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on Central Banking |
| By: | Gökhan Ider; Alexander Kriwoluzky; Frederik Kurcz; Ben Schumann |
| Abstract: | We empirically show that a central bank’s ability to affect global energy prices crucially alters monetary policy transmission. We first provide novel evidence that euro area monetary policy significantly affects energy prices. Employing a Lucas critique-robust counterfactual framework, we find that this ability strengthens and accelerates transmission to inflation and substantially alleviates the inflation-output trade-off. We further show that this ability materially shapes the mandate-optimal policy response to an energy supply shock: the optimal response implies a smaller interest rate increase and a more favorable inflation-output allocation than in a scenario where energy prices are unaffected by monetary policy. |
| Keywords: | inflation, energy prices, monetary policy, monetary transmission mechanism |
| JEL: | C32 E31 E52 Q43 |
| Date: | 2026–07–10 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0102 |
| By: | Timo Wochner; Lukas Hack; Niklas Potrafke |
| Abstract: | What inflation rate should central banks target? Using two global surveys, we provide evidence on inflation preferences among economic experts—the group whose models and judgments inform monetary policy. We document that, although experts’ preferred inflation rates are centered on central-bank targets, roughly half of them deviate (symmetrically) from the target. Cross-expert heterogeneity in preferences is driven by (i) beliefs about the costs of disinflation, (ii) normative views on the relative importance of different central bank objectives, and (iii) inflation narratives. Finally, we show that experts’ preferences influence their evaluations of monetary policy decisions, suggesting that experts’ preferences are likely to matter for policymaking. |
| Keywords: | inflation preferences, optimal inflation rate, economic experts, monetary policy |
| JEL: | E31 E52 E58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12850 |
| By: | Mr. Luis Ignacio Jácome; Mr. Nicolas E Magud; Samuel Pienknagura; Martin Uribe |
| Abstract: | We explore the historical link between populist regimes, fiscal monetization, and inflation, and how these links affect monetary policy in the 21st century. Using data for a large set of advanced economies and emerging markets since 1960, we show that, historically, left-leaning populist regimes are linked to increases in central bank lending to the central government, a gauge of deficit monetization. In turn, central bank lending is associated with marked increases in inflation. We show that past exposure to populism that relied on deficit monetization affects the conduct of monetary policy today. Countries with a history of deficit monetization and left-wing populist regimes systematically respond more strongly to deviations of inflation expectations from target. This effect persists even after controlling for the direct effect of past inflation on monetary policy rules. In the context of the literature of experienced learning, this novel finding sheds light on the persistence of past populist policies---central banks operating under the shadow of past populist regimes that relied on inflation-prone deficit monetization continue today needing to send stronger signals of their independence and commitment to price stability to effectively anchor inflation expectations. |
| Keywords: | Monetary Policy; Populism; Inflation Targeting; Fiscal Dominance; Past Inflation; inflation expectation; deficit monetization; monetary policy rule; IMF working papers; central bank lending; Inflation; Bank credit; Central bank credit; Output gap; Global; South America; Central America; Caribbean |
| Date: | 2026–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/167 |
| By: | Wolswijk, Guido |
| Abstract: | This paper analyses the European prohibition of monetary financing from an economic perspective. The prohibition seeks to safeguard central bank independence in setting monetary policy to maintain price stability, and to preserve fiscal discipline, thereby preventing monetary policy from becoming constrained or hindered by fiscal policies. Imposing a prohibition on financing public deficits helps to ensure a clear separation of responsibilities between monetary policy and fiscal policy and is consistent with a range of macroeconomic theories, including monetarism and the fiscal theory of the price level. The current EU-wide ban is more stringent than those in place in Europe before the start of Economic and Monetary Union and also than those prevailing in other major currency areas of the world. Tasked with monitoring compliance with the prohibition among European national central banks, the European Central Bank (ECB) has developed certain standards over time, informed by definitions contained in EU regulations and by cases that have arisen over the years. Over the three decades since its introduction, the prohibition in general has been well respected, although a few actual or potential conflicts with the prohibition have required national central banks to take corrective action. Recent economic crises in Europe have given rise to academic proposals to reinterpret or circumvent the ban, notably during the COVID-19 pandemic. These suggestions have included central banks handing out “helicopter money” to the public and cancelling part of the government debt held by European central banks. In general, these proposals would seem to jeopardise the prohibition of monetary financing and ultimately weaken price stability and sound public finances. JEL Classification: E58, E61, E62, F45, K33 |
