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on Central Banking |
| By: | Jorge Abad (EUROPEAN CENTRAL BANK); Saki Bigio (UCLA AND NBER); Salomón García-Villegas (CUNEF UNIVERSITY); Joël Marbet (BANCO DE ESPAÑA); Galo Nuño (BANCO DE ESPAÑA, CEMFI AND CEPR) |
| Abstract: | How does heterogeneity in banks’ interest-rate risk exposure shape monetary policy transmission? We develop a quantitative macroeconomic model of heterogeneous banks to answer this question. We establish an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter for transmission only when bank solvency concerns become relevant. By calibrating the model to the euro area, we show that idiosyncratic default risk pushes a substantial share of banks toward the solvency threshold, making heterogeneity quantitatively important. When policy rates rise, fixed-rate banks’ net interest margin is compressed – funding costs increase while legacy loan income stays unchanged – eroding capital and triggering sharper deleveraging. The elasticity of lending to monetary policy is one-third higher in fixed-rate economies. The effects extend to financial stability: tightening raises bank failure rates in fixed-rate systems while lowering them in variable-rate systems. The results provide a rationale for macroprudential and monetary policy coordination and for monetary policy gradualism. |
| Keywords: | Monetary policy transmission, bank lending channel, heterogeneous banks, interest-rate risk, fixed-rate loans, variable-rate loans, bank solvency, bank capital, macroprudential policy, euro area |
| JEL: | E44 E52 E58 G21 G28 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2620 |
| By: | Anyfantaki, Sofia; Cucic, Dominic; Fricke, Daniel; Hartmann, Philipp; Kaufmann, Christoph; Lukmanova, Elizaveta; Maddaloni, Angela; Barahona, Ricardo |
| Abstract: | The growing importance of non‑bank financial intermediaries (NBFIs) also has important implications for the transmission of monetary policy in the euro area. It alters the composition of credit supply and strengthens the role of market‑based finance for the corporate sector. In the aggregate, NBFIs tend to amplify the transmission of monetary policy within the financial sector. In particular, intermediaries with uninsured short‑term funding amplify monetary transmission to credit. This becomes particularly pronounced during episodes of financial stress, when liquidity pressures and valuation losses can trigger asset sales and spillovers to banks. By contrast, institutions that benefit from stable long-term funding, such as insurers, pension funds and certain specialised finance companies, may attenuate the transmission of monetary policy to credit, although only to a limited extent. The implications for monetary policy transmission arising from NBFIs also extend beyond lending, notab JEL Classification: G2, G23, G28 |
| Keywords: | collateral, insurers, investment funds, monetary policy, non-bank intermediation |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026391 |
| By: | Gregorio Impavido; Shuyu Wang |
| Abstract: | This paper examines the impact of voluntary and involuntary excess liquidity on monetary policy effectiveness and inflation in Kazakhstan. Consistent with first-principles predictions, we find that voluntary liquidity held for precautionary motives is (i) negatively related to the opportunity cost of holding liquid assets and to the level of mandatory reserve requirements; (ii) positively related to average liquidity outflows, proxied by transactional demand for cash; and (iii) ambiguously affected by the magnitude and volatility of the business cycle. We further show that higher voluntary liquidity weakens monetary policy transmission and increases exchange rate pass-through to inflation. In contrast, involuntary liquidity hampers monetary policy effectiveness no matter its level and it increases average inflation primarily through its influence on the formation of inflation expectations. Overall, the results suggest that reforms aimed at reducing both forms of liquidity would enhance monetary policy effectiveness and, ceteris paribus, reduce inflation. |
| Keywords: | Liquidity risk; precautionary liquidity; involuntary liquidity; monetary policy; interest channel; credit channel; Kazakhstan. |
| Date: | 2026–06–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/109 |
| By: | Ascari, Guido; Bijnens, Gert; Bobasu, Alina; Colciago, Andrea; Dhyne, Emmanuel; Elfsbacka-Schmöller, Michaela; Grimaud, Alex; Valderrama, Maria Teresa; Zlobins, Andrejs; Audzei, Volha |
