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on Central Banking |
| By: | Ryan Byun; Bennett Fees; Margaret M. Jacobson; Todd B. Walker |
| Abstract: | Central bank communications, particularly FOMC statements and press conferences, play a crucial role in shaping financial market expectations. Using large language models to quantify central bank content, this paper demonstrates how sentiment aligns with traditional market-based monetary policy measures. We show that press conferences correlate with future policy to a greater extent than other communications. While FOMC statements coarsely signal the current stance of policy, press conferences fine-tune the message, which helps market participants revise their expectations about future policy. |
| Keywords: | central bank communication; large language models (LLMs); monetary policy transmission; empirical monetary economics |
| JEL: | E52 E58 E31 E32 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103339 |
| By: | Shigenori SHIRATSUKA (Faculty of Economics, Keio University) |
| Abstract: | In a modern central bank system in which the government and the central bank are separate entities, seigniorage arises from the interest margin between the central bank’s assets and liabilities. However, the misconception that seigniorage is equivalent to the difference between the face value of banknotes and their production costs remains widespread. This paper clarifies the concept of seigniorage in modern central banks, which is derived from the interest spread between the central bank’s assets and liabilities, and verifies this point by examining the Bank of Japan’s balance sheet and profit-and-loss statement. Furthermore, by taking into account the fact that the budget constraints of the government and the central bank are separate, a consideration not reflected in standard macroeconomics textbooks, I confirm that seigniorage as an interest spread can be derived. In this sense, the concept of seigniorage can vary depending on the institutional design of currency issuance. Given that central banks will continue to conduct monetary policy with large balance sheets in the future, it is important to discuss the relationship between central bank finances and monetary policy management, grounded in an accurate understanding of seigniorage. |
| Keywords: | Central Bank, Independence, Seignorage, Consolidated Government |
| JEL: | H21 |
| Date: | 2026–06–03 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:dp2026-010 |
| By: | Sriya Anbil; Sebastian Infante; Zeynep Senyuz |
| Abstract: | In an ample-reserves framework, administered rates anchor money markets but suppress information from unsecured interbank trading. We recover that information by isolating the small interbank segment of the federal funds market. Using high-frequency bank-level data, we employ deposit shocks as an instrument for bank borrowing demand. Our analysis reveals that non-bank lenders, such as Federal Home Loan Banks, supply funds elastically, whereas bank lenders exhibit price inelasticity, which intensifies as their reserve balances decline, particularly for bankers’ banks. This interbank segment highlights distributional frictions in the federal funds market that emerge well before aggregate reserves become scarce and provides new evidence on monetary policy transmission in an ample-reserves regime. |
| Keywords: | monetary policy implementation; balance sheet policy; central bank reserves; federal funds market |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103338 |
| By: | Wabenga, James Yango; Nlemfu Mukoko, Jean Blaise |
| Abstract: | This paper examines the transmission of external monetary disturbances in a highly dollarized small open economy, using the Democratic Republic of Congo (DRC) as a representative case. We develop a tractable open-economy model featuring partial dollarization, incomplete price adjustment, and an endogenous risk premium linked to interest rate differentials. The framework captures the key mechanisms through which foreign financial conditions interact with domestic monetary dynamics. Model simulations indicate that a U.S. interest rate tightening generates an immediate and significant depreciation of the domestic currency, accompanied by rising risk premia and inflationary pressures. Money supply shocks produce amplified exchange rate and price level responses due to weakened real money demand under dollarization, while risk premium shocks generate additional volatility through expectation-driven dynamics. Across all shock types, domestic monetary policy exhibits limited capacity to counteract external disturbances. The results show that dollarization changes how monetary shocks spread by reducing policy independence and increasing the impact of global financial conditions. The analysis provides a quantitative foundation for understanding macroeconomic swings in dollarized economies and indicates that stabilization requires additional tools beyond traditional interest-rate policies. |
| Keywords: | Exchange rate dynamics, dollarization, monetary policy spillovers, Democratic Republic of Congo, commodity prices |
