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on Central Banking |
| By: | Ahmet Degerli; Jing Wang |
| Abstract: | We provide evidence that banks use loan covenants to prepare for future monetary policy tightening, thereby facilitating the bank lending channel of monetary policy transmission. Specifically, banks with greater monetary policy exposure—those whose lending capacity contracts more as the federal funds rate increases—include stricter financial covenants in loan contracts, granting them flexibility to reduce existing loan commitments during monetary policy tightening when firms breach covenants. The resulting credit reductions to covenant violators by high-exposure banks account for over one-third of the total decline in credit during recent federal funds rate hikes. |
| Keywords: | Monetary policy transmission; Federal funds rate; Monetary policy; Loans |
| JEL: | G21 E52 M41 G32 |
| Date: | 2026–02–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:102441 |
| By: | Juan Michelsen |
| Abstract: | This paper studies the macroeconomic effects of global risk shocks (GRS) in a small open economy and their implications for the identification of monetary policy shocks. I construct a novel proxy for GRS based on unexpected daily innovations in the VIX and employ it as an external instrument in a proxy-SVAR for Canada. The advantage of this proxy is that, by exploiting the safe-haven role of the U.S. dollar, it identifies the effects of GRS using only domestic endogenous variables, without imposing restrictions or relying on global aggregates or narratively selected events. GRS that depreciate the Canadian dollar, tighten financial conditions, reduce asset prices, output, and prices, inducing an expansionary monetary policy response. I provide evidence that high-frequency (HF) monetary policy surprises partly reflect endogenous, risk-driven deviations between policy actions and market expectations. Ignoring GRS can lead to an overestimation of monetary policy effects obtained using HF identification. |
| Keywords: | global risk shocks, small open economy, proxy-SVAR, monetary policy surprises |
| JEL: | E52 F41 F42 F44 |
| Date: | 2026–02–19 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0093 |
| By: | Itay Goldstein; Ming Yang; Yao Zeng |
| Abstract: | We study competition between monies that provide separate payment and non-payment (e.g., store-of-value) functions. Our central insight is that payment adoption is governed not by absolute payment superiority, but by comparative advantage between payment and non-payment roles. A money that is “too good” as a store of value may circulate less as a payment instrument, even if it is technologically superior, because agents prefer to hoard it rather than spend it. The model delivers equilibria in which monies either specialize into distinct roles or coexist as payment instruments with one emerging as dominant. These mechanisms provide a unified microfoundation for classic monetary phenomena such as Gresham’s law and the big problem of small change, and offer a new perspective on modern debates over stablecoins and central bank digital currencies (CBDCs). Contrary to the common view that interest-bearing digital currencies necessarily threaten bank deposits, we show that higher yields can weaken payment adoption by raising the opportunity cost of spending. As a result, traditional bank deposits may coexist with, and even retain dominance over, technologically superior digital alternatives. |
| JEL: | E41 E42 E58 F33 G21 G23 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34865 |
| By: | Mustapha Abderrahim; Riad Mansouri; Fatma Zohra Ouail; Sara Abadi; Kenza Elkrim; Mohamed-Fariz Zidane; Mr. Philippe D Karam; Mr. Gyorgy Molnar; Karel Musil; Valeriu Nalban |
| Abstract: | The paper describes QMPM, the Quarterly Projection Model for the Bank of Algeria that underpins the Bank’s Forecasting and Policy Analysis System. The model is designed to capture the key features of the economy, including the importance of the hydrocarbon sector, sizable fiscal policy impacts, monetary-fiscal interactions, a monetary aggregate targeting policy framework, and a managed exchange rate regime. Model-based analytical exercises demonstrate that AMPM displays both theoretical consistency and a robust data fit, confirming its practicality for conducting real-time policy analysis, forecasts, and risk scenarios in support of the Bank of Algeria’s policy processes. |
| Keywords: | Algeria; Forecasting and Policy Analysis; Quarterly Projection Model; Monetary Policy; Fiscal Policy; Transmission Mechanism |
| Date: | 2026–02–13 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/025 |
| By: | Manuel Adelino; Miguel A. Ferreira; Sujiao Zhao |
| Abstract: | Adjustable-rate mortgages (ARMs) transmit monetary policy less directly than often assumed. We exploit quasi-experimental variation in ARM rate reset timing in Portugal—where over 92% of mortgages are indexed to Euribor—around the ECB’s 2022–2023 tightening cycle to estimate responses to mortgage payment shocks. After reset dates, mortgage renegotiations increase by 10 percentage points, lender switching by 4, partial prepayments by 5, and full prepayments by 3, offsetting about 17% of the payment increase implied by policy rates. Responses occur only immediately after resets, consistent with selective inattention, and are largest among younger, more educated, and higher-balance borrowers. Supply-side factors amplify these effects: as rates rise and bank competition intensifies, households at more flexible banks renegotiate, switch lenders, and prepay more, while greater broker presence further increases lender switching. Our findings suggest that monetary policy pass-through in ARM-dominated markets depends on borrower behavior, market frictions, and sticky deposit rates. |
