|
on Central Banking |
| By: | Minki Kim; Mitchell VanVuren |
| Abstract: | This paper develops a general equilibrium macroeconomic model to rationalize why large-scale cash transfers in low-income settings generate high multipliers with little price inflation. We provide two mechanisms, slackness in local production and openness to external trade, and show they have distinct policy implications. We esti mate the modelon baseline data from an ongoing large-scale cash-transfer experiment in Malawi. The estimated economy lies on a slackness plateau where firms have sub stantial idle capacity, muting the price response and generating a local GDP multiplier of between 1.1 and 1.5. Within this regime, the welfare-maximizing transfer design spreads transfers across more villages rather than concentrating them at higher per household amounts. Our approach illustrates the value of pairing a structural model with an ongoing field experiment. |
| Keywords: | Cash Transfer, Slackness, Openness, Fiscal Multiplier |
| JEL: | E0 O1 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_764 |
| By: | Ehrmann, Michael; Hubert, Paul |
| Abstract: | Monetary policy effects are usually identified through surprises. We test whether their effects differ when central banks exceed market expectations (“overdelivery†) versus fall short (“underdelivery†). Using a panel of 14 advanced economies over three decades, we document that short-term interest rates respond up to ten times more to overdelivery surprises. Overdelivery triggers macroeconomic forecast revisions consistent with central bank information effects, while underdelivery generates standard monetary transmission responses. In contrast, overdelivery does not shift perceptions of policymakers’ inflation and output responsiveness differently than underdelivery. The asymmetry does not extend to macroeconomic data surprises, ruling out reference-dependent preferences as a cause. |
| JEL: | E52 E44 D84 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21241 |
| By: | Rose Portier (Centre d'Economie de la Sorbonne, Université Paris 1 Panthéon-Sorbonne et Banque de France) |
| Abstract: | Monetary policy dynamics can be split into two phases: cycle and plateau. This paper examines how these two phases of the policy rate shape monetary policy transmission to interest rates. We provide new evidence that monetary policy surprises have stronger effects during plateau phases than during tightening or easing cycles. This pattern holds in the United States, euro area and United Kingdom. It is not driven by unconventional policies, hysteresis from past cycles, or anticipation of future cycles. It operates through revisions to medium-term policy expectations and holds beyond the lower monetary policy uncertainty and background noise characterizing plateau phases |
| Keywords: | Monetary policy cycles; Long-term interest rates; Monetary policy surprises; State-dependence; Policy signaling |
| JEL: | E43 E52 E58 G12 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:mse:cesdoc:26008 |
| By: | Matteo Deleidi; Enrico Sergio Levrero; Antonino Lofaro |
| Abstract: | This paper assesses the impact of a monetary policy tightening on prices and income distribution. We estimate Structural Vector Autoregressive models for Japan, the UK, and the US over the period 1960Q1-2019Q4. Our findings reveal a cost channel of monetary policy since an increase in interest rates exerts a positive and long-lasting impact on the price level. Furthermore, we highlight the negative effects of restrictive monetary policies on real wages, as price increases are not compensated by an equivalent increase in nominal wages. These findings remain robust across different subperiods and when alternative measures of expectations are incorporated. Finally, by estimating pure shocks from a counterfactual VAR, we decompose the transmission of monetary policy into the demand, distributional, and exchange-rate channels. While the demand channel only partially mitigates the cost channel, the distributional channel amplifies it. By contrast, the exchange-rate channel exerts a disinflationary effect mainly since the 1980s |
| Keywords: | Monetary policy; Structural vector autoregression; Counterfactual analysis; Price puzzle, Functional income distribution. |
| JEL: | E24 E31 E43 E44 E52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:imk:fmmpap:124-2026 |
| By: | Canova, Fabio; Pérez Forero, Fernando J. |
| Abstract: | We investigate the transmission of US monetary policy shocks in high and low inflation regimes using a Bayesian threshold vector autoregressive model. The propagation of conventional disturbances differs: the peak response of output growth and inflation is smaller, but the effects lasts longer when inflation is high. Liquidity shocks are more expansionary when inflation is high. The reaction of financial markets to the shocks accounts for the differences. Implications for theoretical models are discussed. |
| Keywords: | Monetary policy shocks |
| JEL: | C3 E3 E5 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21339 |
| By: | Stefan Nagel |
| Abstract: | A large share of secular variation in real interest rates can be understood as the effect of monetary policy leaning against experience-based long-run inflation expectations. Survey microdata show that adaptive learning from experienced inflation generates highly persistent, slow-moving long-run inflation expectations. When expectations are shaped by experience, central banks cannot anchor them through communication. Instead, when expectations deviate from the inflation target, monetary policy must remain persistently hawkish or dovish to generate realized inflation outcomes that, through agents’ belief updating, gradually pull long-run expectations back toward the target. Consistent with this mechanism, I find a strong positive relationship between experience-based long-run inflation expectations and real interest rates in the U.S., Germany, the U.K., and Japan. Under their subjective expectations, private-sector agents do not anticipate future reversals in inflation and short-term real interest rates. As a result, long-term real interest rates move with experience-based long-run inflation expectations about as much as short-term real interest rates do, consistent with the data. Secular movements in real rates are also accompanied by persistent patterns in interest-rate forecast errors. Overall, the interaction of monetary policy and learning from experience generates a distinct source of secular real-rate variation, beyond movements in the natural rate of interest. |
| JEL: | E43 E71 G12 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35379 |
