|
on Central Banking |
| By: | Burdekin, Richard C. K.; Siklos, Pierre L. |
| Abstract: | The monetary policy of the People's Bank of China (PBoC) during 2001-2023 is assessed in terms of Taylor and McCallum rules, as well as a proposed composite monetary policy rule. PBoC policy is found to be responsive to the gap between target and actual nominal GDP in the McCallum rule, as well as the output and inflation gaps in the Taylor rule. We find a relatively close fit between actual and predicted monetary policy moves under both rules, and a superior fit with our composite rule incorporating monetary and interest-rate factors. The policy reactions persist across a series of transitions between high- and low-volatility regimes identified via Markov-switching regressions. The results are shown to be robust using several techniques. |
| Keywords: | monetary policy, People's Bank of China, policy rules, inflation, deflation |
| JEL: | E58 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:315478 |
| By: | Almerud, Jakob (Monetary Policy Department, Central Bank of Sweden); Krygier, Dominika (Monetary Policy Department, Central Bank of Sweden); Lundvall , Henrik (Monetary Policy Department, Central Bank of Sweden); Njie, Mambuna (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | We construct and make available a new monetary policy event study database with high-frequency financial market reactions to Riksbank communications, spanning a period of 20 years. Using these data as instruments, we estimate the macroeconomic effects of monetary policy shocks in Sweden. A temporary, unexpected policy rate tightening induces an immediate and persistent appreciation of the krona exchange rate, as well as a gradual, negative response in output and consumer prices. These results are statistically significant, economically meaningful and robust to a number of variations in our econometric specification. In particular, we consider the possibility that financial market reactions to Riksbank communications may consist not only of pure monetary policy shocks, but could also reflect market participants’ updates concerning the central bank’s reaction function. |
| Keywords: | monetary policy surprise database; monetary policy shocks; intraday; event study; proxy VAR; macroeconomic effects |
| JEL: | E43 E44 E52 E58 G14 |
| Date: | 2024–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0445 |
| By: | Carlos Goncalves; Mauro Rodrigues; Fernando Genta |
| Abstract: | We investigate the impact of high frequency monetary policy shocks in Brazil using daily data and Rigobon’ s identification via heteroskedasticity. We show that positive changes in interest rates cause inflation expectations to decline and the exchange rate to appreciate. To the best of our knowledge, this is the first paper to study how monetary policy affects inflation expectations in an emerging economy using high frequency identification techniques. |
| Keywords: | Monetary policy; inflation expectations; Brazil |
| Date: | 2025–02–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/048 |
| By: | Mr. Divya Kirti; Akshat V. Singh |
| Abstract: | We study the role of life insurers in the transmission of US monetary policy. Insurers have uniquely long-term liabilities. We posit that they face a trade-off between matching liability duration exposure by investing in long-term government debt and earning higher yields by shifting to risky—but shorter-term—private debt. We show that, due to this tradeoff, long-term risk free rates play a critical role in shaping insurers' demand for risky private debt. Contractionary monetary policy shocks that raise long-term risk-free rates reduce insurers' demand for private debt, raising risk premia. We use granular, high frequency data and regulatory changes to trace how insurers' investment behavior transmits monetary policy shocks to risk premia. |
| Keywords: | Monetary policy; risk premia; NBFIs; life insurance |
| Date: | 2025–03–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/054 |
| By: | Thomas Lejeune (Economics and Research Department, National Bank of Belgium); Jolan Mohimont (Economics and Research Department, National Bank of Belgium) |
| Abstract: | We extend the reference DSGE model used for policy analysis at the NBB with a financial sector, by incorporating multi-period fixed-rate corporate and mortgage loans, an imperfect pass-through from policy rates to the deposit rate, and bank capital re-quirements. Adding multi-period fixed-rate loans amplifies the propagation of default risks and strengthens the effectiveness of macroprudential policy. This amplification operates through a bank capital channel and a market timing effect that delays borrowing and investment when rates are expected to fall. The bank capital channel also propagates shocks across sectors, and amplifies the effects of monetary policy when the duration of banks’ assets is larger than that of their liabilities. With universal banks, that grant both corporate and mortgage loans, sectoral prudential policy instruments can have unintended consequences on credit supply in the untreated sector. These crowding out effects increase with the loan duration in the treated sector and decrease with the risk weight differential between the treated and untreated sectors. Finally, we apply our model to the mortgage risk weight add-on introduced by the NBB in 2013. |
