|
on Central Banking |
| By: | Ece Ozge Emeksiz; Mr. Güneş Kamber; Ms. Julia Otten; Gurnain Kaur Pasricha |
| Abstract: | This paper assesses the transmission of monetary policy using a new state-of-the-art intra-day dataset of monetary policy shocks for 16 advanced economies and emerging markets, the most comprehensive cross-country coverage to date. Using 30-minute windows around policy announcements, we construct target and path factor shocks for a broad sample of countries and assess their transmission to government bond yields, stock prices, and exchange rates. High-frequency identification improves the significance of estimated responses relative to lower-frequency intraday or daily data. Both target and path surprises generate large and consistent effects across asset classes. We find limited evidence of central bank information effects, confirming the validity of high-frequency methods. Post-COVID-19, transmission to yields and equity prices remains stable, but exchange rate responses weaken—likely due to synchronized monetary tightening across countries. The findings underscore the value of high-frequency data for robust identification and cross-country analysis of monetary policy transmission. |
| Keywords: | Monetary Policy; High-Frequency Identification; Asset Prices; Yield Curve; Central Bank Communication; Emerging Markets; Advanced Economies; Quantitative Easing; Post-COVID-19 Inflation; Financial Market Response |
| Date: | 2026–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/018 |
| By: | Hanno Kase; Leonardo Melosi; Sebastian Rast; Matthias Rottner |
| Abstract: | When public debt is elevated, the fiscal cost of fighting inflation rises sharply, as interest rate hikes increase government interest expenditures. We formalize this mechanism in a nonlinear New Keynesian model with a state-dependent fiscal constraint on monetary policy. High debt may dampen the monetary response to inflation, generating an inflationary bias even though government debt remains fully fiscally backed. The interaction between high debt and inflationary cost-push shocks makes the fiscal limit more likely to bind, amplifying inflation. In demand-driven downturns, the fiscal constraint may become more restrictive than the zero lower bound, forcing the central bank to either print money to purchase excess debt or accept fiscal dominance. |
| Keywords: | fiscal limits, public debt, monetary policy, inflation, zero lower bound, fiscal space, nonlinear new Keynesian models |
| JEL: | E31 E52 E62 E58 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1328 |
| By: | Kristin Forbes; Jongrim Ha; M. Ayhan Kose |
| Abstract: | Business cycles are increasingly driven by global shocks, rather than the domestic demand shocks prominent in earlier decades, posing challenges for central banks seeking to meet domestic mandates and communicate their policy decisions. This paper analyzes the evolving influence and characteristics of global and domestic shocks in advanced economies from 1970-2024 using a new FAVAR model that decomposes movements in interest rates, inflation, and output growth into four global shocks (demand, supply, oil, and monetary policy) and three domestic shocks (demand, supply, and monetary policy). We find that the role of global shocks has increased sharply over time and that their characteristics differ from those of domestic shocks across multiple dimensions. Compared to domestic shocks, global shocks have a larger supply component, higher variance, more persistent effects on inflation, and are more asymmetric (contributing more to tightening than to easing phases of monetary policy). As global supply shocks have become more prominent, central banks have also been less willing to "look through" their effects on inflation than for comparable domestic shocks. The distinct characteristics and rising influence of global shocks - particularly global supply shocks - have significant implications for modeling monetary policy and designing central bank frameworks. |
| Keywords: | demand shocks, supply shocks, geopolitical risk, oil prices, supply-chain disruptions, global uncertainty, central banks, Federal Reserve, European Central Bank |
| JEL: | E52 E31 E32 Q43 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-05 |
| By: | Marco Graziano; Marius Koechlin; Andreas Tischbirek |
| Abstract: | We study the spillovers of large-scale asset purchases (LSAPs) in the U.S. on financial intermediation in the euro area using bank-level supervisory data and high-frequency identified policy surprises. Our detailed panel data permit us to trace the impact of LSAPs through bank balance sheets. We find that the Federal Reserve affects credit provision in the euro area through a channel that we refer to as the ``international bank capital channel'' of unconventional monetary policy. In response to an LSAP shock that leads to a steepening of the U.S. Treasury yield curve, the Treasury positions of euro area banks shrink, capital ratios worsen, and banks that are less well capitalized contract their lending relative to banks that are better capitalized. Our results are consistent with an important role of revaluation effects, imperfect risk hedging, and credit as an adjustment margin for banks in the proximity of regulatory capital constraints. |
