; Sandrine Lecarpentier; Cyril Pouvelle |
| Abstract: | This paper examines the impact of multiple regulatory constraints on the financing of the economy in the context of the implementation of the Basel III regulation on capital and liquidity. We propose a simple theoretical model of bank lending decision to analyse the interactions between these various regulatory requirements and the conditions under which some constraints may bind while others may not. Building on the predictions of this theoretical model, we estimate the impact of these different regulatory requirements on lending growth, on a panel of 54 French banks since 2014. Our results indicate that four pairwise interactions, most of them involving the leverage ratio, have a significant effect on lending growth. We also emphasize that the regulatory ratios interact more for banks with lower regulatory ratios and in periods of financial stress. More specifically, our results highlight a significant relationship of partial substitutability between the leverage ratio, the LCR and the NSFR for such banks in such periods, resulting from the positive effect of bank own funds on liquidity. |
| Keywords: | Bank Capital Regulation, Bank Liquidity Regulation, Basel III, Stress Tests |
| JEL: | G28 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:988 |
| By: | Agam Shah; Siddhant Sukhani; Huzaifa Pardawala; Saketh Budideti; Riya Bhadani; Rudra Gopal; Siddhartha Somani; Michael Galarnyk; Soungmin Lee; Arnav Hiray; Akshar Ravichandran; Eric Kim; Pranav Aluru; Joshua Zhang; Sebastian Jaskowski; Veer Guda; Meghaj Tarte; Liqin Ye; Spencer Gosden; Rutwik Routu; Rachel Yuh; Sloka Chava; Sahasra Chava; Dylan Patrick Kelly; Aiden Chiang; Harsit Mittal; Sudheer Chava |
| Abstract: | Central banks around the world play a crucial role in maintaining economic stability. Deciphering policy implications in their communications is essential, especially as misinterpretations can disproportionately impact vulnerable populations. To address this, we introduce the World Central Banks (WCB) dataset, the most comprehensive monetary policy corpus to date, comprising over 380k sentences from 25 central banks across diverse geographic regions, spanning 28 years of historical data. After uniformly sampling 1k sentences per bank (25k total) across all available years, we annotate and review each sentence using dual annotators, disagreement resolutions, and secondary expert reviews. We define three tasks: Stance Detection, Temporal Classification, and Uncertainty Estimation, with each sentence annotated for all three. We benchmark seven Pretrained Language Models (PLMs) and nine Large Language Models (LLMs) (Zero-Shot, Few-Shot, and with annotation guide) on these tasks, running 15, 075 benchmarking experiments. We find that a model trained on aggregated data across banks significantly surpasses a model trained on an individual bank's data, confirming the principle "the whole is greater than the sum of its parts." Additionally, rigorous human evaluations, error analyses, and predictive tasks validate our framework's economic utility. Our artifacts are accessible through the HuggingFace and GitHub under the CC-BY-NC-SA 4.0 license. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.17048 |
| By: | Stephen J. Cole (Department of Economics Marquette University); (Department of Economics Marquette University) |
| Abstract: | This paper examines how FOMC participants construct their Summary of Economic Projections (SEP) forecasts. FOMC expectations are assumed to contain two components: (1) an endogenous part that follows an adaptive learning model and (2) an exogenous part defined as sentiment (waves of optimism and/or pessimism). The results include key policy takeaways. The forecasts of FOMC members are responsive to new economic information. Their sentiment about future GDP growth and inflation also displays persistence and is correlated with each other. Moreover, FOMC participants rely more on their endogenous/learning model to form expectations. However, sentiment plays a larger role during and around recessions. |
| Keywords: | summary of economic projections, FOMC, constant-gain learning, sentiment shocks, waves of optimism and pessimism, evolving beliefs, monetary policy |
| JEL: | C52 D84 E50 E52 E58 E60 E70 E71 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:mrq:wpaper:2025-02 |
| By: | Olivier Coibion; Yuriy Gorodnichenko |
| Abstract: | We review recent research and experiences linking inflation and expectations, emphasizing what has been learned since 2020. One clear lesson is that the inflation expectations of most economic agents have been and remain unanchored. The unanchored nature of inflation expectations, in combination with supply shocks, can explain much of the inflation surge and subsequent disinflation when viewed through the lens of an expectations-augmented Phillips curve, both in the U.S. and abroad. New policy frameworks are unlikely to address this feature of expectations. Only a communication strategy that breaks what we refer to as the “cycle of selective inattention” is likely to be successful, but it is probably already too late to stop the next inflation surge. |
| JEL: | E30 E4 E5 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33858 |
| By: | Anis Foresto; Monique Reid; Jeffrey Rakgalakane |
