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on Central Banking |
| By: | Luis I. Jácome; Nicolás E. Magud; Samuel Pienknagura; Martín Uribe |
| Abstract: | We explore the historical link between populist regimes, fiscal monetization, and inflation, and how these links affect monetary policy in the 21st century. Using data for a large set of advanced economies and emerging markets since 1960, we show that, historically, left-leaning populist regimes are linked to increases in central bank lending to the central government, a gauge of deficit monetization. In turn, central bank lending is associated with marked increases in inflation. We show that past exposure to populism that relied on deficit monetization affects the conduct of monetary policy today. Countries with a history of deficit monetization and left-wing populist regimes systematically respond more strongly to deviations of inflation expectations from target. This effect persists even after controlling for the direct effect of past inflation on monetary policy rules. In the context of the literature of experienced learning, this novel finding sheds light on the persistence of past populist policies—central banks operating under the shadow of past populist regimes that relied on inflation-prone deficit monetization continue today needing to send stronger signals of their independence and commitment to price stability to effectively anchor inflation expectations. |
| JEL: | E43 E52 E58 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35758 |
| By: | Zeno Enders; Sophia Oberbrinkmann |
| Abstract: | Many central banks, such as the ECB, explicitly tie monetary policy decisions to medium-term inflation forecasts. Standard New Keynesian models, however, typically abstract from this feature. This paper studies equilibrium determinacy in a New Keynesian model in which monetary policy targets inflation at a forecast horizon larger than one. When policy reacts to sufficiently distant inflation expectations, it may fail to pin down a unique equilibrium. In fact, stronger reactions to expected inflation can make indeterminacy more likely. Whether monetary policy can achieve determinacy at a given forecast horizon depends not only on satisfying the Taylor principle, which provides a lower bound on the inflation coefficient, but also on an upper bound. This upper bound becomes more restrictive as the forecast horizon increases, until determinacy becomes impossible, and depends critically on the slope of the New Keynesian Phillips curve. A sufficiently flat Phillips curve preserves a non-empty determinacy region even at longer forecast horizons. Introducing fiscal policy can restore determinacy across all forecast-horizon targets by ensuring a unique stationary equilibrium. However, this holds only if fiscal policy does not actively stabilize government debt, which implies that inflation forecast targeting at medium horizons puts monetary policy in a passive position and invites fiscal dominance. |
| Keywords: | inflation forecast targeting, fiscal policy, monetary–fiscal interaction, determinacy, New Keynesian models, forward-looking Taylor rules |
| JEL: | E52 E58 E63 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12991 |
| By: | Guillaume Bazot (Aix Marseille Univ, CNRS, AMSE, Marseille, France); Eric Monnet (Paris School of Economics); Matthias Morys (University of York [York, UK]) |
| Abstract: | The origins of modern financial globalization are often traced to the emergence of the Eurodollar market in the 1960s, but its implications for monetary policy under Bretton Woods remain unclear. This paper revisits international monetary transmission between 1948 and 1971 using a new monthly series of exogenous U.S. monetary policy shocks based on unanticipated daily changes in the Fed discount rate. We show that U.S. monetary tightening strongly affected U.S. inflation, output, and unemployment, while attracting capital inflows primarily through borrowing Eurodollars from the foreign branches of U.S. banks. After the restoration of current account convertibility in 1958, U.S. monetary shocks also increased Eurodollar and foreign interest rates, pointing to growing international financial integration. However, they had no significant effects on foreign output or credit, suggesting that domestic financial regulation and market segmentation continued to insulate Japanese and European economies from international shocks despite the expansion of offshore dollar markets. |
| Keywords: | US monetary policy shocks; International monetary transmission; Trilemma; Financial globalization; Capital controls; Eurodollar market; Bretton Woods system |
| JEL: | E44 E52 F33 F36 F42 N10 N20 |
| Date: | 2026–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2625 |
| By: | Ehud Shapiro |
