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on Central Banking |
| By: | Reiner Martin (National Bank of Slovakia); Piroska Nagy Mohacsi (London School of Economics and Political Science); Tatiana Evdokimova (Joint Vienna Institute); Jan Klacso (National Bank of Slovakia); Olga Ponomarenko (Caplight) |
| Abstract: | Central bank communication on financial stability has been less studied than on monetary policy. Our paper aims to contribute to the growing literature in this area. Our focus is the region of Central Europe, where financial sectors are intertwined through close cross-border ownership, and about half of the countries are members of the euro area. Using large language models (LLMs) combined with country-specific contextual analysis, we study executive summaries of Financial Stability Reports (FSRs) published since the early 2000s by seven Central, Eastern, and Southeastern European (CESEE) central banks, as well as by Austria and the European Central Bank (ECB). We construct a novel financial stability sentiment index and document that central bank communication is strongly risk-focused, most notably in the case of the ECB. In addition, prior to the Global Financial Crisis, the Austrian central bank was much less concerned than other central banks in the region although Austria plays a pivotal role in the financial system in the region. Our analysis of the link between financial stability sentiment communication and macroprudential policy action highlights that many central banks actively use and communicate about borrower-based measures, while most countries activated non-zero counter-cyclical capital buffers belatedly or not at all. Finally, comparing central banks’ communication on financial stability and monetary policy, we find that euro area national central banks and the ECB’s FSR communicated about the rising risks of post-Covid inflation in a timely manner, ahead of the ECB’s monetary policy communication. |
| JEL: | C55 E58 E61 H12 D83 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1139 |
| By: | Shunsuke Haba (Bank of Japan); Ryuichiro Hirano (Bank of Japan); Yuichiro Ito (Bank of Japan); Sohei Kaihatsu (Bank of Japan) |
| Abstract: | We estimate the policy reaction function of monetary policy as perceived by Japan's market participants, using market survey data. The key findings are as follows. First, consistent with previous research in other economies, the coefficient for inflation rate in the perceived policy reaction function in Japan is almost zero when the nominal interest rate is constrained by the effective lower bound. This coefficient tends to rise during subsequent interest rate hike periods, following changes in central bank policy, suggesting that market participants update their perceptions of monetary policy in response to actual policy changes. Second, although the coefficient for inflation rate generally increases, in the group with long-term inflation expectations deviating downward from the price stability target, it remains low even during recent interest rate hikes, suggesting that this subgroup of market participants may expect an extended period of low interest rates. Third, the market participants who assume a stronger monetary policy response to inflation tend to have more stable long-term inflation expectations around 2%. These results suggest that the perceptions of monetary policy among private agents are state-dependent, and that the macroeconomic stability and the effectiveness of monetary policy may vary over time. |
| Keywords: | Monetary Policy Rule; Survey Forecasts; Policy Reaction Function |
| JEL: | C32 E43 E52 E58 |
| Date: | 2026–03–25 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp26e05 |
| By: | Michał Brzoza-Brzezina; Paweł Galiński; Makarski Krzysztof |
| Abstract: | We check how monetary and fiscal policies (in particular their open-economy dimensions) are affected by expectations being behavioral in the spirit of Gabaix (2020). We first show that the data strongly favor this setting compared with the standard rational expectations (RE) assumption. Then we document several novel findings. First, monetary policy is less powerful and faces a higher sacrifice ratio when agents are behavioral. Second, the Taylor principle is affected: determinacy regions are larger if the economy is more open or the central bank abroad is more hawkish. Third, fiscal policy and its international spillovers are amplified under behavioral expectations (BE). In contrast, the spillovers of monetary policy are dampened. Fourth, BE contribute to solving the puzzle of excess foreign currency returns (UIP puzzle). |
| Keywords: | behavioral agents, monetary and fiscal policy, open-economy model |
| JEL: | E30 E43 E52 E70 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:sgh:kaewps:2025110 |
| By: | Ricardo J. Caballero; Alp Simsek |
