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on Central Banking |
| By: | de Souza, Tomás Carrera; Oosterhek, Koen; Weber, Soizic |
| Abstract: | The Eurosystem implements its monetary policy through a set of monetary policy instruments (MPIs). This report reviews the main changes in the use of MPIs and the associated developments in the Eurosystem’s monetary policy implementation framework over 2024-25. Inflation returned to the ECB’s medium-term target of 2%, supported by the smooth transmission of monetary policy. After completing the hiking cycle of 2022 and 2023, the ECB began reducing its key interest rates in June 2024. This easing phase occurred alongside further balance sheet normalisation. Holdings in the monetary policy bond portfolios continued to run-off, and funds lent under the third series of targeted longer-term refinancing operations (TLTRO III) were fully repaid by December 2024. In March 2024, the ECB announced several changes to its operational framework for implementing monetary policy following a review process. Finally, the collateral framework remained broad, while temporary crisis-related measures were phased out and climate-related considerations were further integrated. JEL Classification: D02, E43, E58, E65, G01 |
| Keywords: | asset purchase programmes, central bank collateral framework, central bank counterparty framework, central bank liquidity management, climate, monetary policy implementation, non-standard monetary policy measures, refinancing operations |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026398 |
| By: | Kira Kang; Rodrigo Sekkel; Temel Taskin; Jing Yang |
| Abstract: | This note decomposes Canadian inflation into supply- and demand-driven components using detailed personal consumption expenditure data. We find that both supply and demand forces contributed to the post-pandemic rise in inflation, with supply-side pressures accounting for the larger share. Demand-driven inflation is more cyclical and declines during economic downturns. We then use the decomposition in two policy applications. First, contractionary monetary policy shocks lower demand-driven inflation but have little effect on supply-driven inflation. Second, estimates of a targeted Taylor rule indicate that the Bank of Canada responds more strongly to demand-driven inflation than to supply-driven inflation. The results highlight the importance of distinguishing between the sources of inflation when evaluating inflationary pressures and monetary policy. |
| Keywords: | Models and tools; Econometric, statistical and computational methods; Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission |
| JEL: | E31 E52 E58 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-33 |
| By: | Naveed Javed; Nicolas Groshenny |
| Abstract: | We estimate SVAR models for six advanced small open economies to evaluate the extent of deviations from uncovered interest parity following SOE and US monetary policy shocks. Since UIP implies that currency movements are driven by the expected path of the spread between the domestic and foreign short-term interest rates, our econometric strategy disciplines the dynamic response of the SOE-US policy rate differential to monetary disturbances. Specifically, our approach jointly identifies the systematic component of SOE and US monetary policy by combining block exogeneity and sign restrictions on policy parameters. We find that UIP broadly holds conditional on SOE and US monetary policy shocks irrespective of the observed exchange rate overshooting patterns. |
| Keywords: | uncovered interest rate parity, monetary policy shocks, systematic component of monetary policy, forward discount puzzle, vector autoregressions, small open economies, block exogeneity |
| JEL: | C32 E52 F31 F41 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-68 |
| By: | Sofia Priazhkina |
| Abstract: | This policy note examines how a non-interest-bearing retail central bank digital currency (CBDC) could affect the financial stability of Canada’s systemically important banks during a severe recession. Stress test results show that the banks remain resilient, maintaining key regulatory ratios even under high CBDC demand. To manage funding outflows, banks scale back balance sheet growth and replace some lost deposits with alternative funding. Profitability stays strong overall, though short-term volatility may occur. To reduce potential risks, the note recommends a gradual CBDC rollout with holding limits, well-timed capital buffer adjustments, liquidity regulation updates, early communication of regulatory changes, and coordination with central bank balance sheet policies. |
| Keywords: | Financial system; Financial stability and systemic risk; Models and tools; Economic models; Money and payments; Digital assets and fintech; Structural challenges; Digitalization and productivity |
| JEL: | E44 E58 E61 G01 G21 G28 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-30 |
| By: | Edward Booth; Edouard Djeutem; Oleksiy Kryvtsov; Fanny McKellips; Yang Zhang |
