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on Central Banking |
| By: | Olena Kostyshyna; Luba Petersen; Jing Yang |
| Abstract: | Using a controlled macroeconomic experiment, we compare monetary policy rules that differ in how much they look through inflation: a Lean-Against policy that responds strongly to inflation and a Look-Through policy that responds less strongly. We combine each rule with communication protocols that vary the information the central bank releases about its policy response: restricted qualitative information, detailed quantitative information, and detailed quantitative information combined with inflation and output projections. Midway through each session, we raise the persistence of the cost-push shock. Looking through large, persistent shocks raises and prolongs inflation and increases the risk that inflation expectations unanchoring, while responding with tighter policy curbs inflation sooner. Communication matters mainly through projections. Adding detailed quantitative information to qualitative statements has little effect on output gaps, inflation, expectations or forecast errors. Communicating projections reduces inflation and output losses, anchors inflation expectations and lowers forecast errors. Under Look-Through, projections anchor inflation expectations and reduce inflation after the increase in supply shock persistence. Looking through supply-shock-induced inflation is only advisable when the central bank can communicate credible and focal projections to guide expectations. |
| Keywords: | Monetary policy; Monetary policy framework and transmission; Monetary policy tools and implementation |
| JEL: | C C9 D D8 D84 E E5 E52 E58 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-39 |
| By: | Amina Enkhbold; Serdar Kabaca |
| Abstract: | Canadian housing imbalances have elevated shelter inflation as a driver of CPI, fueled by high house prices, mortgage costs, rents, supply constraints, and leverage. This note uses a model with housing supply and extrapolative expectations to assess whether monetary policy should incorporate or look through shelter inflation under demand and supply shocks. |
| Keywords: | Financial system; Household and business credit; Monetary policy; Monetary policy framework and transmission |
| JEL: | E E5 E52 G G2 G21 R R2 R21 R3 R31 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-53 |
| By: | Stéphane Surprenant |
| Abstract: | We examine the effects of monetary policy shocks on the Canadian housing market. Using high-frequency surprises around fixed announcement dates as an instrument in a Bayesian VAR, we estimate the responses of house prices, housing starts, building permits, resales, inventories, and mortgage purchases to a contractionary monetary policy shock. An increase in the policy rate leads to a substantial and persistent decline in average house prices. Housing starts and building permits fall, but their implied effects on the future housing stock are both slow and modest. Interpreted through the lens of market equilibrium, these results are most consistent with a stronger response of housing demand than housing supply. Mortgage purchases provide additional evidence in support of this interpretation. |
| Keywords: | Monetary policy; Monetary policy framework and transmission |
| JEL: | C C3 C32 E E5 E52 R R3 R31 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-52 |
| By: | Ina Hajdini; Edward S. Knotek; James Mitchell; Mathieu Pedemonte; Taylor Shiroff |
| Abstract: | Using a five-year survey of over 170, 000 US consumers, we provide a novel direct measure of attention to monetary policy and show that the data strongly support the predictions of a rational inattention model. First, attention is incentive-driven: consumers with "skin in the game"—those planning major purchases like homes or cars—are significantly more attentive to monetary policy news. Second, attention varies systematically with interest rate volatility and news supply, exhibiting cyclical patterns around FOMC meetings. Third, marginal effects of volatility and news supply decline with "skin in the game, " implying external factors primarily affect low-skin-in-the-game consumers. These findings imply that, when communication is costly and attention is endogenous, optimal central bank communications in our model target consumers who bear the largest welfare losses from information frictions. This targeted communication approach increases aggregate attention to monetary policy, leading to an amplified response of consumption to interest rate changes. |
| Keywords: | monetary policy; rational inattention; communication |
| JEL: | D8 E5 |
| Date: | 2026–10–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:103975 |
| By: | Romero, Paola; Castaneda, Juan |
| Abstract: | Independent central banks must be effectively accountable, particularly when they engage in discretionary policies during a crisis. We argue that ex post assessment of central bank performance is insufficient for proper accountability. Using the inflationary episode that followed the Covid-19 pandemic, we show that a central bank explicitly committed to an inflation-targeting rule can deviate substantially from its target, with the extent of the deviation being identified only once it is already too late to correct it. We propose ‘procedural accountability’, a comprehensive framework for monetary policymaking. Drawing on the gold standard experience and existing rule-based proposals, we specify the minimal formal architecture any such regime must satisfy. |
