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on Central Banking |
| By: | Johanna Tiedemann; Olivier Bizimana; Kiswendsida Tougouma |
| Abstract: | This paper empirically reassesses monetary policy transmission in emerging and frontier market economies in Sub-Saharan Africa (SSA EFMs). Using the identification approach of Romer and Romer (2004), we construct measures of monetary policy shocks and provide evidence on transmission mechanisms in the region. We show that monetary policy shocks pass through quickly to short-term market interest rates and lead to persistent increases in bank deposit and lending rates in most economies, indicating an operative bank-based interest rate channel. By contrast, exchange rates generally do not appreciate and, in many cases, depreciate following monetary tightening, consistent with the exchange rate puzzle—suggesting that interest rate hikes alone may be insufficient to systematically influence exchange rate movements. We also find that contractionary monetary policy reduces both output and inflation, with effects that are modest and notably weaker than in more developed economies. In addition, we find that transmission is stronger in economies that have adopted, or are transitioning toward, inflation-targeting regimes. Finally, we show that cross-country heterogeneity in transmission largely reflects differences in monetary policy transparency, financial development, and, to a lesser extent, fiscal dominance. |
| Keywords: | Monetary policy transmission; inflation; Financial markets; Sub-Saharan Africa |
| Date: | 2026–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/102 |
| By: | Glenn Abela; Arianna Antezza; Alissa Gorelova; Gianmarco Meta; Roberta Montebello |
| Abstract: | We study sign asymmetry in the effect of conventional monetary policy on key real macroeconomic variables in the euro area, using monthly data ranging from 2002 until 2022. We make use of local projections with state-dependence coming from the sign of the monetary policy shock, employing shocks identified using high-frequency identification. Our baseline findings suggest that there are asymmetries in the response of real variables to contractionary and expansionary monetary policy shocks. Furthermore, we investigate the potential sources of asymmetry by clustering countries that present similarities in proxies of labour, financial and housing markets, respectively. We find results that are consistent with theoretical predictions that downward nominal wage rigidities, sectoral composition of the economy, firm sizes as well as the housing market and housing debt conditions all contribute to the sign asymmetries we uncover in our baseline results. |
| Keywords: | Monetary economics, central banking, high-frequency identification, asymmetries |
| JEL: | E52 E58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2165 |
| By: | Lucyna Gornicka; Sumaiyah R Mirza; Vina Nguyen; Mr. Jerome Vandenbussche |
| Abstract: | We document the state-dependence of monetary policy transmission to output and core consumer prices in a sample of eleven large inflation-targeting emerging markets along three cyclical dimensions: the business cycle position, the monetary policy stance, and the level of trend inflation. We show that monetary policy has strong effects on output during recessions and after a period of loose monetary policy, but little to no impact during expansions or when monetary policy has been tight. In contrast, the response of prices is muted regardless of business cycle position or monetary policy stance. Transmission also depends on trend inflation: when trend inflation is low, monetary policy has a stronger impact on output and a weaker effect on prices, whereas a high-inflation environment dampens the output response and amplifies price adjustments. These findings are broadly consistent with the presence of financial frictions in the form of occasionally binding borrowing constraints, endogenous frequency of price adjustments, loss aversion preferences, and a convex Phillips Curve. |
| Keywords: | Monetary policy transmission; state-dependence; emerging markets |
| Date: | 2026–05–15 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/096 |
| By: | Paul Beaudry; Thomas J Carter; Amartya Lahiri |