| JEL: | E52 F31 F41 O55 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129083 |
| By: | Harald Badinger; Christian Glocker; Stefan Schiman-Vukan |
| Abstract: | Using a structural VAR with a relatively agnostic identification based on narrative sign restrictions, this paper, in line with recent empirical evidence, documents an increase in the labor share following restrictive monetary policy in the euro area. We then complement the empirical analysis with a theoretical investigation that provides mechanisms linking monetary policy and the labor share — a connection that has so far been regarded as lacking an explanation. Specifically, we show that the observed responses of the labor share, real wages, and productivity to a monetary policy shock can be reconciled within an otherwise standard New Keynesian framework once capital accumulation is introduced and both nominal and real frictions — in particular, labor adjustment costs — are incorporated. |
| Keywords: | monetary policy, labor share, euro area, structural VAR, New-Keynesian model, labor market frictions |
| JEL: | C32 E25 E52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12709 |
| By: | Nundo Chilima (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper examines how external commodity shocks, exchange rate depreciation, and monetary policy shocks shape macroeconomic adjustment in Zambia. Using monthly data from 2010 to 2024, the analysis applies sign-restricted local projections to trace the responses of output, inflation, exchange rates, policy rates, and lending conditions. The copper-to-oil ratio serves as the baseline indicator of Zambia’s external commodity position because it captures copper export-price gains relative to oil import costs. Robustness checks use separate copper-price and oil-price systems, a longer signrestriction window, state-dependent specifications, and Bayesian VAR evidence. The results show that favorable copper-to-oil shocks lower inflation, ease lending conditions, support kwacha appreciation, and gradually raise output. Exchange-rate depreciation shocks generate persistent inflationary effects, confirming strong exchange-rate passthrough in Zambia´s import-dependent economy. Monetary-policy shocks reduce output and affect financial conditions, but do not produce a clean disinflationary response in the linear baseline, indicating constrained transmission and price-puzzle dynamics. State-dependent results show that transmission varies across inflation and commodity regimes, with weak commodity conditions amplifying inflationary and exchange-rate stress. The findings imply that stabilization in Zambia requires stronger external buffers, credible monetary-fiscal coordination, deeper financial intermediation, and reduced exposure to imported cost shocks. |
| Keywords: | Commodity prices; Copper-to-oil ratio; Exchange-rate pass-through; Monetary policy; Sign-restricted local projections; State dependence; Zambia |
| JEL: | E31 E52 F41 Q43 C32 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2026_11 |
| By: | Mubarak, Hussein Ali Mubarak |
| Abstract: | *Abstract: Giant Inflation Theory* Giant Inflation Theory presents a new economic framework for analyzing hyperinflation episodes exceeding 1, 000, 000% annually. Unlike classical monetary models that attribute hyperinflation primarily to excessive money supply, this theory integrates institutional and governance factors, with emphasis on systemic corruption as a core accelerator. The model proposes that when corruption indices cross a critical threshold, public trust in monetary policy collapses, triggering three feedback loops: (1) capital flight and dollarization, (2) collapse of tax revenue leading to deficit monetization, and (3) indexation of wages and prices that creates inertial inflation. These mechanisms drive economies into a "giant inflation" regime where price levels can double in days or hours. Using case studies from historical and contemporary hyperinflations, the theory identifies early-warning indicators and tipping points where conventional stabilization policies become ineffective. It further outlines a two-stage recovery protocol: institutional anti-corruption reform followed by currency reform with external anchoring. Giant Inflation Theory provides policymakers with a predictive tool for assessing inflationary risk in fragile states and proposes that monetary stability cannot be restored without addressing governance deficits. The findings suggest that corruption control is not only a political issue but a prerequisite for macroeconomic stability. *Keywords*: hyperinflation, corruption, monetary policy, economic crisis, institutional |
| Keywords: | Inflation , monetary policy , corruption |
| JEL: | E00 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129044 |
| By: | Ralph Luetticke (University of Tübingen & CEPR); Christopher Roth (University of Cologne, ECONtribute, CEPR, CESifo, Max Planck Institute for Behavioral Economics); Mirko Wiederholt (LMU Munich, CEPR & CESifo); Johannes Wohlfart (University of Cologne, ECONtribute, CESifo, Max Planck Institute for Behavioral Economics) |
