|
on Central Banking |
| By: | Bremer, Björn (Central European University); Chwieroth, Jeffrey |
| Abstract: | Central banks relied for a decade on unconventional monetary policies (negative interest rates, large-scale asset purchases, and forward guidance) that carry significant distributive consequences and became intensely politicized. Yet little is known about the mass politics of central banking, or whether contestation over specific instruments threatens central banks' broader legitimacy. We provide evidence from two pre-registered survey experiments in Germany and the Netherlands. A conjoint experiment shows that citizens strongly oppose negative interest rates, the most penalized levels in the design, and are skeptical of unconditional asset purchases. A framing experiment shows support for negative rates responds to both egotropic and sociotropic arguments, with pocketbook concerns resonating most strongly. Exploiting a within-respondent measure of trust in the European Central Bank (ECB), we show that these same frames shift citizens' specific support for the policy without eroding their diffuse trust in the ECB, a highly insulated, technocratic, non-elected institution. |
| Date: | 2026–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:es7wf_v1 |
| By: | Henricot, Dorian; Sette, Enrico |
| Abstract: | This paper studies whether securitisation affects monetary policy transmission via banks. Using granular loan-level data from the euro area, we show that banks actively engaged in securitisation adjust credit supply more strongly in response to monetary policy shocks than a matched sample of non-securitising banks. This is because securitisation expands banks’ lending capacity, but by increasing reliance on investors whose required returns and risk appetite are more sensitive to monetary policy conditions. Following a monetary tightening, these investors demand higher compensation and reduce their exposure to securitised assets, leading securitising banks to contract lending more than other banks. Effects are stronger for loans more likely to be securitised — i.e., to safer borrowers with longer maturities — and are primarily driven by synthetic securitisations, which provide additional capital relief through Significant Risk Transfers. Firms exposed to securitising banks cannot fully substitute tighter loan supply through existing or new bank relationships. JEL Classification: G21, G23 |
| Keywords: | bank lending channel, monetary policy transmission, securitisation |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263289 |
| By: | Lucia Esposito (Bank of Italy); Elisa Guglielminetti (Bank of Italy); Elia Moracci (Bank of Italy); Andrea Papetti (Bank of Italy); Massimiliano Pisani (Bank of Italy) |
| Abstract: | This paper assesses the impact of artificial intelligence (AI) on monetary policy transmission and on central banks' reaction functions. By speeding up routine and repetitive tasks through automation and accelerating the incorporation of incoming information into decision-making, AI may affect productivity, market structure and broader macroeconomic developments. AI may also increase macro-financial complexity and systemic vulnerabilities by amplifying interconnectedness, heightening operational and cyber risks, and reinforcing procyclical and herding dynamics in an environment characterized by faster and partly algorithmic decision-making. Central banks' reaction functions will need to adapt to a setting marked by a different transmission mechanism, new uncertainty surrounding the natural rate of interest and tail risks. At the same time, AI could enhance the effectiveness of monetary policy by improving assessments of the macroeconomic outlook and the distribution of risks around it, as well as by strengthening monetary policy communication and the management of expectations. |
| Keywords: | artificial intelligence, credit markets, financial markets, inflation, business cycle, monetary policy |
| JEL: | O33 E44 E32 E31 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_1051_26 |
| By: | Evan Dudley; Jean-Sébastien Fontaine; Dimitri Hadjistavropoulos; Neil Maru; Sofia Tchamova; Andreas Uthemann; Jun Yang |
| Abstract: | Banks and their dealers’ arms play a key role in balancing clients’ demand in the Canadian repo market. Repo market imbalances can be large and persistent, at times putting upward pressure on the cost of short-term funding in Canada, including the CORRA benchmark. This note examines the main funding sources that banks use to absorb these imbalances. We show that during QE and early during quantitative tightening, banks’ holdings of settlement balances were the main buffer to absorb clients’ net repo demand, but by the end of QT they had become far less central to balancing the repo market. Despite this, we find that throughout QT, banks and dealers accommodate increasingly volatile shifts in their clients’ repo demand through a more active redistribution among them, a somewhat more active use of foreign currency markets and a more active use of the Receiver General (RG) and Bank of Canada (BoC) facilities. |
| Keywords: | Financial system; Financial institutions and intermediation; Monetary policy; Monetary policy tools and implementation |
| JEL: | E E5 E52 E58 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-40 |
| By: | Guney, Dogukan |