| Abstract: | We analyze monetary policy responses to noisy financial conditions in an open economy where exchange rates and domestic asset prices affect aggregate demand. Noise traders operate in both markets, and specialized arbitrageurs have limited risk-bearing capacity. Monetary policy creates cross-market spillovers: by adjusting the interest rate to stabilize one market, the central bank influences volatility in the other. We show that targeting a financial conditions index (FCI)—a weighted average of exchange rates and domestic asset prices—delivers substantial macroeconomic benefits. FCI targeting commits the central bank to respond to unexpected movements in financial conditions beyond what discretionary monetary policy implies. These stronger responses improve diversification across markets: each market becomes more exposed to external shocks but less exposed to its own. This reduces volatility in both markets and activates the recruitment effect from Caballero et al. (2025b) in each market—lower variance induces arbitrageurs to trade against noise, further dampening volatility. Foreign exchange (FX) targeting can also be effective when the exchange rate is the primary source of noise, with benefits that increase as the economy becomes more open. In this case, FX targeting recruits arbitrageurs to stabilize the FX market, reducing volatility and dampening the macroeconomic impact of noise. However, FX targeting also raises volatility in non-targeted markets through anti-recruitment effects, limiting its effectiveness relative to FCI targeting, especially when domestic asset markets also matter for financial conditions and are comparably noisy. |
| JEL: | E32 E40 E44 E52 F30 F41 G12 G15 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34974 |
| By: | Mahmood, Asif et al. |
| Abstract: | This study, drawing on domestic and international literature and new empirical results, finds that monetary policy affects inflation and output in Pakistan, but transmission is slow, incomplete, and uneven across channels due to entrenched structural frictions. The interest rate channel influences short-term market rates, yet pass-through to deposit and lending rates remains weak amid banking concentration, large sovereign portfolios, and distortions from concessional refinance schemes. The exchange rate channel reacts faster, with tighter policy supporting nominal appreciation and easing tradable inflation, but credibility gaps, discretionary interventions, and shallow FX markets reduce predictability. The credit channel tightens private credit, though fiscal dominance, high NPLs, and bank inefficiencies dilute responsiveness. Asset price transmission is largely absent given shallow capital markets and informality. Policy signals can shape inflation expectations, but repeated external shocks and administered energy price changes often dominate the outlook. Importantly, the updated results indicates that post-COVID shocks developments – subsidized credit, commodity price spikes, floods, and exchange rate instability – have exposed the structural weaknesses and raised the premium on reform and fiscal-monetary coordination. |
| Keywords: | Monetary policy, transmission channels, transmission lags, inflation, output, Pakistan |
| JEL: | C54 E31 E50 E52 E58 |
| Date: | 2025–06–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128120 |
| By: | Edward Nelson |
| Abstract: | Central bank independence is a major area of study, but the economic literature has been characterized by numerous misstatements regarding how U.S. monetary policy independence has operated over time. Against this backdrop, this paper lays out major elements of the practice of central bank independence in the United States in the period from 1951 to 2006—a time span that encompasses the William McChesney Martin, Jr., through Alan Greenspan tenures as the head of the Federal Reserve. Many documentary materials and policymaker quotations not considered in previous research on U.S. monetary policy are highlighted. The analysis covers both institutional aspects (statutory objectives, formalities of Federal Reserve structure, and conventions followed in regularizing the central bank’s interactions with the legislative and executive branches) and the conceptual basis for independence, as expressed by leading Federal Reserve officials, particularly Chairs. It is shown—with heavy reliance on their own words—how Federal Reserve Chairs have characterized the position of the central bank within the governmental structure of the United States and how they have set out the case for monetary policy independence. What emerges is that successive Chairs over the decades made essentially the same, three-part, economic case for independence. This case does not rely on the arguments associated with economic research on time inconsistency. |
| Keywords: | Federal Reserve System; Board of Governors of the Federal Reserve System (U.S.); monetary policy rules; central banks |
| JEL: | E52 E58 |
| Date: | 2026–03–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:102903 |
| By: | Budnik, Katarzyna |
| Abstract: | This paper maps the euro-area digital-banking segment and assesses how digital banks transmit monetary policy relative to brick-and-mortar peers. I compile a hand-checked universe of over 170 digital banks (2016–2025) from supervisory data, classifying institutions by business model (e-retail, e-service, e-wholesale). Digital banks are small on average yet growing fast, rely more on household deposits—predominantly overnight—and hold larger cash buffers and intangibles than traditional banks. Using a difference-in-differences design around the ECB tightening cycle that began in July 2022 and the initial 2024 easing. Three results stand out. (i) The funding channel is stronger and faster at digital banks in tightening: household deposit rates rise more and retail-funding spreads compress less, especially at overnight maturities and for stand-alone digital banks. Corporate-funding results are directionally similar but weaker and less robust. (ii) Loan-rate pass-through is not stronger, implying margin compression and a later slowdown in lending growth at digital banks despite continued retail inflows. Household deposits are markedly more rate-sensitive than corporate or unsecured funding. (iii) In early easing, digital banks cut new funding rates relatively quickly —particularly at longer maturities — yet effective deposit premia persist and retail inflows soften while margins begin to normalise. Policy implications concern the interaction of market digital adoption and banks’ capacity to adjust balance-sheet duration through the monetary cycle, along with financial stability. JEL Classification: E52, G21, E51, E43, E58, O3 |