| Abstract: | The post-pandemic inflationary surge again challenged our views on the Phillips curve. International evidence that the Phillips curve is non-linear is supported by micro-evidence that agents are attentive to inflation once it passes a threshold. Beyond this threshold, inflation expectations are slow to fall, steepening the Phillips curve. Using a self-exciting threshold autoregressive model, we determine that the slope of the Phillips curve in South Africa is state dependent (20002024). The threshold is best described as a range between 4.28% and 9.29%, with a mean of 5.55%. We find low-inflation regimes to be self-stabilising as the probability of remaining in this regime exceeds the probability of transitioning to a high-inflation regime. Our findings have implications for discussions about the appropriate level of the inflation target. We recommend that the inflation target should fall low enough that a routine-sized supply shock does not push inflation deep into the threshold range (red zone). Considering the size of oil price shocks typically experienced in South Africa, we argue that a target of 3.37% would be just low enough to offer a buffer to accommodate the direct effect of standard-sized shocks without entering the red zone. Our results therefore support the position of Honohan and Orphanides (2022) that the South African Reserve Bank should target inflation of 3%. |
| Date: | 2025–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11080 |
| By: | James Hebden; Fabian Winkler |
| Abstract: | We propose an efficient procedure to solve for policy counterfactuals in linear models with occasionally binding constraints in sequence space. Forecasts of the variables relevant for the policy problem, and their impulse responses to anticipated policy shocks, constitute sufficient information to construct valid counterfactuals. Knowledge of the structural model equations or filtering of structural shocks is not required. We solve for deterministic and stochastic paths under instrument rules as well as under optimal policy with commitment or subgame-perfect discretion. As an application, we compute counterfactuals of the U.S. economy after the pandemic shock of 2020 under several monetary policy regimes. |
| Keywords: | Sequence space; DSGE; Occasionally binding constraints; Optimal policy; Commitment; Discretion |
| JEL: | C61 C63 E52 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:100035 |
| By: | Goutsmedt, Aurélien (UC Louvain - F.R.S-FNRS); Sergi, Francesco; Acosta, Juan |
| Abstract: | What do economists do in central banks? Why do central banks hire economists? This book investigates the evolving role of economists and economic knowledge within central banks, arguing that their current centrality is neither self-evident nor historically inevitable. While the presence and influence of economists in central banks today may seem natural, this book shows that it is the result of a complex, gradual, and uneven historical process shaped by institutional structures, disciplinary transformations, and shifting relationships between science and policy. Drawing on a rich but dispersed body of literature, the book traces how economists progressively gained authority through the establishment of statistics departments, the adoption of macroeconometric models, and the emergence of a shared cognitive infrastructure between academia and central banks. Rather than focusing on individuals or doctrines, it examines general trends and institutional shifts across a series of national case studies to show how central banks function as boundary organizations, at the intersection of policy and science. |
| Date: | 2025–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:acymv_v1 |
| By: | Paul Bergin; Giancarlo Corsetti |
| Abstract: | Central banks around the world have grappled with the question of how to respond to the mix of inflationary and output implications of a trade war. Recent tariff changes have impacted a wider cross-section of goods than was true in the previous tariff round, targeting final consumption goods in addition to materials such as aluminum and steel. This paper studies the optimal monetary stabilization of tariffs using a New Keynesian model enriched with comparative advantage between multiple traded sectors that differ in terms of tariff exposure as well as market structure and price rigidity. We find that, in the aggregate, the optimal monetary response is expansionary, supporting activity and producer prices at the cost of tolerating short-run headline inflation – both in response to tariffs aimed at differentiated consumption goods and to tariffs on non-differentiated goods. The output and export dynamics arising from tariffs on each sector differ sharply, as do the motivations for an expansionary monetary response. Sectoral reallocation is an order of magnitude larger than predicted by standard macro models featuring one tradable and one nontradable sector. |
| JEL: | E52 F42 F44 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33845 |
| By: | Guido Menzio; Saverio Spinella |
| Abstract: | Recent empirical evidence documents that different individuals earn systematically different rates of return, even after controlling for portfolio composition. We propose a general equilibrium theory of residual heterogeneity in rates of return on wealth by embedding a financial market with search frictions into a monetary incomplete-market model. We show that the distribution of rates of return offered in the financial market is endogenous and depends on the marginal product of capital, the return on fiat money, and the joint distribution of households across wealth and financial human capital. When calibrated, the model succeeds in reproducing the extent of residual dispersion in returns to wealth across individuals. We use the calibrated model to study various policies and counterfactuals, with a particular focus on monetary policy. |