| JEL: | D14 E44 E52 G21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34824 |
| By: | Sackey, Lawrence; Nortah-Ocansey, Derick A.; Mensah, Daniel |
| Abstract: | The Cash Reserve Ratio (CRR) has long served as a vital monetary policy instrument for the Bank of Ghana (BoG), playing a central role in liquidity management, money supply and the stabilization of the financial sector and general price level. Over time, the CRR has been modified in response to shifting economic landscape and emerging challenges. In more recent years, the CRR has been adjusted to tackle inflation and liquidity challenges. In September 2022, the BoG announced a phased increase from 12% to 15%, executed in three stages: 13% in September, 14% in October, and 15% in November. However, in December 2022, the CRR was reduced to 12% as part of measures to cushion banks during the domestic debt exchange program. By April 2023, the BoG reset the CRR to 14% to manage excess liquidity while supporting economic recovery. The key objective for the increase in the CRR was to mop-up excess liquidity within the banking system by deploying it as an inflation targeting tool. Over the period of its implementation, inflationary pressures have persisted, and the targeted inflation rate was missed by a wide margin. The policy does not do much to mop up liquidity in the informal sector, hence the failure to significantly impact inflation. (...) |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:gabpbs:336966 |
| By: | Chenning Xu |
| Abstract: | This paper examines how monetary tightening transmits to bank credit supply through deposit funding conditions during the 2022-23 cycle. Using a quarterly panel of more than 3, 800 US commercial banks, it constructs predetermined exposure indices measuring depositor sophistication, branch intensity, and local deposit-market concentration, and interacts these exposures with cumulative changes in the federal funds rate to form bank-level shift-share instruments. These interactions are employed in a two-stage least-squares framework to instrument for cumulative changes in effective deposit rates and, in parallel specifications, deposit quantities. The exposure indices explain substantial cross-bank heterogeneity in deposit-rate pass-through with signs consistent with canonical predictions, and jointly provide a strong instrument for cumulative change in effective deposit rates. By contrast, the corresponding results for deposit quantities are weaker and less intuitive. In the second stage, a larger policy-induced increase in a bank’s effective deposit rate is associated with a statistically and economically significant deceleration in the growth of loans not held for sale, consistent with a funding-cost channel through which tightening reduces credit supply. Quantity-based specifications that instrument for deposit growth, however, yield either weak identification or coefficients of the opposite sign, consistent with deposit volumes being endogenous to deposit pricing and with banks' capacity to substitute across liability classes as core deposits run off. Overall, the evidence supports a deposit channel that operates primarily through funding costs and depositor-composition–driven pricing behavior rather than through a mechanical balance-sheet constraint tied to deposit quantities. |
| Keywords: | Monetary Policy Transmission; Deposit Channel; Bank Funding Shocks; Credit Supply; Instrumental Variables |
| JEL: | E52 G21 E44 E51 C36 C23 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1106 |
| By: | Sangyup Choi (Yonsei University); Kyung Woong Koh (Johns Hopkins University) |
| Abstract: | Does government spending raise prices? While standard models predict an inflationary effect, empirical findings are mixed-a puzzle known as the "fiscal price puzzle." We argue that this puzzle reflects differences in aggregation rather than a failure of standard demand transmission. Using newly constructed U.S. MSA-level federal procurement data from 1989-2023 and a shift-share IV strategy, we show that regional fiscal shocks raise local consumer prices when aggregate forces are absorbed through time fixed effects. When aggregate conditions are allowed to respond endogenously, however, the same shocks generate attenuated or even negative price responses. To interpret these findings, we develop a two-region New Keynesian model with centralized monetary policy. Local fiscal expansions increase regional prices but induce union-wide monetary responses that dampen aggregate inflation. Extending the model to consumption and investment sectors, we show that government consumption shocks raise regional and sectoral prices more than investment shocks, yet can produce smaller aggregate price effects due to stronger monetary feedback. Our results highlight how general equilibrium mechanisms and spending composition jointly shape fiscal inflation dynamics. |
| Keywords: | Fiscal price puzzle; Government spending; Spending composition; Military procurement; Monetary union; Shift-share instrument |
| JEL: | E31 E52 E58 E62 F33 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2026rwp-280 |
| By: | Sackey, Lawrence; Nortah-Ocansey, Derick A.; Mensah, Daniel |
