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on Central Banking |
| By: | Thomas Wangi |
| Abstract: | The central bank uses sterilization policy to mitigate the monetary effects of foreign capital inflows in PNG. The effectiveness of the policy depends not only on the conduct of open market operations, but also on the raising of cash reserve requirement. Thus, this paper estimates the sterilization and non-sterilization coefficients by using the monetary policy reaction and money supply functions. The empirical analysis uses quarterly data from March 1998 to December 2020 under the 2SLS framework. The estimated coefficients indicate that the central bank highly sterilizes the monetary effects of foreign capital inflows. However, the intensity of sterilization is not perfect through the implementation of both monetary policy instruments. Hence, the unsterilized reserves positively influence the monetary base and money supply in the domestic economy. Furthermore, the findings establish that the open market operations are more effective than cash reserve requirement regarding the success of monetary sterilization in PNG. The study suggests that in order to effectively manage the monetary effects of capital inflows, the central bank may consider other policy option such as fiscal tightening and capital controls. |
| Keywords: | capital inflows, monetary sterilization, monetary base, sterilization coefficient, non-sterilization coefficient, 2SLS method |
| JEL: | C39 E52 F21 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-35 |
| By: | Maximilian Fandl; Boris Fišera; Adam Geršl; Christian Schmieder |
| Abstract: | This paper investigates how changes in monetary policy interest rates affect credit loss rates in advanced and emerging market economies using annual data for 113 countries over the past three decades. Applying local projections, we find that a 1 percentage point increase in policy rates raises loan loss rates, on average, by 0.1 percentage points - an economically significant effect that is larger in relative terms in advanced economies than in emerging market economies. These rule-of-thumb estimates are robust across methodologies, including instrumental-variable estimation, exogenous monetary policy shocks, and bank-level data. Crucially, the effect of rate hikes is strongly state dependent: it intensifies when pre-tightening monetary policy is loose, private debt is high, fiscal policy is contractionary, the economy is in a downturn, and central bank balance sheets are shrinking at the same time. Banks with riskier pre-tightening loan portfolios record larger increases in credit losses. Our findings suggest that central banks and prudential authorities should account for the side effects of monetary policy and incorporate credit-risk dynamics into macroprudential and stress-testing frameworks to safeguard financial stability. |
| Keywords: | credit loss rates, interest rates, monetary policy, financial stability, macro-financial conditions |
| JEL: | E32 E52 G21 G28 G32 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1346 |
| By: | Jorge Abad; Saki Bigio; Salomon Garcia-Villegas; Joël Marbet; Galo Nuño |
| Abstract: | How does heterogeneity in banks' interest-rate risk exposure shape monetary policy transmission? We develop a quantitative macroeconomic model of heterogeneous banks to answer this question. We establish an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter for transmission only when bank solvency concerns become relevant. Calibrating the model to the euro area, we show that idiosyncratic default risk pushes a substantial share of banks toward the solvency threshold, making heterogeneity quantitatively important. When policy rates rise, fixed-rate banks suffer net interest margin compression — funding costs increase while legacy loan income stays unchanged — eroding capital and triggering sharper deleveraging. The lending elasticity to monetary policy is one-third larger in fixed-rate economies. The effects extend to financial stability: tightening raises bank failure rates in fixed-rate systems while lowering them in variable-rate systems. The results provide a rationale for macroprudential and monetary policy coordination and for monetary policy gradualism. |
| Keywords: | heterogeneous banks, bank lending channel, loan pricing |
| JEL: | G21 E51 E43 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12676 |
| By: | Spencer Krane; Leonardo Melosi; Matthias Rottner |
| Abstract: | We examine how private sector agents might learn a new monetary strategy introduced while policy rates are at their effective lower bound (ELB) in an environment with large inflationary and deflationary shocks. We consider the adoption of a new asymmetric average inflation targeting rule aimed at countering the disinflationary bias imparted by the ELB. The most crucial time for learning runs from when rates would be near liftoff under the old strategy through early liftoff under the new rule. Recessionary shocks during this time could delay learning while large inflationary shocks could outright stop it, inhibiting the ability of the new strategy to address the costs associated with the ELB. Using the US post-Covid experience as an example, we also find that the monetary policy shocks can have important feedback on the learning process. |
| Keywords: | new framework, central bank's communications, deflationary bias, inflation surprises, asymmetric average inflation targeting, imperfect credibility, liftoff, Bayesian learning |
| JEL: | E52 C63 E31 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1349 |
| By: | Willem THORBECKE |
| Abstract: | In 2013 the Bank of Japan (BoJ) began multiplying the monetary base. In 2016 it fixed the uncollateralized overnight call rate at -0.1% and the 10-year Japanese government bond (JGB) rate in a narrow band around zero. In 2021 it allowed JGB rates to increase. In 2024 it began increasing target rates for the overnight call rate. This paper investigates how monetary policy impacts stock returns both during the ultra-low and negative interest rate era and as the BoJ began normalizing monetary policy. Using Krippner’s (2013) shadow monetary policy rate to measure monetary policy, the results indicate that expansionary monetary policy did little to raise stock returns before 2021. After August 2021, however, contractionary monetary policy lowered returns on many stocks. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:26038 |