| Abstract: | This paper shows that central bank communication reduces monetary policy uncertainty, which in turn generates substantial effects on real economic activity. I construct a novel monthly measure of Federal Reserve communication from 9, 298 speeches by FOMC members between 1951 and 2022 and relate it to a newspaper-based measure of U.S. monetary policy uncertainty. To address the simultaneity between communication and uncertainty, I exploit a shift in the volatility of communication associated with the Fed’s transition toward greater transparency in the early 2000s and use the resulting heteroskedasticity to identify causal effects. An unexpected one-standard-deviation increase in communication lowers monetary policy uncertainty by about 0.25 standard deviations. Structural VAR estimates show sizable and persistent real effects: within two months, industrial production rises by about 0.3 percent, unemployment falls by 0.2 percentage points, and durable goods consumption increases by about 0.5 percent. These findings highlight an uncertainty channel of monetary policy communication and show that active communication can serve as an independent policy tool. |
| Keywords: | Monetary Policy Communication; Uncertainty; Textual Analysis; Identification Through Heteroskedasticity |
| JEL: | C32 D80 E52 E58 |
| Date: | 2026–09–14 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:132139 |
| By: | Behn, Markus; Forletta, Marco; Reghezza, Alessio |
| Abstract: | We construct a novel bank-level index that quantifies fragmentation in the capital buffer framework faced by euro area banks. Defined at quarterly frequency, it measures fragmentation by looking at the number of simultaneously active buffers, their geographical dispersion, and the frequency of buffer rate changes within the preceding year. The index is orthogonalised with respect to the level of capital requirements, bank size, and the financial cycle, thus controlling for these factors when measuring fragmentation as defined above. We then show that a one standard deviation increase in the index is associated with about 36 basis points higher capital headroom and around 50 basis points lower corporate lending growth within existing bank-firm relationships. We interpret these results as suggestive evidence that banks facing more fragmented buffer requirements retain extra capital and adjust lending more cautiously to account for higher uncertainty with respect to future adjustments in buffer requirements. JEL Classification: E5, E51, G18, G21, G28 |
| Keywords: | banking, capital buffers, credit supply, financial regulation |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263287 |
| By: | Tatjana Dahlhaus |
| Abstract: | Climate change is becoming an increasingly important consideration for central banks because of its implications for economic stability, inflation, and output. In Canada, physical climate hazards such as wildfires, floods, and storms can destroy productive capacity, housing, and critical infrastructure while disrupting domestic and global supply chains. These shocks can reduce economic activity while simultaneously putting upward pressure on prices, creating challenging trade-offs for monetary policy. The challenge may be particularly acute in small open economies, where disaster impacts can also affect external demand and terms of trade. This note examines the implications of physical climate risks for monetary policy by reviewing evidence on how climate-related disasters affect output and inflation, with a focus on Canada, and by using a structural macroeconomic model to assess how more frequent and severe natural disasters could shape macroeconomic outcomes and the inflation-output trade-offs facing policymakers. |
| Keywords: | Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission; Structural challenges; Climate change |
| JEL: | C C6 C68 E E1 E12 E3 E31 E5 E52 F F4 F41 Q Q5 Q54 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-44 |
| By: | Heyran Aliyeva (Central Bank of Azerbaijan Republic); Ramiz Rahmanov (Central Bank of Azerbaijan Republic) |
| Abstract: | This paper examines the interaction between the fiscal and monetary policies in Azerbaijan using the VAR methodology and quarterly data for the period 2003Q1-2018Q4. The results of the Granger causality tests and impulse response analysis show that although both the monetary and fiscal policies demonstrate activity, the fiscal policy dominates over the monetary policy. In terms of the fiscal regime classification, we find the regime in the country to be non-Ricardian. |
| Keywords: | Fiscal policy, Monetary policy, Interaction, Policy regimes, Azerbaijan |
| JEL: | F31 F39 |
| URL: | https://d.repec.org/n?u=RePEc:aze:wpaper:1901 |
| By: | Anat Assoratgoon |
| Abstract: | This paper examines the role of misperception in shaping the inflation dynamics of Thailand following the 2022 energy price shock. For this purpose, I evaluate whether a New Keynesian model of a small open economy featuring a signal extraction problem can replicate the inflation and broader macroeconomic dynamics observed in Thailand during this episode. The signal extraction problem arises because agents observe the terms-of-trade shock but cannot distinguish its constituent components, transitory versus persistent, and must therefore infer the underlying state via the Kalman filter. Four information regimes are compared: full information, symmetric limited information in which both the central bank and the private sector misperceive, and two asymmetric cases in which only one agent misperceives while the other correctly identifies the shock. A simple distance-based comparison against Thai data indicates that the symmetric limited information regime most plausibly characterizes the prevailing dynamics of the 2022 Thai economy. The asymmetric cases further reveal that the consequences of misperception depend critically on who gets it wrong. Central bank misperception produces a prolonged inflation surge alongside a relatively muted output contraction, while private-sector misperception keeps inflation contained at the cost of a sharper and more persistent output decline – a stark illustration of the inflation–output trade-off in action. |
