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on Central Banking |
| By: | Kaiji Chen; Yiqing Xiao; Tao Zha |
| Abstract: | We examine how interbank wholesale funding shapes the transmission of interest-rate-based monetary policy in China and contributes to systemic risk. Using a bank-level quarterly panel dataset and an estimated policy rule for the 7-day repo rate, we find that access to wholesale funding amplifies the transmission of monetary policy easing to lending by non-state banks, but also heightens their vulnerability to systemic risk during economic downturns. Since 2018, non-state banks with greater reliance on wholesale funding have experienced larger increases in expected capital shortfalls. To interpret these findings, we develop a structural model that incorporates a dual-track interest rate system and a segmented deposit market. The model quantifies the role of a liquidity reallocation channel from state to non-state banks and reveals a macroprudential trade-off: tighter regulation of wholesale funding weakens the effectiveness of monetary policy but mitigates systemic risk. |
| JEL: | E02 E5 G28 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34056 |
| By: | Kase, Hanno; Rigato, Rodolfo Dinis |
| Abstract: | We introduce an estimated medium scale Heterogeneous-Agent New Keynesian model for forecasting and policy analysis in the Euro Area and discuss the applications of this type of models in central banks, focusing on two main exercises. First, we examine an alternative scenario for monetary policy during the early 2020s inflationary episode, showing that earlier hikes in interest rates would have affected more strongly households at the lower end of the wealth distribution, whose consumption our model suggests was already depressed relative to the rest of the population. To provide intuition for this result, we introduce a new decomposition of the effects of monetary policy on consumption across the wealth distribution. Second, we show that introducing heterogeneous households does not come at the cost of forecasting accuracy by comparing the performance of our model to its exact representative-agent counterpart and demonstrating nearly identical results in predicting key aggregate variables. JEL Classification: D31, E12, E21, E52 |
| Keywords: | forecasting, heterogeneous-agent New Keynesian models, inequality, monetary policy |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253086 |
| By: | Eliezer Borenstein (Bank of Israel) |
| Abstract: | I analyze a setting in which monetary policy has a state dependent effect due to an endogenously driven information channel. Specifically, I develop a model of investment in risky capital, where a central bank holds private information regarding the state of the economy and sets an interest rate accordingly in order to stabilize aggregate demand. Lowering the interest rate stimulates investment via the standard channel, but also signals weaker economic conditions, which reduces investors' confidence and their desire to invest. The information effect is negligible when the economy is strong, but can become significant when the economy is weaker. In a sufficiently weak economy, reducing the interest rate generates a decline in investment. Thus, a policy aimed at stimulating investment might unintentionally cause the opposite result, weakening aggregate demand even further. The reduction in aggregate demand is inefficient, as it reflects a coordination failure among investors. In line with the model's s prediction, I provide empirical evidence suggesting that the information effect of monetary policy is stronger in times of weaker economic conditions. |
| Keywords: | Central bank information effects, Monetary policy, Financial crisis, Stock market |
| JEL: | D83 E43 E44 E52 G01 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2025.03 |
| By: | Egan, Paul; McQuinn, Kieran |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:esr:wpaper:wp797 |
| By: | Volz, Ute; Wicknig, Florian |
| Abstract: | We propose novel measures to evaluate the risk profile of longer-term inflation expectations, using data on inflation probabilities from the ECB's Survey of Professional Forecasters (SPF). Unlike existing indicators, these measures specifically incorporate the central bank's inflation target. This allows for a more precise assessment of forecasters' perceptions of risks to the central bank's ability to achieve its target. Consequently, these measures provide a valuable additional criterion for assessing the degree of expectation anchoring. In contrast to other metrics, our measures indicate that, between 2014 and 2017 as well as during the Covid-19 crisis, professional forecasters saw the risk that inflation could undershoot the target in the longer term. Moreover, our indicators suggest that, following Russia's invasion of Ukraine, survey participants perceived a risk of inflation overshooting the target four to five years ahead. |
| Keywords: | Inflation, Expectations, Monetary Policy, Survey of Professional Forecasters |
| JEL: | E31 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:323949 |
| By: | Jesús Fernández-Villaverde (UNIVERSITY OF PENNSYLVANIA); Joël Marbet (BANCO DE ESPAÑA); Galo Nuño (BANCO DE ESPAÑA); Omar Rachedi (ESADE BUSINESS SCHOOL) |
| Abstract: | This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully non-linear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households’precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality. |
| Keywords: | heterogeneous agents, HANK models, neural networks, non-linear dynamics |
| JEL: | D31 E12 E21 E31 E43 E52 E58 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2407 |
| By: | Miguel Acosta-Henao (CENTRAL BANK OF CHILE); María Alejandra Amado (BANCO DE ESPAÑA); Montserrat Martí (CENTRAL BANK OF CHILE); David Pérez-Reyna (UNIVERSIDAD DE LOS ANDES) |