| Abstract: | This paper surveys research from the ESCB ChaMP Research Network on how ongoing structural change is affecting monetary policy transmission in the euro area. It shows that transmission is state-dependent and varies systematically with changesin the sectoral composition of the economy, in its international integration, in financial conditions and in inflation regimes. More service-intensive economies exhibit weaker real responses to monetary tightening, while high-inflation environments areassociated with faster and stronger price pass-through, helping explain why the recent disinflation episode entailed relatively low output costs. The paper also shows that variations in leverage, supply shocks and energy-related disturbances alter theinflation-output trade-off and can make appropriate policy responses more contingent on the source and persistence of shocks. Finally, it reviews evidence that monetary policy can affect the supply side through innovation, reallocation and productivity, implying that structural change influences transmission and may itself be influenced by policy. JEL Classification: E52, O33, Q54 |
| Keywords: | climate and energy transition, frictions, innovation, monetary policy transmission, reallocation, structural transformation |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026393 |
| By: | Jaemin Jeong; Eunseong Ma; Choongryul Yang |
| Abstract: | The expectations channel of monetary policy is state dependent because households endogenously adjust attention to macroeconomic conditions. We develop a behavioral framework in which attention trades off forecast accuracy against cognitive cost, so monetary policy operates through an expectations multiplier. Using the Michigan Survey, we proxy attentiveness from whether households’ reading of business conditions matches realized outcomes, measured before identified policy shocks arrive. Policy news moves inflation beliefs primarily among attentive households, especially those with greater economic exposure; others barely respond. In the aggregate, pass-through scales with attentiveness and strengthens in recessions and high-uncertainty periods, making monetary transmission nonlinear. |
| Keywords: | inflation expectations; monetary policy transmission; rational inattention; state dependence; expectations multipliers |
| JEL: | E31 E32 E52 E58 E70 |
| Date: | 2026–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:103552 |
| By: | Altavilla, Carlo; Bottero, Margherita; Imbierowicz, Björn; Abad, Jorge; Anyfantaki, Sofia; Benkovskis, Konstantins; Bredl, Sebastian; Burlon, Lorenzo; de Souza, Tomás Carrera; Giovannini, Massimo; Malovaná, Simona; Maruhn, Franziska; Nicoletti, Giulio; Vilerts, Kārlis; Gasparini, Tommaso; Gric, Zuzana; Modica, Alessandro; Silvo, Aino |
| Abstract: | This Occasional Paper reviews evidence from the ChaMP Research Network on the transmission of monetary policy to firms in the euro area. Overall, transmission to firms remains effective, including during the 2022-23 tightening cycle. However, new results show that this transmission is neither uniform nor mechanical. The pass-through from policy rates and other instruments to corporate financing conditions is shaped by multiple layers of heterogeneity that may, in some cases, have aggregate implications. Country-level segmentation, linked to sovereign risk, institutional frameworks and local lending practices, plays an important role in shaping transmission, especially during periods of stress. Beyond cross-country effects, bank balance sheets and business models also influence transmission by affecting the strength of lending responses. In particular, the composition of banks’ liabilities can lead to different speeds of transmission. Firm characteristics further differentiate the impact of monetary policy, with the funding mix playing a critical role. At the contract level, collateralisation and interest rate fixation materially affect both the magnitude and composition of transmission. As some of these heterogeneities may, in certain circumstances, have aggregate implications, this paper explains how a broad and flexible toolkit, centred on the main policy rate and, when needed, complemented by other policy instruments such as asset purchases and targeted liquidity operations, can be deployed in a proportionate manner to ensure effective monetary policy transmission across a structurally diverse monetary union. JEL Classification: E52, E58, G21, G32 |
| Keywords: | bank lending channel, country segmentation, financial fragmentation, firm financing and investment, loan contract features, monetary policy transmission |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026389 |
| By: | Michael D. Bauer; Alexander Czarnota; Mathias Klein |
| Abstract: | Firm heterogeneity in financial constraints is a quantitatively important driver of how monetary policy transmits to inflation. Using detailed microdata on Swedish public and private firms, and high-frequency monetary policy surprises around Riksbank announcements, we document that smaller, financially constrained firms adjust prices significantly less than larger firms in response to changes in monetary policy. This heterogeneous price response materially dampens the aggregate PPI inflation response to monetary policy. Models of customer markets and financial frictions can explain our findings: because the external finance premium rises after a monetary contraction, constrained firms cut prices less to preserve cash flows, sacrificing future market share. Additional evidence on heterogeneous sales, debt, marginal cost, and markup responses further supports this channel. We consider several alternative explanations, including differences in price adjustments, working capital, market share, and export share, but these cannot rationalize our main heterogeneity result. |
