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on Central Banking |
| By: | Alexandra Glazova (Bank of Russia, Russian Federation); Maxim Nevalennyi (Bank of Russia, Russian Federation); Andrey Sinyakov (Bank of Russia, Russian Federation) |
| Abstract: | This article presents a diagrammatic model of a small open economy. The dynamics of this graphical model are illustrated using impulse responses from the corresponding formal semi- structural model (Quarterly Projection Model, QPM). This graphical model reflects the modern understanding of how a fiat monetary economy and the current global financial system operate.1 It describes the specifics of monetary policy (MP) responses to supply and demand shocks under inflation targeting and the importance of anchoring inflation expectations. It explicitly considers the foreign exchange market (taking into account its potential imperfections) and demonstrates the role of the exchange rate in the transmission of MP. The model helps to link the global financial (credit) cycle to accumulating risks to financial stability, which create constraints on MP (‘dilemma, not trilemma’) and require the use of additional policy instruments. In our view, the presented diagrammatic model is a simpler version of the graphical model for analysing monetary policy in a small open economy than that proposed by Basu and Gopinath (2024). Therefore, it is suitable for less experienced readers—undergraduate students. The model not only accounts for the constraints facing monetary policy in a small open developing economy with developed financial markets but also allows for the analysis of extreme cases, like the closure of the financial account of the balance of payments and the associated changes in monetary policy transmission. Consequently, the model can be used to explain the rationale behind the Bank of Russia’s monetary policy decisions over the entire inflation targeting period. The authors provide a detailed analysis of the Bank of Russia’s decisions from 2022 onward using the model. |
| Keywords: | monetary policy, small open economy, foreign exchange market, inflation targeting, monetary policy dilemma, diagrammatic general equilibrium model, Quarterly Projection Model (QPM), Bank of Russia |
| JEL: | E58 F38 F41 G28 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps154 |
| By: | Carlos Cañizares Martínez (BANQUE CENTRALE DU LUXEMBOURG); Adriana Lojschová (NATIONAL BANK OF SLOVAKIA); Alicia Aguilar (BANCO DE ESPAÑA) |
| Abstract: | This paper estimates the effects of standard monetary policy shocks on housing and other macro variables in Slovakia, a CESEE country. For that purpose, we use a non-linear local projection model which uncovers asymmetries in these effects around three different dimensions: high versus low economic growth, interest rates and inflation. The main findings in this study are as follows. First, we often find no evidence of standard monetary policy eliciting a contractionary response in house prices or housing investment. Second, evidence is weakest during recessions and periods of low interest rates or low inflation. Third, these findings may be linked to the inability of monetary policy to trigger significant contractionary effects on household lending, which in turn may be linked to the effective lower bound on interest rates, the predominance of fixed-rate mortgages in Slovakia or interaction between monetary and macroprudential policy. We also discuss the possible country characteristics that might drive these results and policy implications. |
| Keywords: | monetary policy, non-linearities, local projections, euro area |
| JEL: | C32 C36 E42 E52 E58 R21 R31 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2602 |
| By: | Dalziel, Paul |
| Abstract: | This paper introduces a finance channel for monetary policy. Following Black (1970) there is no money commodity in the paper's model. Instead, the medium of exchange is bank deposits supplied by the financial system in response to optimal rational expectations decisions by firms about financing investment in new capital assets, and demanded by households as part of their optimized financial portfolio of accumulated savings. The model demonstrates how central banks maintain price stability through changes in base interest rates (the Wicksell monetary policy rule) which influence the debt financing decisions of firms. |
| Keywords: | Financial Economics |
| URL: | https://d.repec.org/n?u=RePEc:ags:canzdp:263800 |
| By: | Sergey Ivashchenko (Bank of Russia, Russian Federation); Andrey Sinyakov (Bank of Russia, Russian Federation) |