| Keywords: | Monetary policy; Signal extraction; Energy price shocks; Small open economy; New Keynesian model; Misperception; Inflation dynamics; Bank of Thailand |
| JEL: | E31 E52 E58 F41 Q43 D84 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:pui:dpaper:263 |
| By: | Nicu Sprincean (Universitatea „Alexandru Ioan Cuza“) |
| Abstract: | This study examines the influence of green rhetoric from central banks on banking institutions. Using a sample of 437 publicly listed banks from 43 countries between 2000 and 2019, I find a positive correlation between an increased proportion of climate-related discourse in central bank speeches and a reduction in both systematic and systemic risk for banks. This may be attributed to improved transparent communication by central banks, which reduces individual and systemic risk for banks. This, in turn, supports the accountability and independence of central banks, which are negatively correlated with bank risk-taking behavior. In a similar vein, central banks that are most vocal about climate issues are also leading the way in adopting climate-related policies that facilitate the transition to net zero, which are positively associated with financial stability. The findings of this study have significant policy implications in the context of central bank's growing involvement in climate-related issues and their consequent shaping of market participants' perceptions. |
| URL: | https://d.repec.org/n?u=RePEc:boc:carp26:10 |
| By: | Trautmann, Simon; Hellenkamp, Detlef |
| Abstract: | The digital euro is intended to preserve access to public central bank money in an increasingly digital payments landscape while strengthening European payments sovereignty. Its potential success, however, will not depend on institutional legitimacy alone. The decisive question is whether it can offer consumers a discernible advantage over established payment instruments and be embedded in a viable intermediated model. This working paper therefore examines the design requirements under which a digital euro could generate tangible everyday utility while preserving the intermediation role of commercial banks. Methodologically, the analysis draws on recent primary sources issued by European institutions and central banks, relevant academic literature and selected international CBDC case studies. The findings indicate that user-friendliness, privacy, online and offline functionality, a sufficiently broad acceptance network and robust integration into existing payment infrastructures are particularly important. At the same time, the digital euro gives rise to tensions between attractiveness and financial stability, privacy and regulatory traceability, and public infrastructure and private-sector innovation. Holding limits, waterfall and reverse-waterfall mechanisms, and an appropriately calibrated remuneration model may help to mitigate these tensions. The digital euro can therefore contribute to European payments sovereignty, provided that it is designed as a user-oriented public infrastructure and underpinned by the functional and economically viable involvement of commercial banks. |
| Keywords: | Digital euro, Retail central bank digital currency (CBDC), European payments sovereignty, Consumer adoption, Bank intermediation, Payment systems, Financial stability, Offline payments |
| JEL: | E42 E58 G21 G28 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:343664 |
| By: | Burak Deniz; Tarik Alperen Er; Ibrahim Yarba |
| Abstract: | This study investigates how banks' foreign exchange (FX) position affects their lending behavior following an exchange rate shock, and the resulting effects on firms' real economic activities. Utilizing bank-firm level credit registry data along with financial statements of all incorporated firms, we show that banks with higher exposure to FX risk cut their lending and shorten their loan maturities compared to banks with lower exposure. Our further analyses indicate that banks transmit the shock they experience not only to the firms with FX risk but also to the firms with no direct FX risk. Moreover, we find that firms could not avoid the lending contraction by switching to low-exposure banks. This is evident only for SMEs, and not for large firms. We also document real effects, stemming from the banks’ role in propagation of FX shock. Consistent with the contraction in bank lending, SMEs with high-exposure banks exhibited a comparatively negative performance in their net sales, employment, and investment. Our findings underscore the importance of macroprudential policies that monitor and reduce banks’ currency mismatches, thereby mitigating the adverse effects of currency shocks on the real economy. They also highlight the importance of incorporating balance-sheet effects stemming from foreign exchange risk into the conduct of monetary policy. |
| Keywords: | Bank lending, Foreign exchange risks, Exchange rate shock, SME |
| JEL: | E44 F31 G21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2617 |
| By: | Chakraborty, Lekha (National Institute of Public Finance and Policy); Prasanth C. (Christ (Deemed to be University), Bengaluru) |