| Keywords: | accountability;central banks;discretion;inflation targeting;monetary policy |
| JEL: | E42 E58 E61 |
| Date: | 2026–10–23 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:140780 |
| By: | Udaibir S. Das (Official Monetary and Financial Institutions Forum; Observer Research Foundation America); David A. Grigorian (Mossavar-Rahmani Center for Business and Government, John F. Kennedy School of Government, Harvard University; Center for Global Development) |
| Abstract: | Domestic debt restructuring (DDR) in emerging markets and developing economies is a monetary and financial event as much as a fiscal one. DDR reallocates losses across three interconnected balance sheets—the sovereign, the central bank, and domestic financial institutions—impairing monetary policy through four channels: the central bank balance sheet, government securities markets, bank credit, and policy credibility. Cross-country evidence from 17 DDR episodes shows that the money multiplier falls below its pre-restructuring level in most episodes, with the compression concentrated in multi-year restructurings, and that banks’ discretionary reserve buffers thin around the restructuring year. Three recent cases—Jamaica (2010), Barbados (2018–19), and Ghana (2022–24)—show that vulnerability to monetary impairment is shaped, among other factors, by the pre-DDR monetary framework and the degree of prior fiscal dominance, and that recovery of monetary transmission is the most uncertain post-DDR outcome. The design lesson is that DDR is constrained optimization: success requires not only reducing debt service but preserving the monetary and financial system capable of supporting economic recovery. |
| Keywords: | domestic debt restructuring, monetary policy, central bank recapitalization, Jamaica, Barbados, Ghana |
| Date: | 2026–10–16 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:wpaper:759 |
| By: | R. Anton Braun; Daisuke Ikeda |
| Abstract: | Routine variation in household labor supply, consumption, saving, and portfolio choice decisions over the lifecycle influences aggregate economic activity in an aging society because the size of different age groups changes. In rapidly aging societies such as Japan, this mechanism produces an aging trap. The inflation rate is low or negative. Real interest rates and per capita output are also persistently low. Unlike inflation, they resist monetary and fiscal stimulus. Monetary policy can offset the decline in the inflation rate, but neither aggressive central bank interest rate policies nor large increases in the public debt–output ratio offset the persistent declines in real interest rates and output. |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:26-019e |
| By: | Corey Feldman; Thomas B. King |
| Abstract: | We quantify the effects of uncertainty about the conduct of monetary policy on asset prices. Nominal yields, real yields, stock returns, and implied volatilities all vary more on days with FOMC communication than on FOMC “blackout” days, consistent with policy communication being a source of risk. Furthermore, these asset prices all respond significantly to changes in interest-rate uncertainty around FOMC announcements, consistent with that risk being priced. A New Keynesian model with stochastic variation in the policy rule quantitatively matches this evidence. Our model shows that monetary-policy risk contributes to excess returns on equities and nominal bonds and accounts for much of the risk premium on inflation-indexed bonds. Transitory increases in monetary-policy risk lower stock and bond prices, reduce inflation-risk premia, and generate macroeconomic weakness similar to that produced by aggregate-demand shocks. The effective lower bound on interest rates reduces the size of monetary-policy risk in the model but magnifies its asset-pricing consequences, consistent with the data. We use our model to assess the effects of the increase in monetary-policy risk that occurred following the rapid tightening of policy in 2022. |
| Keywords: | monetary policy risk; Monetary policy uncertainty; Asset pricing; Risk premia; interest rate volatility; Monetary policy communication |
| JEL: | E43 E44 E52 E58 G12 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:103966 |
| By: | Frederico Bastone (PUC-Rio); Mauro Sayar Ferreira (Cedeplar/UFMG) |