| Abstract: | The Lucas critique holds that policy evaluations based on historical correlations can fail because policy changes alter expectation formation. We develop a new approach to monetary policy evaluation that addresses this concern: we elicit expectations under alternative policy scenarios from household surveys and feed these measured expectations into a heterogeneous agent model. The surveys reveal that the response of income and inflation expectations to interest rate changes is state-dependent. Incorporating these expectation differences into the model yields estimates of the effects of policy on aggregate consumption that are statedependent, varying with economic conditions at the time of the policy change. |
| Keywords: | Policy Scenarios, Expectation Formation, Aggregate Consumption, Monetary Policy |
| JEL: | D12 D14 D83 D84 E32 G11 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:414 |
| By: | boughabi, houssam |
| Abstract: | This paper investigates the impact of low-interest rate policies on export performance in a small open economy under stochastic inflation and interest rate volatility, using Switzerland as a natural laboratory. We develop a continuous-time stochastic framework linking exports to inflation dynamics and policy-controlled short rates and implement Monte Carlo simulations to evaluate export trajectories under uncertainty. The results show that negative interest rates significantly support export performance despite deflationary pressures, while the effectiveness of the policy is largely invariant to the persistence (memory) of interest rate volatility. By integrating numerical modelling with approximation in a multi-periodic setting, the study provides both a methodological contribution and evidence on the trade channel of unconventional monetary policy. |
| Keywords: | interest rates; export dynamics; inflation volatility; stochastic modeling; monetary policy; Switzerland |
| JEL: | C15 E52 F41 |
| Date: | 2026–05–19 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129149 |
| By: | Harashima, Taiji |
| Abstract: | This paper proposes that inflation dynamics follow a law of motion analogous to Newtonian mechanics, driven by a "repulsive force" between the government and households. While the government attempts to manipulate the real interest rate toward its preferred level, households resist to maintain their own, resulting in a strategic tug-of-war. The study demonstrates how this force-based inflationary motion mirrors Newtonian laws—specifically inertia, acceleration, and action-reaction. Additionally, the concept of kinetic energy is employed to analyze central bank strategies for achieving price stability. |
| Keywords: | Central bank; Inflation acceleration; Law of motion for inflation; Maximum degree of comfortability; Newtonian mechanics |
| JEL: | E31 E58 E60 |
| Date: | 2026–05–03 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128966 |
| By: | Raza, Hassan; Siddiqui, Danish Ahmed |
| Abstract: | The Objective of this study is to explore a suitable framework of Central Bank Digital Currency for Pakistan according to its unique socio-economic needs through Delphi and Analytical Network Processing Method. This study has used a mixed-method approach combining two distinct techniques to achieve a robust, expert-driven consensus on the design of CBDC for Pakistan. This study consisted of two phases. In the first phase, the modified electronic Delphi Method is used to gather and synthesise the expert opinions about CBDC. In the second phase, ANP is used to model complex relationships and determine the relative importance of different factors that can frame CBDC for Pakistan. The analysis was made through RStudio and Super Decision software. It revealed that the Hybrid CBDC model (64%), having a dual-tiered approach-combining features of both retail and wholesale CBDCs-is optimal for Pakistan, balancing accessibility for the public with institutional efficiency. The study also details designs, challenges, identification of key stakeholders, optimal timeline, regulatory and technological requirements to implement CBDC in Pakistan, according to the socioeconomic needs of Pakistan, based on Expert consensus. This study provides a tailored Framework of CBDC which will address key challenges, like Financial Inclusion, Informal economy and provide opportunities like modernise payment systems, and will also inform policy makers about the practical implications of CBDC. It also provides a clear, expert-validated road map for the State Bank of Pakistan to design and implement the CBDC. |
| Keywords: | Delphi, Analytical Network Process, Central Bank Digital Currency, Financial Inclusion, Payment Efficiency, Financial Stability, Shariah Compliance |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:341063 |
| By: | Serrano Rodriguez, Enrique; Barmes, David; Nino Corredor, Alejandra |