| Abstract: | When countries are hit by supply shocks, central banks often face the dilemma of either looking through such shocks or reacting to them to ensure that inflation expectations remain anchored. In this paper, we propose a tractable framework to capture this dilemma and explore optimal policy under various assumptions on how agents form their expectations and the sophistication with which those expectations account for the central bank’s announced policies. While our analysis covers a wide range of potential specifications, our baseline results focus on level-k thinking (LKT) – a form of bounded rationality that enjoys significant support in the experimental literature and encompasses both adaptive expectations (AE) and rational expectations (RE) as special cases. Nonetheless, we show that the optimal policy under LKT is qualitatively very different from its analogues under AE and RE, exhibiting abrupt pivots in the policy stance. In particular, it is optimal for the central bank to initially look through supply shocks until a threshold is reached, then pivot discontinuously to a more hawkish anti-inflationary stance. We find that such pivots can, if optimally executed, be compatible with soft landings in the sense that most (or even all) of the reduction in inflation occurs through re-anchoring of expectations rather than economic slack. We also discuss risks and why policy errors in terms of tightening too late or too slowly can be especially costly in such an environment. |
| Keywords: | Inflation expectations; supply shocks; monetary policy |
| Date: | 2026–05–15 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/097 |
| By: | Quaicoe, Nana |
| Abstract: | In economies where a portion of the population transacts through mobile money and the other portion strictly uses only cash, can any single interest rate rule serve both groups well? I develop a two-agent New Keynesian model calibrated to Ghana in which included households manage liquidity through mobile money under Baumol– Tobin demand, while excluded households depend on government transfers under fiscal dominance. I find a critical threshold at approximately 70 percent financial exclusion.Below it, aggressive inflation targeting is optimal for both household types. Above it, the welfare surface for included households develops an interior optimum, the optimal Taylor rule diverges across groups, and no single rule resolves the conflict. The distributional cost of monetary policy is convex in exclusion: the welfare variance ratio between household types rises from 7.6:1 at 50 percent exclusion to 98:1 at 80 per- cent, the range observed across Sub-Saharan Africa. Aggregate welfare statistics mask this entirely. The trade-off is reducible only through financial inclusion, not through monetary policy design. |
| Keywords: | monetary policy, financial inclusion, mobile money, TANK model, fiscal dominance, Taylor rule, distributional effects, Sub-Saharan Africa |
| JEL: | E52 E58 G23 O16 |
| Date: | 2026–04–18 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128793 |
| By: | Okan Akarsu; Emrehan Aktug |
| Abstract: | This paper examines how monetary policy committee announcements and inflation surprises affect Turkish firms' inflation expectations and FX management decisions during the 2015–2024 period—a time characterized by both relatively stable and highly volatile inflation. Using survey data, we define monetary policy (inflation) surprises as the unexpected component of interest rate (inflation) forecasts measured within a narrow window around policy announcements. First, we show that firms' aggregate inflation expectations change significantly in response to monetary policy shocks, but their response is highly state-dependent: In relatively stable inflation environments, firms react in line with standard theory, anticipating a decline in prices while becoming pessimistic about the economic outlook. By contrast, in volatile settings, firms adopt a supply-side interpretation, revising their expectations upward amid pessimism. Second, inflation surprises increase inflation expectations and heighten pessimism regardless of the state, providing additional evidence for the supply-side view. Third, a positive inflation surprise induces an increase in FX holdings—reflecting concerns about potential currency depreciation—whereas an unexpected policy rate hike prompts firms to reduce FX positions in anticipation of currency appreciation. Our findings demonstrate that in a high-inflation environment, firms are especially attentive to macroeconomic developments, revising their inflation expectations and adjusting their financial strategies accordingly. These results underscore the importance of monetary policy communication and inflation news in shaping firm-level decisions, particularly when inflation is elevated and volatile. |
| Keywords: | E12; E24; E31; E52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2609 |
| By: | Matthew Fink (Reserve Bank of Australia); Jonathan Hambur (Reserve Bank of Australia) |
| Abstract: | The sharp rise in inflation following the COVID-19 pandemic has renewed interest in how firms adjust prices after large economic shocks and the implications for modelling inflation and setting monetary policy. Using a large dataset of web-scraped Australian retail prices, we document an increase in the frequency of price changes in 2022 and 2023, alongside strong goods price inflation. We incorporate these microdata-based estimates of price-setting frequency into the Reserve Bank of Australia's dynamic stochastic general equilibrium model to assess their macroeconomic implications. We find that failing to account for higher rates of price adjustment during the high-inflation period leads to inflation forecasts that are up to 1.2 percentage points too low, even when the underlying shocks are known. The increase in the frequency of price resets also steepens the Phillips curve, reducing the policy trade-off between inflation and output. Given knowledge of this change in price-setting behaviour, a hypothetical central bank with unchanged preferences would tend to raise interest rates more aggressively than in a scenario where price rigidity was stable. Our findings highlight the importance of accounting for shifts in price-setting behaviour when interpreting inflation and setting monetary policy. |