| Abstract: | It is well-documented in economic literature that inflation expectations exhibit significant heterogeneity across various economic agents, notably households, firms, and financial institutions. This paper investigates the relative importance of these agents' expectations in shaping inflation dynamics within a general equilibrium framework. We introduce non-rational, non-systematic expectation shocks into an otherwise standard small open economy New-Keynesian model, calibrated and estimated using Russian data. This novel approach allows us to isolate exogenous variations in inflation expectations specific to each agent type and assess their distinct impacts on realized inflation. Our results demonstrate that central banks must respond explicitly to non-rational, non-systematic expectation shocks originating from private agents. Importantly, we find that expectation shocks from financial institutions (banks) exert a larger influence on realized inflation than shocks originating from households or firms. This outcome remains robust across multiple variations in model structure and parameterization. In contrast, the inflationary effects of households’ and firms’ expectation shocks manifest in ways unpredictable to these agents themselves, highlighting an expectations-feedback gap. The findings have important implications for monetary policy, particularly regarding communication strategies. |
| Keywords: | inflation expectations, heterogeneous agents, expectation shocks, monetary policy, financial institutions, New-Keynesian model, general equilibrium, diversity in inflation expectations |
| JEL: | E31 E37 E52 D84 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps152 |
| By: | Romain Baeriswyl; Kene Boun My; Camille Cornand |
| Abstract: | In a monetary system in which risk-free and risky money coexist, Gresham's law predicts that people will prefer to hoard risk-free money as a store of value and spend risky money as a medium of exchange. Establishing a payment system on the basis of risk-free money, such as a retail CBDC, while maintaining the fractional reserve banking system in place poses numerous challenges. In a laboratory experiment, we demonstrate that when the holding of risk-free money is unrestricted, people hold and pay with it extensively. However, when the ability to hold risk-free money is limited by a ceiling or an unattractive interest rate, people tend to hoard risk-free money and use risky money for payments. |
| Keywords: | Central Bank Digital Currency, Gresham's law, Laboratory experiment |
| JEL: | E52 E58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-03 |
| By: | Fernando Avalos; Boris Hofmann; José María Serena Garralda |
| Abstract: | Private equity funds play an increasingly important role in financial systems. Yet, the impact of monetary policy on their activity has been little explored so far. In this paper, we analyse the transmission of monetary policy through private equity (PE) deals, focusing on the impact on: (i) the volume of private equity deals; (ii) the use of leverage; and (iii) the pricing of those deals. We find that contractionary monetary policy shocks to the short end of the yield curve tend to dampen private equity activity, by reducing deal volumes, the use of leverage and deal prices. A credit channel of monetary transmission seems to affect deal volumes and the use of leverage, while a valuation channel appears to drive the transmission to deal pricing. Monetary policy shocks to the long end of the yield curve have weaker effects on PE activity. |
| Keywords: | private equity, buyouts, monetary policy, credit spreads, equity risk premium |
| JEL: | G21 G32 F32 F34 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1326 |
| By: | Martin Hodula; Simona Malovana |
| Abstract: | Do domestic or foreign interest rates matter more for investor behavior in a small open economy? This paper examines how domestic investors adjust mutual fund allocations in response to monetary policy shocks, using granular Czech mutual fund data from 2009 to 2023. Employing a local projection framework with an instrumental variables strategy, we show that fund flows react strongly to exogenous changes in interest rate differentials. Foreign monetary policy shocks are found to have a more pronounced effect than domestic ones. These responses occur almost exclusively through adjustments in inflows, with outflows remaining largely stable, indicating that monetary policy influences new allocations rather than causing redemptions. Exchange rate movements, economic sentiment, and fund liquidity further modulate these effects, making them stronger when the currency depreciates, sentiment is negative, or funds are less liquid. |
| Keywords: | Domestic investors, foreign monetary policy, interest rate differentials, liquidity, mutual fund flows, small open economy |
| JEL: | E44 E52 F32 G11 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2025/11 |