| Keywords: | debt monetisation, fiscal policy, monetary financing, monetary policy |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026397 |
| By: | Jonathan Chiu; Cyril Monnet; Oliver Junye Xu |
| Abstract: | This paper develops a general equilibrium model to assess central bank digital currency (CBDC) design in a monetary system where traditional banks and “crypto banks” (i.e., banks that issue stablecoins) coexist. We compare tokenized and non-tokenized CBDC, showing that their desirability depends on the reliability of private money provision, the availability of collateral assets and the features of the crypto sector. Crucially, we show that the tokenization decision of CBDC matters for the equilibrium outcomes only when collateral use differs across sectors, identifying conditions under which tokenization is necessary to improve welfare. Tokenized CBDC can crowd out stablecoins and improve efficiency when crypto banks are not that trustworthy and crypto assets are scarce. Non-tokenized CBDC may be preferred when crypto transactions are less desirable or when reallocating reserves from traditional to crypto banks is beneficial. Our results highlight a trade-off between gains in payment efficiency and potential reductions in bank lending. These findings offer new policy insights on CBDC design under evolving financial conditions. |
| Keywords: | Money and payments, Digital assets and fintech, Payment and financial market infrastructures |
| JEL: | E50 E58 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-14 |
| By: | Mátyás Farkas; Zoltan Jakab; Jesper Lindé |
| Abstract: | We study how policy expectations affect the estimated natural rate of interest (r*) for the United States and the euro area. To discipline policy expectations, we incorporate information on future policy rates and long-term yields in episodes when the Fed and ECB provided forward guidance. For the post-Covid period, we find that r* rises much more than in an otherwise standard specification that omits yield-curve observables. By implication, the post-Covid tightening of the monetary policy stance was not nearly as large as standard r* models imply, which helps explain why economic activity did not slow much when nominal policy rates were raised dramatically in 2022 to fight inflationary pressures. Yield-curve information pins down anticipated policy innovations and alters r* estimates and, thus, the monetary policy stance. |
| Keywords: | Natural Rate of Interest; Bayesian Inference; DSGE Model; Monetary Policy Stance; Convenience Yield; Forward Guidance; Covid tightening; IMF working papers; yield-curve information; Policy expectation; Covid period; Central bank policy rate; COVID-19; Inflation; Dynamic stochastic general equilibrium models; Global |
| Date: | 2026–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/168 |
| By: | Francesca Caselli; Ms. Luisa Charry; Mr. Larry Q Cui; Mr. Pragyan Deb; Allan Dizioli; Alexandra Fotiou; Ben Park; Mr. Sebastian Weber |
| Abstract: | More frequent large macroeconomic shocks since the global financial crisis have entrenched uncertainty, particularly in Europe. This has increased the premium on central bank communication in guiding expectations and strengthening macroeconomic resilience. European central banks have responded by adapting their communication toolkits and styles. This study provides a systematic assessment of recent central bank communication across advanced and emerging European economies, combining a survey of institutional communication frameworks with novel text-miningbased indicators on monetary policy guidance in these economies over 2009-2025. While communication toolkits are broadly similar, their intensity and transparency differ markedly, with central banks in advanced economies making greater use of forward-looking tools. Central banks in both groups respond primarily to inflation uncertainty. However, communication strategies diverge, as central banks in advanced economies increasingly shift toward forward-looking language, whereas those in emerging markets shift toward more backward-looking communication. These patterns highlight credibility and institutional capacity as key determinants of central bank communication under uncertainty. |
| Keywords: | Central bank communication; uncertainty; forward guidance; monetary policy |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/133 |
| By: | Gulan, Adam; Silvo, Aino |
| Abstract: | In both the U.S. and the euro area, the share of market finance in aggregate corporate credit has grown over time. To study the implications of the corporate debt structure for the transmission of monetary policy, we develop a New Keynesian DSGE model in which firms differ in productivity and may finance themselves with either bonds or loans. Our setup makes the aggregate corporate debt composition and firms' credit access endogenous and dependent on aggregate economic conditions. The model rationalizes the empirically documented substitution from bank loans to bond finance following a monetary policy contraction. Credit is squeezed for those bank-dependent firms that cannot access the bond market. A structural shift in the aggregate bond-to-loan ratio among credit-eligible firms affects financial market dynamics, but does not materially change the overall impact of monetary policy shocks on the macroeconomy. Instead, in an economy with greater credit access, aggregate demand is less responsive to monetary policy shocks. |