| Abstract: | Central banks are increasingly integrating climate considerations into collateral frameworks, with the climate factor proposed by the European Central Bank (ECB) representing the most recent and novel development in this space. Scheduled for implementation in June 2026, the climate factor introduces adjustments to collateral valuations based on assets’ exposure to uncertainties around the low-carbon transition. We examine the climate factor’s design and scope, outlining the riskbased case for extending it to credit claims, asset-backed securities (ABS), covered bank bonds and sovereign bonds. |
| JEL: | F3 G3 N0 |
| Date: | 2026–05–26 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:138616 |
| By: | Giulio Cornelli; Leonardo Gambacorta; Boris Hofmann; Michael Brei |
| Abstract: | This paper examines the implications of two coincident digital trends - the digitalisation of banking and the widespread adoption of social media - for the pricing of deposits in the United States. Using branch-level data, we analyse how both trends interact to influence the level of deposit rates as well as their adjustment to changes in the policy rate. Our analysis distinguishes between traditional banks with physical branch networks and digital banks. Using panel regression analysis and local projections, we find that digital banks' deposit rates are higher and more reactive to changes in policy rates, consistent with the view that their customers are more price sensitive. We further find that digital banks offer higher deposit rates and react more sharply to policy rate changes in counties with higher social media activity, as measured by Twitter usage, supporting the notion that high social media use further increases price sensitivity. |
| Keywords: | deposit rate pass-through, digital banking, monetary policy transmission, social media activity, branch-level data, policy rate |
| JEL: | E43 E52 G21 O33 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1357 |
| By: | Vujeva, Karlo |
| Abstract: | This paper examines TARGET2 imbalances in relation to the slowdown of the euro area overnight interbank market and the transformation of the Eurosystem’s operational framework after the global financial crisis and the European sovereign debt crisis. It argues that TARGET2 imbalances are not merely technical by-products of Eurosystem balance-sheet expansion, but balance-sheet traces of a structural reorganization of liquidity circulation inside the euro area. The paper develops and tests a substitution hypothesis: when private cross-border redistribution of central-bank liquidity through the overnight interbank market weakens, public settlement through TARGET2 increasingly records liquidity flows no longer intermediated through private money markets. Using a vector autoregressive framework for the euro area, the analysis links TARGET2 dynamics to overnight interbank market activity, the overnight money-market rate, and the Composite Indicator of Systemic Stress. The results show that positive shocks to TARGET2 imbalances generate a significant and persistent contraction in overnight interbank transaction volume, while financial-stress shocks generate an immediate and durable increase in TARGET2 imbalances. A complementary transmission analysis further shows that TARGET2 is the most persistent balance-sheet response to excess-liquidity shocks among the variables considered, exhibiting a larger and more durable response than sovereign bond yields, equity prices, or bank lending. Finally, regime-threshold results suggest that the center–periphery confidence gap becomes statistically relevant for TARGET2 accumulation only in the abundant-reserves regime, linking settlement dynamics to safe-asset scarcity and incomplete financial integration. The findings imply that TARGET2 should be interpreted not only as an accounting counterpart of central-bank operations, but also as a signal of impaired private liquidity circulation, financial fragmentation, and the evolving operational architecture of the Eurosystem. |
| Keywords: | TARGET2 imbalances; settlement infrastructure; euro area interbank market; excess liquidity; financial fragmentation; financial stress; monetary policy implementation |
| JEL: | E42 E44 E52 E58 F36 |
| Date: | 2026–05–15 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129148 |
| By: | Dräger, Lena; Marencak, Michal; Nghiem, Giang; Paloviita, Maritta |
| Abstract: | This paper examines cross-country differences in consumer expectations about macroeconomic outcomes and mortgage borrowing conditions within a monetary union. Using harmonized microdata from the ECB Consumer Expectations Survey for eleven euro area countries, we document significant national disparities. By sequentially adding a rich set of consumer- and country-specific macro controls to pooled regressions with country fixed effects, we find that these factors account for much, but not all, of the cross-country heterogeneity in expectations. These remaining differences likely reflect unobserved countryspecific factors, highlighting the need for country-tailored monetary policy communication to effectively stabilize consumer expectations. |
| Keywords: | Country heterogeneity, Expectations, Consumer Expectations Survey |