| By: | Firmin Ayivodji (International Monetary Fund); Etienne Briand (University of Quebec in Montreal); Kevin Moran (Laval University); Dalibor Stevanovic (University of Quebec in Montreal) |
| Abstract: | News media coverage of monetary policy is not a passive transcript of central-bank communication: it filters announcements, macroeconomic news, and editorial choices into narratives that move expectations and policy decisions. We embed media sentiment into a behavioral New-Keynesian model in which the central bank reacts to sentiment and sentiment follows an explicit law of motion. We construct monetary-policy sentiment indicators from more than 50, 000 Canadian newspaper articles using dictionary methods, transformer models, and a generative-AI framework. Media sentiment shifts household inflation and wage expectations, improves out-of-sample forecasts of GDP growth and inflation, and loads positively on the Bank of Canada's estimated Taylor rule once treated as endogenous. A Bayesian SVAR identifies anticipated and unanticipated monetary-policy shocks together with a narrative shock; the narrative shock contributes a non-trivial share of medium-horizon macroeconomic variance, and a counterfactual that shuts down the dynamic feedback from media sentiment attenuates the propagation of monetary policy to output and prices. |
| Keywords: | Monetary policy, text analysis, news media, machine learning, forecasting |
| JEL: | E52 E58 E71 D84 C32 C55 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bbh:wpaper:26-03 |
| By: | Petre Caraiani (Bucharest University of Economic Studies and Institute for Economic Forecasting, Romanian Academy, Romania); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | We compare four policy instruments--deficit-financed spending, tax cuts, progressive redistribution, and monetary easing--across three HANK specifications: a one-asset baseline, a two-asset model with conventional monetary policy, and an extended two-asset model with endogenous capital, Tobin's Q, and Quantitative Easing (QE) with an explicit central bank balance sheet.Introducing a second, illiquid asset produces a sharp output reversal in the fixed-capital two-asset economy: progressive redistribution moves from most expansionary to contractionary, while deficit spending becomes the dominant output tool. Endogenous capital partially rehabilitates progressive redistribution through the investment channel, but deficit spending remains the most expansionary instrument in both two-asset specifications. A decomposition of the progressive redistribution experiment into its spending and progressivity components confirms that the output reversal is driven entirely by the progressivity channel, which shifts from mildly expansionary in the one-asset economy to strongly contractionary in both two-asset economies. Under the income-based measure, progressive redistribution remains the most equalizing instrument in every specification, with progressivity alone generating pro-poor level gaps of 0.6 percent to 2.2 percent of steady-state output across all three economies. Finally, QE stimulates output relatively more than expansionary conventional monetary policy, but has limited distributional impact. |
| Keywords: | HANK models, fiscal policy, monetary policy, inequality, two-asset models, progressive taxation, quantitative easing, Tobin's Q |
| JEL: | E21 E22 E52 E62 E63 H23 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202610 |
| By: | Tomohito HONDA; Chihiro SHIMIZU; Iichiro UESUGI |
| Abstract: | This study investigates how unconventional monetary policy affects the economy when the central bank purchases equities issued by non-bank institutions, focusing on the Bank of Japan's Real Estate Investment Trust (REIT) purchase program. Unlike previous studies that examine the impact of monetary policy on the real estate sector primarily through the bank lending channel, this program influences the sector through the risk-taking channel by purchasing equities issued by non-bank institutions. Using detailed data on REITs, we find that: (1) the central bank’s purchases lowered both equity and loan costs for targeted REITs; (2) these REITs acquired riskier properties with higher expected returns; (3) banks reallocated lending from listed real estate companies toward the REIT sector, especially targeted REITs; and (4) real estate prices of properties adjacent to those purchased by REITs increased more than those of more distant properties and the tendency is more pronounced when the properties were purchased by targeted REITs. Together, these findings indicate that central bank equity purchases stimulate risk-taking in targeted non-bank institutions and affect the broader loan and real estate market. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:26037 |
| By: | Firmin Ayivodji; Etienne Briand; Kevin Moran; Dalibor Stevanovic |
| Abstract: | News media coverage of monetary policy is not a passive transcript of central-bank communication: it filters announcements, macroeconomic news, and editorial choices into narratives that move expectations and policy decisions. We embed media sentiment into a behavioral New-Keynesian model in which the central bank reacts to sentiment and sentiment follows an explicit law of motion. We construct monetary-policy sentiment indicators from more than 50, 000 Canadian newspaper articles using dictionary methods, transformer models, and a generative-AI framework. Media sentiment shifts household inflation and wage expectations, improves out-of-sample forecasts of GDP growth and inflation, and loads positively on the Bank of Canada's estimated Taylor rule once treated as endogenous. A Bayesian SVAR identifies anticipated and unanticipated monetary-policy shocks together with a narrative shock; the narrative shock contributes a non-trivial share of medium-horizon macroeconomic variance, and a counterfactual that shuts down the dynamic feedback from media sentiment attenuates the propagation of monetary policy to output and prices. %The results suggest that media narratives are an integral part of monetary-policy transmission, not merely an additional source of information. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.15092 |