| Abstract: | This paper investigates whether AI adoption has induced structural changes in the determinants of Indian sovereign bond yields across the maturity spectrum. The rapid global adoption of artificial intelligence (AI) in times of macroeconomic turmoil, particularly generative AI technologies since late 2022, has prompted intense debate about its potential macroeconomic consequences, including the measurement issues. Using monthly data from 2000 to 2025 and autoregressive distributed lag (ARDL) models augmented with an AI dummy variable and slope interactions on expected inflation and broad money (M3) growth, we identify significant regime shifts. Results indicate that in the post-AI period, longer-maturity yields exhibit markedly reduced sensitivity to expected inflation and money supply growth. This dampening is statistically significant, with interaction terms largely offsetting baseline positive elasticities. By contrast, short-term yields (91-day Treasury bills) show heightened inflation sensitivity in the AI era, while intermediate yields display mixed patterns. These findings are consistent with theoretical predictions that AI-driven productivity gains could lower equilibrium real interest rates and weaken traditional monetary transmission channels at the long end of the yield curve. For an emerging market like India, where inflation expectations have historically influenced borrowing costs, such changes may enhance monetary policy independence but complicate fiscal-monetary coordination. The paper contributes to the sparse empirical literature on AI’s financial market implications in emerging economies. Policy implications include the need for the Reserve Bank of India (RBI) to recalibrate forward guidance and liquidity operations in light of evolving yield dynamics. |
| Keywords: | Sovereign bond yields ; artificial intelligence ; ARDL bounds testing ; structural change ; monetary transmission ; India |
| JEL: | E43 E44 O33 G12 C22 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:npf:wpaper:26/450 |
| By: | Kok, Christoffer; Barquero, Javier Arranz; Bertelsen, Christian Hellum |
| Abstract: | This paper examines how bank capital conditions the effect of competition on credit risk in lending markets, informing the debate on banking competition, deregulation, and risk-based supervision. Using ECB supervisory data for 146 euro area banks across 19 countries over 2020Q2–2025Q3, we analyze whether this relationship depends on banks’ regulatory capital positions. We find that greater market power is associated with higher subsequent credit risk, while stronger capitalization is associated with lower risk. Crucially, competition reduces credit risk primarily for well-capitalized banks, whereas the effect is weak or absent for banks with lower capital ratios. By aligning the measurement of competition and risk with the pricing-based mechanism, the paper provides a direct empirical test of the borrower-risk channel and offers an explanation for mixed evidence in the competition–risk literature. The results highlight the importance of considering the interaction between competition and prudential capital requirements when assessing financial stability. JEL Classification: G21, G28, L11, C23 |
| Keywords: | bank capital, bank competition, borrower-risk channel, credit risk, financial stability |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263285 |
| By: | Maria Alessia Aiello (Bank of Italy); Salvatore Cardillo (Bank of Italy); Caterina Ciancaglioni (Bank of Italy) |
| Abstract: | We analyse the effects of internal ratings-based (IRB) models on risk-weighted asset (RWA) variability, investment strategies and capital management among significant banks in the euro area, using a unique supervisory dataset. Our findings indicate a decline in RWA density (i.e. the ratio of risk-weighted assets to total exposure at default) following the adoption of internal models. The magnitude of this reduction varies across banks and is influenced by balance sheet characteristics. We find no evidence that, in the post-2015 SSM setting, weakly capitalized or fragile banks reduced RWA density more than other banks after the adoption of IRB models along the margins examined in the paper. This is consistent with the view that harmonized supervision may have limited the scope for opportunistic post-adoption reductions in RWAs. Finally, we provide evidence that IRB models encourage banks to reallocate credit towards more profitable assets - particularly those to large non-financial corporations - while reducing sovereign and central bank exposures. |
| Keywords: | risk-weighted assets, internal ratings-based models, bank regulation |
| JEL: | G21 G28 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:wptemi:td_1537_26 |
| By: | Hellmers, Emilio; Henry, Jérôme; Santone, Arianna Pilar |
