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on Central Banking |
| By: | Sheryl Chen; Tony Wang; Kyle Feinstein |
| Abstract: | We study how a central bank should dynamically set short-term nominal interest rates to stabilize inflation and unemployment when macroeconomic relationships are uncertain and time-varying. We model monetary policy as a sequential decision-making problem where the central bank observes macroeconomic conditions quarterly and chooses interest rate adjustments. Using publically accessible historical Federal Reserve Economic Data (FRED), we construct a linear-Gaussian transition model and implement a discrete-action Markov Decision Process with a quadratic loss reward function. We chose to compare nine different reinforcement learning style approaches against Taylor Rule and naive baselines, including tabular Q-learning variants, SARSA, Actor-Critic, Deep Q-Networks, Bayesian Q-learning with uncertainty quantification, and POMDP formulations with partial observability. Surprisingly, standard tabular Q-learning achieved the best performance (-615.13 +- 309.58 mean return), outperforming both enhanced RL methods and traditional policy rules. Our results suggest that while sophisticated RL techniques show promise for monetary policy applications, simpler approaches may be more robust in this domain, highlighting important challenges in applying modern RL to macroeconomic policy. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.17929 |
| By: | Conesa Martinez, Marina |
| Abstract: | This policy brief explores the role of communication by central banks as they facilitate the operation of green bond markets. It analyses whether the integration of climate considerations into central banks’ communication strategies has had an effect on market behaviour. Summary An estimated US$4.5 trillion in annual investment is needed to meet the Paris Agreement targets and reduce the possibility of a significant drop in global GDP caused by unmitigated climate change. Central banks can play a crucial role in addressing this challenge by incorporating climate-related considerations into their frameworks, including strategic communication. Subject to legal requirements, central banks may also assume a catalytic role in promoting sustainable development. Cross-country evidence suggests that more active messaging from central banks about climate change considerations is positively associated with green bond issuance at the firm level. Green bonds and similar instruments can help channel funding to renewable energy, clean transport and other environmental projects. Overall, analysis of central bank speeches suggests that these communications can serve as a soft tool to bridge the financing gap for a low-carbon economy. By clearly communicating climate-related risks and policies, central banks could reduce uncertainty around their actions, foster confidence among investors and firms, and align market behaviour with long-term sustainability goals, ultimately supporting their objectives such as price and financial stability. Recommendations – central banks could: Regularly report on progress made on climate-related initiatives to strengthen credibility, address concerns about mandate overreach, and strengthen stakeholder trust. Integrate discussion of climate risks and policies into their regular communications wherever relevant, such as monetary policy statements, speeches and reports, to guide market behaviour and foster confidence in sustainable finance. Collaborate with international organisations to standardise taxonomies and verification mechanisms, ensuring credibility and addressing greenwashing. |
| JEL: | F3 G3 N0 |
| Date: | 2025–10–15 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130756 |
| By: | Yuhan Hou; Tianji Rao; Jeremy Tan; Adler Viton; Xiyue Zhang; David Ye; Abhishek Kodi; Sanjana Dulam; Aditya Paul; Yikai Feng |
| Abstract: | The Federal Open Market Committee (FOMC) sets the federal funds rate, shaping monetary policy and the broader economy. We introduce \emph{FedSight AI}, a multi-agent framework that uses large language models (LLMs) to simulate FOMC deliberations and predict policy outcomes. Member agents analyze structured indicators and unstructured inputs such as the Beige Book, debate options, and vote, replicating committee reasoning. A Chain-of-Draft (CoD) extension further improves efficiency and accuracy by enforcing concise multistage reasoning. Evaluated at 2023-2024 meetings, FedSight CoD achieved accuracy of 93.75\% and stability of 93.33\%, outperforming baselines including MiniFed and Ordinal Random Forest (RF), while offering transparent reasoning aligned with real FOMC communications. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.15728 |
| By: | Feyertag, Joe |
| Abstract: | Climate change, environmental degradation, and the accelerating transition to a low-carbon economy are reshaping global labour markets. These forces are altering both the demand for and supply of labour, with far-reaching implications for central banks. As institutions that closely monitor labour market dynamics to guide monetary policy, central banks will increasingly need to account for the disruptions caused by environmental pressures. This report addresses a critical gap in current analysis by exploring how environmental risks intersect with central banks’ mandates through the labour market. It aims to equip central banks with the insights needed to integrate these evolving risks into their policy frameworks and operational decisions. |