| JEL: | D30 D84 E31 E52 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:han:dpaper:dp-747 |
| By: | Adviye Hazal Guzel (Department of Economics, Middle East Technical University, Ankara, Turkiye) |
| Abstract: | Inflation targeting (IT) is a widely used monetary policy. We examine the effects of it on emerging and developing countries’ inflation, output growth, dollarization, real effective exchange rate (REER), REER volatility, fiscal balance, output volatility and inflation volatility via propensity score matching. Propensity score matching is based on matching IT adopters and non-IT adopters on their propensity scores. The mean difference of the outcomes between these two is the average treatment effect (ATT). The main aim of it is to solve the self-selection problem. Propensity scores indicate the likelihood of adaptation of IT and these can be estimated via a probit model. In our main analysis, there is evidence of a decrease in inflation after the introduction of IT. Note that there is a decrease in GDP growth. Moreover, there is a decrease in REER suggesting there is a depreciation. The increase in fiscal balance implies the government becomes more efficient in tax collection to compensate the loss of the seignorage income. There is also an increase in GDP per capita volatility and GDP volatility. Our results are robust to different probit model specifications. By moving beyond inflation outcomes alone, this study provides new empirical evidence on the broader macroeconomic trade-offs associated with IT adoption in emerging and developing countries. The findings highlight that IT must be supported by institutional and structural reforms to achieve stable growth in these economies. |
| Keywords: | dollarization, emerging countries, inflation targeting, macroeconomic volatility, propensity score matching, real effective exchange rate |
| JEL: | E4 E5 E6 F3 H6 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:met:wpaper:2603 |
| By: | Tirupam Goel; Ulf Lewrick; Isha Agarwal |
| Abstract: | We model a stablecoin issuer that optimises capital, cash and bond holdings under persistent stablecoin flows. Absent regulation, the issuer holds little capital and favours interest-bearing but less-liquid bonds over cash. This exposes coin-holders to default risks and poses systemic spillovers via price impact of bond fire-sales. How can regulation mitigate these risks? We consider capital and liquidity thresholds as usable buffers. They can be breached in stress but discipline issuers by triggering additional redemptions, thus endogenising stablecoin flows. The thresholds work through asymmetric channels. While the liquidity threshold only raises cash holdings, the capital threshold increases both capital and cash. Both thresholds mitigate default and spillover risks, suggesting they are substitutes. However, they are complements for regulators targeting both risks. Using stablecoin flows and US Treasury market depth, we calibrate a two-way mapping that enables regulators to recover capital-liquidity threshold combinations implied by chosen risk targets (and vice-versa). |
| Keywords: | capital regulation, liquidity regulation, stablecoins, crypto, money market funds, financial stability, buffer usability |
| JEL: | G2 G28 C6 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1355 |
| By: | Ludolph, Melina; Nghiem, Giang; Tonzer, Lena |
| Abstract: | We examine whether combining factual information on inflation levels and forecasts with a narrative can persistently shape consumers' inflation expectations. In a preregistered randomized controlled trial with a representative sample of 3, 000 German consumers, participants received either numerical or textual information about inflation rates, with or without an accompanying narrative. All treatments immediately lower inflation expectations, with numerical information eliciting stronger adjustments. Adding a narrative produces no additional immediate effect, confirming that it conveys no new information. However, only the combination of numerical information with a narrative yields a lasting reduction in inflation expectations and forecast uncertainty still observable after four weeks. Our results suggest that combining precise information with a narrative enhances information retention and can lead to more persistent shifts in consumers' beliefs. The effects are strongest when respondents perceive the narrative as relatable and emotionally engaging, and among those with low financial literacy and limited knowledge of inflation. |
| Keywords: | Inflation expectations; central bank communication; narratives |
| JEL: | D84 D91 E31 E58 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:han:dpaper:dp-748 |
| By: | R. Jay Kahn; Matthew McCormick |
| Abstract: | The structure of the Treasury and repurchase agreement (repo) markets has changed over the past decade in ways that alter how administered rates pass through to market rates. |
| Keywords: | hedge fund leverage; monetary policy; spreads; Treasury yields |
| Date: | 2026–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:103350 |