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on Central Banking |
| By: | Elizaveta Lukmanova (Central Bank of Ireland); Katrin Rabitsch (Vienna University of Economics (WU), Department of Economics) |
| Abstract: | In light of recent evidence on the significant contribution of persistent monetary shocks to inflation dynamics in the U.S., we study their international transmission. In contrast to standard temporary nominal interest rate shocks, persistent shocks increase long-run inflation and the nominal rate while decreasing the real rate. We find that it leads to non-negligible international spillovers and dollar depreciation. We further show that when it comes to understanding the international spillover effects of U.S. monetary policy, persistent monetary policy shocks rather than temporary nominal interest rate shocks have the potential to explain long-run co-movements of macroeconomic variables across advanced countries. |
| Keywords: | Monetary Policy, International spillovers, Long-run Inflation, Neo-Fisher effect |
| JEL: | E12 F31 E52 E58 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp394 |
| By: | Sami Alpanda; Serdar Kabaca; Kostas Mavromatis |
| Abstract: | This paper examines the optimal coordination of conventional and unconventional mone-tary policy tools in an environment characterized by household heterogeneity and mortgage debt. We develop a dynamic stochastic general equilibrium (DSGE) model with three types of households—savers, borrowers, and renters—and incorporate housing investment, fixed-rate long-term mortgages, and a housing production sector. The central bank controls both the short-term interest rate and the long-term rate via the relative supply of long-term bonds. We show that household heterogeneity significantly alters the optimal policy response to macroeconomic shocks. In particular, following a cost-push shock, the optimal policy involves raising the short-term rate to combat inflation while lowering the long-term rate to alleviate financial burdens on indebted households and renters. This policy mix accelerates investment recovery but increases consumption inequality. In contrast, in a representative-agent economy, both rates are raised. Our findings highlight the importance of accounting for distributional effects in monetary policy design and suggest that yield curve control can be a valuable tool in heterogeneous economies. |
| Keywords: | Monetary policy, household heterogeneity, yield curve control |
| JEL: | E40 E43 E52 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:853 |
| By: | Reimers, Paul; Michaelis, Henrike |
| Abstract: | Compared to 2021, the aggregate bank lending rate to firms in the euro area in- creased strongly during the monetary tightening and easing cycle of 2022-25. However, it rose up to 1.5 percentage points less than the rise in policy and money market rates. We approach this gap using granular credit registry data, revealing how changes in the composition and pricing of credit translate into developments of the aggregate rate. The tool we use is standard in labor economics, but scarcely used outside that context: the Oaxaca-Blinder decomposition. We are the first to apply it to analyze the development of an aggregate variable over time in the loan pricing literature. We find that changes in the pricing of credit compared to 2021 were the main reason why a gap opened up. Compositional shifts in firm and credit characteristics and changes in banks' market shares had minor effects. Our micro-level insights have implications for policy makers, bankers and debtors, as they help understand what shapes aggregate pass-through patterns and the strength of monetary policy transmission. Moreover, our approach opens up promising new applications in the loan supply literature. |
| Keywords: | Credit pricing, euro area, monetary policy transmission, interest ratepass-through |
| JEL: | E52 E43 E44 E58 G20 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:334533 |
| By: | Wolswijk, Guido |
| Abstract: | This paper examines how fiscal policy in the euro area reacts to monetary policy, by estimating fiscal policy reaction functions for the period 1999-2019. Inclusion of the monetary policy stance in the fiscal reaction function, approximated by a shadow interest rate, is a relatively novel aspect in this type of analysis. The findings suggest that fiscal policy acts in a substitutive manner, its stance moving in the opposite direction of monetary policy, though this effect may have ceased operating during ECB’s quantitative easing. Using local projections, the substitutive effect is found to increase over time before turning broadly neutral. Analysing the fiscal response to other monetary policy relevant variables - government debt and the output gap -, outcomes suggests that budget balances react positively to government debt, supporting fiscal sustainability, and that fiscal policy acts countercyclically in recessions. JEL Classification: E61, H11, H62 |
| Keywords: | debt sustainability, monetary policy transmission, policy interactions, reaction function |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263172 |