| Abstract: | This paper reviews system-wide liquidity stress-testing (SLST) frameworks in the European Union and illustrates the impact of a common aggregate liquidity shock on the EU financial system using a range of modelling approaches. Motivated by recent episodes of market turmoil, including the COVID-19 crisis, the 2022 energy shock and the 2023 banking stress, the analysis focuses on the propagation of liquidity stress across financial sectors and institutions. The paper combines a survey of SLST practices among EU authorities, a mapping of cross-sectoral financial interconnections in the euro area, and stress-testing simulations based on jurisdiction-specific models, an ESRB cross-sectoral balance sheet tool and the ECB’s system-wide stress-testing framework. The results suggest that the financial system remains broadly resilient to a severe aggregate liquidity shock over a 30-day horizon, with net outflows ranging from 0.5% to 0.7% of total financial assets. However, second-round effects, including fire sales, mark-to-market losses and behavioural responses, can significantly amplify the initial shock. The findings highlight the importance of financial interconnections, the role of non-bank financial intermediaries in shock transmission and the stabilising effect of central bank interventions. This paper also provides a stocktake of existing SLST practices and discusses priorities for the further development of SLST in Europe. JEL Classification: C63, G01, G21, G23, G28, E58 |
| Keywords: | contagion, financial interconnectedness, financial stability, fire sales, liquidity stress testing, macroprudential policy, non-bank financial intermediaries, stress testing, system-wide liquidity stress testing, systemic liquidity risk |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:srk:srkops:202631 |
| By: | Donato Ceci (Bank of Italy); Claudia Pacella (Bank of Italy); Fabrizio Venditti (Bank of Italy) |
| Abstract: | This paper examines the unexpectedly weak consumption dynamics of euro-area households following the COVID-19 crisis. Despite a recovery in disposable income during the 2022 reopening and the government measures mitigating the energy shock after Russia's invasion of Ukraine, the saving rate rose and remained high through 2025. We show that tighter monetary policy dampened consumption via higher interest rates, while inflation eroded real financial wealth, limiting spending further. Persistently weak consumer confidence also weighed on expenditure. However, even after taking account of these factors, the increase in savings remains unusually large by historical standards. We discuss two possible explanations: heightened pessimism about future income due to the exceptional sequence of shocks, and the disproportionate contribution of wealthier households to aggregate savings, as suggested by micro-level evidence. |
| Keywords: | consumption, savings, energy, monetary policy |
| JEL: | C11 C32 C53 C54 E21 E31 E37 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_1047_26 |
| By: | Riccardo Degasperi (Bank of Italy); Tara Hamadi (Queen Mary University of London); Filippo Natoli (Bank of Italy); Valerio Nispi Landi (Bank of Italy); Kevin Pallara (Bank of Italy) |
| Abstract: | We examine the macroeconomic implications of the green transition, focusing on the role of carbon policy. Using high-frequency surprises around regulatory events in the EU Emissions Trading System and a Proxy-SVAR framework, we identify two distinct shocks: one to the current policy stance (current stance shocks) and another to the expected path of the green transition (expected path shocks). Both types of shocks reduce greenhouse gas emissions and economic activity, but differ in their inflationary effects. Current stance shocks raise inflation, while expected path shocks are deflationary. A structural scenario analysis shows that monetary policy easing following a path shock substantially mitigates output losses and moderates the decline in inflation. Moreover, path shocks lower expected growth, depress economic sentiment and increase uncertainty, while also encouraging a reallocation towards greener assets and reducing climate-related risks. These findings align with the predictions of an environmental New Keynesian model. Our results highlight the importance of forward guidance in climate policy, emphasizing its role in shaping macroeconomic expectations and accelerating the transition to a low-carbon economy. |
| Keywords: | climate policy, forward guidance, inflation, green transition |
| JEL: | C3 E3 H23 Q58 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:wptemi:td_1540_26 |
| By: | Filippo Natoli (Bank of Italy) |
| Abstract: | Hot temperatures are known to impair economic growth, but extreme cold also poses significant macroeconomic risks. Yet, despite the rising temperature volatility in a warming climate, the aggregate effects of cold shocks remain comparatively understudied, particularly regarding their transmission through the business cycle and their implications for inflation and monetary policy. I construct monthly unexpected heat and cold shocks for the United States using daily county-level temperatures. I find that heat shocks have negligible aggregate effects, whereas cold shocks significantly reduce industrial production, increase uncertainty, and are deflationary, triggering an endogenous monetary policy response. I show that identifying temperature surprises crucially depends on how expectations, extremes, and aggregation are defined. As climate instability increases the probability of cold air outbreaks in the US, adaptation policies should take account of unexpected cold spells, highlighting a dimension of climate risk that has received limited attention so far. |
| Keywords: | temperature shocks, cold shocks, climate change, monetary policy |
| JEL: | C32 E32 E52 Q54 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:wptemi:td_1541_26 |
| By: | Itskhoki, Oleg; Mukhin, Dmitry |