| Abstract: | Relative to the pre-pandemic period, supply shocks in the Bank of Canada’s Terms-of-Trade Economic Model (ToTEM) have been moderately larger since 2022, and markedly larger if the 2020–21 pandemic is included. ToTEM simulations show that moderately larger supply shocks increase inflation volatility without materially worsening the medium-term inflation outlook or significantly increasing recession risks. When supply shocks are especially large, however, episodes of core inflation outside of the 1–3% control range become both more frequent and more persistent, and recession risks rise sharply. In these environments, monetary policy faces more challenging trade-offs as stabilizing inflation increasingly entails costs to real activity, and even more aggressive policy rules cannot replicate inflation outcomes in more stable periods. Amplification of inflationary risks—due to de-anchoring inflation expectations or high cost pass-through—worsens these trade-offs and reduces the scope to look through inflationary shocks. When such amplification is present, a much tighter policy response than the one embedded in the historical rule is warranted to manage more frequent high-inflation states and ensure price stability. |
| Keywords: | Models and tools; Economic models; Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission |
| JEL: | E31 E32 E52 E58 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-27 |
| By: | Leonard, Clara; Braun, Ben; Klooster, Jens van 't; Monnet, Eric |
| Abstract: | The Hormuz shock of February 2026 confronts the European Central Bank (ECB) with a familiar dilemma: inaction can risk entrenching inflation, while tightening risks deepening the slowdown and penalising renewable energy and cleantech investment. We argue that the ECB should be cautious and, if tightening proves necessary, ensure its operations shield renewable energy and cleantech sectors. Our analysis also reveals a growing gap between the ECB's communication on fossil fuel risks and its policy framework. |
| JEL: | F3 G3 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:140409 |
| By: | Carlos Giraldo (Fondo Latinoamericano de Reservas - FLAR); Iader Giraldo-Salazar (Fondo Latinoamericano de Reservas - FLAR); Jose E. Gomez-Gonzalez (Department of Finance, Information Systems, and Economics, City University of New York – Lehman College); Jorge M Uribe (Universitat Oberta de Catalunya) |
| Abstract: | Deposits are the primary source of funding for commercial banks, but their role in the transmission of monetary policy remains relatively understudied, particularly in emerging and developing economies. This paper examines whether monetary policy affects both the growth of bank deposits and the spread between policy rates and deposit remuneration. Using a panel of more than 1, 600 banks across 52 countries between 1996 and 2021, we find that higher policy rates are associated with slower deposit growth and wider deposit spreads. These relationships remain robust after accounting for macroeconomic conditions, bank-specific characteristics, and the banking-sector structure. These results are consistent with the view that banks do not fully pass policy rate increases through to depositors, allowing funding spreads to widen during periods of monetary tightening. By providing broad cross-country evidence from emerging economies, this paper highlights the importance of deposit markets for monetary transmission and suggests that the liability side of bank balance sheets deserves greater attention in both research and policy discussions. |
| Keywords: | Monetary Policy Transmission; Deposit Channel; Bank Deposits; Emerging Markets |
| JEL: | E52 G21 E44 |
| Date: | 2026–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:023352 |
| By: | Spanò, Guido; Figueres, Juan Manuel |
| Abstract: | This paper investigates the interest rate pass-through of monetary policy in the euro area by focusing on the role of banks’ funding structures. We estimate the interest rate pass-through for loans to non-financial corporations using bank-level balance sheet data. In doing so, we interact the response of lending rates with characteristics of the funding structure, and show that banks that rely more on bond issuance than on the money market tend to be less responsive to policy changes. Finally, we test the presence of the asset-liability-management channel, and find that banks combining longer-term liabilities (higher bond shares) with longer rate fixation periods for loans (higher share of loans with fixed rates) exhibit the most muted lending rate response to policy shocks. JEL Classification: C23, E44, E52, G21 |
| Keywords: | bank lending channel, banks’ funding structures, monetary policy pass-through |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263274 |
| By: | Matteo Cacciatore; Daniela Hauser; Yuko Imura |
| Abstract: | The global economy is entering a period of greater volatility and structural change, with rising geopolitical fragmentation and a partial reversal of decades-long globalization trends. This note examines the implications of deglobalization and trade fragmentation for the Bank of Canada's flexible inflation-targeting framework, focusing on the inflation–output trade-off faced by a small open economy. Using a two-country, multi-sector general equilibrium model calibrated to Canada and the United States, we trace how trade-cost shocks propagate through production networks and assess the monetary policy trade-offs they generate. A bilateral 10 percentage-point increase in trade costs produces a non-trivial trade-off: fully stabilizing CPI inflation over a two-year horizon requires accepting a 0.16% reduction in output relative to potential, while fully closing the output gap implies tolerating a 0.32 percentage-point increase in inflation. The severity of the trade-off depends on shock size and persistence, on whether tariffs target final or intermediate goods, and on the inflation measure the central bank stabilizes. For trade-cost shocks of magnitudes comparable to recent policy measures, the existing framework retains sufficient flexibility to return inflation to target within the standard horizon. Larger or more persistent shocks, however, would make "look-through" policies costlier and raise the risk of expectation de-anchoring. |
