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on Central Banking |
| By: | Rami Najjar; Adam Hale Shapiro |
| Abstract: | We show that the underlying source of inflation impacts financial market perceptions of the persistence of monetary policy tightening. Investors expect policy tightening to be more persistent inflation is driven by demand factors. During supply-driven episodes, however, investors perceive tightening as less persistent and less effective at producing a disinflation. These results point to a state-dependent financial market response to monetary policy: credibility, and therefore financial-market transmission, depends on what kind of inflation the central bank is perceived to be fighting. |
| Keywords: | monetary transmission; inflation expectations; high frequency; taylor rule |
| JEL: | E43 E52 E58 |
| Date: | 2024–11–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:102150 |
| By: | Nautz, Dieter |
| Abstract: | This paper investigates how the ECB's monetary policy affects consumers' perceptions about the credibility of the inflation target. Monetary policy is assessed by the gap between the actual policy rate and a Taylor rate to approximate the interest rate expected by the public. Drawing on survey data for German consumers from 2019 to 2024, we find that the ECB's interest rate policy contributes significantly to the credibility of the inflation target. In particular, the massive dent in inflation target credibility observed from 2021 to the end of 2023 could have been ameliorated by an earlier and more decisive tightening of monetary policy. This suggests that simple outcome-based Taylor rules may deserve more attention in the communication of the ECB's monetary policy strategy. |
| Keywords: | Credibility of Inflation Targets, Consumer Inflation Expectations, European Central Bank, Taylor Rules |
| JEL: | E43 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:fubsbe:333391 |
| By: | Ginn, William; Saadaoui, Jamel; Salachas, Evangelos |
| Abstract: | We investigate how the European Central Bank (ECB) and the US Federal Reserve (Fed) re-spond to climate-related shocks, assessing whether the green transition can advance without compromising price stability. Using data from 2000 to 2025 and employing time-varying local projection (TVP-LP) models, we examine the monetary policy reactions to both physical and transition climate risks. Our results show that physical shocks, such as extreme weather events and natural disasters, exert stronger and more inflationary effects on monetary policy than tran-sition shocks related to decarbonization and climate policy. The ECB systematically tightens policy in response to physical shocks, viewing them as supply-side disturbances that threaten price stability, while the Fed’s response is more state-dependent and event-driven, loosening policy during crises like Hurricane Katrina but tightening in the post-COVID inflationary peri-od. For transition risks, both central banks show subdued reactions until 2015, after which the ECB increasingly interprets them as inflationary, whereas the Fed remains more cautious and output oriented. A one standard deviation physical risk shock raises the shadow rate by about 30 bps in the EA and 20 bps in the US after 20 months. These findings reveal that climate shocks have become an integral part of monetary transmission, shaped by mandates and macro-economic context, underscoring the need for price stability to enable the green transition. |
| Keywords: | Climate Risks, Monetary Policy, ECB; Fed, Time-varying Local Projections, Price Stability. |
| JEL: | E52 E58 Q54 Q56 |
| Date: | 2025–10–20 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126542 |
| By: | Christopher D. Cotton |
| Abstract: | Markets systematically misprice interest rate changes around central bank announcements. I show that the strongest predictor of this mispricing is recent change in global interest rates. More specifically, a 1 percentage point increase in global short-term interest rates in the 15 days before a central bank meeting is associated with a 12-basis point surprise increase in short-term rates at that meeting. I demonstrate that this is the result of markets underreacting to signals coming from the global interest rate cycle. |
| Keywords: | monetary policy surprise; central bank; global interest rate cycle; predictability |
| JEL: | E43 E52 E58 |
| Date: | 2025–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:102186 |
| By: | Hie Joo Ahn; Thomas R. Cook; Taeyoung Doh; Elias Kastritis; Jesse Wedewer |
| Abstract: | This paper uses text data from Federal Open Market Committee (FOMC) meeting transcripts to estimate the reference levels of full employment, inflation, and financial conditions perceived by voting members and to uncover time variation in the Taylor rule parameters. We construct topic dictionaries on economic slack, inflation, and financial markets, and infer reference levels from members’ sentiment using a state-space model. The estimated employment reference level indicates that FOMC voting members generally perceived the labor market as tighter than implied by the Congressional Budget Office’s estimates between the mid-1980s and early 2000s, whereas the two measures align closely during the Great Recession and its subsequent recovery. The members’ perceived inflation target varies widely in the 1970s and 1980s, trends downward in the 1990s, and stabilizes slightly below two percent thereafter. The estimated Taylor rule exhibits shifting policy weights over time—stronger emphasis on inflation stabilization before the mid-1990s, greater responsiveness to employment deviations thereafter, and renewed emphasis on the inflation trend following the Great Recession—while interest-rate smoothing remains substantial throughout. |
| Keywords: | Federal Open Market Committee (FOMC); Taylor rule; Federal Reserve monetary policy; sentiment |
| JEL: | C32 E43 E52 E58 |
| Date: | 2025–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:102162 |
| By: | Altavilla, Carlo; Gürkaynak, Refet S.; Laeven, Luc; Kind, Thilo |
| Abstract: | We empirically examine the role of both official monetary policy announcements and policymakers’ speeches in the transmission of monetary policy to financial markets and the real economy in the euro area. Using intraday data covering a broad cross-section of financial assets, we construct the Euro Area Extended Monetary Policy Event-Study Database (EA-EMPD). We refine the identification of monetary policy surprises by exploiting granular, quote-level data on individual participants’ bid and ask submissions. This novel dataset expands the set of identifiable policy events by an order of magnitude relative to databases based solely on scheduled rate-setting meetings. Our analysis yields three main findings. First, speeches by euro area policymakers exert statistically and economically significant effects on asset prices across maturities, with magnitudes comparable to those observed following official policy announcements. Second, the transmission of speech-induced short-rate changes to the real economy closely mirrors that of policy decisions and combining both types of surprises significantly enhances the precision of statistical inference. Finally, when speeches are included in the measurement of policy surprises, the share of real-economy variance attributable to monetary policy increases fivefold, although its absolute magnitude remains relatively modest. JEL Classification: E43, E44, E52, E58, G14 |