| Keywords: | inflation; price setting; monetary policy |
| JEL: | E31 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2026-02 |
| By: | Venslauskas, Kazimieras |
| Abstract: | This paper examines the fiscal and institutional implications of post-pandemic public debt dynamics, with particular focus on the treatment of sovereign debt instruments held by central banks. It develops a normative framework for assessing the macroeconomic and institutional dimensions of pandemic-era debt expansion and subsequent normalization strategies. The analysis is intended to inform ongoing debates in fiscal and monetary policy coordination, debt sustainability, and institutional design in advanced economies. |
| Keywords: | fiscal policy, monetary policy, public debt, sovereign debt, central bank balance sheet, macroeconomic policy, post pandemic economy |
| JEL: | E6 E62 |
| Date: | 2026–04–19 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128889 |
| By: | Eric Engstrom |
| Abstract: | In January 2012, the Federal Reserve began publishing the Summary of Economic Projections (SEP) "dot plot, " revealing FOMC participants' projections for the federal funds rate. This paper documents a dual role for SEP projections in the formation of private interest-rate expectations. On one hand, SEP projections contain valuable information, achieving lower forecast errors than consensus surveys, VAR models, and several market-based measures at many horizons. Because the SEP is informative, some reliance on it by private forecasters is natural. On the other hand, because the SEP is updated only quarterly, SEP projections that are useful when released can become stale between updates. If private forecasts continue to place excessive weight on those earlier projections, they may respond too slowly to newly arriving information. Consistent with this prediction, survey forecast errors-and, to a weaker extent, market-based forecast errors-are systematically related to the gap between current expectations and lagged SEP projections, even after controlling for macroeconomic conditions, risk premia, and other predictors of forecast errors. The findings imply that official guidance can simultaneously improve average forecast accuracy while reducing the speed with which new information is incorporated into expectations. |
| Keywords: | anchoring bias; monetary policy expectations; Federal Reserve communications; forecast efficiency; dot plot; term structure |
| JEL: | E43 E47 E52 E58 G12 G14 |
| Date: | 2026–05–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103336 |
| By: | Raza, Hassan; Siddiqui, Danish Ahmed |
| Abstract: | While the growing, informal adoption of cryptocurrencies exacerbated by Pakistan's inconsistent regulatory stance regarding cryptocurrency adoption and regulation, presents a speculative and volatile threat to the nation's financial stability, a well-designed Central Bank Digital Currency (CBDC) offers a controlled, secure, and regulated path toward financial inclusion, economic formalization, and enhanced monetary policy control. The objective of this analytical review to search the grey literature and Scientific writings to analyze the mix approach of Pakistan toward Digital Finance especially Cryptocurrency and CBDC. This review article examines this ideological struggle, tracing the history of the State Bank of Pakistan's (SBP) and Securities and Exchange Commission of Pakistan's (SECP) cautionary stance on decentralized cryptocurrencies, driven by concerns over financial integrity, money laundering, and consumer protection. It then contrasts this with the government's recent pivot toward a pro-innovation approach, spearheaded by the establishment of the Pakistan Crypto Council (PCC) and the appointment of key advisors. This pivot is a direct response to a burgeoning, informal digital asset market, with millions of Pakistanis already actively using virtual currencies to hedge against inflation and overcome financial access barriers. The article analyzes two parallel policy pathways emerging from this tension: the development of a state-controlled Central Bank Digital Currency (CBDC) and the formalization of the decentralized virtual assets market through the new Virtual Assets Act (VAA) 2025. The research offers a comprehensive understanding of the strategic trade-offs a developing country faces when navigating the complex relationship between financial stability, technological innovation, and economic inclusion, providing a crucial case study for international policymakers. |