| JEL: | N0 R14 J01 F3 G3 |
| Date: | 2025–07–23 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130735 |
| By: | Vito Polito (School of Economics, University of Sheffield, Sheffield S10 2TU, UK); Paulo Santos Monteiro (Department of Economics and Related Studies, University of York, UK); Mike Wickens (Cardiff University, University of York, CEPR, CESifo, UK) |
| Abstract: | This paper analyses the government expenditure multiplier at the zero lower bound (ZLB) in the presence of quantitative easing (QE), using a tractable New Keynesian model with financial frictions. We show that sufficiently large exogenous QE can lift the economy off the ZLB, thus yielding multipliers below one even for a small fiscal stimulus. Pre-commitment to a gradual QE unwinding further reduces the fiscal stimulus needed to keep multipliers below unity. When QE instead follows an instrument rule that responds to conventional monetary shortfalls, the multiplier can remain below one even at the ZLB. This result also holds under an optimally designed, welfare-based QE policy. Our analysis provides theoretical support for the growing empirical evidence that government spending multipliers can remain below unity at the ZLB. |
| Keywords: | Government expenditure multiplier, Zero lower bound, Quantitative easing |
| JEL: | E52 E58 E62 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:shf:wpaper:2025011 |
| By: | Ilona Cserh\'ati; \'Eva Gyurkovics; Tibor Tak\'acs |
| Abstract: | To model the interaction of fiscal and monetary policy, a novel discrete-time, uncertain, infinite time horizon, dynamic game model is developed, where the uncertainties of expectations are modeled by unknown nonlinear but quadratically constrained deterministic functions. Cost-guaranteeing Nash strategies are defined for fiscal and monetary policy as two players. The model is suitable for comparative analysis of the development paths of catching-up economies. Specifically, we evaluate nine possible development paths for the Hungarian economy, where each path is characterised by a proxy for the debt-to-GDP ratio. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.15723 |
| By: | Hiebert, Paul; Monnin, Pierre |
| Abstract: | Climate change is often characterised as a standalone risk for the financial system. In practice, however, the emergence and materialisation of climate-related shocks interact with general macro-financial conditions, implying potentially novel and difficult-to-predict interactions. In such an environment, macroprudential buffers earmarked for specific risks have limitations, as they might not account for important correlations between climate-related shocks and other sources of financial vulnerability, nor for the extent to which climate-related shocks might compound existing challenges in the real economy and financial sector. In light of such complex challenges, this report investigates how a holistic approach can enhance the financial system’s ability to absorb compound shocks. It finds that consolidated capital buffers accounting for the amplifying effects of combined shocks, which single-risk buffers might underestimate, offer general insurance against several sources of uncertainty (both reducible and irreducible). |
| JEL: | N0 F3 G3 |
| Date: | 2025–09–03 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130740 |
| By: | Viral V. Acharya; Nicola Cetorelli; Bruce Tuckman |
| Abstract: | We argue that the rapid asset growth of nonbank financial intermediaries (NBFIs) relative to banks is the outcome of transformations of risks between banks and NBFIs that increase the interconnectedness of the two sectors. These transformations are consistent with avoiding tighter, post-GFC bank regulation while harnessing the funding and liquidity advantages of bank deposit franchises and access to safety nets. Specifically, we show that banks fund NBFIs through senior loans and credit lines, which NBFIs use for acquiring junior credit claims, warehouse financing, and liquidity management. We empirically demonstrate that shocks experienced by NBFIs spill over to the banks that provide them with credit lines, particularly in times of stress. We then suggest policy approaches consistent with our transformation view and conclude with suggestions for future research. |
| Keywords: | non-bank financial intermediaries; nonbanks; shadow banking; bank regulation; regulatory arbitrage; systemic risk; credit lines; derivatives margin |
| JEL: | G01 G21 G23 G28 |
| Date: | 2026–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:102312 |
| By: | DiLeo, Monica |
| Abstract: | As central bankers have increasingly considered the impacts of climate change and a net zero transition on their mandates, analysis has focused on the challenges of the technical uncertainty presented by financial and climatic systems. This report builds on previous work by focusing on how uncertainty created by political systems affects central banks. Political uncertainty is not inherently negative. It is often a byproduct of the dynamism inherent in democratic political systems. However, it can generate practical challenges for central banks and create a risk that they will avoid action on certain topics relevant to their mandates. This report offers central bankers a framework for defining different types of political uncertainty and principles to enable them to cope and move forward. |
| JEL: | F3 G3 N0 |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130739 |