| Keywords: | U.S. Treasury securities; Monetary policy transmission; Capital requirements; Asset purchase operations |
| JEL: | E52 F42 F44 G21 |
| Date: | 2026–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:102399 |
| By: | Jonathan Hambur; Qazi Haque |
| Abstract: | We study how professional forecasters perceive a central bank's reaction function and how those perceptions evolve over time, using survey evidence from Australia between 2015 and 2025. Adapting recent survey-based approaches, we recover time-varying perceived policy rules that map expected macroeconomic conditions into expected policy rates. We find that perceived responsiveness to inflation was modest prior to the pandemic, collapsed at the effective lower bound, and rose sharply only after sustained policy tightening began in 2022. Central bank communication about labour market conditions and financial stability shaped perceptions of the reaction function. However, during periods of elevated uncertainty--particularly following COVID--beliefs about the importance of inflation adjusted only after forecasters observed realised policy actions, highlighting the limits of guidance alone. We also show that heterogeneity in long-run beliefs, including views about long-run inflation, plays an important role in shaping interest rate expectations, but can be parsimoniously captured using forecaster fixed effects. |
| Keywords: | perceived monetary policy rules, survey expectations, central bank communication, Reserve Bank of Australia |
| JEL: | E43 E52 E58 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-09 |
| By: | Alexander Mihailov; Giovanni Razzu; Zhe Wang |
| Abstract: | This paper examines the gendered effects of monetary policy shocks on key labour market outcomes in the Euro Area spanned by the 11 original member states from 2000 to 2016. Using a quarterly panel dataset and an identification strategy based on high-frequency financial surprises, we isolate exogenous monetary policy shocks from central bank information effects and trace their transmission across labour market outcomes for men and women. We provide new evidence on the distributional consequences of the common monetary policy shocks originating at the European Central Bank. A contractionary shock significantly increases unemployment for both genders, with systematically larger effects for men. At the same time, women exhibit a stronger rise in labour force participation, consistent with household labour supply adjustments. Gender differences in unemployment and participation are primarily driven by individuals aged 25–55 and are most pronounced among those with basic and intermediate education. Finally, labour market institutions shape the magnitude of these effects, either mitigating or amplifying gender disparities. |
| Keywords: | gender gaps, labour market outcomes, monetary policy shocks, labour market institutions, Euro Area |
| JEL: | E24 E32 E52 F45 J16 J24 |
| Date: | 2026–02–08 |
| URL: | https://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2026-01 |
| By: | Michael D. Bordo |
| Abstract: | On the fiftieth anniversary of Milton Friedman receiving the Nobel Prize in economics, I reflect on the legacy of monetarism – his revolutionary idea. Friedman developed the modern quantity of money in 1956 as a challenge to the prevailing Keynesian view that “money did not matter.” Friedman’s empirical and historical research made a strong case that changes in the money supply, largely instituted by the monetary authorities, account for much of the macro instability in the twentieth century including the Great Recession 1929-1933 and the Great Inflation 1965 -1982. Friedman’s ideas were at the base of the creation of modern macroeconomics, and of the adoption by many central banks of rules based monetary policy as a guidepost to maintain credibility for low inflation. His emphasis on monetary aggregates as the key monetary policy tool has been superseded by the use of policy interest rates, but the monetary aggregates are still useful as a crosscheck against incipient high inflation. |
| JEL: | E12 E31 E32 E41 E42 E51 E52 E58 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34765 |
| By: | Consolo, Agostino; Foroni, Claudia; Hjelm, Linnéa |
| Abstract: | Unlike past high-inflation episodes, the euro area labour market remained surprisingly resilient during the inflation surge of the early 2020s. This paper investigates the drivers of this resilience by combining long-span euro area macroeconomic data (1970–2025) with a structural VAR analysis that disentangles the roles of aggregate demand and supply, monetary policy, and factor-substitution shocks. Our findings show that, in contrast to the 1970s and 1980s, the decline in real wages has supported labour demand and, more broadly, the labour market, thereby helping to explain the decoupling between output and employment. We also find that monetary policy shocks have had a stronger impact on output than on employment, further amplifying the pro-cyclicality of labour productivity. JEL Classification: E24, E32, C32 |