| Keywords: | CBDC, Cryptocurrency, Digital Pakistani Rupee, Pakistan Crypto Council (PCC), Distributed Ledger Technology |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:341060 |
| By: | Asker Lau Andersen (Department of Economics, University of Copenhagen); Andreas Jakobsen (Danske Bank, Copenhagen Business School); Mads Rahbek Joergensen (Danske Bank, Department of Economics, University of Copenhagen); Niels Johannesen (Oxford University Centre for Business Taxation, University of Copenhagen) |
| Abstract: | We study the transmission of rising interest rates to consumption using granular customerdata from a major bank in Denmark. We show that households with adjustable-ratemortgages gradually reduced spending and increased deposits as market rates soared in 2022 but made no further spending cuts when their mortgage rates eventually reset to a higher level in 2023-2024. These patterns are consistent with forward-looking households who respond to new information about future mortgage costs and use liquid buffers to smooth consumption. The cash-flow channel of monetary policy may therefore operate almost instantaneously even when mortgage rates reset with a significant lag. |
| Keywords: | Consumption, Saving, Cash-flow effect, Monetary policy, Mortgage |
| JEL: | D12 D14 E21 E43 E52 |
| Date: | 2026–05–19 |
| URL: | https://d.repec.org/n?u=RePEc:kud:kucebi:2604 |
| By: | Raza, Hassan; Siddiqui, Danish Ahmed |
| Abstract: | he primary objective of this study is to develop an optimal framework for a Retail Central Bank Digital Currency (CBDC) by determining how its design features should be structured to achieve financial inclusion and monetary policy enhancement in a developing economy like Pakistan, while explicitly mitigating risks to financial stability and public adoption. This research employed a Systematic Literature Review (SLR) following the PRISMA 2020 Guidelines. A total of 224 academic papers were assessed to synthesize global findings and identify critical consensus and conflicts regarding CBDC design, particularly in contexts relevant to developing nations. The analysis reveals a strong consensus supporting a two-tiered, accessible, and interoperable model as the most pragmatic design. Literature frequently points to the use of Distributed Ledger Technology (DLT) for smart contract functionality and enhanced security, regardless of whether the system is account- or token-based. The review establishes two central tensions in design. The first highlighted is the core conflict between mitigating systemic risk and expanding access. The Second seem to arise from the perspective of Privacy vs. AML/CFT concerns. The viable path for this trade-off is indicated as a tiered system offering high privacy for low-value transactions while mandating stringent AML/CFT checks for large transfers. These findings provide a robust, evidence-based design blueprint for the State Bank of Pakistan and other developing countries considering the issuance of a retail CBDC. By explicitly defining the necessary trade-offs (stability vs. inclusion; privacy vs. compliance), this framework allows policymakers to prioritize design features that maximize public trust and regulatory compliance, thereby significantly accelerating the successful adoption and effective use of a CBDC as a tool for economic modernization and financial deepening. |
| Keywords: | Central Bank Digital Currency, Distributed Ledger Technology, PRISMA2020 Guidelines, Digital Pakistani Rupees, Retail CBDC, Financial Inclusion, Financial Stablitiy |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:341059 |
| By: | Mark A. Carlson; Daben Chen; Benjamin K. Johannsen |
| Abstract: | This article examines press releases from the Board of Governors of the Federal Reserve System (Board) in the 1960s and 1970s related to changes in the discount rate through the lens of monetary policy communications. As argued by Yellen (2013), we start from the premise that communications have a "distinct and special role in monetary policymaking." |
| Date: | 2026–05–29 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:103334 |
| By: | De Jonghe, Olivier; Lewis, Daniel |
| Abstract: | We propose a new model in which relationship-specific effects or shocks are identified in a bipartite network under mild covariance restrictions, generalizing the influential Abowd et al. (1999) framework. For example, separate demand shocks are identified for each bank from which a firm borrows. We show how previous approaches break down when confronted with such heterogeneity, while our novel identification strategy yields a simple estimator that is consistent and asymptotically normal, under weaker network density assumptions than previous approaches. The methodology performs well in empirically-calibrated simulations. We apply our approach to identify relationship-level credit demand and supply shocks for thousands of firms and banks across nine Euro-area countries and three distinct economic episodes. We formally reject the Abowd et al. (1999) assumptions in nearly every country-period and show that within-firm/bank shock variation is of comparable scale to between firm/bank variation. We document considerable bias in Abowd et al. (1999) style estimates and associated regressions, while finding significant deleterious effects of the post-2022 monetary contraction on exposed firms. We highlight novel heterogeneity in the transmission of monetary policy. JEL Classification: C33, C58, E44, G21, G30 |
