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on Central Banking |
| By: | Tarishi Matsuoka; Makoto Watanabe |
| Abstract: | This paper examines the role of Central Bank Digital Currency (CBDC) in a monetary model in which fundamental-based bank runs arise endogenously. We demonstrate that introducing a CBDC designed to replicate the properties of cash displaces physical cash and, when offered at a sufficiently attractive rate, can increase the likelihood of a bank run. In contrast, when the CBDC is designed to resemble bank deposits, cash, CBDC, and deposits can coexist as media of exchange, and a high CBDC rate can eliminate the risk of runs. We further characterize the optimal CBDC policy within this framework. |
| Keywords: | monetary equilibrium, bank run, CBDC |
| JEL: | E42 E58 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11922 |
| By: | Galo Nuño (BANCO DE ESPAÑA, CEMFI AND CEPR) |
| Abstract: | The natural interest rate is the real rate that would prevail in the long run. The standard view in macroeconomics is that the natural rate depends exclusively on structural factors, such as productivity growth and demographics. This paper challenges this view by discussing three alternative, and complementary, views: i) that the natural rate depends on fiscal policy via the stock of risk-free assets; ii) that it depends on monetary policy via the central bank inflation target; and iii) that it depends on persistent supply shocks, such as tariffs or wars. These three theories share the relevance of precautionary saving motives. The paper concludes by drawing some lessons for monetary policy design. |
| Keywords: | financial HANK model, monetary-fiscal interactions, deep learning, cost-push shocks |
| JEL: | E32 E58 E63 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2528 |
| By: | Iván Werning; Guido Lorenzoni; Veronica Guerrieri |
| Abstract: | We study the optimal monetary policy response to the imposition of tariffs in a model with imported intermediate inputs. In a simple open-economy framework, we show that a tariff maps exactly into a cost-push shock in the standard closed-economy New Keynesian model, shifting the Phillips curve upward. We then characterize optimal monetary policy, showing that it partially accommodates the shock to smooth the transition to a more distorted long-run equilibrium—at the cost of higher short-run inflation. |
| JEL: | E5 E6 F4 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33772 |
| By: | Emil Holst Partsch; Ivan Petrella; Emiliano Santoro |
| Abstract: | Durable and nondurable consumption comovement is central to monetary policy trans mission. Using a two-sector Heterogeneous Agent New Keynesian model, we generate re alistic sectoral comovement while capturing key household spending patterns. Both direct and indirect effects matter: intertemporal substitution strongly influences durable spend ing, while income effects drive persistence in nondurable responses. Comovement also extends to households sorted by liquid asset holdings. Distinguishing transmission chan nels is crucial for understanding the macroeconomic impact of targeted fiscal policies, as subsidies for durable goods purchases. |
| Keywords: | Durable goods, sectoral comovement, monetary policy, HANK |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:cca:wpaper:736 |
| By: | Fatih Kansoy; Joel Mundy |
| Abstract: | Central banks increasingly use social media to communicate beyond financial markets, yet evidence on public engagement effectiveness remains limited. Despite 113 central banks joining Twitter between 2008 and 2018, we lack understanding of what drives audience interaction with their content. To examine engagement determinants, we analyzed 3.13 million tweets mentioning the Bank of England from 2007 to 2022, including 9, 810 official posts. We investigate posting patterns, measure engagement elasticity, and identify content characteristics predicting higher interaction. The Bank's posting schedule misaligns with peak audience engagement times, with evening hours generating the highest interaction despite minimal posting. Cultural content, such as the Alan Turing 50 pound note, achieved 1, 300 times higher engagement than routine policy communications. Engagement elasticity averaged 1.095 with substantial volatility during events like Brexit, contrasting with the Federal Reserve's stability. Media content dramatically increased engagement: videos by 1, 700 percent, photos by 126 percent, while monetary policy announcements and readability significantly enhanced all metrics. Content quality and timing matter more than posting frequency for effective central bank communication. These findings suggest central banks should prioritize accessible, media-rich content during high-attention periods rather than increasing volume, with implications for digital communication strategies in fulfilling public transparency mandates. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.02559 |
| By: | Veronica Guerrieri; Guido Lorenzoni; Iván Werning |
| Abstract: | Individual central banks respond to global supply shocks that transmit inflationary pressures—such as oil prices, shipping costs, and bottlenecks in global supply chains—taking these conditions as given. However, their combined global response determines global demand and, thus, the resulting global price pressure. This paper builds a simple monetary open economy model to explore the economic implications of this channel. We show that, following a negative world supply shock, uncoordinated monetary policy may be excessively loose. Our mechanism for this “expansionary bias” applies to an aggregate shock in a symmetric world economy of small open economies having no individual control over their terms of trade. In these ways, it is distinct from asymmetric shocks and terms-of-trade manipulation motives emphasized in the monetary coordination literature. |