| By: | Cooper Howes; Marc Dordal i Carreras; Olivier Coibion; Yuriy Gorodnichenko |
| Abstract: | We construct a new dataset of FOMC meeting transcripts from 1966 to 1990 to analyze the sources of heterogeneity in individual monetary policy preferences and study how this heterogeneity shapes policy decisions. Using these detailed discussions, we manually quantify and characterize each FOMC participants’ preferred policies along with their reasoning and justification. We show that participants' beliefs about the effects of monetary policy—specifically, their perceived slope of the Phillips Curve—play a central role. Participants who believe monetary policy has stronger effects on real activity are more likely to cite output as a justification for easing, while those perceiving stronger price effects emphasize inflation as a reason for tightening. We then show that the Chair plays a unique and powerful role in reconciling these views, not just in setting policy rates, but also in minimizing dissent. The latter occurs because dissenters find their ability to influence policy in subsequent meetings is significantly curtailed. |
| JEL: | E03 E4 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34632 |
| By: | Eric Vansteenberghe |
| Abstract: | This paper investigates how dispersion in banks’ subjective inflation forecasts is a channel of the transmission of monetary policy to credit supply. We extend the Monti--Klein model of monopolistic banking by incorporating risk aversion, subjective beliefs, and ambiguity aversion. The model predicts that greater inflation uncertainty or asymmetry in beliefs raises equilibrium loan rates and amplifies credit rationing. Using AnaCredit loan-level data for France, we estimate finite-mixture density regressions that allow for latent heterogeneity in loan pricing. Empirically, we find that higher subjective uncertainty and asymmetry both increase average lending rates and skew their distribution, disproportionately affecting financially constrained firms in the right tail. Quantitatively, moving from the 25th to the 75th percentile of our indicators raises average borrowing costs by more than 10 basis points, which translates into roughly 0.5 billion euros of additional annual interest expenses for non-financial corporations. By contrast, forecast disagreement has a weaker and less systematic effect. Taken together, these results show that uncertainty and asymmetry in inflation expectations are independent and powerful drivers of credit conditions, underscoring their importance for understanding monetary policy transmission through the banking sector. |
| Keywords: | Monetary Policy Transmission, Inflation Uncertainty, Bank Lending |
| JEL: | D84 E52 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1025 |
| By: | Bujunoori, Raja Reddy; Mannil, Nithin; Tantri, Prasanna |
| Abstract: | We ask whether the presence of contract workers influences the sensitivity of firm output to monetary policy shocks. We use a judgment of the Supreme Court of India that facilitated the hiring of contract workers as a setting that exogenously increased their presence, especially in states with stringent labor laws. Difference-in-differences and triple-difference tests show that the sensitivity of output to monetary policy shocks moderates due to the presence of contract workers. The relative flexibility of contract workers’ wages and not the relative ease of hiring/firing is the mechanism. Additional analysis shows that the moderation in output sensitivity is stronger during monetary contractions. |
| Keywords: | contract workers; monetary policy transmission; wage rigidity |
| JEL: | J31 J53 L24 |
| Date: | 2024–03–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:121576 |
| By: | McCann, Fergal (Central Bank of Ireland); Riva, Luca (Central Bank of Ireland) |
| Abstract: | After borrower-based measures (BBM) were introduced in Ireland in 2015, average house price growth expectations fell upon impact and remained stable over the following four to five years, even as price growth accelerated The right tail of extreme growth expectations also dropped immediately upon policy introduction and stabilised until 2019, consistent with credit limits playing a role in stabilising more extreme or optimistic expectations that can be particularly important in credit bubble formation. Our findings suggest macroprudential policies act as a "guardrail" that shifts forward-looking beliefs and contributes to macro-financial stability beyond the direct effects of these policies on the volume and riskiness of lending. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:stafin:12/si/25 |
| By: | Milda Valentinaite; Egle Ceponyte; Ingars Zustrups |
| Abstract: | The shift in monetary policy has different repercussions on bank profits depending on the prevalence of fixed or floating interest rates charged on loans. The Baltic states provide a case study of the impact of monetary tightening on profits in predominantly floating interest rates setup amid high liquidity. This paper examines the drivers of the profit surge following 2022-2023 tightening cycle, reviews the fiscal policy responses chosen by Lithuania, Latvia and Estonia, and draws tentative lessons on the design and effectiveness of sector-specific windfall taxation. |