| Keywords: | BVAR, event study, monetary policy surprise, speeches |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253157 |
| By: | Barbora Livorova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & Czech National Bank); Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper contributes to studying the impacts of monetary policy on labour income inequality in the euro area using subnational regional data on compensation per employee. The dataset covers 932 NUTS3 regions from 16 countries over the period 2000 - 2022 at a yearly frequency. Using sub-sample analysis combined with local projections, the results show that monetary policy rate changes have heterogeneous effects on the growth of real compensation per employee (deflated by the GDP deflator) at both the bottom and upper ends of the regional distribution within individual countries. From the whole euro area perspective, monetary policy tightening has a heterogeneous effect on labour incomes between regions - in times of monetary policy easing, shortening the gap between average low- and high-income regions. |
| Keywords: | Monetary Policy, Regional Inequality, Compensation of employees, Local Projections |
| JEL: | E52 J31 R10 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2025_27 |
| By: | Ciftci, Muhsin; Wieland, Elisabeth |
| Abstract: | In this paper, we evaluate a set of measures of underlying inflation for Germany using conventional measures, such as core inflation (excluding energy and food items), and alternative measures based on econometric models, machine learning, and micro-price evidence. We compare these measures through detailed in-sample and out-of-sample evaluations. The alternative measures exhibit lower volatility, minimal bias, and superior out-of-sample forecasting accuracy performance. While we find no evidence that any single measure clearly outperforms the others over time, the range of alternatives measures also reflects a somewhat earlier uptick and downturn in light of the recent inflation surge in comparison to traditional ones. In addition, all measures under consideration are highly sensitive to monetary policy shocks. |
| Keywords: | Underlying inflation, monetary policy, local projections, machine learning |
| JEL: | E31 E37 C22 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:333424 |
| By: | Jeremy Srouji (International Institute of Social Studies, Erasmus University Rotterdam, The Netherlands; Université Côte d'Azur, CNRS, GREDEG, France); Dominique Torre (Université Côte d'Azur, CNRS, GREDEG, France); Qing Xu (ICL, Junia, Université Catholique de Lille, LITL, Lille, France) |
| Abstract: | This article examines proposals to establish a BRICS Central Bank Digital Currency (CBDC) aimed at facilitating trade flows among the members, as part of their broader discussions around reforming the international monetary and financial system. It sets these proposals within the context of global CBDC efforts, South-South convergence processes and the challenges the BRICS have faced in navigating global geo-political tensions, while aligning national CBDC efforts with groupwide initiatives. We focus on a Brazilian proposal to establish a unified BRICS cross-border payment system, seen as a first step towards a full-fledged BRICS CBDC. Our main finding is that while this cross-border digital currency can be useful for smoothing payments and reducing the trade deficits of the smaller BRICS members, it does little to redress their asymmetric position vis-à-vis the larger country, China. The implication is that sustainable convergence among the grouping through the adoption of a unified cross-border currency would require a higher level of monetary and policy coordination than that set out in the Brazilian proposal. |
| Keywords: | CBDC, BRICS, cross-border payments, international currency, international trade, stablecoins |
| JEL: | F33 F36 E12 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2025-48 |
| By: | Mr. Selim A Elekdag; Mananirina Razafitsiory; Luis-Felipe Zanna |
| Abstract: | We develop and estimate a parsimonious New-Keynesian small open-economy model that incorporates Diagnostic Expectations (DE)—a behavioral alternative to Rational Expectations (RE). Under DE, agents systematically overreact to new information, generating additional endogenous volatility. Our empirical analysis provides robust support for the DE framework: it fits Canadian data significantly better than the nested RE benchmark and improves forecasts of key macroeconomic variables, including real GDP growth, even during crises such as the Global Financial Crisis. These gains arise because DE reshapes the transmission of shocks, amplifying their effects and strengthening the exchange-rate channel of monetary policy. As a result, the relative importance of structural shocks shifts—with greater roles for supply shocks—and policymakers face a meaningfully worse inflation–output volatility trade-off. Taken together, our results highlight the relevance of behavioral expectations for open-economy dynamics and policy design. |
| Keywords: | Small Open Economy; Diagnostic Expectations; Bayesian Estimation; Forecasting |
| Date: | 2025–11–21 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/246 |
| By: | Alain Coen; Philippe Guardiola |
| Abstract: | The main objective of this article is to investigate the impact of monetary policies led by the Bank of England, the ECB and the Fed on the dynamics of British commercial real estate markets between 2000 and 2023, using vector autoregression and structural vector autoregression (SVAR) models. With our modelling, we also shed new light on the role played by the stock market and REITs as transmission channels. Our results report that monetary policies have a highly significant impact on eight British commercial real estate sectors, with different implications. As an illustration of financialization, REITs seem to be a transmission channel for all asset classes. However, Brexit appears to mark a major turning point as the BoE and BCE monetary policies effects drop sharply after 2016. |
| Keywords: | commercial real estate; Monetary policies; REIT; SVAR |
| JEL: | R3 |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:arz:wpaper:eres2025_56 |