| Keywords: | corporate credit, demand shock, higher moments, identification, networks, networks, supply shock, two-way fixed effects |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263238 |
| By: | Bijnens, Gert; Hutchinson, John; Saint Guilhem, Arthur |
| Abstract: | Monetary policy asymmetrically affects the response of firms’ employment to an output shock and plays a role in cushioning employment adjustment over the business cycle. Combining annual firm-level data until 2020 with quarterly firm-level data until 2023 and high-frequency monetary policy surprises, we show that for a given change in output, monetary policy influences the extent to which firms hold on to labour, or “labour hoard”. Furthermore, this effect is asymmetric: a restrictive monetary policy reduces labour hoarding behaviour by 2 to 3 times more than an accommodative policy increases it. Finally, we look at the role of financing conditions and firm demographics. JEL Classification: E52, J23, E32 |
| Keywords: | employment adjustment, financial constraints, firm-level heterogeneity, labour hoarding, monetary policy transmission |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263240 |
| By: | Patrick A. Imam; Mr. Tigran Poghosyan |
| Abstract: | This paper investigates why the post-COVID inflation surge, though globally synchronized, led to widely divergent outcomes across countries. Using cross-country regressions for 130 economies and local projections methods for 70 advanced and emerging markets, we analyze the structural, institutional, and policy determinants of post-pandemic inflation dynamics. The results indicate that historical inflation and the scale of domestic energy price shocks account for most of the cross-country variation in cumulative post-COVID inflation. In contrast, many frequently cited country-specific, macroeconomic fundamentals and institutional features exhibit limited power to explain cross-country variation. The association between post-COVID inflation and domestic policy responses is also weak, although endogeneity complicates a clear causal interpretation. The analysis further reveals that pass-through from energy prices to headline inflation intensified markedly in the post-COVID period, particularly in emerging markets, in non-inflation-targeting regimes, and in countries that did not expand fossil fuel subsidies. These findings highlight the asymmetric transmission of supply shocks and underscore the importance of credibility, historical inflation experience, and energy policy design in shaping inflation persistence. Strengthening central bank credibility and anchoring expectations may be essential to bolster resilience against future global supply disruptions. |
| Keywords: | Inflation Targeting; Central Bank Credibility; Supply Shocks |
| Date: | 2026–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/103 |
| By: | Maurice Bun; Eric Cuijpers |
| Abstract: | We study the heterogeneous relationship between bank capital ratios, capital requirements, bank lending and loan pricing using data on portfolios and bank characteristics for a sample of large European banks in the period 2014-2025. Exploiting dynamic panel data models with parameter heterogeneity, we relate time-varying bank capital ratios and bank capital requirements to portfolio exposures and loan rates. We establish a pattern of differentiated deleveraging whereby higher capital ratios are associated with smaller portfolio sizes, but only for high-risk portfolios and banks with low leverage ratios. On the pricing side, higher capital requirements are associated with only a small increase in portfolio loan rates. The empirical evidence suggests that, once banks are adequately capitalized, capital requirements can be varied without causing substantial changes in bank loan supply and loan pricing. |
| Keywords: | Bank lending; capital ratio; capital requirement; loan pricing; panel data model |
| JEL: | C23 C54 G21 G28 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:862 |
| By: | Bernd Hayo; Matthias Neuenkirch; Manuel Walz |