| Keywords: | prices; monetary policy; financial constraints; firm heterogeneity |
| JEL: | E31 E32 E52 G32 L11 |
| Date: | 2026–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103550 |
| By: | Guerrieri D'Amati, Andrea (University of Warwick); Hassall, Gavin (University of Bath) |
| Abstract: | This paper studies how forward-looking language in the Federal Open Market Committee (FOMC) minutes affects market expectations of future interest rates. We analyse the text of the FOMC minutes from 1997 to 2023 with structural topic modelling combined with LLM-based tone and tense analysis. We estimate market reactions in an event study that exploits the fact that the release of the minutes involves no policy change, ensuring any market response reflects pure expectation revisions. We show that forward-looking information about certain topics has systematically moved private sector expectations of future interest rates. In particular, hawkish forward-looking inflation language raises 2-, 5- and 10-year Treasury yields. We interpret these findings through a model where the private sector does not observe the central bank’s responsiveness to its inflation outlook, and learns about it via a signal extraction problem. We argue that communication effectiveness depends not only on what topics are discussed but on how they are temporally framed. |
| Keywords: | Central Bank Communication, Monetary Policy, Market Expectations JEL codes: E52, E58, E59 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1619 |
| By: | Jessica Piccolo; Alessia Russo; Eleonora Granziera; Efrem Castelnuovo |
| Abstract: | We design a novel survey to study how education shapes households' joint beliefs about inflation, unemployment, and monetary policy transmission. College-educated respondents perceive the inflation-unemployment trade-off and hold views similar to professional forecasters, while less educated respondents favor supply-side narratives. When exposed to hypothetical monetary policy interventions, the more educated update expectations and adjust consumption and saving in line with standard models, whereas the less educated display greater rigidity. This education gradient persists after controlling for information sources, financial literacy, and institutional trust, pointing to differences in abstract reasoning. Open-ended responses are consistent with college-educated households holding mental models aligned with standard macroeconomic theory. |
| Keywords: | household expectations, education, mental models, monetary policy transmission, belief heterogeneity, survey data |
| JEL: | D83 D84 E31 E52 I21 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-52 |
| By: | Felipe Alves; Giovanni L. Violante |
| Abstract: | The current monetary policy framework of the Fed intends to be more ’inclusive’ by running the economy hot for longer during expansions. The logic of this strategy rests on Okun’s (1973) hypothesis that sustaining a ‘high-pressure economy’ persistently improves labor market outcomes of low-wage workers. To evaluate this conjecture, we develop a Heterogeneous Agent New Keynesian framework with a three-state frictional model of the labor market where low-skilled workers are more exposed to the business cycle and recessions have a long-lasting effect on their labor force participation and earnings, in line with the evidence. Under a canonical Inflation Targeting rule, the ZLB generates a deflationary bias and severely amplifies the persistent scars of recessions at the bottom of the wage distribution. The Lower-for-Longer strategy is an effective antidote to the ZLB-driven hysteresis and leads to notable earnings gains for low-wage workers and a reduction to overall earnings inequality. If pursued aggressively, however, the policy reverts the inflation bias from negative to positive. Since policymakers might prioritize differently inflation relative to inclusion, we conclude by quantifying the inflation-inclusion trade-off implied by various monetary policy rules. |
| Keywords: | Models and tools, Economic models, Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission |
| JEL: | E21 E24 E31 E32 E52 J24 J64 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-3 |
| By: | Alice Albonico; Guido Ascari; Qazi Haque; Kostas Mavromatis; Andra Smadu |