| By: | Benigno, Pierpaolo |
| Abstract: | We develop a tractable monetary framework in which central bank liabilities and privately issued stablecoins provide liquidity services. We study the interaction between managing the unit of account and managing the means of payment in a currency system. A wedge between market rates and administered remuneration on reserves and tokens makes the supply of public liquidity an independent policy instrument. We characterize when a fully remunerated central bank digital currency or frictionless private issuance can achieve liquidity satiation without losing price-level control, and why balance-sheet risk, seigniorage, and intermediation frictions prevent these knife-edge outcomes. An intermediate regime with a small central bank balance sheet and an elastic backstop stabilizes liquidity premia and inflation. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21033 |
| By: | Corsetti, Giancarlo |
| Abstract: | Countries around the world hold large stocks of reserves—on average 10% of GDP, with some countries holding as much as 90%. This paper examines the role of international reserve accumulation through the lens of the Fiscal Theory of the Price Level (FTPL). The main insights are as follows. First, for a given level of net debt, issuing reserves against nominal debt modifies the government’s asset base, increasing the stock of liabilities that can be devalued via price-level movements. A high stock of reserves therefore reduces inflation volatility stemming from fiscal shocks. Second, for a given stock of reserves, the greater the equilibrium elasticity of the exchange rate to domestic inflation, the stronger the valuation effects on foreign-currency assets, which help stabilize prices and the exchange rate by affecting net debt. However, these valuation effects are double-edged: a positive stock of international reserves also influences the transmission of foreign nominal (inflation and currency) shocks. In addition to providing a rationale for foreign exchange interventions, nominal-to-real spillovers raise issues in fiscal and monetary policy design. |
| Keywords: | Valuation effects; Debt sustainability; International spillovers; Fiscal policy |
| JEL: | E31 E62 E63 F31 F34 H63 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21113 |
| By: | Chen Lin; Eswar S. Prasad; Daniel Rabetti; Che Zhang |
| Abstract: | We study the emerging market for tokenized US Treasuries and yield-bearing dollar instruments on public blockchains. Using a comprehensive dataset that combines on-chain transactions, protocol-level total value locked, pool yields, and monetary policy and stress events, we document three core findings. First, yields can be decomposed into distinct components reflecting issuer fees, lending premia, leverage, basis-trade carry, and collateral pledgability, with the latter generating economically large implicit convenience yields. Second, monetary policy transmission into on-chain dollar markets is highly heterogeneous across product designs, with administratively set rates adjusting slowly and basis-trade-backed instruments displaying economically amplified responses to policy shocks. Third, tokenized Treasuries serve as digital safe havens during episodes of cross-asset stress, attracting large inflows during risk-off events while simultaneously exposing new fragilities arising from the interaction between on-chain composability and off-chain reserve structures, particularly through stablecoin balance sheets. Overall, we provide insights into the distinctive dynamics of pricing, transmission, and fragility of digital Treasuries as decentralized and traditional financial infrastructures increasingly integrate. |
| JEL: | E44 E52 G1 G2 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35412 |
| By: | Wolf, Martin; Zessner-Spitzenberg, Leopold |
| Abstract: | We study an inflationary supply shock in an economy with a high amount of private sector debt. In our framework, the central bank cannot control inflation by raising the interest rate sharply after the shock as doing so would trigger a debt crisis. It therefore follows a "backstop approach" of raising the interest rate sufficiently slowly so that the debt crisis is marginally avoided. We show that this backstop approach invites equilibrium multiplicity. Once agents expect the central bank to respond slowly to inflation, interest rate expectations fall, keeping private leverage high. As this constrains the central bank even more, inflation remains high for longer than fundamentals alone would imply. We derive these insights in a Keynesian growth model with financial frictions, calibrated to the recent Covid inflation crisis. |
| Keywords: | Monetary policy; Financial stability; Financial crisis; Inflation; Keynesian growth; Multiple equilibria |
| JEL: | E22 E31 E32 E44 E52 O42 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21161 |
| By: | Sriya Anbil; Alyssa G. Anderson; Ethan Cohen; Romina Ruprecht |
| Abstract: | We present a new constraint on the size of the Fed’s balance sheet: repo market capacity. Calibrating a structural model to the recent monetary tightening cycle, we show that repo market capacity—driven by money market fund liquidity supply—is the binding constraint on the Fed’s balance sheet, not bank reserve demand, which was highlighted in the events of September 2019. We also demonstrate a novel complementarity between interest rate and balance sheet policies: higher policy rates expand repo capacity, allowing the central bank to operate with a smaller balance sheet. |
| Keywords: | monetary policy implementation; quantitative tightening; reserves; overnight reverse repo facility; shadow banks |
| Date: | 2026–06–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103441 |
| By: | Bouscasse, Paul; Hong, Seungki |
| Abstract: | How does the fiscal side of the US government respond to monetary policy, and does it matter? We estimate the response of fiscal variables to monetary shocks and the counterfactual response of macroeconomic aggregates under different fiscal rules. Following an interest rate hike, the fiscal authority does not react: spending and transfers remain unchanged, tax receipts fall along with output, and interest payments and debt increase. Monetary policy would be more contractionary if fiscal policy were to stabilize debt through spending or taxes, but less contractionary if it used transfers. Indeed, transfer hikes reduce real debt by raising inflation. |
| Keywords: | Fiscal policy; Monetary policy |
| JEL: | E52 E63 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21084 |
| By: | Luo, Yulei; Qu, Lijuan; Wang, Gaowang |