| By: | Fernando Ávalos (BANK FOR INTERNATIONAL SETTLEMENTS); Boris Hofmann (BANK FOR INTERNATIONAL SETTLEMENTS); Jose M. Serena (BANCO DE ESPAÑA) |
| Abstract: | Private equity funds play an increasingly important role in financial systems. Yet the impact of monetary policy on their activity has been little explored so far. In this paper, we analyse the transmission of monetary policy through private equity (PE) deals, focusing on the impact on: (i) the volume of private equity deals; (ii) the use of leverage; and (iii) the pricing of those deals. We find that contractionary monetary policy shocks at the short end of the yield curve tend to dampen private equity activity, by reducing deal volumes, the use of leverage and deal prices. A credit channel of monetary transmission seems to affect deal volumes and the use of leverage, while a valuation channel appears to drive the transmission to deal pricing. Monetary policy shocks at the long end of the yield curve have weaker effects on PE activity. |
| Keywords: | private equity, buyouts, monetary policy, credit spreads, equity risk premium |
| JEL: | G21 G32 F32 F34 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2605 |
| By: | Martin Hodula; Simona Malovana; Lukas Pfeifer |
| Abstract: | This paper examines how mortgage lending adjusts when higher interest rates coincide with tighter borrower-based regulatory constraints. Using loan-level data from the Czech Republic for 2020–2023, we exploit a unique policy sequence that combines rapid monetary tightening with the subsequent re-tightening of LTV, DTI, and DSTI limits in order to trace changes in borrower and loan characteristics among new originations. During the initial phase of tightening, higher interest rates curtailed mortgage lending, yet some adjustment was still possible: new loans started to feature higher downpayments and longer maturities, which partly absorbed the rise in financing costs. As tightening persisted and borrower-based limits were reinstated, these adjustment margins narrowed. Liquidity buffers were depleted, and new lending increasingly reflected financially stronger borrowers with lower leverage and lower default risk. The evidence further shows that while monetary policy primarily reduced lending volumes, it was the re-application of borrower-based limits that improved the risk composition of new loans. |
| Keywords: | Borrower-based limits, household finance, loan-level data, macroprudential policy, monetary policy |
| JEL: | E58 G21 G28 G51 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2026/02 |
| By: | Gabriela Araujo; David Rivero Leiva; Hugo Rodríguez Mendizábal |
| Abstract: | This paper develops a general equilibrium banking model where lending and payment flows endogenously link credit, liquidity, and solvency risks. Banks issue deposits at loan origination. As deposits circulate, reserve settlement creates liquidity exposure and repayment shortfalls generate credit and solvency risks. These risks are jointly determined by credit provision and bound balance sheet expansion at an internally determined profitability threshold rather than an external funding or capital limit. We present an application of the theory that provides a new look to the bank lending channel where monetary policy operates through the endogenous generation of bank risks. Our quantitative results align with empirical observations, including declines in deposit growth after monetary policy tightening and its different impact on lending depending on the balance sheet strength of banks as well as the relation of funding costs in interbank markets with liquidity and solvency ratios. |
| Keywords: | banks, credit risk, interbank market, liquidity risk, monetary policy, payments, risk premium, solvency risk |
| JEL: | E10 E44 E52 G21 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1549 |
| By: | Sergey Ivashchenko (Bank of Russia, Russian Federation) |
| Abstract: | The small-scale open economy dynamic stochastic general equilibrium (DSGE) models are estimated with a second-order approximation. The models differ in monetary policy rules. Optimal policy under commitment is best according to marginal likelihood. The conventional Taylor-type rule performs better in short-term forecasting but loses to other policies in long-term forecasting. Monetary policy rules heavily influence the dynamic and estimated parameters of models. They may produce a "price puzzle" and easily lead to the absence of inflation anchoring. The most interesting results relate to the performance of different rules in economies estimated with other rules. Very hawkish policies in a usual economy lead to a non-unique solution. An explosive trajectory is produced by the usual policy in an economy with a fiscal authority that does not care about debts/assets. Only the optimal policy under commitment can work in each of them. However, it may lead to a worse loss function than that produced by simple rules. |