| Abstract: | A Central Bank Digital Currency (CBDC) is central-bank money in digital form, held by the public. Leading designs have two limitations: conversion from bank deposits into CBDC can accelerate deposit flight, requiring safeguards; the CBDC stays outside credit creation and monetary-policy operations. Here we present a CBDC architecture that overcomes these limitations, based on grassroots currencies. It has three components: (1) Money: sovereign grassroots coins, which are digital debts of one unit of fiat currency issued by the central bank, constituting a direct CBDC; (2) Credit and Liquidity: non-sovereign grassroots coins, which are digital debts of one unit of the same fiat currency, redeemable at par, that can be issued by any person, natural or legal - adding credit; and (3) Interest: grassroots bonds, sovereign and non-sovereign - adding maturity, and with it interest, standard banking instruments, and the central bank's instruments of monetary policy. The central bank can therefore lend, absorb liquidity, set its rates and buy and sell securities in the coins and bonds the public holds, choosing the counterparties and terms of its credit operations, and without converting bank deposits into newly issued central bank money on demand. We prove that one unit of the fiat currency is the only arbitrage-free price of a grassroots coin whose issuer meets presentations, and argue that the central bank's lending rate and the rate on its own bonds bound what its counterparties pay and accept on comparable terms; the central bank can choose to deal with any counterparty, not just banks. |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.27727 |
| By: | Martin Feldkircher (Oesterreichische Nationalbank, Foreign Research Division); Márton Kardos (School of Culture and Society - Center for Humanities Computing); Kristoffer Laigaard Nielbo (School of Culture and Society – Center for Humanities Computing) |
| Abstract: | Central bank press conferences are not merely information releases — they are structured narratives. We study whether the shape of sentiment within a statement, not just its average tone, carries policy-relevant signals. Constructing sentiment arcs for ECB press conferences along three dimensions — monetary policy stance, economic outlook, and uncertainty — we assess their predictive content for policy rate changes and inflation expectations. Our findings show that arc shape robustly predicts rate decisions beyond lexicon-based benchmarks: it is not merely whether a statement sounds hawkish or economically optimistic on average, but how these sentiments are sequenced, emphasized, and sustained across the statement, that carries the policy signal. Arc features also shape how professional forecasters update inflation expectations, pointing to a receiver-side effect distinct from the direct policy signal. Our results are robust to a range of additional exercises, including different sample splits as well as controlling for the content of the statement. They also carry over to a short sample of Fed press conferences. These findings suggest that the sequencing and emphasis of policy language across a statement is a first-order feature of the policy signal, not a second-order refinement. |
| Keywords: | monetary policy; introductory statement; sentiment arc |
| JEL: | C55 C88 E52 E58 D83 |
| Date: | 2026–09–28 |
| URL: | https://d.repec.org/n?u=RePEc:onb:oenbwp:281 |
| By: | Steenkamp, Daan; Morrow, Sinead |
| Abstract: | This paper evaluates the South African Reserve Bank's historical monetary policy stance by applying different inputs to the Bank's forecasting model's Taylor rule specification. We quantify the impact of input measurement on assessments of the appropriate policy stance, as well as the impacts of a shift to a lower inflation target. Our findings emphasise the importance of communicating uncertainty around the central bank's assessment of the state of the economy, inflation expectations and price setting, and the expected path of inflation. We argue that, in the absence of a sequence of favourable economic shocks, South African interest rates will likely have to remain restrictive for longer than SARB currently assumes. |
| Keywords: | Taylor rule, reaction function |
| JEL: | E52 E47 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esrepo:344059 |
| By: | Massimiliano Affinito (Bank of Italy) |
| Abstract: | This paper contributes to the ongoing debate on central bank balance sheet policies by examining the evolution of Banca d'Italia's balance sheet over the course of the 20th century. Using a range of VAR models, the analysis shows that in Italy, throughout the century, both balance sheet responses and impulses to macroeconomic conditions closely resemble those traditionally attributed to conventional monetary policy instruments, as well as those observed during recent episodes of unconventional balance sheet expansions. The paper therefore concludes that the central bank balance sheet functioned de facto as a monetary policy instrument throughout the century. Specifically, on the reaction function side, the balance sheet contracted in response to positive inflation shocks and exchange rate depreciations, while it expanded following positive shocks to real output and government debt. On the impulses side, exogenous balance sheet expansions were followed by significant increases in output, trade and inflation, as well as by exchange rate depreciation. A complementary analysis of balance sheet components shows that the composition of the balance sheet also changed over time in line with evolving macroeconomic needs. The role of the balance sheet changed from the early 1980s onwards, when policy interest rates became the primary instrument for controlling inflation internationally. Even in the latter part of the century, however, the balance sheet does not appear to have lost its function as a monetary policy instrument. Instead, it seems to have operated alongside the policy rate. |