| Keywords: | Monetary policy, corporate debt, bonds, bank credit |
| JEL: | E32 E44 E52 G32 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:342406 |
| By: | Kodjovi M. Eklou |
| Abstract: | Exchange rate movements have implications for the purchasing power of residents or voters. Given that the exchange rate is often seen as a barometer of government performance, there could be strong incentives to influence exchange rate valuation during elections. This paper investigates whether political economy factors affect Foreign Exchange Intervention (FXI) policy across countries. It investigates whether central banks tend to implement FX sales, leaning against depreciations, during electoral periods in a sample of 28 countries including both advanced (AEs) and emerging (EMs) economies over the period 2000-2019. The results show that EMs with competitive elections tend to implement more and larger FX sales in pre-electoral period, compared to post-election period, given their political popularity. Further, this result is driven by countries where political pressures on central bank governors are more prevalent. Furthermore, the paper also finds that monetary policy transparency has the potential to mitigate this politically driven FXI during electoral period. Finally, the paper discusses policy implications given that politically motivated FX sales could hamper the ability of central banks to effectively respond to large shocks. |
| Keywords: | Foreign Exchange Interventions; Electoral Cycles; Monetary Policy; Political Economy; Transparency. |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/130 |
| By: | Groiss, Martin; Sondermann, David |
| Abstract: | This paper examines how monetary policy announcements affect firms’ employment expectations. Using German survey data, we combine high-frequency monetary policy surprises with survey response dates to identify the immediate and dynamic effects of monetary policy on firm-level expectations and subsequent employment. Contractionary shocks lead firms to revise employment plans downward immediately and persistently, eventually reducing employment growth. Initially, hiring plans are reduced, while layoffs increase later. Production expectations adjust twice as often but revert faster, consistent with greater labour market rigidity. Labour market institutions shape these responses: firms subject to the minimum wage or with lower collective bargaining coverage revise employment expectations more strongly. Financially constrained firms exhibit disproportionately larger downward revisions, indicating that the financial accelerator operates already at the expectation formation stage. Because firms adjust plans well before effects appear in aggregate data, employment expectations provide an early measure of monetary policy transmission to the labour market. JEL Classification: E24, E52, J20, J63 |
| Keywords: | employment expectation, hiring, labour market, monetary policy surprises, survey data |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263272 |
| By: | Stefano Carattini; Givi Melkadze; Inès Mourelon |
| Abstract: | Central banks and financial surveillance authorities need to cope with the potential realization of financial stability risks, adopting preventive measures or using liquidity once crises materialize. Transition risk — the stability risk associated with decarbonization — is a case in point. Such risk not only comes from policy changes, but also from preference shocks. Hence, this paper develops an environmental DSGE model with financial frictions and examines responses to shocks, including a novel angle on preference shocks. We show that these market-driven transition shocks generate larger macro-financial instability than carbon pricing for a given change in emissions, while delaying environmental gains. We then compare policy responses according to their timing. Ex-ante macroprudential policies that reduce banks’ exposure to transition risk dampen financial amplification, whereas ex-post interventions, such as quantitative easing, provide only partial stabilization once losses have materialized. Overall, our results indicate that market-led adjustments to transition risk are more destabilizing than carbon pricing, whereas preventive financial measures limit macro-financial instability more effectively than ex-post interventions under the policy comparisons considered, supporting the case for early action. |
| Keywords: | transition risk, financial frictions, climate policy, preference shocks, macroprudential policy, quantitative easing |
| JEL: | E32 E60 G18 Q43 Q58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12844 |
| By: | Rashid Mirzaakhmedov (The Central Bank of Uzbekistan) |
| Abstract: | This paper examines how foreign ownership of importing firms shapes exchange rate pass-through (ERPT) to import prices in Uzbekistan across three distinct monetary policy regimes. Using transactionlevel customs data matched with a firm ownership registry, I find that ERPT remained near-complete before inflation targeting but declined sharply following its formal adoption in October 2019. Foreignaffiliated importers exhibit significantly lower pass-through than domestically owned firms under inflation targeting, with the gap most pronounced for capital and intermediate goods. Rolling window estimation reveals that foreign affiliates adjusted more rapidly to the new monetary framework, suggesting that ownership structure and institutional credibility jointly shape import price dynamics. The results provide micro-level evidence that the central bank’s credibility has weakened the exchange rate channel of inflation, while the growing presence of foreign affiliates reduces the effectiveness of exchange rate depreciation as an instrument for correcting the trade balance. |