| Keywords: | DSGE; monetary policy; estimated optimal policy under commitment |
| JEL: | C31 C32 E37 E52 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps144 |
| By: | Vadim Grishchenko (Bank of Russia, Higher School of Economics, Russian Federation); Maria Lymar (Bank of Russia, MSU, Russian Federation); Andrei Sinyakov (Bank of Russia, Russian Federation) |
| Abstract: | In theory, the anchoring of household inflation expectations contributes a lot to the success of inflation targeting, since inflation expectations may significantly influence consumer and financial decisions. In this paper, we estimate the causal relationship between information and the inflation expectations of Russian households using a randomized controlled trial (RCT) approach applied to the data of the 6th wave of the Survey of Consumer Finance (2024). To the best of our knowledge, this is the first study of this kind based on Russian data. According to our estimates, direct, quantitative estimates of future inflation are more sensitive to incoming information. Respondents react most strongly to the treatment about growth in the money supply in the previous year, adjusting their inflation expectations upwards. At the same time, as opposed to research based on data from other countries, we find no relationship between information about inflation in the past year or about the central bank's target and its success in inflation targeting, on the one hand, and household inflation expectations, on the other. This means that monetary policy should react more strongly to pro-inflationary shocks to achieve the target. Actions, not words, matter the most. |
| Keywords: | inflation expectations, randomized controlled trial (RCT), Household Survey of Consumer Finances, central bank communication policy |
| JEL: | C83 C93 D84 E31 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps148 |
| By: | K. Azim Ozdemir |
| Abstract: | Changes in firm executives’ perceptions of profitability may lead to business expansion or contraction. This study focuses on the antecedents and consequences of changes in profitability perceptions. First, conceptual constructs related to how firm executives perceive and interpret economic conditions are developed. Subsequently, the relationships among these constructs are modeled within the framework of Structural Equation Modeling. Using data from interviews conducted under the Economic Lens to the Real Sector (RESÝM) program carried out by the Central Bank of the Republic of Türkiye (CBRT), the results obtained from the estimated model can be summarized as follows: (1) During periods of high inflation, the fear of losing profitability becomes a dominant sentiment among firms and disrupt pricing behavior. (2) In periods of tight monetary policy, firms’ optimism regarding external demand more strongly motivates production activities. (3) When monetary policy is tight, employment intentions tend to be observed predominantly among firms that also exhibit strong investment intentions. (4) Even when monetary policy is supportive, firms may continue to perceive financial conditions as tight in certain periods. |
| Keywords: | Firm behavior, Structural equation modeling, Central Bank of the Republic of Türkiye (CBRT), RESIM program, Latent variables, Monetary policy |
| JEL: | C51 D9 E31 E32 E52 E71 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2603 |
| By: | Steele, David; Wright, Julian |
| Abstract: | The ex post failure of uncovered interest parity (i.e. the forward premium bias) in the post-Bretton Woods era is well documented. Recently, explanations have been offered for this failure which have centred upon the unusual monetary experience over this period. We test these explanations using data from earlier periods as well as subsequent to the adoption of an inflation target. Canada operated a flexible exchange rate regime during the Bretton Woods era, providing a unique opportunity to examine ex post deviations from uncovered interest parity. Canada is also unusual in that it has pursued an explicit inflation rate target since February 1991. We find no forward premium bias over the flexible rate period during Bretton Woods, as well as prior to Canada's adoption of inflation rate targeting (when learning would be expected to have taken place), while a forward premium bias does exist during the inflationary/disinflationary period or subsequent to the new monetary regime. |
| Keywords: | Financial Economics |
| URL: | https://d.repec.org/n?u=RePEc:ags:canzdp:263781 |
| By: | Guender, Alfred V.; Tam, Julie |