| Abstract: | We study monetary policy surprises in Brazil using daily financial-market changes around 158 COPOM announcements from 2005 to 2024. We extract two orthogonal factors from interest-rate futures, interpreted as target and path components of monetary policy news, and estimate their effects on nominal yields, real yields, breakeven inflation, and Focus survey inflation expectations. Both factors move the yield curve, but with different timing: path surprises are priced rapidly, while target surprises are followed by more gradual adjustment around the release of COPOM minutes. Inflation expectations respond mainly at the medium-term horizon. In linear specifications, contractionary surprises reduce second-year expected inflation, consistent with expectations-anchoring or demand effects. Nonlinear specifications reveal important sign asymmetries: some surprises move expected inflation in the direction predicted by standard policy transmission, while others are consistent with announcements revealing information about the inflation outlook. Because COPOM decisions are announced after local markets close, the event window is daily rather than intraday; predictability tests show that the path factor is partly correlated with global financial news. The results should therefore be interpreted as event-study evidence on how Brazilian markets and forecasters respond to COPOM announcement surprises. |
| Keywords: | monetary policy shock; inflation; yield curve; inflation expectation, information channel. |
| JEL: | E43 E52 C54 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:cdp:texdis:td705 |
| By: | Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent |
| Abstract: | We investigate the existence of calendar effects in the interest rate pass-through in the euro area by examining how changes in the money market rate are transmitted to bank lending rates within quarters. Using monthly data on the interest rates of new loans for a large sample of euro area banks from January 2010 to April 2024, we find that this short-term pass-through to non-financial corporation and consumption lending rates is weaker in the fourth quarter of the year during periods of policy tightening. We obtain limited evidence that the pass-through is stronger in the fourth quarter for housing and consumption loans during periods of policy easing. We interpret these findings as consistent with trade loading behavior, whereby banks inflate their loan volumes at the end of the year to meet annual targets. Our work highlights the importance of considering seasonal effects when assessing interest rate pass-through in the euro area. |
| Keywords: | bank, monetary policy, monetary transmission mechanism, calendar effects, euro area |
| JEL: | E52 G21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:344221 |
| By: | Louphou Coulibaly; Charles Engel |
| Abstract: | We examine optimal non-cooperative monetary policy in a two-country New Keynesian setting with complete financial markets and pricing to market for goods. In contrast to the case in which the law of one price holds for goods, currency misalignments are an important consideration even for self-oriented policymakers. Financial markets are critical in the analysis. Under “full” commitment, the optimal policy considers the effects on asset values and hence wealth distribution across countries. Optimal policy under full commitment differs from the “partial” commitment case in which the policy commitment is not made until after asset markets clear. Surprisingly, the optimal targeting rule under strategic policy with full commitment is the same as under cooperative policy. In this setting, changes in state-contingent claim prices offset the wealth a self-oriented policymaker might seek through terms-of-trade manipulation, and we show that there are no gains from cooperation. Although a policy chosen under partial commitment may be desirable from a country’s perspective, the resulting Nash equilibrium yields lower welfare. |
| JEL: | E44 E52 F31 F41 F42 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35928 |
| By: | Sebastian Doerr; Gaston Gelos; Vesa Pursiainen |
| Abstract: | We study the role of bank liquidity regulation in the growth of private credit. Following the introduction of the liquidity coverage ratio (LCR), private credit increases significantly more in U.S. counties with a larger footprint of banks subject to the LCR or of LCR banks with greater initial liquidity shortfalls. Our estimated effect of the LCR on private credit growth is comparable in economic magnitude to that of the increased capital requirements from the 2012 CCAR stress tests. Consistent with loan supply effects, the relationship between banks’ LCR footprint and private credit is stronger in industries that are more reliant on credit. |
| Keywords: | private credit, liquidity regulation, liquidity coverage ratio, nonbank lending |
| JEL: | G21 G23 G28 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1388 |
| By: | Lavender, S. |
| Abstract: | This paper shows how the design of fiscal policy and the characteristics of government debt can drive significant differences in monetary transmission within and across countries with different fiscal contexts, and across models with different fiscal specifications. Using a tractable HANK model, I derive analytical expressions for the effects of fiscal policy on monetary transmission as the sum of three channels: a debt service channel, a debt composition channel, and a fiscal cyclicality channel. The magnitudes and directions of these channels are strongly context dependent, being determined by the interactions between the size and composition of government debt, the choice of fiscal rule, the progressivity of the marginal fiscal instrument, and the distribution of government debt ownership. For a given fiscal block used in a theoretical model, or for a given fiscal context observed in the data, the framework explains when the fiscal channels are large or small, and why they amplify or dampen monetary policy. |