| Abstract: | We develop and estimate an open economy DSGE model for the euro area where global energy prices and the exchange rate jointly determine domestic inflation, because imported energy, priced in foreign currency, enters both consumption and production. Energy and exchange-rate disturbances account for the bulk of short-run volatility in headline euro area inflation, with energy price shocks driving most of the post-pandemic surge. Because energy and non-energy goods are poor substitutes, an adverse energy price shock raises import values, deteriorating the trade balance and depreciating the real exchange rate through the net-foreign-asset and UIP channels. The exchange-rate channel strengthens monetary transmission and improves the short-run inflation-output trade-off relative to a non-energy economy. Optimal policy can exploit this channel rather than looking through energy price shocks. The case for looking through such shocks becomes stronger when the central bank assigns a greater weight to output gap stabilization and prices become stickier. |
| Keywords: | monetary policy, inflation, energy, Bayesian estimation |
| JEL: | E52 E31 E32 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-55 |
| By: | Andrew Lee Smith; Victor J. Valcarcel |
| Abstract: | We show that operationally similar central bank asset purchases can have markedly different effects. Combining security-level data on the Federal Reserve’s duration-adjusted asset holdings with narrative event-based identification reveals that purchases made for accommodation strongly affect yields, while purchases made for market functioning primarily enhance liquidity. We advance a partial equilibrium model of an intermediated bond market that can reconcile these findings. When trading flow is orderly, large-scale asset purchases (LSAPs) operate through the expected supply of duration with large effects on yields. When trading flow is disorderly, LSAPs reduce dealer inventories, improve liquidity, and compress bid-ask spreads. |
| Keywords: | monetary policy; balance sheet policy; SOMA; quantitative easing; primary dealers; market making; narrative restrictions; structural VAR; liquidity; intermediation |
| JEL: | E3 E4 E5 |
| Date: | 2026–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:103551 |
| By: | Gebauer, Stefan; Nakov, Anton; Nuño, Galo; Osbat, Chiara; Paz-Pardo, Gonzalo; Paulus, Alari; Quintana, Javier; Valderrama, Maria Teresa; Palazzolo, Alberto |
| Abstract: | The repeated occurrence of supply-chain disruptions since the COVID-19 pandemic reveals the need to complement traditional macroeconomic frameworks with approaches that better capture the complexity of modern economic productionstructures. This paper synthesises the findings of the ChaMP Research Network, highlighting how production network models and heterogeneity across firms, sectors and countries enrich our understanding of monetary policy transmission. Bycapturing input-output relationships between firms and economic sectors, these approaches show how the propagation and persistence of shocks depend on network structure, the position of sectors within the network – where central sectorsexert disproportionate influence – and differences and variations in price and wage flexibility. The inflationary effects of supply shocks tend to be amplified, while the effects of demand shocks, including monetary policy shocks, are dampened. Inaddition, large shocks can give rise to nonlinearities, such as a steepening of the Phillips curve. This aligns with the conclusions of the ECB’s most recent strategy assessment, which emphasise the need to analyse the risks surrounding the inflationoutlook. The findings also point to the emergence of trade-offs between inflation and output gap stabilisation, as production networks and heterogeneity weaken the alignment between price and output dynamics. As a result, stabilising inflation andoutput simultaneously calls for astute fiscal policy. Overall, incorporating production networks provides a more nuanced and policy-relevant framework for designing state-contingent and data-informed monetary policy. JEL Classification: E52, E58, D57, E32 |
| Keywords: | monetary policy transmission, Phillips curve, production networks, sectoral structure, supply chains, supply shocks |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026392 |
| By: | Bonfim, Diana; Moretti, Laura; Auer, Simone; Bandoni, Emil; Briglevics, Tamás; Ferrando, Annalisa; De Jonghe, Olivier; Kho, Stephen; Mendicino, Caterina; Rodriguez-Moreno, Maria; Moura, Afonso S.; Aguilar, Alicia; Cucic, Dominic; Pica, Stefano |
| Abstract: | This Occasional Paper reviews evidence from the ChaMP Research Network on the transmission of monetary policy to households in the euro area – an area of monetary policy that has attracted less attention among researchers. It highlights thecentral role of banks and non-bank intermediaries in shaping how policy affects borrowing, saving and consumption. Despite the overall effectiveness of monetary policy in the euro area, the pass-through of policy rates to household borrowingcosts is incomplete and heterogeneous, reflecting differences in funding structures, market power and institutional settings.A key insight is that transmission depends on household heterogeneity. Differences in balance sheets, credit access and housing market characteristics produce uneven effects across income, age and wealth groups, with important implications foraggregate demand and distributional consequences. Another key finding is that several components of consumption respond more rapidly to changes in interest rates than previously thought, especially in high-debt, variable-rate environments.Overall, the findings point to the need for an integrated, system-wide perspective that accounts for multiple aspects of financial structure and heterogeneity when assessing monetary policy transmission. ChaMP research also highlights the valueof readily available granular data, as many novel findings stem from a major coordinated effort to use new data on households obtained from national credit registers, as well as novel granular data on household expenditure. JEL Classification: E52, E21, G21 |