| Abstract: | Tariffs, trade wars, and financial sanctions have become a common feature of the global economy. In response, many governments consider departing from the Washington Consensus and adding unconventional tools such as foreign exchange interventions, capital controls, and financial repression. This paper asks when, and how, financial repression can be used in the currency market, and how it compares with foreign exchange (FX) interventions and conventional monetary and fiscal policy. We show that although the use of financial repression is welfare-reducing in response to international shocks, even when FX interventions are fully constrained, it can be effectively used for redistributive and fiscal reasons. Greater international financial isolation makes financial repression more potent in extracting fiscal surplus from the private sector. |
| Keywords: | currency market;financial repression;financial sanctions;official reserves |
| JEL: | F3 G3 L81 |
| Date: | 2026–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:140876 |
| By: | Yohann Berthelin (Université Lumière Lyon 2, CNRS, Université Jean-Monnet Saint-Etienne, emlyon business school, GATE, 69007, Lyon, France); Lise Clain-Chamosset-Yvrard (Université Lumière Lyon 2, CNRS, Université Jean-Monnet Saint-Etienne, emlyon business school, GATE, 69007, Lyon, France) |
| Abstract: | We address the question of whether macroprudential policy can extend its mandate beyond correcting financial frictions to also internalizing environmental externalities. We analyze a dynamic general equilibrium model with two externalities: financial frictions and pollution from using brown capital. Our model features heterogeneous agents with infinite lifetimes, of two kinds of capital, polluting and non-polluting, and of a macroprudential policy represented by differentiated loan-to-value (LTV) through a credit constraint faced by entrepreneurs. First, we derive closed-form expressions for optimal differentiated LTV ratios that replicate the social planner’s allocation. Second, the green LTV internalizes financial frictions only, while the brown LTV additionally accounts for pollution externalities, which can turn negative when environmental costs are sufficiently high, indicating that the first-best allocation instead requires a tax-like penalty on the financing of dirty capital rather than a conventional non-negative loan-to-value ratio. Third, the LTV associated with polluting capital becomes more stringent when environmental quality directly affects agents’ utility rather than total factor productivity. |
| Keywords: | Environmental policy, Macroprudential policy, Environmental transition |
| JEL: | E32 Q50 Q58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:gat:wpaper:2608 |
| By: | André Binette; Colleen Smith |
| Abstract: | This note presents Segmented Inflation Dynamics (SID), a data-driven tool for assessing trend inflation. SID uses time-series segmentation to divide the price index into contiguous segments with stable inflation rates. The segmentation breaks are identified from the data. The slope of each segment provides a well-defined estimate of trend inflation that is stable but responsive to persistent shifts. Using Canadian data from 1992 to 2025, the note describes the resulting inflation segments, tests the robustness of the method and assesses its real-time properties. Results show that SID offers a stable, interpretable measure of trend inflation, with limited sensitivity to short-term volatility and quick adjustment to shifts in inflation dynamics. Based on data through December 2025, SID indicates that Canada’s trend inflation has been near 2 percent since early 2024. |
| Keywords: | Models and tools; Econometric, statistical and computational methods; Monetary policy; Inflation dynamics and pressures |
| JEL: | C C2 C22 E E3 E31 E5 E52 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-43 |
| By: | Guillermo Calvo; Emilio Colombi; Fabrizio Coricelli; Pablo Ottonello |
| Abstract: | We document the macroeconomic patterns that characterize labor market recovery from financial crises. Using a sample of postwar recession episodes from around the world, we show that financial crises are typically followed by jobless recoveries, with a sluggish recovery in employment relative to output. A departure from this empirical regularity occurs in emerging-market crises with high inflation, which feature strong employment recoveries but persistent declines in real wages and result in “wageless recoveries.” Our findings highlight the central role of financial components in labor input costs and nominal wage rigidities in shaping labor market dynamics following economic crises. |
| Keywords: | Monetary policy; Inflation dynamics and pressures; Real economy and forecasting |
| JEL: | E E2 E3 E31 E4 E44 F F3 F32 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-31 |
| By: | Rishabh Choudhary; Chetan Dave; Chetan Ghate |
| Abstract: | Managing rapid economic growth in India naturally brings into focus the role of inflation forecasts for monetary and fiscal policy making. We investigate whether any of a large set of forecasting models improves upon a univariate auto-regression in forecasting core consumer price inflation. Using a monthly panel of forty macroeconomic and financial indicators we estimate nine classes of models that range from an auto-regression to various factor models, quantile regressions and machine learning specifications. In doing so, we also account for inflation expectations and climate change variables. Our root mean square forecast error model comparison metric operates at horizons of one, three, six and twelve months. With respect to the conditional mean, no model produces a forecast error significantly below that of an auto-regression at any horizon over the full comparison sample. With respect to the conditional distribution, quantile regressions that include estimated factors reduce forecast loss relative to a specification without such factors at every quantile and horizon. Our approach is general enough to be applicable to forecasting core inflation in other emerging market economies. |