| Abstract: | This paper examines how monetary authorities should balance inflation and output stabilization when firms face rational inattention and working capital requirements. In our environment, monetary expansion both stimulates aggregate demand and lowers marginal costs, yet rational inattention endogenously determines the net transmission: limited information capacity strictly governs the policy sensitivity of the price level. We identify an endogenous regime-switching property in optimal policy: as information capacity improves, the focus shifts from price to output stability, a transition strictly accelerated by the cost channel. For natural rate shocks, this implies a shift from aggressive to restrained policy responses. For markup shocks, the cost channel generates a supply-side subsidy that makes an accommodative policy optimal in high-information environments, overturning the conventional "lean against the wind" prescription. Furthermore, we establish that financial frictions amplify welfare losses from natural rate disturbances but can endogenously mitigate the costs of markup shocks. We analytically and numerically confirm the robustness of these mechanisms under elastic attention, generalized signal structures, and persistent shocks. |
| Keywords: | Optimal Monetary Policy; Rational Inattention; Cost Channel |
| JEL: | D8 E32 E52 E58 |
| Date: | 2026–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128958 |
| By: | Kengo NUTAHARA |
| Abstract: | This paper investigates asset-price-targeting monetary policy in a New Keynesian model with money illusion. Money illusion is introduced as misperceptions of current and expected future inflation. We derive a necessary and sufficient condition for equilibrium determinacy and express it as an extended Taylor principle. In the benchmark case, a policy response to asset prices may weaken determinacy. With current inflation misperception, however, higher inflation can raise dividends and asset prices, making asset-price targeting stabilizing. The results show that the effects of asset-price targeting depend on both nominal rigidities and inflation perceptions. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:26-010e |
| By: | Mark Setterfield (Department of Economics, New School for Social Research, USA); Christopher R. Herdelin (Department of Economics and Finance, Saint Peter's University, USA) |
| Abstract: | In this paper, we present an alternative to the conventional view regarding the Goodwin pattern. We demonstrate that the Goodwin pattern emerges from a three-dimensional system of real, monetary, and distributional dynamics where the monetary linkage includes a central bank incorporating an asymmetric reaction function. The asymmetric reaction function is the result of a central bank that is inflation averse resulting in a deflationary bias. Therefore, the central bank sets interest rates in response to variations in the wage share and real activity, however, there is no influence of distribution on real activity. In our model, the central bank reaction function reflects implicit inflation targeting in real activity × wage share space responding to goods market and labour market pressure. In other words, the central bank finds itself in a conflicting claims environment, changing interest rates when either output or the wage share deviate from their target values. Our results show that the introduction of the central bank reaction function with a deflationary bias produces the cyclical behavior associated with the Goodwin pattern, but more importantly, it also demonstrates a weakening of the profit squeeze mechanism and a secular decline in the wage share. |
| Keywords: | Goodwin pattern, central bank, reaction function, cyclical growth |
| JEL: | E11 E12 E32 E37 E43 E58 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:new:wpaper:2608 |
| By: | Agarwal, Sumit; Mayordomo, Sergio; Rodriguez Moreno, Maria; Tarantino, Emanuele |
| Abstract: | We study how household balance-sheet adjustments shape the transmission of monetary policy to bank credit supply. Using Spanish credit registry data around the ECB’s 2022–2023 rates hike, we show that high-income households with floating-rate mortgages accelerated repayments, generating bank-specific liquidity inflows. Banks more exposed to these inflows expanded credit to micro and small firms, while consumer credit, mortgages, and investment assets were unaffected. This reallocation did not increase delinquency or risk-taking. Our results complement alternative transmission channels and highlight a cross-segment mechanism linking household financial behavior to the bank lending channel, exploiting predetermined mortgage-rate exposure around monetary policy tightening. |
| JEL: | D14 E43 E51 E52 G21 G28 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21039 |
| By: | Albertazzi, Ugo; Faber, Finn; Georgescu, Oana-Maria; Gavazza, Alessandro; Lecomte, Ernest |
| Abstract: | We investigate the supply and demand drivers of bank deposit pricing in the Euro area during the period 2007–2024. We document that the pass-through of policy rates to sight deposit rates is low, asymmetric, varies across the monetary policy regimes, and decreases over time. We build and estimate an equilibrium model of bank deposit markets, and find that the price sensitivity of depositors exhibits large heterogeneity between households and firms, across countries, and over time. Our estimates suggest that rate-sensitive depositors increasingly switched to alternative, higher-yielding savings products over time, thereby decreasing the average rate-sensitivity of the remaining pool of sight deposits. In turn, banks’ market power over sight deposits increased, thereby accounting for the sluggish increase in overnight deposit rates following the 2022 European Central Bank’s policy rate hikes. JEL Classification: G21, G28, E52, E43 |
| Keywords: | bank market power, deposit pricing, price elasticity |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263255 |
| By: | Bignon, Vincent; Jobst, Clemens |
| Abstract: | We provide empirical evidence that central banks can mitigate economic crises more efficiently when they extend eligibility for their discount facility to any safe asset or solvent agent. Nineteenth-century France serves as case study to circumvent endogeneity. Following 1863, an agricultural pandemic increased defaults outside agriculture. We exploit specificities of the discount window to create exogenous variation in central bank access. Regressions show that while the demand shock brought about by the pandemic led to an increase in defaults outside agriculture by 20 percent, this effect was reduced significantly whenever a branch office of the central bank was present. |