| JEL: | E12 E58 F42 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33840 |
| By: | Frida Adjalala; Felipe Alves; William Beaudoin; Hélène Desgagnés; Wei Dong; Ingomar Krohn; Jan David Schneider |
| Abstract: | We assess both the US and Canadian nominal neutral rates to be in the range of 2.25% to 3.25%, unchanged from the range assessed in 2024. |
| Keywords: | Economic models; Interest rates; Monetary policy |
| JEL: | E4 E40 E43 E5 E50 E52 E58 F4 F41 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-16 |
| By: | Pia Stoczek (Paderborn University); Alexander Liss (KU Leuven); Boaz Noiman (The Hebrew University of Jerusalem) |
| Abstract: | We examine risk-taking by lending syndicates as a response to central banks’ corporate quantitative easing (QE) targeting non-financial firms, specifically within the European Central Bank’s Corporate Sector Purchase Programme (CSPP). This setting allows us to investigate how syndicates adjust to decreased credit demand from CSPP-eligible borrowers in environments characterized by higher risk and lower returns. Our analysis reveals that these syndicates engage in “controlled” risk-taking by directing capital towards first-time and non-relationship borrowers, especially in the leveraged loan sector, while implementing mechanisms to manage increased risk. Our study explores controlled risk-taking across four dimensions. Firstly, we observe adjustments in loan contracting terms, such as stricter collateral requirements and cross-default clauses, coupled with reductions in loan sizes and maturities. Secondly, our findings indicate that syndicate size and the intensity of relationships within syndicates increase. Thirdly, we highlight the influence of the borrower country’s debt enforcement regime on lending decisions. Lastly, we report no significant changes in loan spreads. These results suggest that following corporate QE, syndicates actively utilize risk mitigation mechanisms, demonstrating a cautious approach to managing elevated risks rather than excessive risk-taking. |
| Keywords: | Loan contracting, Relationship lending, Unconventional monetary policy, Quantitative easing |
| JEL: | E52 E60 G12 G21 G28 G30 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:pdn:dispap:142 |
| By: | Federico Ravenna; Carl E. Walshy |
| Abstract: | Central banks are increasingly debating monetary policies aimed at reducing inequality and ensuring employment gains are spread widely across all parts of the labor market. What are the trade-offs faced by íinclusive policiesí, and the implications for the e¢ ciency of the aggregate economy? We address this question within a model that allows for workers with different levels of productivity competing in the same job market. We compare traditional and íinclusiveípolicies in terms of their impact on earnings and employment inequality, on the labor market outcomes of lower-productivity, lower-income workers, and in terms of their ináation outcomes. Inclusive policies come at a high cost in terms of ináation, but they can substantially reduce the uneven burden of a recessionary shock on the lowest productivity workers. We provide a normative assessment, and show that while making monetary policy more inclusive is beneÖcial for the overall economy, making monetary policy much more inclusive results in sizeable deviations from the Örst best allocation. |
| Keywords: | Unemployment, heterogeneity, selection, COVID-19, monetary policy. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cca:wpaper:734 |
| By: | Rice, Jonathan; Guerrini, Giulia Maria |
| Abstract: | This paper examines how the ECB’s 2022–2023 interest-rate hikes affected euro-area banks’ economic net worth and vulnerability to deposit runs. Drawing on granular, confidential data for 139 banks, we estimate each bank’s economic net worth and find that unrealised losses on loans and bonds averaged around 30 per cent of equity. By September 2023, however, roughly half of these losses had been offset by gains from the deposit franchise and interest-rate swaps. We develop a theoretical framework linking banks’ economic net worth and deposit-rate setting to depositor behaviour and run incentives. Further results indicate that banks with larger unrealised losses raised their deposit rates by less - a pattern we interpret as banks leveraging a more valuable deposit franchise to fund longer-duration assets. Although euro-area banks as a whole avoided widespread runs, several institutions nonetheless carried substantial mark-to-market losses, suggesting latent fragilities. JEL Classification: G21, E43, E58, G28 |
| Keywords: | asset valuations, banking system, bank runs, euro area, interest rate risk, monetary policy |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:srk:srkwps:2025151 |
| By: | Michal Franta; Jan Vlcek |
| Abstract: | Inflation at Risk provides a coherent description of the risks associated with an inflation outlook. This paper explores the practical applicability of this approach in central banks. The method is applied to Czech inflation to highlight issues related to short data sample. A set of quantile regressions with a non-crossing quantiles constraint is estimated using monthly data from the year 2000 onwards, and the model's in-sample fit and out-of-sample forecasting performance are then assessed. Furthermore, we discuss the Inflation at Risk estimates in the context of several historical events and demonstrate how the approach can inform monetary policy. The estimation results suggest the presence of nonlinearities in the Czech inflation process, which are related to supply-side pressures. In addition, it appears that regime changes have occurred recently. |
| Keywords: | Inflation dynamics, inflation risk, quantile regressions |
| JEL: | E31 E37 E52 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2025/8 |
| By: | De Nora, Giorgia; Pereira, Ana; Pirovano, Mara; Stammwitz, Florian |