| JEL: | D52 D83 E21 E44 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33868 |
| By: | Alessia De Stefani |
| Abstract: | I study how monetary policy interacts with mortgage underwriting standards in shaping tenure decisions and rental market equilibria. Using property-level data from the American Housing Survey, I show that the increase in mortgage rates between 2021 and 2023 pushed many potential first-time home-buyers above FHA mortgage payment-to-income limits, restricting their access to home-ownership. This resulted in additional demand pressure on local rental markets, contributing to rent price inflation in 2023. Rentals located in cities with larger shares of constrained first-time buyers experienced steeper price growth, controlling for unit characteristics and contemporaneous economic developments. Rent inflation was more pronounced in smaller units occupied by lower-income renters, underscoring the potential for second-round distributional effects of monetary policy. |
| Keywords: | Mortgages; Homeownership; Monetary Policy; Rents |
| Date: | 2025–05–09 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/090 |
| By: | Leonardo Tariffi (Universitat de Barcelona, CIVREF) |
| Abstract: | This paper shows what the main inflation macroeconomics drivers in Spain are. Even if there has been a less than two-digit inflation in the last three decades, it can be emphasized the fact that the inflation rate has raised and declined rapidly in recent years because of its fundamental determinants. Main reasons behind the behaviour of the consumption price index are related to higher prices in the energy sector and a higher government expenditure, particularly after the post-pandemic economy re-opening. Proxy variables such as oil prices free on board in the European Brent market, the 12 months Euribor interest rate of the Economic and Monetary Union, the nominal gross domestic product, the government expenditure of the public administration, and fiscal deficits in terms of the gross domestic product are those variables in which the consumer price index depends on. Changes on interest rates have managed to stabilized inflation rates once again, thereby diminishing the percentage change in the consumer price index. |
| Keywords: | Inflation rate, Consumer Price Index, Central Banks, Hydrocarbon Fuels |
| JEL: | E31 E58 L71 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ewp:wpaper:480web |
| By: | Hie Joo Ahn; Matteo Luciani |
| Abstract: | We disentangle price changes due to economy-wide shocks from those driven by idiosyncratic shocks by estimating a two-regime dynamic factor model with dynamic loadings on a new large dataset of finely disaggregated monthly personal consumption expenditures price inflation indexes for 1959-2023. We find that up to the mid-1990s and after the Covid pandemic, common shocks were the primary driver of US inflation dynamics and had long-lasting effects. In between, idiosyncratic shocks were the main driver, and common shocks had short-lived effects. |
| Keywords: | Core inflation; Dynamic factor model; Disaggregated consumer prices; Monetary policy |
| JEL: | C32 C43 C55 E31 E37 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:100036 |
| By: | Philippe Burger |
| Abstract: | This paper proposes that the South African Reserve Bank should pursue a 3% inflation target, instead of the current 4.5% midpoint of a 3%-to-6% target range. Doing so may also result in lower inflation volatility, thereby reducing nominal exchange rate risk for investment and trade, and may thus support economic growth. Using a two-regime Markov-switching model, the analysis shows that since the global financial crisis, periods of higher inflation volatility are much shorter. Thus, inflation is relatively better anchored since the global financial crisis. |
| Keywords: | Inflation targeting, Sacrifice ratio, Budget deficits, Markov switching, South Africa, Prices |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2025-42 |
| By: | Guglielmo Maria Caporale; Luis Alberiko Gil-Alana |
| Abstract: | This paper examines persistence and nonlinearities in the US Federal Funds rate over the period from July 1954 to April 2025 by using fractional integration methods. More precisely, a general model including both deterministic and stochastic components is estimated under alternative assumptions concerning the error term (white noise and autocorrelation), and both linear and a nonlinear specification (the latter based on Chebyshev polynomials) are considered. The empirical results provide evidence of mean reversion but also of high persistence when allowing for autocorrelation in the errors. Moreover, they point towards significant nonlinearities in the stochastic behaviour of the series. Both are important properties of the Federal Funds rate, mainly reflecting underlying inflation persistence and policy shifts respectively. |
| Keywords: | US Federal Funds rate, fractional integration persistence, nonlinearities |
| JEL: | C22 E43 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11913 |