| Keywords: | France |
| JEL: | E5 G28 N14 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20974 |
| By: | Adam, Christopher; Luk, Paul; Vines, David |
| Abstract: | This paper shows that coordination of monetary policy and fiscal policy can be desirable in the face of a temporary supply side shock. To calibrate our study we use the sharp rise – and subsequent reversion - of energy prices as a result of Russia’s invasion of Ukraine in early 2022. We take as the objective of policy the control of inflation, and the avoidance of a wage-price spiral, without it being necessary to greatly increase interest rates. We show how such a coordinated strategy could make use of a temporary subsidy to consumption following the energy-price shock. We demonstrate that it would be possible to follow such a strategy without creating either excess demand in the short run or Ponzi-game-like fiscal outcomes in the longer run. Our model is a modified version of the new-Keynesian DSGE model due to Christiano, Eichenbaum and Evans (2005) and Smets and Wouters (2007), to which we have added a fiscal-policy process and an energy-sector enclave. We examine the macroeconomic and welfare outcomes of our policy strategy. We show why the welfare outcomes might be better than those which would emerge in the absence of any consumption subsidy, in which case monetary policy would be the only means used to control inflation. We discuss broader implications of our results in the concluding section of the paper. |
| Keywords: | Energy-price shock; Inflation targeting; energy-price subsidy; fiscal and monetary cooperation ; real wage resistance |
| JEL: | E31 E47 E52 E61 E62 E65 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21147 |
| By: | Bellifemine, Marco; Couturier, Adrien; Jamilov, Rustam |
| Abstract: | We study how regional heterogeneity shapes the aggregate transmission of monetary policy and its distributional implications across space. We build a multi-region Heterogeneous-Agent New Keynesian model with 3, 140 U.S. counties and cross-county differences in (i) intertemporal Marginal Propensities to Consume (MPCs) and (ii) non-tradable employment shares. We analytically characterize the nationwide consumption response to monetary policy in terms of the joint distribution of (i) and (ii). Using U.S. and Italian micro-data, we construct novel empirical measures of regional MPCs to validate our theory. Quantitatively, geographic heterogeneity leads to large distributional consequences of monetary policy across space and can sizably amplify its aggregate effects. |
| Keywords: | Monetary policy |
| JEL: | E12 E21 E23 E52 F41 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21076 |
| By: | Wenhao Li; Sebastian Merkel |
| Abstract: | We show that quantitative easing (QE) worsens government debt sustainability. In our model, the government has a negative primary balance and downward-sloping debt demand that makes interest rates endogenous. The central bank has long-term capital and remits profits to the fiscal authority. QE depletes this capital stock, reducing future remittances and crisis-fighting reserves. Contrary to Sargent and Wallace (1981), where greater monetary accommodation lowers the steady-state debt level, we show that QE increases the steady-state level of debt and shifts the default boundary inward, thus heightening fragility and reducing debt sustainability. Moreover, while QE can keep interest rates low for extended periods, sustaining a QE-backed rate peg requires a growing central-bank footprint and accelerating capital depletion, until financing costs rise sharply. Under certain parameters, large-scale QE makes previously sustainable debt levels unsustainable, leading ultimately to sovereign default. |
| JEL: | E58 E63 G01 G12 H60 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35421 |
| By: | De Jonghe, Olivier; Benkovskis, Konstantins; Bielskis, Karolis; Bonfim, Diana; Bottero, Margherita; Briglevics, Tamás; Cesnak, Martin; Dirma, Mantas; Emiris, Marina; Filep-Mostberger, Palma; Jouvanceau, Valentin; Kaiser, Nicholas; Khametshin, Dmitry; Lalinsky, Tibor; Grolmusz, Viola; Moretti, Laura; Nikitins, Arturs; Nunnari, Angelo; Rodriguez Moreno, Maria; Stefanova, Elitsa; Szabo, Lajos Tamas; Vilerts, KÄ rlis; Zhao, Sujiao (Emma) |
| Abstract: | We study heterogeneity in households' credit across nine European countries (Belgium, Spain, Hungary, Ireland, Italy, Latvia, Lithuania, Portugal, and Slovakia) during 2022-2024 using granular credit register data. We first document substantial between- and within-country variation in mortgage and consumer lending by borrower age, loan maturity, and interest rate fixation. We then quantify the pass-through of the ECB’s recent tightening cycle to household borrowing costs, and assess its heterogeneous impact across households. Pass-through is nearly complete for mortgages (around 0.9) but considerably weaker for consumer credit (around 0.4). While mortgage pass-through is relatively homogeneous across countries, consumer credit shows pronounced cross-country differences that cannot be explained by borrower or loan characteristics. Younger households face stronger mortgage pass-through but weaker consumer credit pass-through relative to older borrowers, and longer maturities are associated with stronger pass-through in both credit markets. |
| Keywords: | Monetary policy transmission; Household borrowing; Credit registers; Interest rate pass-through; Cross-country heterogeneity |
| JEL: | E52 G21 D14 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20928 |
| By: | Monnet, Eric |
| Abstract: | The Bretton Woods system is often described as freeing national monetary policies from the gold-reserve constraints of the gold standard. Breaking the “gold fetters†was essential to the embedded liberalism and economic interventionism of the postwar era. Yet gold retained a crucial role: monetary authorities backed currency with gold reserves, both de facto and de jure, frequently maintaining gold cover ratios comparable to those of the gold standard. How, then, could gold backing coexist with autonomous domestic macroeconomic policy? This article shows that the combination of two phenomena provides an answer: credit growth and currency growth became increasingly decoupled after 1945, and central banks shifted their emphasis from money toward credit. This created substantial scope to stimulate domestic economic activity through credit expansion without being constrained by the link between gold and currency in circulation. Econometric analysis for 38 countries indicates that gold reserves remained strongly correlated with currency, but not with bank credit. Changes in credit markets and central bank instruments therefore allowed gold backing to persist largely as a symbolic tie, without constraining domestic policy. Gold, however, exerted pressure on US policy and shaped international monetary relations. These findings indicate that institutional persistence does not necessarily generate similar economic effects across historical periods. |