| Keywords: | banking sector, household heterogeneity, monetary policy transmission |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026390 |
| By: | Dudley Cooke |
| Abstract: | This paper presents new evidence on the role of collateral in bank-firm lending and its interaction with monetary policy. Loans secured with collateral have lower spreads than unsecured loans and financial assets generate greater spread discounts than other collateral types, including real assets. The valuation of collateral is sensitive to monetary policy shocks. Contractionary policy shocks cause the spread discount on loans secured with real assets to rise by more than other collateral types. Contractionary policy shocks also cause the spread discount smaller firms receive on secured loans to fall. This monetary policy-contingent valuation of collateral puts smaller firms at a disadvantage because they lack real assets to pledge. |
| JEL: | E32 E44 E52 G20 O16 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202604 |
| By: | Mohamed, Saladin |
| Abstract: | \noindent This paper demonstrates how a purely random central bank policy generates endogenous economic fluctuations in an overlapping generations (OLG) model. By pivoting from traditional physical stores of value (like capital or renewable resources) to nominal fiat money, we explore how a completely random, noisy central bank money supply affects precautionary savings, inflation volatility, and macroeconomic stability. We find that the economy's stability depends entirely on the intertemporal elasticity of substitution, echoing the mathematical mechanics of earlier resource-based models, and proving that monetary unpredictability is a systemic distortion rather than neutral noise. |
| Keywords: | Complex Dynamics, Inflation Volatility, Overlapping Generations Approach} |
| JEL: | E5 |
| Date: | 2026–04–02 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128547 |
| By: | Diana Lima; Duarte Maia; Rita Basto |
| Abstract: | We discuss the implications of macroprudential policymakers' welfare choices based on a policy exercise that determines optimal capital requirements for banks. The inter-linkages between the financial system and the real economy are analyzed with a DSGE model with financial frictions, providing a rationale for capital regulation. The existence of heterogeneous agents allows several equilibria depending on the balance between potential conflicting objectives of savers - who favor banking resilience - and borrowers - who benefit from better credit conditions. These equilibria can be translated into preferences policymakers have between promoting the resilience of the banking system and economic growth. These preferences are modeled through three welfare-maximising strategies. We find that policymakers' preferences play a role in determining optimal capital requirements, which, in turn, conditions bank resilience, economic growth and well-being in the long-run. The sum of welfare gains strategy yields higher banking sector resilience, while improving the well-being of savers without disregarding the interests of borrowers. |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202607 |
| By: | Alessandro Berti (Urbino University Carlo Bo); Chiara Catenacci (Trento University) |
| Abstract: | This paper investigates the macro-financial implications of the implementation of the European Banking Authority Guidelines on Loan Origination and Monitoring (EBA-LOM), which became applicable to new lending in June 2021. The Guidelines represent a major micro-prudential reform aimed at strengthening borrower assessment, data governance, collateral valuation, and monitoring practices in European banking.Using annual Bank of Italy data for the period 2017?2025, the analysis examines the evolution of credit supply and credit quality indicators for loans granted to non-financial corporations in Italy. The empirical strategy combines descriptive analysis with interrupted time-series models and reduced-form dynamic specifications controlling for macroeconomic conditions and the ECB monetary stance.The results provide no evidence of a structural contraction in aggregate lending following the implementation of EBA-LOM. At the same time, credit quality indicators?measured by default inflow rates and the NPL ratio?continue to improve or remain stable throughout the post-implementation period. Credit dynamics appear instead to be primarily driven by macro-financial conditions, particularly the sharp monetary tightening cycle initiated by the European Central Bank in 2022.These findings suggest that strengthened underwriting and monitoring standards can improve the resilience of bank loan portfolios without undermining aggregate credit provision in bank-based financial systems. The Italian experience therefore provides relevant policy insights for the design of prudential frameworks aimed at simultaneously supporting financial stability and sustainable credit supply. |