| Abstract: | We study the impact of cyclical systemic risks on banks’ profitability in the euro area within a panel quantile regression model, with the ultimate goal to inform the calibration of the Countercyclical Capital buffer (CCyB). Compared to previous studies, we augment our model to control for unobserved bank-specific characteristics and year-fixed effects and find a lower degree of heterogeneity in the estimated effects across the conditional distribution of bank returns on assets. We propose a simple yet intuitive framework to calibrate the CCyB through the cycle, including the socalled "positive neutral" rate. The model suggests a target positive neutral rate for the euro area ranging from 1.1% to 1.8%. Furthermore, the calibrated CCyB rates are consistent with the evolution of domestic cyclical systemic risks in the countries considered. The results further show that the adoption of a positive neutral CCyB approach allows for an earlier and more gradual build-up of the buffer, but does not lead to higher CCyB requirements at the peak of the cycle. Importantly, a positive neutral CCyB strategy would have implied that most euro area countries would have had a positive CCyB in place at the onset of the COVID-19 pandemic. JEL Classification: E52, G11, G23 |
| Keywords: | bank capital, local projection, macropudential policy, quantile regression, systemic risk |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253061 |
| By: | Jonathan Benchimol; Itamar Caspi; Sophia Kazinnik |
| Abstract: | We use text-mining techniques to measure the accessibility and quality of information within the texts of interest rate announcements published by the Bank of Israel over the past decade. We find that comprehension of interest rate announcements published by the Bank of Israel requires fewer years of education than interest rate announcements published by the Federal Reserve and the European Central Bank. In addition, we show that the sentiment within these announcements is aligned with economic fluctuations. We also find that textual uncertainty is correlated with the volatility of the domestic financial market. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.09868 |
| By: | Wishnu Badrawani |
| Abstract: | This paper evaluates the performance of prominent machine learning (ML) algorithms in predicting Indonesia's inflation using the payment system, capital market, and macroeconomic data. We compare the forecasting performance of each ML model, namely shrinkage regression, ensemble learning, and super vector regression, to that of the univariate time series ARIMA and SARIMA models. We examine various out-of-bag sample periods in each ML model to determine the appropriate data-splitting ratios for the regression case study. This study indicates that all ML models produced lower RMSEs and reduced average forecast errors by 45.16 percent relative to the ARIMA benchmark, with the Extreme Gradient Boosting model outperforming other ML models and the benchmark. Using the Shapley value, we discovered that numerous payment system variables significantly predict inflation. We explore the ML forecast using local Shapley decomposition and show the relationship between the explanatory variables and inflation for interpretation. The interpretation of the ML forecast highlights some significant findings and offers insightful recommendations, enhancing previous economic research that uses a more established econometric method. Our findings advocate ML models as supplementary tools for the central bank to predict inflation and support monetary policy. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.10369 |
| By: | Yu-Ting Chiang; Piotr Żoch |
| Abstract: | We characterize governments' optimal responses to asset market disturbances across a broad class of models with financial frictions. We show that the Ramsey plan can be achieved by a policy rule targeting a specific relationship between asset returns, regardless of the underlying disturbances. This relationship is determined by asset supply and demand elasticities that can be estimated empirically with standard identification strategies. Absent financial frictions, the optimal policy stabilizes spreads across all assets. However, in the presence of financial frictions, the optimal rule prescribes time-varying spreads to facilitate financial intermediation. We apply our framework to study the optimal design of asset purchase and lending programs, as implied by key empirical estimates of asset supply and demand elasticities. |
| Keywords: | monetary policy; financial frictions; asset demand estimation; sufficient statistics |
| JEL: | E2 E6 H3 H6 |
| Date: | 2025–06–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:101128 |
| By: | Matteo Iacoviello; Ricardo Nunes; Andrea Prestipino |
| Abstract: | We study optimal credit market policy in a stochastic, quantitative, general equilibrium, infinite-horizon economy with collateral constraints tied to housing prices. Collateral constraints yield a competitive equilibrium that is Pareto inefficient. Taxing housing in good states and subsidizing it in recessions leads to a Pareto-improving allocation for borrowers and savers. Quantitatively, the welfare gains afforded by the optimal tax are significant. The optimal tax reduces the covariance of collateral prices with consumption, and, by doing so, it increases asset prices on average, thus providing welfare gains both in steady state and around it. We also show that the welfare gains stem from mopping up after the crash rather than a pure ex-ante macroprudential aspect, aligning with prior research that emphasizes the importance of ex-post measures compared to preventive policies alone. |
| Keywords: | Credit Market; Housing; Collateral Constraints; Macroprudential Policy; Fiscal Policy; Financial Crises |
| JEL: | E32 E44 G18 H23 R21 |
| Date: | 2025–05–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1406 |