| Keywords: | inflation forecasting in EMEs, core inflation, diffusion index models, quantile regression, machine learning, inflation targeting |
| JEL: | C22 C53 E31 E37 O23 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-83 |
| By: | Michael D. Bordo; Carolyn Wilkins |
| Abstract: | This paper uses the history of private money to assess the conditions under which stablecoins could function safely at scale and what their growth may imply for U.S. monetary power. Historical systems of private money in the United Kingdom, the United States, Canada, Sweden, and Switzerland show that par circulation depended on institutional arrangements rather than payment technology. Drawing on the monetary history of private money, convertibility, and international currencies, the paper identifies five foundations for scalable private money: credible convertibility, high-quality and transparent backing, a uniform regulatory perimeter, par clearing infrastructure, and credible crisis management and loss allocation. Stablecoins may improve settlement speed, programmability, and cross-border access, but they do not remove these requirements. Applying this framework to contemporary stablecoins and the GENIUS Act, the paper finds that the Act addresses several of these foundations more fully than others, with crisis management and cross-border coordination less fully developed. Dollar stablecoins could extend the reach of dollar settlement, but historical experience reviewed here suggests that whether this strengthens the dollar system depends both on the institutional framework supporting stablecoins and on the deeper foundations of U.S. monetary dominance: confidence in U.S. institutions, fiscal capacity, monetary credibility, and the rule of law. |
| JEL: | E42 E44 G15 N20 N40 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35768 |
| By: | Kar, Sohini |
| Abstract: | As microfinance has expanded in India, so have efforts to regulate the sector. The competing regulatory authority of the state governments and the central bank have produced unexpected refusals by borrowers to repay loans, claiming waivers. These waivers, however, are often found to be fakes. In the context of financial inclusion, this article examines regulatory authority at the margins of the state. The growth of microfinance has raised concerns over the systemic impact of non-performing assets in the sector. While the expansion of formal finance has required the greater reach of the central bank, this often comes into competition with the political arm of the state. This paper shows how waivers—both real and fake—operate as a form of claims-making by poor borrowers. |
| Keywords: | microfinance;financial inclusion;regulation;central banks;debt |
| JEL: | F3 G3 J1 |
| Date: | 2026–08–29 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:138696 |
| By: | Xi Chen |
| Abstract: | Under the classical gold standard, historians have long debated what guided the Bank of England's adjustments to Bank Rate: whether policy followed a mechanical gold-standard rule or discretion when City or exchange conditions required it, and whether domestic money-market stability or external convertibility carried greater weight. This paper revisits those questions with a London-specific monthly panel, 1870-1913, jointly testing ten domestic and external indicators the Court watched when setting the published minimum rate. The findings fit neither a single frozen channel nor unstructured ad hoc policy. Instead, the Bank appears to have drawn repeatedly on a multivariate information set-trade settlement, gold movements, City asset prices, bill-market conditions, and episodic convertibility pressure-with state-dependent weights across subperiods. In the confirmatory specification, exports, gold flow, and industrial share prices carry the clearest joint forecasting content for changes in Bank Rate. Gold flow forecasts rate changes even when reserve stock does not, separating bullion settlement from balance-sheet position. Bill-market and convertibility pressures also carry incremental forecasting content in the multivariate specification, though their prominence depends on how domestic and external indicators are modeled together. The overall pattern is most consistent with systematic discretion under the classical gold standard. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.10544 |
| By: | Juan Diego Chavarría Mejía (Department of Economic Research, Central Bank of Costa Rica); Fabio Gómez-Rodríguez (Department of Economic Research, Central Bank of Costa Rica); Claudio Mora-García (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | This article proposes a structural vector autoregression (SVAR) to study the forces driving inflation in Costa Rica, a small open economy. We estimate the model using Bayesian methods and combine several identification strategies. The resulting historical decomposition attributes inflation dynamics to structural drivers, including supply, demand, exchange-rate, and monetary-policy shocks, classified according to their global or domestic origin. The historical decomposition attributes the inflation surge from 2021Q4 to 2023Q1 primarily to global factors. The subsequent disinflation from 2023Q2 to 2024Q1 reflected both a decline in global inflationary pressures and additional downward pressure from domestic factors. Domestic monetary-policy