| Keywords: | EBA Guidelines on Loan Origination and Monitoring, Credit Supply, Credit Risk, Lending Standards, Non-Performing Loans (NPLs), Bank Lending Channel, Monetary Policy and Credit Dynamics, Prudential Regulation |
| JEL: | G21 G28 E51 |
| URL: | https://d.repec.org/n?u=RePEc:sek:iefpro:15817126 |
| By: | Elton Beqiraj; Giuseppe Ciccarone; Giovanni Di Bartolomeo |
| Abstract: | We examine how expectations of future inflation influence current inflation in a generalized time-dependent (GTD) price-setting framework. We find that the expectational pass-through depends only on discounting and on the parameters of the hazard function governing price resets. It increases with the initial hazard, is hump-shaped with respect to the hazard slope, and varies with the effective pricing horizon implied by the hazard func-tion, which shapes aggregation-driven rollback and catch-up effects across price vintages. Using GTD estimates, we show that the Calvo approximation systematically overestimates pass-through. In the 1980s–1990s period, commonly associated with stronger nominal anchors, pass-through is often higher, although changes are heterogeneous across economies. |
| Keywords: | Expectational pass-through; Inflation persistence; Price-setting models; Hazard functions; Monetary policy transmission; Generalized time-dependent pricing |
| JEL: | E31 E52 D84 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:sap:wpaper:wp282 |
| By: | Matt Darst; Lucia Gurrieri; Arazi Lubis; Alexandros Vardoulakis |
| Abstract: | This paper examines whether regulatory liquidity buffers enable banks to support corporate borrowers during financial stress. Using confidential bank-firm credit data and handcollected Liquidity Coverage Ratio regulation (LCR) disclosures during COVID-19, we find that banks with higher LCR buffers above the regulatory minimum provided significantly more credit to firms with large undrawn credit lines in March 2020. Critically, only buffers, not overall LCR levels, matter, revealing that the regulatory minimum operates as a binding constraint during stress. The effect is concentrated among high-quality borrowers with clean credit profiles and disappears by mid-2020, confirming that LCR buffers provide selective, temporary liquidity insurance during acute stress. |
| Keywords: | liquidity regulation; credit lines; bank lending; financial crises; regulatory buffers |
| JEL: | G01 G21 G28 |
| Date: | 2026–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103560 |
| By: | Leandro Lyra Braga Dognini |
| Abstract: | This paper uses the generalized Cass criterion $\sum^{\infty}_{t=1}(\Vert p_{t}\Vert\sum_{h\in G_{t}}\Vert e^{h}_{t}\Vert)^{-1}=\infty$ to extend the results from Dognini (2026) regarding the existence of efficient monetary equilibria on consumption-loan overlapping generations economies. These results reveal that if the economy is prone to savings, then monetary equilibria will emerge in a pure non-stationary general equilibrium model with heterogeneous households, thus providing a solution to the Hahn (1965) problem. It is also proved that, in prone-to-savings economies, non-vanishing relative aggregate real savings fully characterize efficient monetary equilibria. I use this result to show that a Taylor rule based on an inflation ceiling and a relative aggregate real savings floor can be used to control the price level and lead the economy towards an efficient monetary equilibrium. In contrast, a Taylor rule based solely on an inflation target is able to control the price level but generally leads the economy towards an inefficient monetary equilibrium. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.06599 |
| By: | Diego Franco (Central Reserve Bank of Peru); Delia Ruiz (Central Reserve Bank of Peru); Walter Cuba (Central Reserve Bank of Peru) |
| Abstract: | This paper develops an intraday early-warning framework to predict deviations of the volumeweighted overnight interbank rate from the BCRP policy rate after the close of the Central Bank’s second intervention window. We study both upward deviations, associated with liquidity-scarcity episodes, and downward deviations, associated with liquidity-abundance episodes. Using a unique high-frequency dataset spanning 2015-2025, we evaluate whether morning liquidity indicators can anticipate rate deviations exceeding 5 basis points. We compare a regularized logistic regression with a nonlinear artificial neural network (ANN), estimating separate models for each direction of deviation. Both models are calibrated on a chronological development sample and