| Keywords: | balance sheet policies and expansions, unconventional and conventional measures, frequentist and Bayesian VARs, rolling VAR, balance sheet components |
| JEL: | E58 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_1042_26 |
| By: | Sergio Cesaratto; George Pantelopoulos; Eladio Febrero; Riccardo Zolea |
| Abstract: | This paper addresses the vexed question of whether Eurosystem National Central Banks (NCBs) pay interest on their respective TARGET2 (T2) liabilities by considering the process through which all NCBs pool and are subsequently allocated an amount of “monetary income†. The paper argues that NCBs with T2 liabilities do pay, but in disguised ways that are only fully revealed by unpacking the monetary income pooling/allocation process. To show how this is the case both in theory and in practice, we detail two specific mechanisms that are saddled within the monetary income pooling and allocation process – denoted as a “restitution mechanism†and a “compensation mechanism†. The paper also exhibits how certain factors can influence the extent to which NCBs with T2 claims are renumerated |
| Keywords: | Eurosystem; monetary policy; monetary income; Target 2; quantitative easing. Jel Classification: E58; E63; G21 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:usi:wpaper:947 |
| By: | João Tovar Jalles (University of Lisbon-Lisbon School of Economics and Management (ISEG)); John Beirne (Asian Development Bank); Donghyun Park (The South East Asian Central Banks (SEACEN) Research and Training Centre) |
| Abstract: | This paper examines how institutional, fiscal, and external conditions shape monetary transmission in 40 economies over 1991–2022. Using forecast-based policy innovations and local projections, we estimate cumulative CPI price-level and real GDP responses. On average, monetary tightening produces a positive but imprecise price response and a modest, delayed output contraction. Heterogeneity is more pronounced for activity than for prices: GDP declines most clearly in flexible-regime emerging markets, whereas regime differences in price responses are generally weak. In joint moderator models, financial openness retains the clearest association with CPI responses, while emerging-market status and public debt matter most for GDP. Controlling for global risk through a shock–VIX interaction leaves these results essentially unchanged. No principal estimate yields a sufficiently precise price decline, precluding meaningful sacrifice ratios. The findings point to overlapping institutional and external influences rather than a single dominant transmission mechanism. |
| Keywords: | Monetary policy transmission, inflation dynamics, exchange rate regimes, central bank independence, financial openness, external buffers, global financial cycle, local projections, cross-country heterogeneity |
| JEL: | E52 E58 F41 F42 C23 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:sea:wpaper:wp65 |
| By: | Michael D. Bauer; Maik Schmeling; Andreas Schrimpf |
| Abstract: | We construct a new high-frequency measure of risk appetite shifts around Federal Open Market Committee (FOMC) meetings, the common component of changes in risk-sensitive indicators. Fed policy actions and communication have substantial effects on risk appetite. Interest-rate surprises explain only about one-fifth of the variation in risk appetite, so most policy-induced changes in risk asset prices are orthogonal to the expected rate path. We therefore use both surprises as external instruments in a proxy SVAR with two separately identified shocks. Risk appetite shocks have large and persistent contractionary effects, lowering output and prices while raising unemployment. By contrast, the effects of risk-free rate shocks tend to be small and imprecisely estimated, and some have puzzling signs. Monetary transmission appears to operate primarily through risk appetite and risk asset prices. Estimates relying on interest-rate surprises alone miss most of these effects, for two reasons: the link from interest rates to risk appetite is state-dependent, and Fed communication moves it independently of the expected rate path. |
| Keywords: | monetary policy shocks; risk appetite; external instruments; proxy SVAR; central bank communication |
| JEL: | E43 E52 E58 |
| Date: | 2026–09–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103796 |