| Keywords: | Monetary policy; Monetary policy framework and transmission; Monetary policy tools and implementation; Structural challenges; International trade, finance and competitiveness |
| JEL: | D57 E52 E58 F13 F41 F62 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-24 |
| By: | Edoardo Briganti; Wei Dong; Olena Kostyshyna; Soyoung Lee; Florent Samson; Rodrigo Sekkel |
| Abstract: | This paper assesses the resilience of flexible inflation targeting in the presence of large and persistent supply shocks. Evidence from Canada’s post pandemic experience, new macroeconomic experiments, and policy changes at the Reserve Bank of New Zealand shows that flexible inflation targeting remains a robust framework provided that credibility is preserved. Timely policy action and clear communication are critical for anchoring inflation expectations and sustaining policy flexibility. |
| Keywords: | Monetary policy; Monetary policy framework and transmission |
| JEL: | E52 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-23 |
| By: | Bodnár, Katalin; Fagandini, Bruno; Healy, Peter; Höynck, Christian; Rousseau, Flavie |
| Abstract: | The ECB’s inflation target is formulated in terms of headline inflation. However, domestically determined inflation features prominently in the monetary policy transmission mechanism and in gauging underlying inflation, making it important to assess it regularly. The ECB monitors various proxies for domestically determined inflation, including: (i) “domestic inflation”, which aggregates inflation items with a low import share; and (ii) “Supercore” inflation, which aggregates inflation items found to be sensitive to the aggregate business cycle. This paper provides a detailed overview of the methodologies used to derive both these indicators and updates the relevant input data. It suggests refinements to the methodologies that would also make these measures more robust in future updates. In addition, it explains the changes in these indicators due to the introduction of a new classification of consumer goods and services (European Classification of Individual Consumption according to Purpose (ECOICOP) version 2) for the compilation of the Harmonised Index of Consumer Prices (HICP). First, on domestic inflation, the paper explains the new underlying data on the import share of inflation items made available since the publication of its methodology, and provides an update, combined with a few methodological changes (for example, moving to a constant composition of the included items). Second, with regard to Supercore inflation, the paper explains the challenges of identifying a cyclical inflation indicator for the euro area, especially in the light of the recent large shocks, and explores modelling approaches. It proposes some refinements to the previous methodology, while keeping a Phillips curve approach as a focal point in the analysis. For both indicators, the paper presents the updated indicators and some key properties. JEL Classification: E31, E32, E52 |
| Keywords: | business cycle, domestic inflation, monetary policy, Phillips curves, Supercore, underlying inflation |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbsps:202654 |
| By: | Harshbir Kaur; Rishi Vala |
| Abstract: | Amid heightened Canada–US trade tensions in 2025, financial markets showed signs that investors had greater difficulty anticipating near-term Bank of Canada interest rate decisions. This uncertainty could have stemmed from two sources: uncertainty about the economic outlook or uncertainty about how the Bank of Canada would respond to that outlook. In assessing these sources, changes in the 2-year Government of Canada bond yield around the Bank of Canada's decisions remained in line with historical norms, suggesting that investors broadly understood the Bank of Canada's monetary policy response by the time decisions were announced. At the same time, the 2-year yield remained highly sensitive to incoming inflation and labour market data, indicating that these data releases continued to resolve uncertainty about the outlook. Taken together, the evidence suggests that the heightened uncertainty around Bank of Canada's interest rate decisions in 2025 was more consistent with an uncertain economic outlook than with an uncertain monetary policy response. |
| Keywords: | Financial markets and funds management; Market functioning; Models and tools; Econometric, statistical and computational methods; Monetary policy; Monetary policy framework and transmission |
| JEL: | C58 D53 E44 E52 E58 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-25 |
| By: | Ryan Niladri Banerjee; Fiorella De Fiore; Marco Jacopo Lombardi; Giovanni Lombardo |
| Abstract: | The recent energy shock ranks among the most significant since the 1990s.Structural factors and initial conditions influence how energy shocks propagate into inflation – directly and through second-round effects. The appropriate monetary policy reaction depends on the persistence of the inflationary pressures as well as the magnitude of the growth impact, and it differs across economies. Uncertainty about these effects further complicates the policy challenge. |
| Date: | 2026–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:131 |
| By: | Kaetlynd McRae; Jessie Ziqing Chen |