| Keywords: | Macroprudential policy, credit risks, loan maturity, financial accelerator, sectoral spillovers, unintended consequences, DSGE. |
| JEL: | E3 E44 E5 G21 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202504-474 |
| By: | Ralf R. Meisenzahl; Friederike Niepmann; Tim Schmidt-Eisenlohr |
| Abstract: | This paper documents a new dollar channel that transmits monetary policy across borders. Exploiting unique features of the syndicated loan market for identification, we show that changes in the euro-dollar exchange rate around ECB monetary policy announcements that are orthogonal to simultaneous changes in euro-area interest rates and stock prices affect U.S. leveraged loan spreads. Specifically, in response to dollar appreciation, investors require higher compensation for risk, and borrowing costs for U.S. firms increase. These findings imply a causal link between the U.S. dollar and investors’ risk appetite. |
| Keywords: | loan pricing, monetary policy spillovers, dollar, institutional investors, risk taking |
| JEL: | F15 G15 G21 G23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11777 |
| By: | Mr. Serhan Cevik; Alice Fan; Sadhna Naik |
| Abstract: | Central banks conduct monetary policy to achieve price stability, but decisions also have effects on labor-market outcomes. In this paper, we identify exogenous monetary shocks with the ‘interest rate surprise’ approach based on high-frequency changes in forward-looking interest rates and use daily data on online job vacancy postings to investigate the impact of monetary policy on labor markets in three European countries (Estonia, Latvia and Lithuania) during the period 2018–2024. Our results indicate that monetary policy exerts significant and durable effects on labor-market conditions as measured by online job vacancy postings in our sample of countries. First, a contractionary (expansionary) monetary policy shock leads to a persistent decline (increase) in online job vacancy postings. Across all countries, the average effect amounts to about 2 percent in 15 days after a contractionary monetary policy shock (i.e., an unanticipated increase of 1 percentage point in short-term interest rates). Second, there is significant heterogeneity in the magnitude and persistence of how monetary policy affects the labor market across three countries in our sample, varying from 0.5 percent in Latvia to 2 percent in Estonia and 3.2 percent in Lithuania. Taken together, these results are both of direct concern for policymakers and important for the transmission of monetary policy. |
| Keywords: | Monetary policy; labor markets; online job vacancy postings; local projections; Europe; Estonia; Latvia; Lithuania |
| Date: | 2025–03–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/058 |
| By: | Pedemonte, Mathieu; Toma, Hiroshi; Verdugo, Esteban |
| Abstract: | We explore the implications of heterogeneous, history-dependent inflation expectations in a general equilibrium setting. We propose an experience-based expectations-augmented Kalman filter to represent consumers' heterogeneous inflation expectations, where heterogeneity arises from an anchoring-to-the-past mechanism. Using survey data, we show that the model replicates US consumers' inflation expectations and their heterogeneity across cohorts. We introduce this mechanism into a New Keynesian model and find that heterogeneous expectations anchor aggregate responses to the agents' inflation history, producing sluggish expectations dynamics. Central banks should be active to prevent inflationary episodes that agents will remember far into the future. |
| Keywords: | Belief formation;Heterogeneous expectations;survey data;Overextrapolation |
| JEL: | D84 E31 E58 E71 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14068 |
| By: | Nieminen, Mika; Norring, Anni |
| Abstract: | Countries choose diverse policy mixes of macroprudential and capital flow management measures, yet the drivers behind these policy choices remain largely unexplored. We identify potential conditions for the adoption and determinants of the use of macroprudential and capital flow management measures from the theoretical literature and test them empirically. Rich and high-growth economies tend to rely on macroprudential policy measures, while the use of capital flow management measures decreases as the regulatory environment improves. Countries with a large foreign bank presence tend to implement fewer macroprudential and capital flow management measures. |
| Keywords: | Macroprudential policy, Capital controls, Foreign banks |
| JEL: | E58 F33 F38 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:315479 |
| By: | Biagio Rosso; Matteo Gatto |