| Abstract: | There is a great deal of support for nominal income targeting in the literature on strategies for monetary policy in a closed economy framework. Is nominal income targeting equally attractive in a small open economy? This paper compares nominal income targeting to alternative monetary policy rules in a stochastic macro model for a small open economy. We find that both, the weighting in the overall price level of the exchange rate and foreign prices and the elasticity of output supplied with respect - to the real exchange rate, are important factors in assessing the attractiveness of nominal income targeting. In a small open economy where the size of both parameters is not negligible, a rule targeting the overall price level may actually be preferred to nominal income targeting. |
| Keywords: | Financial Economics |
| URL: | https://d.repec.org/n?u=RePEc:ags:canzdp:263799 |
| By: | Guender, Alfred V. |
| Abstract: | The effectiveness of the bank lending channel of monetary policy hinges on the extent to which changes in the availability of bank credit relative to non-bank credit are systematically transmitted to the real sector of the economy. On this count, there is no evidence of a link between three finance mix , variables and economic activity in New Zealand during selected intervals over the 1967-87 period. Similar, unfavourable results are reported by the investigation of the connection between movements in an interest rate spread and real economic performance between 1975 and 1994. Moreover, neither the finance mix variable nor the spread respond consistently to changes in various indicators of monetary policy. The results reported in the paper cast serious doubt on the existence of a potent bank lending channel of monetary policy in New Zealand either before or after the reforms of the mid-1980s. |
| Keywords: | Financial Economics |
| URL: | https://d.repec.org/n?u=RePEc:ags:canzdp:263783 |
| By: | Joe Cannataci; Benjamin Fehrensen; Mikolai G\"utschow; \"Ozg\"ur Kesim; Bernd Lucke |
| Abstract: | The European Central Bank (ECB) is working on the "digital euro", an envisioned retail central bank digital currency for the Euro area. In this article, we take a closer look at the "digital euro FAQ", which provides answers to 26 frequently asked questions about the digital euro, and other published documents by the ECB on the topic. We question the provided answers based on our analysis of the current design in terms of privacy, technical feasibility, risks, costs and utility. In particular, we discuss the following key findings: (KF1) Central monitoring of all online digital euro transactions by the ECB threatens privacy even more than contemporary digital payment methods with segregated account databases. (KF2) The ECB's envisioned concept of a secure offline version of the digital euro offering full anonymity is in strong conflict with the actual history of hardware security breaches and mathematical evidence against it. (KF3) The legal and financial liabilities for the various parties involved remain unclear. (KF4) The design lacks well-specified economic incentives for operators as well as a discussion of its economic impact on merchants. (KF5) The ECB fails to identify tangible benefits the digital euro would create for society, in particular given that the online component of the proposed infrastructure mainly duplicates existing payment systems. (KF6) The design process has been exclusionary, with critical decisions being set in stone before public consultations. Alternative and open design ideas have not even been discussed by the ECB. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2601.18644 |
| By: | María Alejandra Amado (BANCO DE ESPAÑA) |
| Abstract: | Macroprudential FX regulations aim to reduce systemic currency-mismatch risks, yet their distributional effects on firms’ access to credit remain poorly understood. This paper studies Peru’s 2014 dedollarization policy, which sharply increased reserve requirements on banks’ foreign-currency liabilities in proportion to their dollar lending to nontradable firms. Exploiting cross-sectional variation in banks’ exposure and using administrative loan-level data covering the universe of firms, I find that moving from the median to the 75th percentile of exposure reduces growth in total new loans by roughly 10 percentage points for micro and small firms, with no significant effects for medium or large firms. Larger firms absorb the shock by reallocating borrowing across banks and into local currency credit, whereas micro firms experience sharp declines in both dollar and total credit, higher borrowing costs, and modest employment losses. The results highlight a trade-off between macroprudential objectives and credit access for small firms. |
| Keywords: | macroprudential FX regulations, currency mismatch, small firms, emerging markets, borrowing constraints, bank lending channel |
| JEL: | E43 E58 F31 F38 F41 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2604 |