| Abstract: | The Standing Liquidity Facility (SLF) is one of the Bank of Canada’s least discussed tools—and one of its most important. Embedded directly in Canada’s high value payment system, Lynx, the SLF operates quietly in the background every business day, ensuring the smooth settlement of payments and reinforcing the implementation of monetary policy. This Staff Discussion Paper demystifies the SLF by answering the questions that are most often overlooked: how intraday and overnight advances work, what their use does (and does not) signal about liquidity conditions, how collateral eligibility and haircuts are determined, and how the facility supports both monetary policy implementation and financial system resilience. By shedding light on this “business as usual” facility, the paper shows why the SLF is the cornerstone of Canada’s liquidity framework—addressing everything you wanted to know about the SLF (and a few things you may have been afraid to ask). |
| Keywords: | Financial markets and funds management; Market functioning; Financial system; Financial institutions and intermediation; Monetary policy; Monetary policy tools and implementation; Money and payments; Payment and financial market infrastructures |
| JEL: | E41 E42 E44 E58 E59 G21 G28 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-26 |
| By: | Jackson, Andrew; Svartzman, Romain; Barmes, David; Pereira da Silva, Luiz Awazu |
| Abstract: | Climate change and volatile fossil fuel prices increasingly drive macroeconomic and price instability. A successful green transition is a precondition for price stability in the long term but could generate inflationary pressures over shorter time horizons. A restrictive monetary response to such pressures would disproportionately affect the capital-intensive green investment needed for a transition. To maintain price stability without compromising the green transition, we propose adaptive inflation targeting, adjustments to monetary operations, and an institutional architecture for systematic monetary–fiscal coordination. |
| JEL: | F3 G3 R14 J01 N0 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:140416 |
| By: | Thomas M. Mertens; Pascal Paul; Andrés Schneider |
| Abstract: | Using historical data on U.S. commercial bank balance sheets, we show that banks’ maturity mismatch has more than tripled since the mid-1980s, moving in close lockstep with declining interest rates and term premia. We rationalize these trends in a model of bank portfolio choice in which banks must cover operating costs out of current earnings. When term premia or short-term rates decline, banks extend the duration of their assets to remain profitable. This “reaching for duration” effect is convex in the degree of term premium compression. The resulting maturity mismatch renders banks increasingly vulnerable to self-fulfilling runs by uninsured depositors. Consistent with the model, less profitable banks subsequently raise their asset maturities, particularly in periods of low term premia and large Federal Reserve asset holdings. Quantitative easing, designed to remove duration risk from the private sector, may thus paradoxically concentrate it on bank balance sheets and undermine financial stability. |
| Keywords: | maturity mismatch; term premium; quantitative easing; financial stability; bank runs; deposit franchise |
| JEL: | E43 E52 E58 G1 G11 G21 |
| Date: | 2026–08–10 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103631 |
| By: | Eduardo Amaral; Rafael Guerra; Alejandrina Salcedo; Pablo Tomasini; Christian Upper |
| Abstract: | Public debt has reached multi-decade highs in the Americas. Additionally, public interest costs have generally increased over the past decade. High public debt and interest costs increase the sensitivity of risk premia to fiscal deficits – regardless of the exchange rate regime – and amplify the sensitivity of short-term inflation expectations to fluctuations in risk premia.Our analysis underscores the relevance of disciplined fiscal policies, which assume heightened significance in the context of current debt dynamics. On the monetary side, safeguarding central bank independence is crucial for ensuring macroeconomic stability. |
| Date: | 2026–08–19 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:133 |
| By: | Michael Cai |
| Abstract: | Benchmark macroeconomic models require additional frictions to explain the sluggish response of aggregate variables to sudden shocks or changes in policy. I show that standard heterogeneous agent (HA) models, the Blanchard (1985) perpetual youth and Bewley (1986) incomplete markets models, are consistent with aggregate consumption inertia without the use of habit preferences or any specific model of expectation underreaction to dampen the responsiveness of consumption savings decisions. I instead replicate observed consumption inertia in standard HA models by directly substituting survey expectations of income and interest rates for agents' expectations. I propose a new theory of macroeconomic inertia that rationalizes the observed extrapolation bias in survey expectations by embedding an unobserved components model of expectations into a tractable HA general equilibrium environment. Inertia results when expectations imperfectly account for the equilibrium amplification of shocks, which is large in HA economies. This imperfect inference causes expectations to gradually unanchor as agents repeatedly misattribute large responses of equilibrium outcomes simply to larger shocks. This theory also illustrates a novel drawback to inertial monetary policy rules and the delayed financing of fiscal deficits: Policy regimes that act more gradually experience longer transmission lags due to their decreased effectiveness at anchoring expectations. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.27548 |