| Keywords: | Exchange Rate Pass-Through; Import Prices; Foreign Ownership; Inflation Targeting; Transaction-level Customs Data; Uzbekistan |
| JEL: | F31 F14 E31 F23 E52 |
| Date: | 2026–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp22-2026 |
| By: | Boris Hofmann; Aaron Mehrotra; Jan Paulick |
| Abstract: | The emergence of stablecoins has created a new channel to access US dollar liquidity in emerging market and developing economies (EMDEs), similar to the historical role of foreigncurrency deposits, or "deposit dollarisation". This has raised concerns about the possible implications for monetary control in EMDEs. Drawing on data on foreign currency deposits and dollar-pegged stablecoin inflows for more than 130 economies, we compare the dynamics and drivers of "stablecoin dollarisation" with those of conventional deposit dollarisation. We document that historical deposit dollarisation and recent stablecoin flows are both associated with similar macro-financial drivers, including the strength of exchange rate pass-through and sovereign or banking crises. We further document significant persistence in both deposit and stablecoin dollarisation, suggesting that dollarisation is hard to reverse once established. Unlike deposit dollarisation, stablecoin flows seem to be largely unaffected by either broad or specific capital flow restrictions. This likely occurs because stablecoins are partly circulating outside the regulatory perimeter. The historical record also suggests that moderate deposit dollarisation has been associated with somewhat higher inflation risks, although there is little evidence of significant impacts on monetary policy transmission. |
| Keywords: | dollarisation, capital flows, stablecoins, monetary control, EMDEs |
| JEL: | E44 E58 F32 F38 G15 G23 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1370 |
| By: | Mr. Francesco Grigoli |
| Abstract: | I study how the production network shapes monetary policy transmission to prices. Using U.S. data, I show that industries farther upstream from final demand exhibit larger cumulative price responses to monetary shocks, while downstream industries absorb shocks through output. A calibrated multi-sector New Keynesian model rationalizes these patterns: upstream sectors, which sell predominantly to other firms, reprice more frequently and therefore exhibit less price rigidity. A counterfactual decomposition of the price response shows that this heterogeneity in price rigidity---rather than cost-cascade propagation through input-output linkages---is the primary driver of the cross-sectional responses. The upstreamness differential is strongly asymmetric, large following expansionary shocks but nearly absent following contractionary ones, consistent with asymmetric price rigidity compounding across production stages. Together, these findings suggest that monetary policy's potency depends on the production network's architecture. |
| Keywords: | production networks; price rigidity; monetary policy transmission; input-output linkages; asymmetric price adjustment |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/127 |
| By: | Toporowski, Jan |
| Abstract: | With the possible exception of her work on economic methodology, the monetary economics of Victoria Chick lay at the heart of her macroeconomics, and her general approach to economics. Chick’s monetary economics started with her participation in the revival of monetary theory in the wake of the Radcliffe Report, which argued that liquidity rather than money should be the central operational concept for theory and policy. When the monetary revival turned to monetarism, Chick countered by insisting on the monetary nature of macroeconomic variables, rather than confining money to a “monetary sector” that was added on to a “real” economy. She developed this approach by showing how macroeconomic relations were affected by banking evolution, and later rejected the concept of monetary endogeneity based on central bank operations in inter-bank markets. However, the critical part that she gave to monetary innovation in Keynes’s macroeconomics is an original but controversial part of her intellectual legacy. |
| Keywords: | Radcliffe report;Victoria Chick;banking;monetary theory |
| JEL: | E12 E42 E52 G21 |
| Date: | 2026–07–12 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:140320 |
| By: | Yuteng Cheng; Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang |
| Abstract: | We study the optimal design of a central bank digital currency (CBDC) in an economy where private payment service providers (PSPs) collect and monetize transaction data and may have market power. Payments data create social benefits through law enforcement and monitoring but also impose privacy costs and negative externalities by enabling profiling and surplus extraction. In our model, the central bank chooses CBDC fees, transaction rewards, and data-collection intensity, taking into account their effects on private payment adoption. We show that a data-collecting CBDC can either raise or lower private payment adoption and aggregate data production relative to cash, depending on the balance between PSP market power and the social costs of privately monetized data. In a calibration to the U.S. economy, the introduction of CBDC raises aggregate data collection, private PSP market share, and PSP profits. But when PSP competition is stronger, data are more valuable, or data-processing costs are lower, the optimal CBDC policy reduces aggregate data production if negative data externalities are sufficiently strong. |