| Keywords: | Bayesian VAR, labour markets, monetary policy, real wages |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263180 |
| By: | Jens H. E. Christensen; Daan Steenkamp |
| Abstract: | Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond-specific liquidity risk premia, this paper provides estimates of bond investors’ inflation expectations and associated inflation risk premia in South African sovereign bonds. The results suggest that investors’ long-term inflation expectations have gradually been declining towards the tolerance band adopted by the South African Reserve Bank in 2000. Although volatile, the estimated inflation risk premia have declined significantly since 2021, while a market-based estimate of the natural real rate has remained stable and slightly negative. A related measure of the stance of monetary policy is currently assessed to be mildly restrictive. Leveraging the estimated model’s rich dynamics to assess the outlook for these key variables suggests that expected inflation is likely to gradually fall further, while monetary policy is projected to ease towards neutral in the context of a stable natural real rate. |
| Keywords: | term structure modeling; inflation risk; liquidity risk; financial market frictions; emerging bond markets |
| JEL: | C32 E43 E52 E58 F41 F42 G12 |
| Date: | 2026–02–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:102406 |
| By: | Willem THORBECKE |
| Abstract: | The correlation between sovereign bond prices and stock prices was positive from the 1970s to 2000 and then turned negative. Researchers have investigated this phenomenon using data from the 1970s to the present. This paper uses data beginning in the 1960s, when there were negative correlations between bond and stock prices, to investigate how positive bond-stock price comovements arose. Evidence from identified vector autoregressions indicates that monetary policy shocks beginning in the late 1960s caused bond and stock prices to covary positively. Evidence from estimating a multi-factor model indicates that news of both monetary policy and inflation contributed to positive bond-stock comovements. The findings imply that rising inflation now that elicits contractionary monetary policy could alter bonds’ risk characteristics, causing them to again covary positively with stocks. To this end, policymakers should be vigilant that large budget deficits do not stoke inflation. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:26011 |
| By: | Heba Y. Hashem (Cairo University); Mahmoud Mohieldin; Mamdouh Abdelmoula M. Abdelsalam |
| Abstract: | This paper investigates the relationship between inflation in and a set of domestic and external factors to provide an assessment of the determinants of inflation dynamics in Egypt. The analysis adopts ordinary least squares (OLS) and quantile regression based on monthly data for headlines and core inflation from 2005 to 2024. A nonlinear auto regressive distributed lag (NARDL) is conducted to explore the asymmetric impacts for determinants in the short run and the long run. Finally, the paper uses forecast analysis within multivariate models to explore the future path of inflation after different shocks in explanatory variables. The results demonstrate that the main significant variables that help explain inflationary pressures are monetary financing, banking sector financing to the government, and the volatility of the exchange rate. There is also an asymmetric effect for exchange rate changes in the short run, where depreciations result in significant increases in inflation. Furthermore, the interest rate tool of monetary policy becomes ineffective at high levels of inflation. This has critical policy implications, shedding light on the role of unconventional monetary policy tools like forward guidance, asset purchases, and term funding facilities in curbing inflation. Priorities for policymaking should include reducing budget deficits, as ensuring a sustainable path of the fiscal deficit would curb the rising inflation. Finally, given the significance of monetary financing and banking sector financing to the government in explaining inflationary pressures, effective implementation of inflation targeting as a framework for monetary policy can contribute to stabilizing inflation rates, as it implies freedom from fiscal dominance and limiting excessive monetary growth. |
| Date: | 2025–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:erg:wpaper:1779 |
| By: | Xu Lu; Lingxuan Wu |