| Keywords: | deposit competition, deposit rate pass-through, digital banks, ECB tightening cycle, household deposits, monetary policy transmission, neobanks, overnight deposits, retail funding |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263206 |
| By: | Giannetti, Mariassunta; Jasova, Martina; Mendicino, Caterina; Supera, Dominik |
| Abstract: | We show that losses on banks’ securities portfolios matter for the transmission mechanism of monetary policy even in the absence of financial stability concerns. When banks experience losses in their pledgeable securities, their ability to tap liquidity through the interbank market is impaired, and they subsequently reduce illiquid corporate lending, regardless of whether the securities were recorded at market or historical value. These effects are less pronounced for banks with abundant collateral and reserves and for banks that receive liquidity through their group’s internal capital market. Our results highlight a collateral channel in the bank-based transmission of monetary policy. JEL Classification: G21, E43, E52, E58 |
| Keywords: | banking groups, foreign banks, interbank market, monetary policy tightening, securities losses |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263209 |
| By: | Calvo, Guillermo A.; Velasco, Andres |
| Abstract: | We study the effects of monetary and fiscal policies when both money and government bonds provide liquidity services. Because money is the unit of account, the price of money is the inverse of the price level. If prices are sticky, so is the price of money in terms of goods, and this is one important reason why money is liquid and attractive. By contrast, the price of government bonds is free to jump and often does, especially in response to news about changes in fiscal policy and the supply of bonds. Those movements in government bond prices affect available liquidity, and therefore aggregate demand, inflation, and output. Under these conditions, bond-financed fiscal expansions can be contractionary, causing deflation and a temporary recession. To avoid those effects, changes in bond supply must be matched by changes in money supply and in the interest rate on money. We conclude that in a liquidity-dependent world, fiscal and monetary policies are joined at the hip. |
| Keywords: | obnd markets; fiscal policy; liquidity; monetary policy |
| JEL: | B22 E42 E44 E51 E52 E58 E61 |
| Date: | 2026–02–24 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137613 |
| By: | Marcin Kolasa; Sahil Ravgotra; Pawel Zabczyk |
| Abstract: | We analyze the implications of adding boundedly rational agents a la Gabaix (2020) to the canonical New Keynesian open economy model. We show that accounting for myopia mitigates several ``puzzling" aspects of the relationship between exchange rates and interest rates and helps explain why some of them only arise in the nested case of rational expectations. Bayesian estimation of the model demonstrates that a high degree of ``cognitive discounting" significantly improves empirical fit. We also show that this form of bounded rationality makes positive international monetary spillovers more likely and exacerbates the unit root problem in small open economy models with incomplete markets. On the normative side, the model with behavioral agents provides arguments against using the exchange rate as a nominal anchor. |
| Keywords: | Monetary Policy, Exchange Rates, UIP Condition, Bounded Rationality |
| JEL: | F41 E70 E52 E58 G40 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:sgh:kaewps:2025111 |
| By: | Di Casola, Paola; Grothe, Magdalena |
| Abstract: | This paper quantifies the role of housing wealth in the transmission of monetary policy to consumption in 20 advanced economies. Using Bayesian VAR models we identify structural shocks with a novel combination of sign and maximum forecast error variance restrictions, isolating the housing wealth channel through counterfactual impulse responses. We find that the housing wealth multiplier — the sensitivity of consumption to exogenous house price changes — is strongly correlated with outright homeownership rates and is higher for durable consumption. Cross-country differences in the monetary policy transmission to consumption are largely driven by the cash-flow channel. JEL Classification: E21, E52, E44, R31, C32 |
| Keywords: | cash-flow channel, consumption, local projections, structural BVAR |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263204 |
| By: | Sugata Marjit; Suryaprakash Mishra; Sanghita Mandal; Mayukh Basu |
| Abstract: | Inequality of wealth or liquid finance in a system with credit market imperfection adversely affects investment by poor investors. This is well known in the literature. In this paper we prove that the aggregate credit demand function would be relatively inelastic with unequal wealth distribution as the average borrowing cost would be greater for people with lower endowment of self-owned capital. Hence, the supply side impact of monetary policy would have different impact on the rate of interest in markets with different degrees of inequality as measured by the elasticity of credit demand. Volatility of interest rate would be higher with greater inequality. For similar types of monetary policy, attaining policy targets would be relatively difficult in such markets. |