| Keywords: | Money and payments, Digital assets and fintech, Payment and financial market infrastructures, Retail payments |
| JEL: | G2 L14 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-21 |
| By: | De Sanctis, Alessandro; Gebauer, Stefan; Holm-Hadulla, Fédéric; Sirani, Matteo |
| Abstract: | We show that monetary policy transmission is shaped not only by a sector’s own financial frictions but also by those prevailing in the broader production network. The latter, indirect frictions amplify the output and price effects of monetary policy and empirically dominate the direct ones. The amplification results from a downstream demand channel, as customers respond to tighter policy by purchasing fewer inputs. This is partly offset by an upstream cost channel, reflecting that suppliers raise prices to protect margins when financing costs rise. We inspect the mechanism in a multi-sector general equilibrium model with input-output linkages and working-capital constraints. JEL Classification: C32, C67, E31, E32, E52 |
| Keywords: | financial frictions, input-output linkages, monetary policy, production networks |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263271 |
| By: | Guillaume Roussellet |
| Abstract: | Monetary policymakers closely monitor the term structure of sovereign bond yields to uncover market participants’ beliefs about the future monetary policy stance, inflation, and activity. A particular object of interest is the natural real rate of return, or “r-star, ” which acts as a guide for monetary policy decisions. Numerous papers have questioned how much information investors possess, and how precisely they know r-star. In this post based on a recent Staff Report, we explore what the term structure of interest rates can teach us about r-star and its perception by investors. |
| Keywords: | r-star; Subjective beliefs; Incomplete information; term structure of interest rates |
| JEL: | E58 E43 |
| Date: | 2026–08–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103600 |
| By: | Fernando Toledo; Luis Dimotta Br\'e; Gabriel Montes-Rojas |
| Abstract: | This paper examines how algorithmic and AI-driven fund management shapes the international transmission of U.S. monetary policy to emerging markets. It argues that the key source of instability is not algorithmic intermediation itself, but the similarity of models across funds. When algorithms rely on similar signals and make correlated errors, their trades reinforce one another and intensify capital-flow responses during periods of stress. When models are diverse, errors offset each other and algorithmic investors can stabilize flows. The paper develops a two-region macro-financial framework and tests its central prediction using equity portfolio flows to nineteen emerging markets from 2000 to 2024. The evidence shows that algorithmic herding amplifies outflows after U.S. monetary shocks only in high-volatility regimes, while faster adjustment alone has no comparable effect. The results imply that policy should focus on preserving model diversity rather than limiting the size of non-bank intermediation. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.15385 |
| By: | Mattia Bevilacqua; Jon Danielsson; Lerby Ergun; Andreas Uthemann; Jean-Pierre Zigrand |
| Abstract: | We study the impact of Fed crisis interventions on market fears — the perceived risk of large asset price drops. To do so, we develop a methodological framework that allows us to evaluate the causal effect of unexpected Fed actions on changes in market fears. We extract daily fear term structures from options markets with event horizons ranging from two weeks to ten years. We then use high-frequency price movements around crisis announcements for a wide range of financial assets, including FX, equity, and fixed income markets, to isolate the shock component of Fed interventions. We can measure the heterogeneous effects of various crisis tools by classifying Fed announcement shocks into five different policy groups. Applying this to the market turmoil of 2020, we find that the Fed impacts market fear via risk and information effects. The risk channel dominates at short to medium terms and works via asset purchases, whereas the information channel dominates at longer terms and operates via interest rate policies. |
| Keywords: | Financial markets and funds management, Market functioning, Financial system, Financial stability and systemic risk, Models and tools, Econometric, statistical and computational methods |
| JEL: | E52 E58 G12 G13 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-17 |
| By: | Juan Mejino-Lopez (Peterson Institute for International Economics); Nicolas Veron (Peterson Institute for International Economics) |