| By: | Andrea Foschi (Bank of Italy); Stefano Pica (Bank of Italy); Marianna Riggi (Bank of Italy) |
| Abstract: | We show that the stock of excess savings alters the propagation of the business cycle. It markedly weakens the transmission of monetary policy shocks to real economic activity and inflation; in contrast, in the event of a cost-push disturbance, excess savings cushion the impact on output while amplifying and prolonging the pass-through to inflation. These findings underscore the importance of incorporating balance-sheet conditions into the assessment and calibration of monetary policy. They also offer additional insights into the 2022-23 cyclical episode in the euro area: in an environment characterized by historically elevated excess savings, the surge in energy prices and the unprecedented pace of policy rate hikes resulted in resilient growth and stubbornly persistent high inflation. |
| Keywords: | excess savings, monetary policy, energy shocks, macroeconomic transmission |
| JEL: | E21 E31 E32 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_1031_26 |
| By: | Edward P. Herbst; Karen Page |
| Abstract: | Multiple-horizon forecast panels are increasingly used to infer perceived monetary policy rules, but inference depends on how coefficients are pooled across forecasters, dates, and horizons. We treat this pooling structure as the object of inference. In a participant-date-horizon Taylor-rule regression model, we compare pooling patterns using Bayesian marginal likelihoods, applying the framework to the Blue Chip Financial Forecasts, Survey of Professional Forecasters, and the Summary of Economic Projections. The preferred specifications place much of the systematic variation in policy-rate forecasts in intercepts that vary across forecast horizons and survey dates. Evidence of "changing perceptions" of monetary policy via economically meaningful time-varying response coefficients is weak overall. |
| Keywords: | Taylor rules; monetary policy expectations; survey forecasts; Bayesian model selection; coefficient heterogeneity |
| JEL: | C11 C23 E47 E52 |
| Date: | 2026–09–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103790 |
| By: | Joshua Brault (Bank of Canada); Qazi Haque (The University of Adelaide); Louis Phaneuf (Université du Québec à Montréal) |
| Abstract: | Taylor rule estimation can be biased if the central bank’s inflation target is counterfactually held fixed. First, we identify in the standard New Keynesian model a downward bias affecting the OLS estimate of the policy response to inflation. Based on simulations from a similar model with positive trend inflation, we show that the policy response to inflation is nearly half the true value with large inflation target fluctuations, as purportedly exhibited by the Fed during the 1960s and 1970s. Second, we implement a procedure for estimating DSGE models using a novel population-based MCMC routine known as parallel tempering. Applying this procedure to a medium-scale DSGE model with positive trend inflation, we do not find evidence of a bias when jointly estimating model parameters and the unobserved time-varying inflation target. |
| Keywords: | Unbiased Taylor rule estimation; time-varying inflation target; parallel tempering algorithm; DSGE models; Positive Trend Inflation. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:adl:wpaper:2025-03 |
| By: | Pier Francesco Asso (University of Palermo); Marcello Messori (European University Institute in Florence) |
| Abstract: | This paper analyzes the evolution of Banca d'Italia during Luigi Einaudi's governorship. Einaudi was appointed in January 1945, and pursued a very broad mandate: to restore the Bank's autonomy across monetary policy, exchange-rate policy and supervision policy; to contribute to the reintegration of the Italian economy into the new international economic order; to reaffirm the Bank's role as the "bank of banks" while reducing its role as the "bank of the Treasury"; and to strengthen its technical reputation in order to help shape the key economic policy decisions in Italy. Before long, bringing excessive inflationary pressures under control became the primary objective. Einaudi chose to postpone the launch of the stabilization intervention until 1947, considering support for economic recovery through an expansion of bank credit to be a national priority. Once implemented, monetary policy proved to be effective in achieving stabilization. Our reconstruction shows how Einaudi's governorship prepared the Bank to play a crucial role in the evolution of the Italian economy in the subsequent decades. |
| Keywords: | Luigi Einaudi; History of Banca d'Italia; Post-war Reconstruction of the Italian Economy; History of Monetary Policy |
| JEL: | B31 E58 N14 N24 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:workqs:qse_58_eng |
| By: | Michele Andreolli (Boston College and CEPR); Natalie Rickard (Bank of England); Paolo Surico (London Business School and CEPR); Chiara Vergeat (London Business School) |