| Abstract: | This paper investigates the granular transmission of U.S. monetary policy shocks to deviations from the uncovered interest rate parity (UIPDs) in emerging economies. Using a comprehensive dataset from Chile that accounts for firm-bank relationships and the time-variant characteristics of both firms and banks, we uncover several key findings: (1) Shocks to the federal funds rate (FFR) increase banks’ costs of foreign borrowing. (2) These higher credit costs disproportionately affect small firms, raising their UIPDs more than for large firms. (3) This size-differentiated impact stems from the relatively higher interest rates on domestic currency loans faced by small firms. (4) In contrast, interest rates on dollar-denominated loans respond homogeneously across all firms. (5) We find no differential effect on loan quantities, suggesting an active role of credit supply and demand. We rationalize these findings with a small open economy model of corporate default that incorporates heterogeneous firms borrowing from domestic banks in both foreign and domestic currencies. In our model, a higher FFR reduces the marginal cost of defaulting on domestic-currency debt for small firms more than for large firms. |
| Keywords: | uncovered interest rate parity, U.S. monetary policy, bank lending, firm financing, firm heterogeneity |
| JEL: | E43 E44 F30 F41 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2530 |
| By: | Montano, Pierina; Quineche, Ricardo; Tipo, Royer |
| Abstract: | This study challenges the conventional assumption of uniform monetary policy transmission by examining interest rate pass‑through across the conditional distribution using quantile cointegration. Using U.S. data from 1994–2024, we estimate long‑run relationships between the federal funds rate and both lending rates and Treasury yields at quantiles 0.1–0.9, employing the Phillips–Hansen fully modified quantile estimator with quantile CUSUM stability tests. We find that transmission is fundamentally asymmetric and varies systematically with economic conditions. Under conventional policy measures, pass‑through mechanisms display marked instability, with cointegration frequently breaking down in crisis periods when policy effectiveness is most crucial. The prime rate remains stably linked to the policy rate only at select quantiles, while Treasury yields show clear maturity‑dependent patterns—medium‑term maturities are generally more resilient than short‑ or long‑term yields. Temporal robustness checks reveal that transmission was more unstable during the pre‑Global Financial Crisis era than often assumed, but markedly more stable in the pre‑COVID period, consistent with institutional learning and enhanced policy frameworks. Using the Wu‑Xia shadow rate in place of the federal funds rate delivers complete stability for the prime rate and substantial stability gains for most Treasury maturities. This indicates that many breakdowns observed under conventional measures reflect policy‑measurement limitations at the zero lower bound rather than genuine transmission failures. The results suggest central banks should adopt state‑contingent frameworks that recognize transmission asymmetries, deploy unconventional tools proactively in stressed conditions, and invest in institutional improvements that can sustain transmission effectiveness across diverse economic environments. |
| Keywords: | Quantile cointegration, Monetary policy transmission, Interest rate pass-through, Asymmetric interest rate effects |
| JEL: | E43 C32 C21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:323756 |
| By: | Marc Dordal i Carreras; Seung Joo Lee |
| Abstract: | This paper introduces a business cycle model that integrates financial markets and endogenous financial volatility at the Zero Lower Bound (ZLB). We derive three key insights: first, central banks can mitigate excess financial volatility at the ZLB by credibly committing to future economic stabilization; second, a commitment to refraining from future stabilization can steer the economy toward more favorable equilibrium paths, thereby revealing a trade-off between future stabilization and reduced financial volatility at the ZLB; third, maintaining uncertainty regarding the timing of future stabilization is strictly superior to alternative forward guidance commitments. |
| Keywords: | monetary policy, forward guidance, financial volatility, risk premium |
| JEL: | E32 E43 E44 E52 E62 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12034 |
| By: | Coppola, Antonio; Clayton, Christopher |
| Abstract: | We examine whether and how granular, real-time predictive models should be integrated into central banks' macroprudential toolkit. First, we develop a tractable framework that formalizes the tradeoff regulators face when choosing between implementing models that forecast systemic risk accurately but have uncertain causal content and models with the opposite profile. We derive the regulator’s optimal policy in a setting in which private portfolios react endogenously to the regulator's model choice and policy rule. We show that even purely predictive models can generate welfare gains for a regulator, and that predictive precision and knowledge of causal impacts of policy interventions are complementary. Second, we introduce a deep learning architecture tailored to financial holdings data—a graph transformer—and we discuss why it is optimally suited to this problem. The model learns vector embedding representations for both assets and investors by explicitly modeling the relational structure of holdings, and it attains state-of-the-art predictive accuracy in out-of-sample forecasting tasks including trade prediction. |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:xwsje_v1 |
| By: | Knarik Ayvazyan; Mr. Etienne B Yehoue |