| Abstract: | We demonstrate that depositor inattention gives rise to banks’ deposit market power. Using transaction-level data on millions of U.S. depositors, we document that unscheduled income remains in low-rate accounts much longer than scheduled income, and interpret this reaction-time gap as inattention. Inattention varies widely across depositors, and more inattentive depositors adjust their balances less in response to monetary policy changes. We then develop and test a theory of temporal monopoly to analyze the implications of inattention for bank funding. Banks face an intertemporal trade-off in deposit rate setting between current spreads and the future deposit base, modulated by inattention. In line with this theory, we find that banks serving more inattentive depositors set lower rates, have weaker pass-through, and experience less deposit flow sensitivity. Using these estimates, we calibrate how the value of banks’ deposit franchise rises with inattention and varies nonmonotonically with the policy rate. Our results shed new light on how digital banking and monetary policy affect deposit funding. |
| JEL: | E5 G2 G4 L1 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34783 |
| By: | Matthew Fink; Jonathan Hambur |
| Abstract: | The sharp rise in inflation following the COVID-19 pandemic has renewed interest in how firms adjust prices in response to large economic shocks and what this means for modelling inflation dynamics and setting monetary policy. Using a large dataset of web-scraped Australian retail prices, we document a decline in price rigidity and increase in the rate of price changes in 2022 and 2023, coinciding with a period of strong goods price inflation. We incorporate these microdata-based estimates of price-setting frequency into the RBA’s DSGE model to assess their macroeconomic implications. We find that failing to account for the increase in the rate of price changes during the high inflation period could have led forecasters to underpredict inflation by up to 1.5 percentage points, even if they knew exactly which shocks were hitting the economy at the time. Moreover, lower price rigidity significantly steepened the Phillips curve, reducing the policy trade-off between inflation and output. Under these conditions, policymakers with the same preferences would tend to raise rates more aggressively (by up to around 40 basis points), compared to the case where rigidity did not change. Our findings highlight the importance of considering the implications of shifts in price-setting behaviour when analysing inflation outcomes and designing monetary policy. |
| Keywords: | inflation, price setting |
| JEL: | E31 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-07 |
| By: | Chaimae Lazzarou (Bank Al-Maghrib – Central Bank of Morocco) |
| Abstract: | This paper estimates Morocco's natural interest rate (NIR) using two approaches: a standard HLW-type framework and an augmented specification that incorporates external factors, namely imported inflation, and movements in the real effective exchange rate. The results point to a downward trend in the natural rate following the Global Financial Crisis and an increase during the post pandemic inflationary episode. The REER-augmented model delivers higher estimates than the baseline, particularly in periods of inflationary pressures. On average, the natural interest rate is estimated to stand at around 2.6 percent over the sample period, implying a negative interest rate gap relative to the policy rate. |
| Keywords: | Natural interest rate; Monetary policy; Small open economy; Bayesian estimation |
| JEL: | E43 E52 F41 C11 |
| Date: | 2026–02–05 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp01-2026 |
| By: | Sriya Anbil; Alyssa G. Anderson; Benjamin Eyal |
| Abstract: | The Global Financial Crisis (GFC) and the Federal Reserve's (Fed) large-scale asset purchases fundamentally reshaped the U.S. monetary policy implementation framework. Before 2008, the Fed operated under a scarce-reserves regime, steering the federal funds rate through daily open market operations. |
| Date: | 2026–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:102397 |
| By: | Magali Marx; Christoph Grosse Steffen; Moaz Elsayed |
| Abstract: | We identify two global supply shocks that generate tensions in supply chains: shocks to transportation services and shocks to the production of highly specific intermediate inputs. Using a structural vector autoregression identified with sign, narrative, and boundary restrictions, we exploit their distinct implications for transportation costs. Transportation shocks raise shipping costs, while input production shocks lower equilibrium transportation prices by reducing output and demand for complementary services. Complementing the analysis with a global demand shock, we construct structurally interpretable, monthly indices for supply-side tensions and demand-induced congestion along global supply chains from 1969 to 2024. Both global supply shocks generate recessionary and inflationary effects in U.S. data but differ markedly in persistence and magnitude. Input production shocks produce large and persistent effects and elicit partial monetary policy accommodation, whereas transportation shocks are transitory and largely looked through. |