evaluated on a held-out test period. The logit model outperforms the ANN in both cases, with a statistically significant ranking advantage (ROC-AUC of 0.95 vs. 0.88 for upward deviations; 0.77 vs. 0.75 for downward deviations). Average marginal effects reveal an economically coherent asymmetry. Market concentration, measured by the HHI, and cross-bank dispersion in reserve requirement compliance reduce the probability of upward deviations and increase the probability of downward deviations. We interpret this as reflecting the presence of a small number of large, readily identifiable liquidity providers: their visibility reduces search frictions and prevents rate spikes when the market is short, while the same concentration shifts bargaining power toward borrowers, who become the scarce side of the negotiation, when the market is long. Overall, the findings support the feasibility of a simple, interpretable early-warning tool for BCRP money market operators. |
| Keywords: | Interbank money market ; Monetary policy implementation ; Earlywarning models ; Machine learning ; Market concentration ; Peru |
| JEL: | E58 E43 G21 C53 |
| Date: | 2026–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp17-2026 |
| By: | David Borner; Heiko Sorg |
| Abstract: | The general search for US dollars in forward currency markets, combined with the balance-sheet constraints of intermediary dealers, induces persistent failure of covered interest parity (CIP). We investigate these CIP deviations across the entire maturity spectrum by analyzing the daily dynamics of the USD/CHF cross-currency basis curve. Applying functional principal component analysis, we identify three components that explain virtually all curve dynamics: a persistent, slow-moving level component, a temporary steepener, and a short-end component inducing sharp basis widenings and contractions around quarter-end dates. We provide empirical evidence that CIP-implied carry opportunities and US monetary policy announcements widen the entire basis curve, whereas Fed swap line announcements tend to narrow it. During periods of global turmoil, the slope inverts in response to rising credit and capital stress among dealer banks, while funding stress steepens the curve as swap line usage mitigates short-end distortions. Reporting date effects, funding stress, and deteriorating market liquidity widen the basis primarily at the short- end. We further show that regulatory reporting dates generate systematic window-dressing distortions not only at the short end but also in the slope of the basis curve. This effect has weakened since 2022, which is consistent with recent changes in the regulatory landscape. |
| Keywords: | Covered interest parity, FX swaps, Cross-currency basis, Limits to arbitrage, US dollar funding |
| JEL: | F31 G15 G2 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-09 |
| By: | Allan Pedersen |
| Abstract: | Is a digital euro-claim that promises to be worth one euro a new kind of money, or a new kind of bank? And does the answer depend on who issues it? Digital Money, the eighth Future of Banking report (Cecchetti, Niepelt, Rey and Vives, CEPR Press / IESE, 2026), gives the right answer to the first question and most of the right answer to the second. It treats digital money as a question of monetary architecture rather than technology, judges instruments by the institutions that stand behind them, likens stablecoins to money-market funds, and concludes that tokenised bank deposits are the better-positioned form of private digital money. This comment agrees, and is offered in that spirit. It adds five refinements from two vantage points the report, working globally and at the level of principle, had less room to develop: the operational detail of the European Union's Markets in Crypto-Assets Regulation (MiCA), and the economic history of offshore money. First, the report's verdict that "MiCA provides no central-bank backstop" is true of only half the regime, because the issuer is the fork. Second, the three-country comparison gains from an organising principle, a trilemma between par stability, private credit and the absence of a backstop. Third, "functional equivalence" is necessary but not sufficient, because the legal category still governs which risks supervisors are told to watch. Fourth, the report passes over a concrete consumer-protection gap that its own conclusion implies. Fifth, "no backstop" is, at systemic scale, an illusion, and saying so sharpens the report's strongest point into a clean policy choice. Two of the five are external to the report: the bank/non-bank split inside MiCA's own e-money-token category, and a deposit-guarantee gap that reaches even bank-issued tokens. The other three reformulate the report's own logic rather than contest it. |
| Keywords: | stablecoins; e-money tokens; MiCA; tokenised deposits; deposit guarantee schemes; lender of last resort; regulatory perimeter; eurodollar market |
| JEL: | E42 E58 G21 G28 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:pmt:wpaper:5 |
| By: | James C. MacGee; Yuxi Yao |