| Abstract: | This paper analyses the extensive and intensive margins of demand for a retail digital euro. We conducted a representative survey in France, Germany and Italy in November–December 2023. We find that 52–62% of respondents are willing to hold a digital euro, depending on the interest rate spread, with a higher share in Italy than in France or Germany. Design features (cash-like vs deposit-like) appear to play only a very limited role. Average demand depends on the hypothetical interest rate spread relative to current accounts and ranges from EUR 700 to EUR 1, 100, implying an aggregate demand of 1.5–2.5% of GDP. Willingness to hold a digital euro is associated with socio-demographic factors, trust in the ECB and the EU, digitalisation and payment behaviour. Negative interest rate spreads relative to current accounts reduce willingness to hold the digital euro more strongly than positive spreads increase it. Behavioural characteristics tend to be correlated with the likelihood of adoption, whereas economic factors, particularly income and interest rates, are mainly related to the level of demand. This distinction becomes more pronounced when conditioning on positive demand, suggesting that socio-demographic factors primarily influence participation decisions rather than quantities demanded. |
| Keywords: | CBDC demand, digital euro, ECB, household survey, monetary policy |
| JEL: | E41 E42 E51 E58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12706 |
| By: | Li, Z. M.; Linton, O. B.; Zhai, Y.; Zhang, H. |
| Abstract: | We propose a new family of liquidity measures—including order imbalance metrics—based on the dispersion and persistence of transitory gaps between transaction prices and the underlying efficient price. We devise an estimation method that renders these latent gaps observable, allowing plug-in estimates of the new measures from intraday trades alone, along with an inference method that allows us to quantify the sampling uncertainty in our estimates. We apply the approach to the S&P 500 equity portfolio, as well as to individual stocks. We use event study methodology to capture heterogeneous liquidity responses to FOMC announcements, which reveals distinct order-persistence patterns on surprise versus non-surprise days, highlighting how markets anticipate and react to monetary policy via the liquidity channel. |
| Keywords: | Market liquidity, FOMC Announcements, Spot Estimation, Monetary Policy Surprises, Order Imbalance, High-Frequency Identification |
| Date: | 2026–01–18 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2639 |
| By: | Ruopu Hu (Graduate School of Economics, Kobe University) |
| Abstract: | We construct and estimate a small open economy DSGE model featuring a regime-switching reserve requirement (RR) ratio rule within a banking sector that has access to foreign assets. The model incorporates key financial characteristics of the Chinese economy and examines the implications of changes in the RR-ratio. Estimation results reveal that the RR-ratio follows a feedback rule with a regime-dependent coefficient on net foreign lending during two distinct phases between 2006 and 2017. The state-contingent rule is temporarily suspended during the Global Financial Crisis, but is reactivated in the post-crisis period amid recovered capital inflows. On the one hand, the RR-ratio has almost negligible real effects on output and inflation; but on the other hand, it proves effective as a macroprudential instrument by mitigating financial instability through a reduced risk of self-fulfilling bank runs by about 25%. |
| Keywords: | Reserve Requirement Ratioï¼› Macroprudential Policyï¼› Financial Stabilityï¼› Capitalï¼› Flow, Regime-switching DSGE |
| JEL: | C11 E58 F41 G18 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2609 |
| By: | Iñaki Aldasoro; Sebastian Doerr; Haonan Zhou |
| Abstract: | We establish a causal link between liquidity regulation and a lower cost of bank wholesale funding. For identification, we use pre-determined variation in banks' liquidity coverage ratio (LCR) in a difference-in-differences setup. Granular instrument-level data allow us to carefully control for any observable and unobservable time-varying factors at the creditor, instrument type, and macroeconomic levels. We find that banks with greater LCR exposure see a steeper decline in their wholesale funding costs. Consistent with seminal theoretical papers on bank liquidity risk, we provide novel evidence that wholesale funding costs decline by more for longer-maturity instruments and that banks shift from short to longer maturity liabilities. Our results support the argument that bank regulation can– at least partly– offset its costs to intermediaries through cheaper wholesale funding. |
| Keywords: | liquidity coverage ratio, liquidity risk, Basel III, money market funds, market discipline |
| JEL: | G21 G23 G28 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1352 |
| By: | Nicola Cetorelli; Shohini Kundu |