| By: | Danila Ovechkin (Bank of Russia, Russian Federation) |
| Abstract: | The deviation of aggregate demand from its equilibrium level is traditionally considered as an important factor of inflation. However, modern studies increasingly find it difficult to detect a significant connection between the growth of consumer prices and changes in business activity, which raises questions about the efficiency of monetary policy. One of the most effective ways to solve the problem of the missing relationship between inflation and business activity is to study the components of the price index for the heterogeneity of the influence of business activity on the inflation of individual components. Foreign studies show that the Phillips curve, which has become flat in relation to the aggregate price index, stays steep in relation to individual goods and services. This paper examines the influence of business activity on the inflation of components of the CPI in the Russian economy. The decomposition of the CPI into cyclical (sensitive to changes in aggregate demand) and acyclical (determined to a greater extent by other factors) components is carried out on the basis of an estimate of the coefficients of the Phillips curve modified for disaggregated price dynamics. The modified Phillips curve takes into account the change in the monetary policy regime, the impact of the exchange rate and relative prices on the inflation of CPI components, as well as the asymmetric response of the growth of prices of individual goods and services to the shock of the general price level growth. The results obtained confirm the hypothesis of the heterogeneity of the influence of demand on the inflation of individual goods and services in the Russian economy. Cyclical inflation is shown to be much more closely related to business activity than the general price level inflation. The dynamics of cyclical and acyclical inflation in 2021-2024 fully corresponds to the dynamics of aggregate demand. Only the modified Phillips curve made it possible to carry out such a decomposition, the results of which are stable to changes in the proxies for business activity, as well as to the methods of weighting the inflation of the CPI components. The results obtained can be further used in the analysis of price dynamics and the implementation of monetary policy. |
| Keywords: | inflation, business cycle, cyclical inflation, acyclical inflation, Phillips curve |
| JEL: | C22 E31 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps149 |
| By: | Wright, Julian |
| Abstract: | This paper presents a model where shocks to interest rates, company earnings and the earnings of financial intermediaries all affect the investment of small but not large firms. These shocks also affect the extent of financial intermediation and companies' debt choice. Evidence from micro and macro data supports the model's predictions. I show that shocks which work by weakening the financial position of firms can explain a sizeable part of the growth slowdown in recessions. Conversely, I show that shocks which work by restricting the ability of financial intermediaries to lend are not significant. Consistent with this I find little evidence of a bank lending channel. |
| Keywords: | Financial Economics |
| URL: | https://d.repec.org/n?u=RePEc:ags:canzdp:263780 |
| By: | Sinem Hacioglu Hoke; Daniel A. Ostry; Hélène Rey; Adrien Rousset Planat; Vania Stavrakeva; Jenny Tang |
| Abstract: | Drawing on 100 million transactions, we show how speculators, hedgers, and market makers interact in the world’s largest FX derivatives market, and that derivatives trading can affect exchange rates. Firms in the largest client sectors—pension and investment funds, insurers, and nonfinancials—use FX derivatives primarily to hedge currency risk, with dealer banks providing the liquidity. Hedge funds, with comparatively smaller net exposures, trade speculatively, whereas dealer banks insulate themselves from changes in speculative demand by taking offsetting positions with hedgers, especially nonfinancials. Non-bank market makers, instead, take residual exchange-rate exposures “on the margin”. Hedge funds’ speculative flows help transmit monetary policy shocks to exchange rates, while investment funds' unwinding of hedges contribute to dollar appreciations when credit risk rises. Our results highlight that exchange rates depend on the composition of trading activities in FX derivatives markets. |
| JEL: | F30 F31 G15 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34588 |
| By: | Blejer, Mario I.; Leiderman, Leonardo |
| Keywords: | Financial Economics |
| URL: | https://d.repec.org/n?u=RePEc:ags:cladsp:262900 |
| By: | Cardoso, Eliana A. |
| Keywords: | Financial Economics |
| URL: | https://d.repec.org/n?u=RePEc:ags:cladsp:263623 |