| Keywords: | Supply Chains, Input Shortages, Transport Shocks, Structural Vector Autoregressions, Inflation, Monetary Policy, Demand-Induced Congestion. |
| JEL: | C32 E31 E52 F60 R40 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1026 |
| By: | Bruno Albuquerque; Mr. Eugenio M Cerutti; Melih Firat; Benedikt Kagerer |
| Abstract: | We study how banking groups adjust corporate credit supply in response to tighter macroprudential policies. Using granular data on syndicated corporate loans, we show that banking groups reallocate lending from bank subsidiaries toward affiliated nonbank financial institutions (NBFIs) following regulatory tightening. Relative to bank subsidiaries within the same group, NBFI subsidiaries expand lending, and their credit supply also increases in absolute terms. We estimate that by ‘banking on’ their nonbanks, banking groups offset, on average, more than half of the contraction in bank lending induced by macroprudential tightening. Our findings highlight an important intra-group reallocation channel through which banking groups can partially offset regulatory constraints and result in greater bank–nonbank interconnectedness. |
| Keywords: | Banking groups; Nonbank subsidiaries; Macroprudential policies; Cross-border lending; Syndicated loans |
| Date: | 2026–02–06 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/023 |
| By: | Schmidt, Sebastian |
| Abstract: | I study price level determination in a currency union when some member countries’ government securities earn a convenience yield. These ”convenience assets” generate fiscal seigniorage revenues that, given appropriate fiscal and monetary policies, back the union’s price level, much like primary surpluses and monetary seigniorage do. An exogenous drop in the private-sector demand for convenience assets reduces seigniorage revenues and raises the price level. It also results in a wealth transfer across countries owing to the heterogeneity in convenience yields. JEL Classification: E31, E63, F45 |
| Keywords: | convenience yield, cross-country heterogeneity, currency union, fiscal theory of the price level |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263183 |
| By: | Marcin Dec (Group for Research in Applied Economics (GRAPE)) |
| Abstract: | This paper shows that in a less liquid government bond market, filtering term premia through a regression-based Adrian, Crump & Moench (ACM) framework yields risk neutral short rate expectations that match, and often rival, the accuracy of Survey of Professional Forecasters (SPF). Using monthly zero-coupon yields, we extract a model consistent risk free yield curve whose implied forward rates exhibit forecasting performance comparable to SPF paths across horizons up to three years. Crucially, these expectations can be generated daily, providing far higher frequency information than SPF’s quarterly releases. We find that term premia are negligible at the short end but rise with maturity, and that the level factor—despite capturing most yield variance-does not command a price of risk. Cointegration tests indicate that SPF forecasts contain no incremental information beyond the filtered curve. The results highlight a practical advantage: once premia are removed, the yield curve becomes a reliable, high frequency source of monetary policy expectations suitable for policy analysis and market surveillance. |
| Keywords: | Term Premia Extraction, Risk Neutral Interest Rate Expectations, Yield Curve Decomposition, Survey of Professional Forecasters |
| JEL: | E43 G12 G17 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:fme:wpaper:113 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | Bank failures can stem from runs on otherwise solvent banks or from losses that render banks insolvent, regardless of withdrawals. Disentangling the relative importance of liquidity and solvency in explaining bank failures is central to understanding financial crises and designing effective financial stability policies. This paper reviews evidence on the causes of bank failures. Bank failures—both with and without runs—are almost always related to poor fundamentals. Low recovery rates in failure suggest that most failed banks that experienced runs were likely fundamentally insolvent. Examiners’ postmortem assessments also emphasize the primacy of poor asset quality and solvency problems. Before deposit insurance, runs commonly triggered the failure of insolvent banks. However, runs rarely caused the failure of strong banks, as such runs were typically resolved through other mechanisms, including interbank cooperation, equity injections, public signals of strength, or suspension of convertibility. We discuss the policy implications of these findings and outline directions for future research. |
| Keywords: | bank failures; bank runs; liquidity; solvency; banking regulation; supervision |
| JEL: | G01 |
| Date: | 2026–02–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:102433 |