| Keywords: | Bretton Woods |
| JEL: | D8 E5 F5 F55 M14 N1 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21215 |
| By: | Born, Benjamin; Lamersdorf, Nora; Schuster, Jana-Lynn; Steffen, Sascha |
| Abstract: | Using modern natural language processing, we construct a high-frequency inflation expectations index from German-language tweets. This index closely tracks realized inflation and aligns even more closely with household survey expectations. It also improves short-run forecasts relative to standard benchmarks. In response to monetary policy tightening, the index declines within about a week, with the effects concentrated in tweets by private individuals and during the recent period of elevated inflation. Using 117 million online transactions from German retailers, we show that higher inflation expectations are followed by lower household spending on discretionary goods. By linking these shifts in demand to stock returns, we find that, during periods of elevated inflation, firms operating in discretionary sectors experience significantly lower stock returns when inflation expectations rise. Thus, our Twitter-based index provides market participants and policymakers with a timely tool to monitor inflation sentiment and its economic consequences. |
| Keywords: | Inflation expectations; Social media; Large Language Models; Nlp; Household consumption; Stock returns; Monetary policy |
| JEL: | E31 D84 E58 C45 C81 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20977 |
| By: | Roc Armenter |
| Abstract: | How monetary policy is implemented can have significant implications for the dynamics of the central bank’s balance sheet. If liquid deposits increase the demand for reserves (Lopez-Salido and Vissing-Jorgensen 2025), then the “ample” level of reserves needed to close the spread between the policy rate and interest on reserves is itself a function of liquid deposits. The supply of reserves will continue to normalize after first reaching ample levels and until liquid deposits return to trend as well. Furthermore, if the supply of reserves encourages deposit creation (Acharya et al. 2024), then a feedback loop arises that can amplify the persistence of elevated deposits and even lead to explosive dynamics. An off-the-shelf calibration exercise finds that even modest amounts of intrinsic deposit persistence could trigger explosive dynamics. Attenuating the response of ample reserves to deposits removes the risk of instability at a modest cost in terms of rate deviations. Simulations with stable roots show that reserves first reach ample earlier and at a higher level than expected by the demand of reserves alone. However, the supply of reserves may decrease further thereafter, at least relative to trend, as liquid deposits remain elevated in the transition period. |
| Keywords: | monetary policy; liquid deposits; ample reserves; policy rate |
| JEL: | E02 E50 E52 E58 |
| Date: | 2026–07–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:103530 |
| By: | Roberto Gómez-Cram; Howard Kung; Hanno Lustig; David Zeke |
| Abstract: | We study the equilibrium effects of financial repression on government funding costs in an endowment economy with limited asset market participation. We show how a broad set of repression policies operates through a wedge in the Euler equation responsive to government size or by affecting fiscal redistribution between agents. Repression intensity is captured by a policy feedback rule that depends positively on net government spending. When fiscal policy is profligate and monetary policy accommodates, we show that such a repression policy raises bond values, reduces the inflationary cost of unfunded fiscal expansions, and lowers bond risk premia. Repression is not a free lunch for bondholders---they pay a lower inflation tax but also earn lower future real returns. When monetary policy does not accommodate fiscal policy, repression can provide stopgap funding for deficits, allowing the central bank to retain control over inflation while making government debt a hedge for fiscal inflation. |
| JEL: | E50 E52 E60 E62 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35391 |
| By: | Acharya, Sushant; Challe, Edouard; Corsetti, Giancarlo |
| Abstract: | We study how monetary policy shapes macroeconomic outcomes in a two-sector small open economy hit by export shocks — due, e.g., to export tariffs, geopolitical tensions, or a recession in destination countries — allowing the shock to have both aggregate and distributional effects. Imperfect worker mobility across sectors, coupled with incomplete markets against aggregate and idiosyncratic shocks, implies that export contractions (i) spill over across sectors due to households’ precautionary response and (ii) affect income and consumption inequalities within and across sectors — in addition to their usual asymmetric effects on sectoral outputs and wages. In this context, exchange-rate flexibility provides insurance against inefficient fluctuations in consumption inequality, which increases the social value of floating-rate regimes. Relative to a nominal exchange-rate peg, flexible inflation targeting helps mitigate the rise in consumption inequality after an export contraction, especially among tradable-sector workers. However, even flexible inflation targeting does not, in general, provide sufficient exchange-rate flexibility relative to the optimal monetary policy. |
| JEL: | F41 F44 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21138 |
| By: | Cristi, José; Kalemli-Ozcan, Sebnem; Sans, Mariana; Unsal, Filiz |
| Abstract: | We study the international transmission of U.S. monetary policy (FED hikes) and a strong U.S.dollar. Both of these variables are endogenous and thus we follow the recent developments in the literature to measure the exogenous components of each from the perspective of the rest of the world (ROW). We show that while U.S. monetary policy shocks act as financial shocks increasing risk premia in emerging markets, a shock to U.S. dollar does not generate the same effect. |
| JEL: | F30 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21042 |
| By: | Wenhao Li; Sebastian Merkel |