| Keywords: | Monetary-Fiscal Interactions, HANK Models, Government Debt |
| JEL: | E52 E62 E63 |
| Date: | 2026–10–09 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2683 |
| By: | Masao Fukui; Masayuki Yagasaki |
| Abstract: | We trace the impact of central bank stock purchases by exploiting discontinuities in the Bank of Japan's policy rule, which triggers purchases when stock market index movements fall below a threshold. In normal times, the purchases raise the long-term interest rate while leaving no detectable impact on stock prices. After the introduction of yield curve control, which pegs the long-term yield at 0%, interest rates stop responding and stock prices rise robustly following the purchases. Although these results are inconsistent with the inelastic market hypothesis in its original form, general equilibrium extensions with endogenous interest rates explain our findings. |
| JEL: | E0 G0 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35886 |
| By: | Pita Marcet, Alicia; Schröder, Christian; Wolters, Maik H. |
| Abstract: | Inflation is often overpredicted during persistent low-inflation periods. We evaluate a model in which inflation expectations can de-anchor, allowing transitions to a low-inflation equilibrium at the effective lower bound. We assess relative and absolute forecast performance using conventional and state-dependent tests. Relative to a model with expectations anchored at the inflation target, the transition model yields substantial accuracy gains during Japan's prolonged low-inflation episode and for euro area core inflation in the 2010s. These gains do not extend to the United States, where inflation remained closer to target. The absolute forecast evaluation also provides comparatively favorable evidence for the transition model in Japan and for euro area core inflation. Central bank projections are particularly strong at short horizons, reflecting their richer real-time information sets. For euro area core inflation during the low-inflation period, however, the transition model's forecast errors were roughly 50 percent lower than the ECB's for the following year and two years ahead. |
| Keywords: | Inflation Forecasting, Inflation Expectation De-anchoring, State-dependent Forecast Evaluation, Effective Lower Bound, Multiple Equilibria, Central Bank Projections |
| JEL: | C52 C53 E31 E37 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:344239 |
| By: | Severin Joho; Enzo Rossi |
| Abstract: | We compiled and processed a novel, comprehensive dataset of 1, 063 speeches delivered by high-ranking Swiss National Bank officials between 1928 and 2024. Beyond tracking their quantitative evolution, we conducted an in-depth analysis of the length, readability and thematic content. To ensure robust results, we benchmarked traditional Python-based NLP text mining against generative artificial intelligence using ChatGPT. Our findings highlight four primary policy insights. First, the frequency of annual speeches has followed an upward trajectory since the mid-1950s, accelerating notably after the transition to flexible exchange rates. Second, a clear shift toward brevity is evident. Third, the language has become increasingly accessible since the 1960s. Fourth, inflation has moved to the forefront of the thematic discourse in the era of flexible exchange rates, while cyclical economic development and unemployment have received less emphasis. Finally, we outline key methodological lessons for deploying LLMs to analyze central bank communication, emphasizing the complementary relationship between probabilistic language models and deterministic Python frameworks, while addressing inherent algorithmic pitfalls and identifying critical open questions for future research. |
| Keywords: | Central bank speeches, Linguistic Analysis, Natural Language Processing (NLP), ChatGPT |
| JEL: | E52 E58 D83 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-13 |
| By: | Yiru Chen; Muhammad Ali Nasir; Xingjie Wei |
| Abstract: | Given the important role of the Federal Reserve Chair, their communications may generate substantial cross-border effects on international financial markets. Building on this perspective, this article investigates whether emotional signals conveyed by the Fed Chair during FOMC post-meeting press conferences generate emotional spillovers to global financial markets. Using press conferences held between 2011 and 2025, we construct multimodal emotional indices from textual, vocal, and facial cues using machine learning techniques, and examine their high-frequency effects on exchange rates and equity markets across six major economies. Using local projection methods with minute-level event windows, the results show that Fed Chair emotional signals have immediate and economically significant impacts on global financial markets. Among different modalities, facial and textual emotions exhibit stronger and more robust effects than vocal signals. In particular, positive emotional