| Abstract: | An economy with fixed-amortization mortgages and borrowing-constrained consumers leads to the non-superneutrality of money as the level of inflation targeted has real effects on home ownership, consumption, and debt. Higher trend inflation increases nominal interest rates, which increases nominal mortgage payments at origination and crowds out non-housing consumption by borrowing-constrained homeowners. Using a life-cycle housing tenure choice model where trend inflation proportionately shifts nominal income growth and interest rates, we show that by front-loading real mortgage payments, higher inflation lowers steady-state home ownership and the mortgage debt-to-income (DTI) ratio. After an unanticipated permanent change in trend inflation, such as the 1980s Volcker disinflation, it can take 20 years for home ownership and the DTI ratio to reach the new steady state. While refinancing of fixed-rate mortgages (FRMs) narrows the differences between economies with FRMs and those with adjustable-rate mortgages (ARMs) after a fall in inflation, the mortgage lock-in effect leads to a longer transition following an increase in inflation with FRMs than ARMs. In our calibrated economy, the fall in inflation from around 8% in the early 1980s to under 3% by 2000, combined with lower mortgage financing costs, can account for half of the rise in US mortgage debt between 1983 and 2001. |
| Keywords: | Financial system, Monetary policy, Inflation dynamics and pressures |
| JEL: | E21 E50 G51 R21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-1 |
| By: | Castells-Jauregui, Madalen; Heider, Florian; Hoerova, Marie; Calomiris, Charles |
| Abstract: | We develop a general equilibrium theory of financial intermediation and its implications for liquidity regulation. The model is built around an agency problem arising from leveraged intermediation: banks finance loan origination with deposits and face moral hazard in risk management, while holding cash mitigates these incentives at the cost of foregone investment returns. Liquidity demand therefore emerges endogenously from incentive considerations rather than from exposure to exogenous funding shocks. In equilibrium, financial experts choose between allocating equity to the banking sector relative to the non-bank financial sector that can provide ex-post liquidity by buying bank assets. Asset prices are determined endogenously in liquidation states, linking banks’ ex ante liquidity choices to market liquidity and the allocation of intermediation across sectors. Comparing the decentralized equilibrium to a planner’s allocation, we show that liquidity regulation mandating higher cash holdings improves incentives within banks but is not sufficient to implement the efficient allocation. In particular, it leads to an inefficiently large banking sector that free-rides on liquidity provision by non-bank investors. Implementing the planner’s allocation requires a second policy instrument, such as limits on bank size or subsidies to equity-financed liquidity provision outside the banking sector. JEL Classification: G21, G28, D82, D6 |
| Keywords: | agency problems, financial intermediation, general equilibrium, liquidity regulation |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263252 |
| By: | Allan Pedersen |
| Abstract: | What sets the boundary of the safety net? In a crisis a central bank rescues some private near-monies and lets others fail, and a tempting answer to which is that rescue tracks an entity's position in the payment, settlement and collateral plumbing, its "circulation-centrality", rather than its size or its legal category. This paper builds that hypothesis into a falsifiable test and reports that it fails. On a panel of thirty rescue decisions from 1970 to 2023, a blind-coded index of circulation-centrality at first appears to separate the rescued from the abandoned. The appearance does not survive scrutiny. Blind coding removes a thirteen-point hindsight inflation in the author's own scoring; dropping two index components that quietly restate the rescue trigger removes the construct's circular content; and correcting two contested keystone cases (Lehman Brothers, whom the Federal Reserve could have saved, and Washington Mutual, whose depositors were in fact protected) removes the rest. Conditioning on legal-political capacity rather than deleting the inconvenient cases, the circulation signal falls to a partial correlation of 0.13, and under an independent coder's blind reconstruction of the covariates it does not appear at all. The boundary of last-resort lending is governed by size and political-legal capacity, the familiar too-big-to-fail account, not by a distinct circulation construct. The paper offers the test as a reusable template and the false positive as a cautionary anatomy. |
| Keywords: | lender of last resort; too big to fail; systemic importance; central-bank rescue; financial safety net; blind coding; replication; null result |
| JEL: | E58 G01 G28 N20 B41 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:pmt:wpaper:6 |