| Abstract: | The effectiveness of macroprudential policy framework depends to a large extent on how the process of monitoring and assessing systemic risks and the calibration of macroprudential policy tools are operationalized in practice. This paper has two main contributions. First we propose an enhanced composite indicator, the Systemic Vulnerabilities Index (SVI), which captures the buildup of systemic vulnerabilities. The index is built on an innovative approach that uses optimal aggregation of subindices, and without imposing exogenous constraints. Specifically, making use of the Principal Component Analysis (PCA) for a broad set of relevant input variables, we determine their relative importance in contributing to the buildup of systemic vulnerabilities. Subsequent use of Monte Carlo simulation techniques allows us to select the optimal SVI that best predicts future credit losses. The proposed SVI captures both time and sectoral dimensions of the buildup of risks. We provide evidence showing a superior performance of the SVI, compared to the traditional credit-to-GDP gap in documenting risk accumulation. We investigate the relationship between our SVI and financial condition index and provide evidence of a negative correlation between the two, whereby a loosening of financial conditions is associated with more accumulation of imbalances. Second, we provide a framework that guides on how the SVI can be used for increasing Countercyclical Capital Buffer (CCyB) beyond its neutral level. Specifically, we propose a mapping that shows how the SVI can help determine the timing of setting a CCyB beyond the neutral rate as well as its magnitude. |
| Keywords: | Financial Imbalances; Credit-to-GDP Gap; Macroprudential Policy |
| Date: | 2025–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/146 |
| By: | Khazan Bakhshaliyev (Central Bank of the Republic of Azerbaijan); Vugar Ahmadov (Central Bank of the Republic of Azerbaijan) |
| Abstract: | The balance between supply and demand influences inflation and understanding whether one factor predominates the other has significant implications for economic policy. Distinguishing the contributions of supply and demand factors to inflation offers insight into the primary drivers of inflation during economic shocks and is especially important for monetary policymaking. Decomposition serves as a tool for testing theoretical frameworks and enables policymakers and practitioners to monitor the factors contributing to inflation in real-time. In this context, the paper aims to decompose inflation into supply- and demand-driven components using an alternative micro-founded approach. It relies on a fundamental theory of price formation: the relationship between price and quantity, based on monthly data for 2, 559 goods sold in one of the largest supermarket chains in Azerbaijan from 2020 and 2025. For each item, a structural vector autoregression (SVAR) model is estimated individually, resulting in 2, 559 SVAR models used to identify whether observed inflation is driven by demand or supply shocks. Preliminary findings from SVAR models highlight that demand is one of the main contributors to inflation, particularly in the post-COVID recovery period, which macro-founded models had previously underestimated. Consequently, this study contributes to the Central Bank of Azerbaijan by providing a tool to estimate the importance of demand-pulled inflation, helping policymakers stay ahead of the curve. |
| Keywords: | Supply and demand driven inflation; SVAR model; supermarket data |
| JEL: | E30 E31 E52 E58 |
| Date: | 2025–08–11 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp12-2025 |
| By: | Stephany Griffith-Jones; Mario Giarda; Jorge Arenas |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchep:75 |
| By: | Noam Michelson (Bank of Israel) |
| Abstract: | This paper evaluates the impact of the Bank of Israel’s corporate bond purchase program initiated in July 2020 amid the COVID-19 pandemic. The analysis reveals that the announcement led to significant reductions in credit spreads for eligible and noneligible bonds, and particularly for A-rated bonds, while actual purchases had an additional, yet limited, effect. Additionally, the program reopened the primary market for noninvestment grade issuances. Finally, the inclusion of bonds issued by commercial banks as eligible for purchasing, a unique feature of the program, had a positive effect on commercial banks' credit supply. This study provides new insights into central bank interventions during financial crises and presents novel evidence for innovative crisis management tools intended to stimulate credit in times of distress. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2025.07 |
| By: | Michael D. Bordo; Oliver Bush; Ryland Thomas |
| Abstract: | Discussion of the causes of the Great Inflation in the UK during the 1970s has centred around the relative importance of two potential explanations, which we label “bad luck” – the occurrence of unusually large commodity price and supply-side shocks - and “bad policy” reflecting failures in both monetary and prices and incomes policies. By reconsidering the historical and empirical record of inflation from 1950s to the early 1990s we show that the persistence of the Great Inflation in the UK cannot fully be explained by these factors, although these can account for some of the major fluctuations. Instead, underlying inflation and inflation expectations appear to be the result of a sequence of regime shifts. We argue those regime shifts are as much related to fundamental changes in fiscal policy as they are to monetary policy and union reforms. Our empirical evidence suggests that fiscal policy was at the heart of many of the problems in the UK during the Great Inflation. In contrast to most of British history, it was not used to stabilise the public finances. Instead, it was used to keep unemployment down and growth up, to subsidise losers from terms of trade shocks and to secure deals with the unions. |
| JEL: | N10 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34063 |