| Abstract: | Every inflation index is an aggregation rule. This paper asks when the aggregation that measures the cost of living is also the one that should guide monetary stabilization. A Consumer Price Index (CPI) measures purchasing power; a stabilization index should weight sectoral prices by what they reveal about states in which the policy rate has high marginal welfare value. In standard New-Keynesian models, the two indices coincide. We show that they diverge when the sectors generating price movements differ from the sectors through which interest rates move demand, income, and marginal costs. New euro-area data reveal such a mismatch. Discretionary sectors are the cyclical quantity margin and employ many hand-to-mouth workers, while necessity sectors account for much of inflation variation. After a contractionary monetary policy shock, discretionary consumption and employment adjust the most, but necessity prices respond more. We lay out a two-sector New-Keynesian model with non-homothetic demand and sectoral labour market heterogeneity that is consistent with these findings. Even with symmetric shocks and homogeneous nominal rigidities, optimal simple rules place nearly all weight on discretionary inflation, because reacting to necessity inflation uses the discretionary sector as the adjustment margin for price movements in sectors with little quantity traction. With stickier discretionary prices, as observed in the euro area, a discretionary inflation rule improves welfare further and closes about two thirds of the welfare gap between a CPI inflation rule and Ramsey policy. Under the empirical distribution of euro-area shocks, the gains come from lower sectoral inflation volatility rather than lower aggregate real volatility. Expenditure weights need not be stabilization weights. |
| Keywords: | Inflation composition;non-homothetic demand;labour market heterogeneity |
| JEL: | E52 E31 E32 |
| Date: | 2026–09–25 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023642 |
| By: | Emiliano A. Carlevaro (The University of Adelaide); Qazi Haque (The University of Adelaide); Leandro M. Magnusson (University of Western Australia) |
| Abstract: | This paper revisits the U.S. fiscal-monetary policy mix using econometric methods that are robust to weak identification and sensitive to structural changes. We find that the pre-Volcker period was predominantly characterised by a passive monetary-passive fiscal regime, consistent with indeterminacy and the presence of self-fulfilling inflationary expectations. However, we cannot rule out the possibility of a passive monetary-active fiscal configuration during the 1960s and 1970s, in line with the Fiscal Theory of the Price Level. In contrast, the post-Volcker period exhibits strong evidence of an active monetary-passive fiscal regime, reflecting greater inflation control and fiscal discipline. |
| Keywords: | Fiscal-monetary interactions; Weak identification. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:adl:wpaper:2025-05 |
| By: | Ritsu Yano; Yoshiyuki Nakazono; Jun Takahashi |
| Abstract: | Many central banks, including the Bank of Japan, define price stability as 2% inflation. Do households agree? We answer this question with a conjoint experiment in which Japanese respondents chose between hypothetical economies that differed in their inflation and unemployment rates. We find that households prefer zero inflation. An economy with 2% inflation is chosen significantly less often than one with 0% inflation. On average, respondents are indifferent between 0% and −2% inflation, although men and younger respondents prefer 0% to deflation. We also find that households weigh unemployment more heavily than inflation: for a one-percentage-point fall in inflation, they accept a rise in unemployment of only about 0.65 percentage points. The results point to a gap between the inflation rate households prefer and the 2% that the Bank of Japan targets. This gap raises the possibility that the weak anchoring of Japanese households’inflation expectations at 2% partly reflects their preference for inflation closer to zero. |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:toh:tupdaa:90 |
| By: | Kenji Miyazaki |
| Abstract: | How does an inherited cross-type wage gap enter Markov-perfect discretionary monetary policy when transfers are passive? In a two-agent New Keynesian model with sticky prices and type-specific own-lag wage adjustment, the gap changes implementable allocations and the second-order welfare loss. A positive lower bound establishes its value relevance; explicit rank conditions characterize when current price inflation, wage inflation, and the output gap fail to determine the implementing nominal rate. An illustrative parameterization satisfies these conditions, although the additional state explains little nominal-rate variance after conditioning on all three aggregate variables. Welfare comparisons with fixed rules are driven mainly by aggregate wage-inflation stabilization and do not isolate the value of distributional information. Unrestricted targeted transfers separate aggregate allocation from the legacy wage-gap transition. In the CES-consistent distribution block, optimal smoothing eliminates consumption dispersion, improves on immediate wage-gap elimination, and coincides under discretion and date-0 commitment. |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.39070 |