| Abstract: | Regulation shapes the boundaries of firms. When prudential standards bind asymmetrically across subsidiaries of an integrated organization, internal capital markets become a mechanism for regulatory arbitrage. We study this in U.S. banking, where holding companies encompass both heavily regulated depository institutions and lightly regulated nonbank affiliates. Following Basel III in 2015, holding companies extract equity from nonbank subsidiaries to recapitalize their banks. Bank subsidiaries accumulate 5-8 percentage points more excess capital than comparable standalone banks through internal transfers; consolidated equity, assets, and lending are unchanged. In response to the same regulatory shock, nonbank affiliates within these organizations exhibit declining capital ratios, deteriorating credit quality, and expansion into consumer lending. The consolidated organization remains exposed to nonbank distress. We calibrate stress scenarios to 2008-scale losses on nonbank assets. If parents were to recapitalize distressed subsidiaries, 4-6 percent of holding companies would exhaust their capital buffers. For the most exposed institutions, the apparent improvement in bank safety is substantially overstated once the implicit liability to nonbank affiliates is accounted for. Organizational structure is a fundamental determinant of regulatory outcomes. |
| Keywords: | banks; nonbanks; bank holding companies (BHCs); regulation; arbitrage; boundary of the firm |
| JEL: | G21 G23 G28 G38 |
| Date: | 2026–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103294 |
| By: | Aykut Sengul; Levent Cinko |
| Abstract: | This paper provides causal estimates of how balance-sheet exposure to floating rate debt transmits monetary tightening into corporate default risk. Leveraging the June 2023 policy shift in Türkiye and a large administrative dataset, we employ a two-part Double Machine Learning framework to disentangle selection from causation, distinguishing between the extensive margin of exposure and the intensive-margin effects. We find that while the average effect is modest, indicating aggregate resilience, treatment effects are markedly heterogeneous and economically significant for a vulnerable subset. Sensitivity is concentrated in firms with weak internal risk ratings, low liquidity, and high exposure shares, whereas exporters and manufacturers are relatively insulated. This relative resilience is consistent with standard transmission mechanisms: exporters and manufacturing firms are more likely to generate foreign-currency revenues and benefit from exchange-rate pass-through, while their working capital cycles and pricing structures allow for partial absorption of higher interest expenses, attenuating the balance-sheet impact of monetary tightening. Moving beyond estimation, we introduce 'explainable heterogeneity' by applying SHAP analysis to causal forest estimates, thereby transparently mapping firm traits to causal sensitivity. |
| Keywords: | Corporate default, Double machine learning, Causal forests, Explainable AI, Treatment effect heterogeneity |
| JEL: | C21 C38 E52 G21 G33 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2610 |
| By: | Mr. Luc Laeven; Mr. Fabian Valencia |
| Abstract: | This paper presents an updated version of the Laeven and Valencia (2013, 2020) database on systemic banking crises, extending the coverage through 2025. The update incorporates new episodes, while maintaining the definition established in previous editions, which emphasizes both significant signs of financial distress and substantial policy interventions. The update integrates textual tools to screen potential candidates that are then further scrutinized to confirm if our definition is met. The database includes information on banking crises episodes during 1970-2025, including starting dates, policy responses, fiscal costs, and output losses. It offers a comprehensive tool for assessing cross-country vulnerabilities and policies to resolve banking crises. |
| Date: | 2026–05–15 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/094 |
| By: | Jaqueson K. Galimberti |
| Abstract: | This paper provides an analysis of the relevance of initial states for the estimation of natural rates of interest. It focuses on U.S. data using an established semi-structural macroeconomic model with time-varying trends. Alternative methods for the specification of initial states are reviewed and evaluated. The results indicate that initial states can significantly impact end-of-sample estimates of the natural rate of interest, with alternative initials leading to estimates about 40 to 130 basis points lower than original estimates. Re-estimating the model with alternative initials also leads to more volatile natural rate estimates. Key dimensions of the initialization issue are discussed, including the uncertainty around initial estimates, the use of diffuse prior initials, and jointly estimated initials. An extension of the original method using an unobserved component model that makes all initial estimates data-dependent is found to provide the most robust model and state estimates relative to varying sample definitions. |
| Keywords: | monetary policy stance, state space models, filtering, uncertainty |
| JEL: | C32 E43 E52 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-38 |