| Abstract: | This Policy Brief focuses on capital requirements on the very largest banks, or megabanks, in the context of the broader current EU policy agenda of banking reform. The authors find that, at end-2024, requirements on US megabanks were generally stricter than requirements on EU megabanks, in line with longstanding US practice. A year later under the second Trump administration, US requirements on megabanks were no longer obviously tougher than those in the European Union, but they were not actually undercutting them either. There is thus no reasonable case for the European Union to ease requirements on its own megabanks in response to the current deregulatory drive in the United States. Instead, EU policymakers should prioritize actions to address the current banking policy fragmentation along national lines, even within the euro area. That means completing the unfinished banking union and integrating decision making on macroprudential buffers at the European Central Bank, which will make the banking policy framework significantly simpler and more predictable. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:iie:pbrief:pb26-13 |
| By: | Mr. Etienne Vaccaro-Grange |
| Abstract: | Small open economies often anchor their exchange rate to a basket of foreign currencies, with weights typically set from trade shares or financial exposure. Such schemes ignore the heterogeneity of pass-through across currencies and the covariance structure of bilateral rates, and therefore do not minimize the volatility of imported inflation, the central bank’s mandate. This paper proposes a minimum-variance framework — formally analogous to a Markowitz portfolio problem in pass-through space — in which basket weights minimize the variance of exchange-rate-driven imported inflation, subject to a constraint that preserves the basket’s cumulative pass-through. Applied to the case of Fiji, an import-intensive island economy with a five-currency basket, the optimization reduces the variance of imported inflation by close to twenty percent, with results robust across alternative specifications. |
| Keywords: | currency basket; exchange rate pass-through; minimum-variance portfolio; small open economies; monetary policy |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/131 |
| By: | Christopoulos, Dimitris; McAdam, Peter; Tzavalis, Elias |
| Abstract: | We develop an endogenous threshold VAR that addresses contemporaneous dependence between the threshold variable and reduced-form innovations— a pervasive issue when regime indicators are jointly determined with system dynamics. A regime-specific copula-based control function removes this dependence instrument-free, without parametric assumptions on the threshold’s marginal distribution, while preserving the linear regime-wise least-squares structure. We characterize the resulting misspecification through excess sensitivity and excess propagation errors in impulse responses, clarify structural and proxy-SVAR identification under endogenous regimes, and establish conditions under which Chan-type threshold asymptotics remain valid with generated controls. A Hermite sieve extension accommodates tail-dependent and asymmetric dependence. Monte Carlo evidence documents large distortions from ignoring endogeneity. Applied to monetary transmission, the framework avoids the price and persistence puzzles displayed by the linear VAR, delivers regime-dependent sacrifice ratios, and aligns estimated regimes with historical inflation episodes. JEL Classification: C32, C34, E52 |
| Keywords: | copula, impulse response, monetary policy, Monte Carlo |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263263 |
| By: | Hasan Dudu; Mr. Troy D Matheson; Mr. Dirk V Muir; Karmen Naidoo; Salem M Nechi; Mr. Pedro C Rodriguez |
| Abstract: | The changing global economic landscape is likely to expose the Middle East, North Africa, and Pakistan (MENAP) and Caucasus and Central Asia (CCA) regions to more frequent external shocks, putting a premium on resilient and flexible macroeconomic policy frameworks. By using empirical analysis and model-based scenarios, this paper highlights the important roles of policy frameworks in stabilizing MENAP and CCA economies against adverse global shocks. Two messages stand out from the analysis. First, as countries make progress toward diversifying their exports and deepening domestic financial markets, credible inflation-targeting monetary policy regimes that allow greater exchange rate flexibility could enable faster adjustment to adverse global shocks. Second, adopting strong fiscal rules could help better anchor long-term expectations, reduce risk premiums, and help support countercyclical fiscal responses. |
| Keywords: | Shocks; Macrodynamics; Fiscal; Monetary; Policy Frameworks |
| Date: | 2026–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/138 |
| By: | Mr. Kangni R Kpodar; Alassane Drabo; Carine Meyimdjui |
| Abstract: | This paper investigates the impact of natural disasters on the domestic sovereign yield curve, shedding light on their distinct transmission channels. Using a sample of 72 developing countries during the period 2000-20, and leveraging a newly compiled dataset on domestic treasury bill and bond yields, the findings from the fixed-effects and the local projection difference in difference estimations point to a disaster premium in the pricing of domestic government securities. While natural disasters significantly steepen the yield curve, their effects are confined to short-term maturity debts. In constrast, a worsening in climate vulnerability shifts upward the entire yield curve. Heightened fiscal stress and monetary policy stance emerge as the main transmission channels. These results underscore the importance of integrating resilience building into debt management and fiscal policy frameworks. |
| Keywords: | Natural disasters; sovereign risk; yield curve |
| Date: | 2026–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/139 |