| By: | Lukasz Adamski; Robert Slepaczuk |
| Abstract: | Our primary goal is to forecast and empirically examine the evolution of the implied volatility (IV) surface, with particular focus on the dates of scheduled meetings of the Federal Open Market Committee (FOMC). Firstly, we check if IV increases before the announcement and if thes effect is stronger for short-dated, out-the-money (OTM) options in high volatility regimes. In the second part, we turn the focus to verifying if the ML framework can beat the benchmark random walk in forecasting this effect. A feature related to dates of scheduled FOMC meetings augments the model, which allows us to discover if it can learn the effect of elevated pre-announcement uncertainty. Our contribution relies mainly on the quantitative prediction of the pre-announcement effect and the inclusion of exogenous information inside the ML framework used for the IV surface forecasting. It is also on of the first attempts to apply ML models directly on the IV surface without relying on dimensionality reduction. To achieve this, we employ a convolutional two-dimensional LSTM model, which is capable of learning spatio-temporal signals in the surface. Our analysis reveals that the edge of the ML framework can be limited due to the noisy characteristics of the IV surface. Nevertheless, our study reinforces the perspective that ML models can effectively forecast the IV surface also during abnormal days. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.10693 |
| By: | DeLay, Nathan; Brewer, Brady; Cowley, Cortney; Kreitman, Ty; Scott, Francisco |
| Abstract: | This study examines the role of interest rates and monetary policy in shaping short-run supply dynamics in the U.S. fed cattle sector. Using quarterly data on agricultural loan rates, feedlot inventories, cattle placements, and marketings across major cattle-producing states, we estimate the relationship between financing costs and cattle inventories. Initial fixed-effects results indicate that higher agricultural interest rates are associated with significantly lower cattle placements, with a one percentage-point increase in loan rates reducing placements by approximately 2.5–2.9%. Evidence on cattle-on-feed inventories and marketings is weaker but suggests dynamic responses over time. Because observed loan rates may be endogenous to local market conditions, we outline an instrumental variables approach that uses exogenous monetary policy surprises used elsewhere in the monetary economics literature. This paper highlights the importance of financing costs as a determinant of cattle supply. |
| Keywords: | Agricultural Finance, Farm Management |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea26:404349 |
| By: | Gabriel Bruneau; Sascha Clazie-Thomson; Thibaut Duprey; Ruben Hipp; Javier Ojea Ferreiro; Kerem Tuzcuoglu |
| Abstract: | This paper reviews recent efforts to monitor and assess systemic risk in the Canadian financial system and outlines a framework for future system-wide stress testing. We examine how perceived and actual interconnections—across banks and non-bank financial institutions, domestic and foreign entities, and institutions of different sizes—shape the propagation of financial stress. We then review advances in system-wide stress-testing approaches, including agent-based and equilibrium-based models that capture downside amplification mechanisms and macro-financial feedback. Finally, the paper presents a blueprint for a Canadian system-wide stress-testing and reverse stress-testing toolkit designed to support the assessment of financial system resilience. |
| Keywords: | Financial system; Financial stability and systemic risk |
| JEL: | G01 G17 G18 G21 G23 G28 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-28 |
| By: | Nader Karimi; Davood Ahmadian |
| Abstract: | We develop a continuous-time structural dynamic model to determine the exact insolvency regions of banks arising from the non-linear interaction between liquidity and credit risk. While existing literature predominantly treats these risks in isolation or via reduced-form specifications, we explicitly model the feedback loop where funding shocks and regulatory constraints force balance-sheet adjustments that can lead to endogenous insolvency. By incorporating Basel III regulatory requirements (LCR and NSFR) into a stochastic optimal control framework, we solve for the exact insolvency boundary using the Hamilton-Jacobi-Bellman (HJB) equation. To bridge the gap between theoretical complexity and supervisory practice, we derive and validate a surrogate analytical approximation function that allows for real-time monitoring. Calibrated using granular balance-sheet data from the Iranian banking sector, our model reveals significant non-linear threshold effects: the joint occurrence of liquidity stress and credit portfolio defaults disproportionately accelerates the transition toward insolvency compared to their individual effects. The proposed surrogate function offers supervisors a computationally efficient tool for stress testing and early warning systems. Our findings provide novel insights into financial frictions in emerging markets and offer a rigorous framework for integrated risk management. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.17381 |