| Abstract: | We show that quantitative easing (QE) worsens government debt sustainability. In our model, the government has a negative primary balance and downward-sloping debt demand that makes interest rates endogenous. The central bank has long-term capital and remits profits to the fiscal authority. QE depletes this capital stock, reducing future remittances and crisis-fighting reserves. Contrary to Sargent and Wallace (1981), where greater monetary accommodation lowers the steady-state debt level, we show that QE increases the steady-state level of debt and shifts the default boundary inward, thus heightening fragility and reducing debt sustainability. Moreover, while QE can keep interest rates low for extended periods, sustaining a QE-backed rate peg requires a growing central-bank footprint and accelerating capital depletion, until financing costs rise sharply. Under certain parameters, large-scale QE makes previously sustainable debt levels unsustainable, leading ultimately to sovereign default. |
| Date: | 2026–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:bri:uobdis:26/839 |
| By: | Kalemli-Ozcan, Sebnem; Unsal, Filiz |
| Abstract: | Contrary to historical episodes, the 2022–2023 tightening of US monetary policy has not yet triggered financial crisis in emerging markets. Why is this time different? To answer this question, we analyze the current situation through the lens of historical evidence. In emerging markets, the financial channel–based transmission of US policy historically led to more adverse outcomes compared to advanced economies, where the trade channel fails to smooth out these negative effects. When the Federal Reserve increases interest rates, global investors tend to shed risky assets in response to the tightening global financial conditions, affecting emerging markets more severely due to their lower credit ratings and higher risk profiles. This time around, the escape from emerging market assets and the increase in risk spreads have been limited. We document that the historical experience of higher risk spreads and capital outflows can be largely explained by the lack of credible monetary policies and dollar-denominated debt. The improvement in monetary policy frameworks combined with reduced levels of dollar-denominated debt have helped emerging markets weather the recent Federal Reserve hikes. |
| JEL: | F30 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21041 |
| By: | Doerr, Sebastian; Drehmann, Mathias |
| Abstract: | In the decade since the implementation of the Liquidity Coverage Ratio (LCR), what have we learned about its design, effectiveness, and impact? The LCR is a central pillar of the Basel III regulatory reforms and aims to ensure that banks hold sufficient high-quality liquid assets to withstand short-term funding stress. Theoretical work, which mostly features fire-sale externalities, concludes that the LCR can raise welfare by mandating banks to hold more liquid assets or rely less on fragile short-term funding. Empirical work suggests that the LCR strongly raises banks' high-quality liquid assets and somewhat reduces their reliance on short-term funding. However, it can crowd out lending and induce greater risk-taking. The survey concludes with a discussion of open questions about the LCR's calibration, consequences, and interaction with central bank policies. |
| JEL: | G20 G21 G28 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21126 |
| By: | Genc, Egemen; Moench, Emanuel; Pazarbasi, Altan |
| Abstract: | Using equity mutual fund holdings and transactions, we show that managers actively tilt toward high-beta stocks when monetary policy is contractionary and short rates rise. This “reaching for beta†is persistent, elevates sector-wide net buying of high-beta stocks, and attracts fund inflows under tighter policy. It raises funds' raw but not risk-adjusted returns and induces temporary stock-level price pressure that subsequently reverts. We show that reaching for beta is consistent with fund managers counteracting investor outflows by boosting expected returns. Unlike reaching for yield in bonds, tighter policy increases risk-taking in equities, revealing a beta channel of monetary policy transmission. |
| Keywords: | Risk-shifting |
| JEL: | E44 G11 G12 G23 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20812 |
| By: | Greg Kaplan; Ken Miyahara |
| Abstract: | We build a model that combines (i) heterogeneous households with incomplete markets, and (ii) state-dependent pricing with strategic complementarities by firms, to analyze the effects of large macroeconomic shocks and policy interventions. Both features significantly influence the transmission of fiscal stimulus and monetary policy—heterogeneous households because of failures of Ricardian equivalence, and state-dependent pricing because of its nonlinear effects on inflation. We use our model to quantify how monetary and fiscal policy shaped macroeconomic dynamics in response to the large shocks of 2020, and how alternative policy choices could have led to different aggregate and distributional outcomes. We find large departures from Ricardian equivalence and strong stepping-on-a-rake effects of interest rate changes. The large unfunded fiscal transfer program helped prevent deflation in 2020 and significantly raised output throughout 2021 and 2022, but led to permanently higher prices. The monetary easing through 2020 and 2021 also contributed to preventing deflation, but had a minimal impact on GDP. The monetary tightening from 2022 lowered the maximum inflation rate, but contributed to persistently above-trend inflation. These policies led to net welfare gains for low-wealth households and net welfare losses for high-wealth households, but those welfare effects are due to incomplete markets for idiosyncratic risk not aggregate stabilization. Alternative commitments to funding fiscal stimulus could have achieved similar short-term effects on inflation and output with a much smaller long-term increase in the price level. |
| JEL: | D3 D4 E3 E5 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35400 |
| By: | Hui He; Yao Zhao; Dayong Zhou |
| Abstract: | The paper develops a new monetarist DSGE model to examine the macroeconomic implications of fiat-money-backed stablecoins and the effectiveness of prudential policies in mitigating associated risks. The model features two segmented sectors: a centralized real economy where fiat money facilitates consumption and investment, and a decentralized virtual economy characterized by anonymous bilateral search and matching, in which transactions are exclusively conducted using stablecoins. Calibrated to the U.S. economy, the simulation results reveal that stablecoins amplify the propagation of exogenous shocks to key macroeconomic variables by weakening the effectiveness of monetary policy. However, prudential regulations—specifically those governing the backing ratio of stablecoins to fiat-denominated reserve assets, analogous to banking liquidity requirements—can serve as stabilizing instruments, dampening volatility and enhancing macroeconomic resilience in the presence of stablecoins. |