| Abstract: | Ghana's banking sector navigated one of its most challenging macro-financial periods between 2020 and 2025, a phase defined by rapid inflation, sharp exchange rate swings, tight fiscal conditions, and elevated interest rates. Despite these pressures, the sector remained functional, resilient, and systemically stable, continuing to provide essential financial intermediation while protecting depositors' funds. Profitability indicators were generally stable in the early years but declined sharply during the height of macroeconomic pressures, particularly when inflation accelerated, cedi weakened significantly together with the huge impairment losses from the domestic debt exchange programme(DDEP), before restoring and stabilizing later in 2023. Credit risk followed an upward trend, with Non-Performing Loans rising as households and firms struggled under increasing costs and reduced real incomes. Capital Adequacy though weakened along the way remained within regulatory requirements and recovered gradually as banks strengthened their balance sheets. Liquidity indicators remained consistently strong throughout, serving as a stable cushion that supported depositor confidence even in the midst of significant macroeconomic volatility. These trends occurred against a backdrop of high inflation, tight monetary policy, elevated interest rates, rapid currency depreciation, domestic debt exchange programme and depleting net international reserves, all of which amplified stress across bank balance sheets. As external reserves improved and inflation moderated from 2024 onwards, overall bankingsector performance strengthened. The experience reinforces a key message: macroeconomic stability is fundamental to banking stability. Banks should continue strengthening creditrisk assessment systems, investing in cost-efficient digital processes, and maintaining strong capitalplanning frameworks that incorporate stress-testing for inflation, interest-rate, and exchange-rate shocks. Policymakers, on their part, must safeguard stability through disciplined fiscal management, credible inflation control, and rebuilding of external buffers to support confidence and reduce systemic risk. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:gabpbs:336969 |
| By: | Benjamin Eyal; Dave Na; Arsenios Skaperdas |
| Abstract: | Since the Global Financial Crisis, central banks have used the size and composition of their balance sheets to influence financial conditions and economic activity when policy rates are constrained by the effective lower bound. A common measure of the size of the Federal Reserve's balance sheet is the System Open Market Account (SOMA) securities holdings expressed as a share of nominal gross domestic product (NGDP). |
| Date: | 2026–02–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:102443 |
| By: | Friedrich Heinemann; Jan Kemper |
| Abstract: | We examine the changing attention that ECB Governing Council members pay to different policy objectives by analysing more than 4, 600 speeches given between the establishment of the ECB and the summer of 2024. Alongside the primary objective of price stability, we consider the following potential secondary objectives: financial stability, stability of the government bond market, sustainable public debt, climate protection and distribution. On the methodological side, we take advantage of LLMs to identify the speeches’ coverage of each of these objectives and the associated support. We conduct a series of validation tests to verify our AI-based scores, including a conventional dictionary approach. We use two-way fixed effects regressions to search for a link between a country's level of public debt and the objective function of its representatives. The results suggest that objectives have become more diverse in recent years. An increase in the public debt-to-GDP ratio in a governor’s home country is associated with a shift in focus away from the primary objective and towards a growing coverage and support for secondary objectives. This general pattern is particularly robust for the distribution objective. These results can only be partly explained by governor selection. Therefore, in their communication, individual governors indicate shifts in their objective function in response to changes in the fiscal situation of their home country. |
| Keywords: | fiscal dominance, green monetary policy, large language model, text analysis |
| JEL: | E58 E52 H63 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12493 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | Bank failures can stem from runs on otherwise solvent banks or from losses that render banks insolvent, regardless of withdrawals. Disentangling the relative importance of liquidity and solvency in explaining bank failures is central to understanding financial crises and designing effective financial stability policies. This paper reviews evidence on the causes of bank failures. Bank failures---both with and without runs---are almost always related to poor fundamentals. Low recovery rates in failure suggest that most failed banks that experienced runs were likely fundamentally insolvent. Examiners' postmortem assessments also emphasize the primacy of poor asset quality and solvency problems. Before deposit insurance, runs commonly triggered the failure of insolvent banks. However, runs rarely caused the failure of strong banks, as such runs were typically resolved through other mechanisms, including interbank cooperation, equity injections, public signals of strength, or suspension of convertibility. We discuss the policy implications of these findings and outline directions for future research. |
| JEL: | G01 G2 G21 N20 N21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34853 |