shocks contributed little to realized inflation, averaging about +0.07 percentage points per quarter. Long-run expectations remained considerably more stable than headline inflation, while the model implied inflation target displayed a gradual downward drift and its associated shock contributed to the initial disinflation. Taken together, these results identify relative resilience, but not perfect alignment, of the perceived nominal anchor and highlight the implicit inflation target as a useful indicator for evaluating Costa Rica's inflation-targeting regime. ***Resumen: Este artículo propone un modelo estructural de vectores autorregresivos (SVAR) para estudiar las fuerzas que impulsan la inflación en Costa Rica, una economía pequeña y abierta. Estimamos el modelo mediante métodos bayesianos y combinamos varias estrategias de identificación. La descomposición histórica resultante atribuye la dinámica de la inflación a distintos determinantes estructurales, incluidos choques de oferta, demanda, tipo de cambio y política monetaria, clasificados según su origen global o doméstico. La descomposición histórica atribuye el aumento de la inflación entre el cuarto trimestre de 2021 y el primer trimestre de 2023 principalmente a factores globales. La posterior desinflación, entre el segundo trimestre de 2023 y el primer trimestre de 2024, reflejó tanto una disminución de las presiones inflacionarias globales como una presión adicional a la baja proveniente de factores domésticos. Los choques domésticos de política monetaria contribuyeron poco a la inflación observada, con un promedio de alrededor de +0, 07 puntos porcentuales por trimestre. Las expectativas de largo plazo se mantuvieron considerablemente más estables que la inflación general, mientras que la meta de inflación implícita en el modelo mostró una tendencia gradual a la baja y el choque asociado a esta contribuyó a la desinflación inicial. En conjunto, estos resultados muestran una relativa resiliencia, aunque no una alineación perfecta, del ancla nominal percibida y destacan la meta de inflación implícita como un indicador útil para evaluar el régimen de metas de inflación de Costa Rica. |
| Keywords: | monetary policy; inflation targeting; implicit target; expectations anchoring; small open economy; Bayesian SVAR; sign restrictions; block exogeneity; historical decomposition; Costa Rica; política monetaria; metas de inflación; meta implícita; anclaje de expectativas; economía pequeña y abierta; SVAR bayesiano; restricciones de signo; exogeneidad por bloques; descomposición histórica |
| JEL: | E31 E52 F41 C32 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:apk:doctra:2607 |
| By: | Giancarlo Mazzoni (Bank of Italy) |
| Abstract: | Geopolitical developments have become a persistent and structurally relevant factor shaping the operating environment of banks. Their prudential significance does not arise from the existence of a distinct 'geopolitical' risk category, but from their capacity to amplify established vulnerabilities, including credit deterioration, market repricing, liquidity stress, funding instability, operational disruption, and governance weaknesses. This reading is also consistent with the broader SSM and European supervisory approach, which frames geopolitical developments as cross-cutting drivers of existing prudential risks rather than as a new standalone risk category. In this context, it is analytically more appropriate to refer to geopolitical uncertainty rather than geopolitical risk in a narrow sense. Geopolitical uncertainty is inherently cross-cutting, heterogeneous, nonlinear, and frequently transmitted through indirect channels. It therefore does not fit neatly within the traditional banking risk taxonomy but propagates through existing prudential categories and affects both sides of banks' balance sheets. This feature is particularly relevant for less significant institutions (LSIs), whose exposure is often not direct or cross-border, but embedded in domestic economic structures, sectoral concentrations, borrower vulnerabilities, and operational dependencies. Against this background, the paper documents how the supervisory approach of Banca d’Italia integrates geopolitical considerations within the standard prudential framework, rather than treating them as a separate supervisory silo. Evidence from recent supervisory cycles suggests that geopolitical uncertainty is reflected indirectly through its impact on governance, credit quality, provisioning adequacy, liquidity, operational resilience, funding sustainability, and capital demand. The paper also develops an original structural framework, inspired by contingent claims analysis and by the Merton approach, but adapted to the specific economics of banking. Relative to the standard Merton model, the proposed framework introduces asset-class heterogeneity, liability-class dynamics, endogenous funding costs, and a payout structure that makes it possible to model banks while preserving analytical tractability. The contribution is therefore not measurement in a narrow sense, but a consistent analytical framework to explain how geopolitical uncertainty affects asset performance, volatility, correlations, funding conditions, distance to default, and equity values. Its main aim is to support supervisory assessment and structured scenario analysis in an environment of fundamental uncertainty. |
| Keywords: | geopolitical uncertainty, banking supervision, prudential risk, contingent claims analysis |
| JEL: | G28 G32 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_1052_26 |