| Keywords: | Stablecoin; DSGE; Monetary Search; Currency Competition; Prudential Regulation; IMF working papers; Dayong Zhou; dampening volatility; views of the IMF; digital currency; can stablecoins; Real interest rates; Dynamic stochastic general equilibrium models; Consumption; Global |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/129 |
| By: | Bergant, Katharina; Mishra, Prachi; Rajan, Raghuram; Pinzon-Puerto, Freddy |
| Abstract: | We study how U.S. monetary policy shocks transmit to cross-border merger and acquisition (M&A) activity. Using country- and firm-level data, tighter U.S. policy is shown to reduce both the value and the number of cross-border deals. The effects are especially pronounced for acquirer firms with larger foreign-currency liabilities, consistent with a net worth channel. Reflecting agency motives for acquisitions, deals announced under more accommodative U.S. conditions underperform ex post, indicating potential capital misallocation. |
| Keywords: | Cross-border flows |
| JEL: | F63 F65 G34 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21198 |
| By: | Guglielmo Maria Caporale; Luis Alberiko Gil-Alana; León Bertram von Ondarza de Miquel |
| Abstract: | This paper examines the persistence dynamics of monetary policy in the euro area by analysing over the period October 2019 to September 2025 daily data on the €STR – DFR spread, i.e. the deviation of the overnight unsecured market rate from the ECB’s deposit facility rate. Fractional integration and cointegration methods are applied to analyse the degree of persistence of deviations from the policy floor and whether it changes across liquidity regimes. Both the €STR and the DFR behave close to I(1) processes, while the spread is integrated of lower order (d ≈ 0.55 – 0.70), which indicates mean reversion with long memory. This confirms that the DFR acts as a long-run anchor for overnight rates. When allowing for a structural break on 2 November 2022, which coincides with the ECB’s tightening cycle and the beginning of the balance sheet normalization, the analysis finds a decline in the estimated persistence in the post-break period (d ≈ 0.35 – 0.43). This regime dependence is confirmed by the liquidity regime analysis. These results imply that the operational effectiveness of the floor system is more accurately characterised by the persistence of deviations from the policy floor than by their average level, and that liquidity regimes affect the degree of persistence. |
| Keywords: | liquidity, monetary policy implementation, persistence, fractional integration, fractional cointegration, €STR-DFR spread |
| JEL: | E52 E58 C22 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12782 |
| By: | Matthew B. Canzoneri; Behzad T. Diba; Luca Guerrieri; Arsenii Mishin |
| Abstract: | In a model with endogenous risk-taking, deposit insurance and limited liability may lead banks to make risky loans that are socially inefficient. Capital requirements can prevent excessive risk-taking at the cost of reducing liquidity-producing bank deposits. A policy that sets capital requirements just high enough to prevent excessive risktaking will move capital requirements pro-, counter-, or a-cyclically depending on the shock source. However, such a policy requires full knowledge of all the shocks hitting the economy and is not implementable. Simple rules that respond to cyclical conditions—in line with Basel III guidance—perform poorly, whereas a small static capital buffer can do much better. |
| Keywords: | banks; capital requirements; endogenous risk-taking; crises |
| JEL: | C54 E13 G21 |
| Date: | 2026–06–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103442 |
| By: | Cars Hommes (University of Amsterdam); Isabelle Salle (University of Amsterdam); Julien Pinter (University of Alicante) |
| Abstract: | We conduct an experiment with educational content within a large-scale household survey on monetary finance. We identify prior narratives that respondents assign to this concept using open-ended questions analyzed with a large language model. Prior narratives are dominated by inflation concerns and ‘magic money’ views, with little reference to taxation. A central bank (CB) educational blogpost preceded by a short video clip on public finance robustly reduces support for monetary financing and shifts a broad set of related fiscal beliefs, including inflation concerns associated to this policy, support for fiscal discipline, and CB independence. These spillovers do not primarily operate through causal economic reasoning but may be suggestive of a broad application of a ‘fiscal seriousness’ mental model. Our findings indicate that CB communication can tackle even complex topics when it combines educational content with salient narrative framing that connects to existing beliefs. |
| Keywords: | Large-scale household survey, educational information, RCT, narratives |
| JEL: | E70 E62 E58 G53 C83 |
| Date: | 2026–06–11 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20260031 |
| By: | Ulrike Malmendier; Stefan Nagel |
| Abstract: | Empirical evidence commonly cited as indicating that inflation expectations have become better anchored includes the declining sensitivity of expectations to inflation surprises over time, particularly around the adoption of inflation targeting. These patterns are typically attributed to the influence of explicit or implicit inflation targets on inflation expectations. We show that this evidence is consistent with a model of experience-based learning in which individuals learn solely from their life-time history of realized inflation, without anchoring their expectations to an announced inflation target. In this model, the prolonged experience of low short-run inflation persistence in the pre-COVID decades renders long-run expectations insensitive to inflation surprises, matching the patterns observed in empirical anchoring tests. A unique prediction of the experience-based learning model is also borne out in the data: the decline in surprise sensitivity since the 1980s is strongest among younger individuals. The memory of low inflation persistence experiences further explains why long-run inflation expectations remained stable in the face of the post-COVID inflation surge. At the same time, simulations indicate that the sensitivity of long-run expectations to inflation surprises would rise sharply if individuals were to experience another sustained episode of highly persistent inflation. Overall, long-run inflation expectations may be less firmly anchored than commonly believed. |