| Abstract: | The role of Occasionally Binding Constraints (OBCs) in transmitting and amplifying macroeconomic shocks in economies institutionally chracterised by market-incompleteness is of increasing interest to quantitative theory and policy. This paper presents a novel framework and iterative algorithm to efficiently formulate and solve for transitional dynamics in a wide class of heterogeneous agent DSGE (HA-DSGE) models with OBCs. The framework accommodates a wide range of constraints, such as policy bounds, without requiring any specific assumptions as to the form of the aggregate shocks must take at an equilibrium solution, and is modelunspecific, marking a departure from the methodological literture on the topic. More imporantly, it preserves key nonlinearities often lost in perturbation-based methods important to retain for a more granular analysis of the interaction between agent heterogeneity and OBCs and its implications for modelling policy transmission through the distribution. In particular, the nonlinearity arising from the interaction, in a rational expectations and forward-looking setting, between the endogenous regime sequence (whether the constraint binds) and the behaviour of heterogeneous agents. The proposed Double Shooting algorithm novelly integrates the Sequence- Space OccBin approach with an iterative and informationally efficient method for solving nonlinearly HA-DSGE models in the sequence space that exploits the availability of a Directed Acyclic Graph (DAG) to efficiently partition the system of equations holding at a sequence space equilibrium and generalising the solution procedure for deterministic transition paths familiar from KS modelling. The algorithm developed is then applied to a fully-fledged one-asset HANK model with a zero lower bound (ZLB) on interest rate. The analysis highlights how wealth distributional dynamics along the transition path can critically influence monetary policy effectiveness (and vice versa) both outside and especially at the ZLB. Thereby, we highlight through the potential role of unconventional redistributive fiscal measures and fiscal forward guidance in addressing recessionary-deflationary episodes, converging in a rich quantitative setting to intuitions familiar from the Keynesian and Post-Keynesian literatures. |
| Keywords: | Heterogeneous Agents DSGE, Occasionally Binding Constraints, Liquidity Trap, In- equality and Monetary Policy, Unconventional Fiscal-Monetary Policy |
| JEL: | C63 D31 E21 E32 E52 E60 E63 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2511 |
| By: | Giraldo, Carlos (Latin American Reserve Fund); Giraldo-Salazar, Iader (Latin American Reserve Fund); Gomez-Gonzalez, Jose E. (City University of New York – Lehman College); Uribe, Jorge M. (Universitat Oberta de Catalunya) |
| Abstract: | We assess the effectiveness of the Gross Leverage Position in Foreign Exchange Derivatives (PBA), a macroprudential policy implemented by the Colombian central bank in 2007, in regulating housing price fluctuations. Using the synthetic control method, we demonstrate that the PBA significantly reduced the pace of housing price growth, particularly during the Global Financial Crisis from 2008 to 2010. Prior to the introduction of the PBA, Colombia experienced unsustainable housing price increases fueled by rapid credit expansion and substantial capital inflows. The PBA successfully reversed this trend, contributing to a decline in housing price appreciation and enhancing financial stability during times of uncertainty. The convergence of housing price growth rates between Colombia and the synthetic control further supports the notion of the PBA’s causal influence. Our findings highlight the value of targeted macroprudential policies for maintaining stability within housing markets and preventing asset bubbles. This study provides insights for emerging economies facing similar challenges, emphasizing the importance of responsive policy measures tailored to specific economic contexts while also suggesting avenues for future research on the long-term effects of such interventions. |
| Keywords: | : Macroprudential policy; PBA; Housing price growth; Synthetic control method; Emerging economies |
| JEL: | E58 G18 R31 |
| Date: | 2025–04–21 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:021366 |
| By: | Klein, Mathias (Research Department, Central Bank of Sweden); Zhang, Xin (Research Department, Central Bank of Sweden) |
| Abstract: | We provide new evidence on the inflationary effects of Quantitative Easing (QE) using Swedish administrative data at the bank, firm, and product level. For identification, we rely on bank-firm lending relationships and the heterogeneous participation rates of banks in the government bond purchase program by the Swedish central bank. Our results show that the bond purchase program led to a significant and persistent increase in producer prices. Importantly, we find that the degree of financial frictions considerably influences firms’ price response: low leverage firms do not change their prices, whereas high leverage firms raise their prices significantly. This divergent pricing behaviour can be rationalized by a significant increase in long-term borrowing and interest rate expenses among high leverage firms. The difference in price responses across high and low leverage firms is less pronounced for exogenous changes in the repo rate implying that the transmission mechanism of QE differs from the one of conventional interest rate policy. |
| Keywords: | Quantitative easing; price dynamics; financial frictions |
| JEL: | E31 E51 E58 |
| Date: | 2025–02–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0447 |
| By: | Frank van der Horst; Anneloes van Gent |