| Keywords: | Monetary policy, Interest rates, Fiscal policy, fiscal rules, inflation, Baltic countries. |
| JEL: | H25 E43 G21 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:euf:ecobri:086 |
| By: | Gillman, Max; Cevik, Emrah Ismail; Dibooglu, Sel |
| Abstract: | This paper examines the dynamic relationship between real oil prices and U.S. monetary policy instruments over more than fifty years. Using symmetric and asymmetric time-varying Granger predictability tests alongside time-varying local projections with stochastic volatility, the study assesses how U.S. monetary aggregates and interest rates predict real oil prices—and how oil prices, in turn, predict monetary variables. The results show that both narrow and broad monetary aggregates, as well as short- and long-term interest rates, Granger predict real oil prices to varying degrees since the 1970s, with notable differences between symmetric and asymmetric specifications. Predictability is bidirectional, yet oil price responses vary substantially over time. Local projections show that interest rates shock real oil prices with high magnitude during early conventional times, especially the 1973 and 1979 oil shocks plus some in the 1980s, but diminish markedly thereafter. In contrast, monetary aggregate shocks dominate in magnitude after 2008, as unconventional monetary policy became manifest. Money supply shocks strongly influence oil prices during the global financial crisis, the 2015–2019 normalization period, the COVID-19 episode, and the 2021–2023 inflation surge. Findings highlight historical time-varying asymmetry in how monetary policy interacts with oil markets, providing implications for policy. |
| Keywords: | real oil prices, time-varying Granger predictability, time-varying local projections with stochastic volatility, U.S. money supply aggregates, U.S. interest rates |
| JEL: | E43 E44 Q41 Q43 |
| Date: | 2025–12–23 |
| URL: | https://d.repec.org/n?u=RePEc:cvh:coecwp:2025/04 |
| By: | Giuzio, Margherita; Kahraman, Bige; Knyphausen, Jasper |
| Abstract: | This paper examines the relevance of banks’ exposure to climate transition risk in the interbank lending market. Using transaction-level data on repo agreements, we first establish that banks with higher exposure to transition risk face significantly higher borrowing costs. This premium is a combination of a risk premium, compensating lenders for increased credit risk, and an inconvenience premium, reflecting the sustainability preferences of key dealer banks. We also find that the transition risk premium intensifies during periods of financial stress, indicating that climate-induced risks amplify existing vulnerabilities in financial markets. Furthermore, the rate segmentation caused by transition risk premium has implications for the transmission of monetary policy. Transition risk is an important factor in financial stability and policy design. JEL Classification: Q54, G21, G32, Q58 |
| Keywords: | climate finance, financial stability, repo markets, risk premium, transition risk |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263168 |
| By: | Weiyang ZHAI; Yushi YOSHIDA |
| Abstract: | Inflation expectation is one of the essential components of monetary policy decisions. Upon examining Japanese inflation expectations between 1991:Q4 and 2025:Q1, we propose a modified empirical model that includes a forecast trend term in addition to the forecast revision term. We found that the forecast trend term affects the forecast errors. The full sample results indicate that people in Japan form non-rational expectations with information rigidity. However, this holds only in the recent episode of inflation following the post-COVID period. During the zero-inflation periods, people formed full-information rational expectations. In addition, we find evidence that consumption tax hikes affect the forecast errors, partly due to the uncertainty about future implementation. In both periods, the possibility of deviating from rational expectations cannot be ruled out. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:26004 |
| By: | Hilscher, Jens; Raviv, Alon; Reis, Ricardo |
| Abstract: | Long-dated inflation swap contracts provide widely used estimates of expected inflation. We develop methods to estimate complementary tail probabilities for persistently very high or low inflation using inflation options prices. We show that three new adjustments to conventional methods are crucial: inflation, horizon, and risk. We find that: (a) U.S. deflation risk in 2011–2014 has been overstated, (b) ECB unconventional policies lowered deflation disaster probabilities, (c) inflation expectations deanchored in 2021–2022, (d) reanchored as policy tightened, (e) but the 2021–2024 disaster left scars, and (f) U.S. expectations are less sensitive to inflation realizations than in the eurozone. |
| Keywords: | option prices; inflation derivatives; Arrow-Debreu securities |
| JEL: | E31 E44 E52 G13 |
| Date: | 2025–11–16 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:127063 |