| JEL: | E31 E52 E71 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35395 |
| By: | Lawrence J. Christiano; Martin S. Eichenbaum; Benjamin K. Johannsen |
| Abstract: | This paper provides an analytic characterization of the speed of convergence under learning to a rational expectations equilibrium (REE) for a large class of multivariate models. We show that learning is slower when people's beliefs about model outcomes are more self-fulfilling. The paper also investigates which features of a model economy make beliefs more self-fulfilling, using variants of the simple new-Keynesian model and a medium-scale DSGE model. For empirically plausible specifications of these models, convergence of a learning equilibrium to the REE is so slow that analysis based on rational expectations can be misleading. |
| Keywords: | monetary policy; dynamic stochastic general equilibrium (DSGE) models; fiscal policy; inflation expectations |
| JEL: | D84 E10 E52 E62 |
| Date: | 2026–06–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103399 |
| By: | Jansen, Kristy; Li, Wenhao; Schmid, Lukas |
| Abstract: | We construct a novel dataset of sector-level U.S. Treasury holdings, covering the majority of the market. Using this dataset, we estimate maturity-specific demand functions and elasticities of different investors and the Fed, and integrate them into a dynamic equilibrium model of the Treasury market with risk-averse arbitrageurs. Quantifying the model reveals that (1) there is a steep downward-sloping term structure of Treasury market elasticity; (2) monetary tightening raises term premia due to arbitrageurs interacting with investors exhibiting high cross-elasticities; (3) QE has limited impact unless the Fed credibly commits to sustained balance sheet expansion. |
| Keywords: | Treasury demand; Financial intermediation; Arbitrage; Monetary policy; Quantitative easing |
| JEL: | E43 E52 G12 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21079 |
| By: | Bilbiie, F. O.; Melitz, M. J. |
| Abstract: | We study productivity shocks in a New Keynesian model with endogenous entry, selection, and nominal rigidities. Adjustment along the extensive margin fundamentally alters the transmission of TFP shocks. Under sticky prices, productivity disturbances generate a large "entry multiplier": firm entry-exit responds much more strongly than under flexible prices, even when output is allocatively efficient to first order. Introducing wage stickiness breaks this neutrality. Adverse TFP shocks reduce profits, trigger exit, and generate a negative output gap while remaining inflationary. Productivity shocks therefore behave as true supply shocks, without resorting to ad hoc cost-push or markup disturbances. Unlike standard markup shocks, TFP shocks in our framework imply procyclical profits and entry, consistent with the data. When wages are sufficiently sticky, expansionary monetary policy raises entry, closes the negative out-put gap, and improves welfare. The model remains analytically tractable and isomorphic to the standard New Keynesian framework, with entry and selection appearing as simple wedges. |
| Keywords: | Entry, Aggregate Demand and Supply, Variety, Sticky Prices, Sticky Wages, Monetary Policy, Recessions |
| JEL: | E30 E40 E50 E60 |
| Date: | 2026–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2655 |
| By: | Olena Kostyshyna (Bank of Canada); Isabelle Salle (University of Amsterdam); Hung Truong (University of Ottawa) |
| Abstract: | Using micro-level data from the Canadian Survey of Consumer Expectations and a heterogeneous expectations model, we characterize the heterogeneity in inflation expectation formation among households across inflation regimes and demographic groups. We show that the recent inflation surge not only increased the level and dispersion of inflation expectations, but also altered expectation formation itself, with marked demographic heterogeneity and more widespread trend-chasing behavior than before the pandemic. Furthermore, only when inflation is high are these trend- chasing behaviors associated with higher expectations for a wide range of economic variables in the short and the long run, concerns about monetary policy, and restrained household spending along weak real wage expectations. Our micro-based insights show how an inflation surge broadly ‘scars’ forecasting behaviors, which poses a challenge for completing the ‘last mile’ of disinflation. |
| JEL: | D84 E31 E70 |
| Date: | 2026–06–19 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20260036 |
| By: | Tobias Adrian; Domenico Giannone; Matteo Luciani; Mike West |
| Abstract: | Central banks monitor macroeconomic risk through two traditions: scenario analysis, regularly used since the mid-1990s, and distributional forecasting, practiced since the late 1960s. The two are complementary but separate: scenarios provide narratives without probabilities, while predictive distributions provide probabilities with limited economic interpretation. Treating baseline forecasts and scenarios as conditional predictive densities, and distributional forecasts as reference predictive distributions, places both within a common framework and clarifies their roles. The Scenario Synthesis assigns weights to scenarios consistent with the reference distribution, offering a practical and reproducible tool for risk assessment and policy deliberation under deep uncertainty. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.16708 |
| By: | Antonova, Anastasiia; Matvieiev, Mykhailo; Poilly, Céline |
| Abstract: | Recessions are often accompanied by heightened uncertainty. We build an imperfect-information New Keynesian model in which procyclical information quality generates endogenous countercyclical uncertainty, and the nonlinear structure allows for a precautionary saving motive. We show theoretically that endogenous uncertainty operates entirely through aggregate demand. For negative supply shocks, the induced rise in uncertainty can depress demand enough to dominate the shock's inflationary force, turning the shock deflationary. Monetary policy can fully eliminate the adverse effect of endogenous uncertainty by stabilizing the output gap. We quantify the endogenous uncertainty channel in the US data and find it to be strong enough to generate deflation in response to negative supply shocks. |
| Keywords: | Endogenous uncertainty; Precautionary saving; Aggregate demand; Imperfect information |
| JEL: | E32 D81 E52 D83 E21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21197 |