| Abstract: | The national central banks of the Eurosystem are investigating the possibility of issuing a retail central bank digital currency (CBDC) – the digital euro – alongside cash. The digital euro would be subject to a holding limit, meaning there would be limit to the amount of digital euro an individual can hold. A holding limit would prevent excessive outflows from the banking system, which could endanger financial stability. For the offline digital euro, a specific consideration for setting a holding limit is also to mitigate anti-money laundering/ countering the financing of terrorism (AML/CFT) risks. At the same time, given that the digital euro is a public means of payment, it is important that everyone is able to use it. A holding limit should therefore not hamper the usability of the digital euro. In existing research on CBDC, this user-centred perspective to holding limits has received limited attention. The added value of this study lies in taking a user-centred perspective. De Nederlandsche Bank conducted an experiment on offline digital euro holding limits among 2, 000 adult participants in the Netherlands. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbocs:2502 |
| By: | Sahasrabuddhe, Aditi; Seddon, Jack |
| Abstract: | Recent crises have cast doubt on the legitimacy of technocratic power, yet its role in global economic governance remains poorly understood. Revisiting the collapse of Bretton Woods, we propose a dynamic theory of global monetary governance to explain how expanding central bank discretion can destabilize systems. While most studies attribute the postwar system's failure to geopolitical struggles, institutional weaknesses, or shifting economic ideas, they overlook the policies designed to manage and stabilize it. Drawing on historical institutionalism, we show how coordination tensions between rule-bound and discretionary policymakers-and the mutually reinforcing adaptation risks they faced-produced responses that appeared stabilizing in the short term but ultimately eroded long-run stability. New archival evidence from the IMF, BIS, and OECD reveals how tools like the London Gold Pool and currency swap lines extended central bank power, concealed macroeconomic imbalances, and crowded out political momentum for structural reform. As technocratic authority grew misaligned with political support and functional economic adjustment, it became a liability. This challenges the dominant view that technocratic actors are inherently superior in managing global economic policy |
| Keywords: | Bretton Woods, London Gold Pool, monetary history, monetary governance, historical institutionalism |
| JEL: | E42 E58 F33 N10 N14 N20 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:qucehw:315744 |
| By: | Francesco D'Acunto; Janet Gao; Lu Liu; Kai Lu; Zhengwei Wang; Jun Yang |
| Abstract: | Using a customized survey and an information-provision experiment, we establish that loan officers’ individual subjective expectations about inflation, GDP growth, and policy rates vary substantially within and across bank types and have a sizable causal effect on credit supply decisions. Decisions about loan issuance and pricing exhibit large heterogeneity based on loan officers’ subjective expectations even for the same borrower assessed at the same time. Moreover, officers with rosier macroeconomic expectations penalize less borrowers with worsening fundamentals than do officers with more pessimistic expectations. Our findings have implications for theories of financial intermediation and reveal an overlooked human-based friction to the transmission of monetary policy. |
| Keywords: | credit supply, financial frictions, behavioral macroeconomics, behavioral finance, monetary policy, banking, micro-to-macro, randomized control trials, surveys. |
| JEL: | D84 D91 E44 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11780 |
| By: | Kevin J. Lansing |
| Abstract: | I use Phillips curve type regressions to assess the relative contributions of demand and supply forces to U.S. inflation during the pandemic era from February 2020 onward and the decade following the end of the Great Recession. In the first specification (Model 1), demand and supply forces are measured using the vacancy-unemployment ratio and the New York Fed’s Global Supply Chain Pressure Index, respectively. In the second specification (Model 2), demand and supply forces are measured using the demand-driven and supply-driven components of PCE inflation from Shapiro (2025). The results derived from the two models are largely in agreement. For both models, variance decompositions imply that demand forces became more important for inflation during the pandemic era and dominated the influence of supply forces. In counterfactual simulations, both models imply that supply forces, together with the endogenous response of expected inflation, were the primary drivers of persistently low inflation after the Great Recession. Given that monetary policy operates to influence demand-driven inflation, this result helps to account for the Fed’s difficulty in achieving its 2% inflation goal during these years. |
| Keywords: | Phillips Curve; demand; supply; expected inflation |
| JEL: | E31 E32 E37 |
| Date: | 2024–04–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99904 |