cues are generally associated with increases in equity ETF returns, while exchange rate responses display substantial cross-country heterogeneity, with emerging market currencies tending to appreciate. We also provide evidence that the effects of emotional cues are non-additive and depend on cross-modal interactions, with vocal signals conditioning the impact of textual and facial emotions. Moreover, the findings show that the transmission of emotional spillovers is shaped by macro-financial vulnerability and global risk conditions. On the one hand, economies with higher vulnerability exhibit stronger responses to emotional shocks, indicating that macro-financial vulnerability acts as a moderating mechanism. However, the effects of emotional signals, especially facial and textual emotion, are amplified during periods of higher global uncertainty. Our main findings remain robust across several robustness checks. In particular, for vocal and facial emotions, coefficient equality is not rejected in 85.8% and 78.3% of the market horizon comparisons, respectively, indicating that the main findings are not systematically driven by the choice of emotion extraction algorithms. |
| Keywords: | central bank communication, multimodal signals, emotional spillover, high-frequency identification, machine learning, facial emotion analysis |
| JEL: | E44 E52 E58 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-86 |
| By: | Quang-Thanh Tran (Development and Policies Research Center (DEPOCEN), Suite 305 - 307, 12 Trang Thi Street, Hoan Kiem, Hanoi and Research Center for Policy Design, Graduate School of Economics and Management, Tohoku University, Japan) |
| Abstract: | The State Bank of Vietnam pursues price stability and sustainable economic growth through a combination of interest rate policy, exchange rate management, and credit guidance. Assessing these instruments requires a framework that captures their interactions with fiscal policy and the transmission of domestic and external shocks. This paper develops VMAP, a hybrid Macroeconomic Analysis and Projection model for Viet Nam, extending earlier semi-structural models to integrate these policies within a unified framework. The model combines a theory-based structure with empirically estimated dynamics, using Bayesian methods and system priors informed by Vietnamese evidence. Estimation draws on nineteen observables over 2010Q1–2025Q4. In recursive forecasting exercises initialized from one-sided filtered states, VMAP outperforms a random walk across most variable–horizon pairs, with statistically significant gains for inflation, the policy rate, credit growth, and the exchange rate. These results support its use as a framework for macroeconomic forecasting, policy analysis, and scenario assessment in Vietnam. |
| Keywords: | quarterly projection model, semi-structural model, hybrid monetary policy, credit guidance, managed exchange rate, fiscal policy, Bayesian estimation, system priors, Vietnam |
| JEL: | E32 E37 E47 E52 E62 F41 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:dpc:wpaper:0205 |
| By: | Shahdah Hanif; Wali Ullah |
| Abstract: | Households do not form inflation expectations with information alone; emotions matter too. This paper introduces an affective channel into the limited-attention model of expectation formation. A household’s economic mood—the emotional component of consumer sentiment that macroeconomic fundamentals cannot explain—shapes how firmly it holds on to its past inflation beliefs. Attention to new information works as in the benchmark. We estimate the model on Michigan Survey microdata from 1978 to 2025. A more positive mood weakens belief persistence in both income groups. Low-income households, however, are about two and a half times as sensitive as high- income households. The affective channel substantially improves the fit of the model and lowers long-run expected inflation below the limited-attention benchmark. The results are robust across estimators, measures of mood and demographic groups, and in an extension where mood also shapes how current inflation is read. For monetary policy, the households most exposed to inflation are also those whose expectations are most sensitive to their emotional state. |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:toh:dssraa:155 |
| By: | Alessandro Villa |
| Abstract: | An AI productivity boom can warrant lower nominal rates even when most gains are anticipated. I derive analytical representations of optimal rates under commitment and discretion in an economy with sticky prices and wages and hand-to-mouth households. Holding the realized productivity path fixed, I vary expectations. Anticipated gains raise the natural rate, but below-target inflation supports real wages and keeps nominal rates lower. Surprises leave the natural rate unchanged, calling for cuts. After surprises, expected redistribution toward hand-to-mouth households calls for deeper rate cuts to sustain savers’ spending. Raising rates requires more anticipation when wages are stickier relative to prices. |
| Keywords: | Optimal monetary policy; Sticky-prices; Hand to mouth |
| JEL: | D84 E25 E31 E52 O33 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:103965 |