| By: | Francesco Corsello (Bank of Italy); Andrea Foschi (Bank of Italy); Marco Fruzzetti (Bank of Italy); Marianna Riggi (Bank of Italy) |
| Abstract: | We study how the composition of household consumption shapes the transmission of macroeconomic shocks in Italy. Over the last two decades, household expenditure has shifted from goods towards services. We show that the transmission of shocks is better understood by combining the goods-services distinction with the distinction between essential and discretionary spending. The response of household consumption is almost entirely concentrated in discretionary items, but the timing of adjustments differs markedly across components. Following a monetary policy shock, discretionary goods respond relatively quickly, whereas discretionary services adjust with a substantially longer lag and greater persistence. By contrast, energy shocks lead to a much faster adjustment in discretionary consumption, in line with their more immediate impact on consumer prices and households' purchasing power. These findings suggest that monitoring discretionary goods and services separately is crucial for assessing the intensity and timing of shock transmission in the economy. |
| Keywords: | consumption, monetary policy shocks, energy supply shocks |
| JEL: | E21 E32 E52 Q43 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_1044_26 |
| By: | Onur Polat (Hacettepe University, Informatics Institute 06800 Beytepe, Ankara, Turkiye); Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, 5500 N. St. Louis Ave, Chicago 60625, USA); Christophe Andre (Economics Department, Organisation for Economic Co-operation and Development (OECD), 75775 Paris, Cedex 16, France); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | This paper examines time-varying connectedness and volatility spillovers between housing markets and macroeconomic policy conditions, with particular emphasis on the role of housing deregulation. Using daily data from September 2007 to May 2026, we estimate a 15-node TVP-VAR network comprising housing volatility series for ten major U.S. metropolitan areas alongside five policy and financial indicators: the housing deregulation index, economic policy uncertainty (EPU), a spliced monetary policy proxy (Effective Federal Funds Rate/Krippner Shadow Short Rate), the Aruoba-Diebold-Scotti (ADS) business conditions index, and the 5-year breakeven inflation rate (T5YIE). Volatility inputs are filtered using a multivariate GJR-GARCH model augmented with time-varying skewness and kurtosis (GJRSK), and parameters are estimated within a Bayesian prior (BayesPrior) framework. The Total Connectedness Index reveals a counter-cyclical network topology, peaking during the 2008 financial crisis, the 2020 pandemic, and the 2024 monetary pivot. Pairwise decompositions reveal pronounced heterogeneity across cities: supply-inelastic coastal market, New York (peak spillover 45.5%), San Diego (48.8%), and San Francisco (39.8%), absorb the largest regulatory shocks, while deregulation also transmits persistently to monetary policy conditions (Shadow Short Rate positive in 87.7% of observations), real activity, and inflation expectations. These findings carry direct implications for macroprudential policy design and institutional portfolio risk management in the U.S. housing sector. |
| Keywords: | Housing Volatility Networks, Housing Deregulation; TVP-VAR, Net Pairwise Spillovers, GJRSK Volatility, BayesPrior |
| JEL: | C32 G10 R31 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202630 |
| By: | Michele Modugno; Benjamin Roscoe; Sarah Zoi |
| Abstract: | We introduce the Financial Vulnerability Index (FVI), a novel indicator of financial vulnerabilities in the U.S. Unlike financial condition indices, which measure current credit market conditions and spike during periods of financial turmoil, the FVI displays the gradual build-up of structural financial weaknesses and declines as such episodes materialize. We demonstrate that the FVI exhibits properties consistent with theoretical mechanisms of financial vulnerabilities. When the index is high, adverse shocks are substantially amplified, generating larger declines in consumption and investment. We provide new empirical evidence that monetary tightening is associated with gradual declines in the FVI, with this effect substantially delayed, taking a few years to fully materialize. Moreover, monetary policy transmission to prices depends on the state of financial vulnerabilities, with significantly stronger effects when vulnerabilities are low. |
| JEL: | C53 E27 E44 G01 |
| Date: | 2026–09–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103791 |