| Keywords: | inequality, monetary policy, capital flows, credit market |
| JEL: | D63 E43 E51 E52 F21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12556 |
| By: | Jonathan Benchimol; Sathya Mellina |
| Abstract: | We study how inflation-related language in Federal Reserve communication reprices market-based inflation compensation along the term structure. Using a domain-adapted transformer, we extract stance and inflation-narrative indices from post-meeting statements and Chair press conferences and embed them in a two-layer event study that conditions on target-rate surprises. We trace responses in breakeven inflation (BEI) yields and forwards from two to ten years and complement daily estimates with intraday BEI changes in narrow announcement windows. Four findings emerge. First, statement inflation language lowers BEI compensation across maturities, consistent with markets interpreting the committee-vetted document through the policy reaction function; this pattern is driven most strongly by the Delphic inflation index and is robust to alternative identification. Second, press conferences display the opposite pattern: inflation narratives are associated with positive repricing of long-horizon BEI forwards, consistent with the Chair conveying incremental information about medium-run inflation risks beyond the statement. Third, within press conferences, Delphic language maps into long-horizon forward repricing, while Odyssean language compresses belly-of-curve forwards, consistent with stabilization-window mechanisms. Fourth, intraday evidence shows a sign reversal: communication indices raise BEI compensation during the press conference, whereas the statement window drives the negative daily effect, clarifying how the two communication objects combine to produce net announcement-day repricing. Overall, inflation compensation is not monolithic: its repricing depends on communication format, narrative content, intraday timing, and maturity. |
| Keywords: | central bank communication, inflation compensation, high-frequency identification, event-study methods, Delphic and Odyssean forward guidance, natural language processing |
| JEL: | C45 E43 E52 E58 G12 G14 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-21 |
| By: | Zhang, Yuliang |
| Abstract: | I introduce an index that formulates the vulnerability of the banking sector from a systemic risk perspective. It is expressed in terms of the size-weighted leverage and the illiquidity-weighted Herfindahl–Hirschman Index. The empirical implementation is demonstrated using balance sheet data from U.S. bank holding companies during 2001–2024 and national banks during the Great Depression. The index can be used to monitor financial instability, activate macroprudential capital buffers, and analyse historical banking crises. |
| Keywords: | measurement; financial vulnerability; macroprudential policy; banking crises |
| JEL: | F3 G3 |
| Date: | 2026–03–10 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137224 |
| By: | Ruthira Naraidoo |
| Abstract: | Commodity-exporting economies, such as South Africa, are susceptible to wide fluctuations in their business cycles, closely tied to commodity price fluctuations. In this research, we develop a prototype dynamic stochastic general equilibrium (DSGE) model with specific features for emerging small open commodity-exporting economies, together with investigating the implications for monetary and fiscal policies following a commodity price shock. |
| Keywords: | Emerging markets, Commodity shocks, Monetary and fiscal policy |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2026-24 |
| By: | Furukawa, Yoko |
| Abstract: | I construct a model that examines the behavior of the inflation rate considering multiple functions of money. The model demonstrates that Taylor Rules are effective when the inflation rate moves to the same direction with regard to money as a medium of exchange and a storage of value. Under deflation, these two functions of money diverge oppositely and that leads to a liquidity trap which the economy struggles to escape. |
| Keywords: | inflation rate, disequilibrium, money. |
| JEL: | E31 E43 E50 |
| Date: | 2026–01–27 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127878 |
| By: | Pawel Janas |
| Abstract: | This paper studies the long-run labor market consequences of lender-of-last-resort (LLR) intervention during the Great Depression. I exploit a natural experiment created by the Federal Reserve district border separating counties under the jurisdiction of the Atlanta and St. Louis Federal Reserve Banks. During the banking panic of 1930, the Atlanta Fed aggressively extended liquidity to distressed banks, while the St. Louis Fed largely refrained from intervention. Using newly digitized county-level manufacturing data and linked individual-level census records from 1930 and 1940, I examine how exposure to this liquidity support affected local economic activity and worker outcomes. Counties within the Atlanta district experienced fewer bank failures and stronger manufacturing performance in the early 1930s. These differences translated into persistent labor market effects: individuals in treated counties were more likely to remain in manufacturing employment and less likely to migrate across state lines by 1940. The results suggest that financial stabilization policies can shape the long-run allocation of labor across regions and sectors. |
| JEL: | E58 G01 N22 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34988 |