| By: | Razzak, Weshah |
| Abstract: | We examine Reserve Bank of New Zealand (RBNZ) Monetary Policy Statements (MPS) from March 1990 to June 2025—real time data spanning four governors—to evaluate the performance of inflation targeting. Across the entire period, governors consistently acknowledged the long and variable lags of monetary policy and were therefore presented with one and two years ahead inflation forecasts. Each governor applied substantial judgment to these projections when setting the Official Cash Rate (OCR). Inflation was systematically underpredicted, and breaches of the upper bound of the target range occurred without being anticipated. Falling behind the curve meant policy was often reactive rather than forward looking. Forecast errors caused persistent policy errors. The data show that the real OCR, various proxies for real short- and long-term interest rates, and real spreads are uncorrelated with multiple measures of the output gap and with inflation itself, which begs the question of how monetary policy affects inflation. By contrast, certain measures of inflation expectations that incorporate government spending into the information set explain roughly 40 percent of New Zealand inflation. Therefore, institutional credibility explains the RBNZ’s record of maintaining inflation within the 1–3 percent target range, on average, over the past 35 years. |
| Keywords: | Monetary Polic, Fiscal Policy, Inflation Targeting, RBNZ, Inflation Forecast, Output Gap and Inflation Expectations |
| JEL: | C1 E0 E00 E3 E30 E4 E40 E5 E50 |
| Date: | 2026–04–27 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128887 |
| By: | Aeimit Lakdawala (Wake Forest University); Timothy Moreland (University of North Carolina Greensboro) |
| Abstract: | When the Federal Reserve raises interest rates, prices faced by younger households fall more than prices faced by older households. Using age-specific distributional consumer price indices together with high-frequency monetary policy shocks, we document a monotone age gradient in inflation responses, from households under 25 through households 75 and older. A simple decomposition combining BLS major-group CPI responses with age-specific CEX expenditure shares accounts for most of the gap between the youngest and oldest households. Transportation and medical care drive the result: younger households spend disproportionately on transportation (including motor fuel, vehicles, and auto insurance), whose prices respond strongly to monetary policy, while older households spend disproportionately on medical care, whose prices respond less. |
| Keywords: | monetary policy;inflation heterogeneity;age |
| JEL: | E52 E31 J11 E58 |
| Date: | 2026–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:022481 |
| By: | Ozan Eksi; K. Peren Arin; Neslihan Kaya Eksi; Moo-Sung Kim |
| Abstract: | This paper investigates the international transmission of Federal Reserve monetary policy shocks to European firms across four firm-level outcomes: investment, sales growth, profit margins, and debt growth. Using high-frequency identification of Fed shocks combined with local projections on firm-level panel data from five Eurozone countries over 2004-2024, we find that Fed tightening reduces investment and sales, leaves profit margins largely unchanged, and increases debt accumulation. These effects are broadly observed across sectors, with Wholesale Retail Trade and Manufacturing somewhat more affected, while Agriculture, Forestry, Fishing, and Services (Health and Education) remain largely irresponsive across all outcomes. The Finance, Insurance, and Real Estate sector is a notable exception, exhibiting a positive investment response to Fed tightening. All results are robust to controlling for concurrent ECB policy shocks, highlighting the independent global reach of U.S. monetary policy through international credit and dollar funding channels. |
| Keywords: | monetary policy transmission, sectoral heterogeneity, high-frequency identification, local projections |
| JEL: | C32 E52 E58 F42 G31 L16 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-32 |
| By: | Solon, Neo |
| Abstract: | This paper proposes the Citizens Standard, a constitutional monetary framework built on a dual-circuit pool architecture and a three-channel issuance mechanism that allows a society to constitutionally select among three operating Modes while preserving a single underlying Model. The framework replaces discretionary central banking with formula-bounded, citizen-anchored monetary creation distributed equally to all verified citizens at issuance. The architecture defines two pools — a circulating money pool used for wages, prices, and commerce, and a Stable Floor pool of locked, individually owned, total-market index shares (technically termed the Citizen Equity Stake) — and three issuance channels: K1 (citizenship endowment), K2 (growth dividend), and K3 (citizen dividend, active in Mode C only). Mode A targets approximately 1.6 percent annual deflation through minimal indirect circulating expansion (~0.35 percent of M2 annually via capital markets). Mode B targets approximate price stability with mild deflationary drift (~−0.5 percent annually) through K2 issuance calibrated to half the real-growth-matched amount, deliberately conservative to provide a meaningful Stable Floor without runaway accumulation. Mode C targets approximately 2 percent inflation through price-level path targeting, producing a citizen dividend that ramps from approximately $173 per month per citizen at launch to approximately $280 per month at steady-state, with annual calibration and monthly distribution. |
| Keywords: | Monetary Policy, Monetary Reform, Constitutional Economics, Retirement, Seigniorage, Sovereign Currency, Rules-Based, Monetary Policy, Chicago Plan, Central Banking, constitutional monetary system, inflation regimes, monetary architecture, structural inflation, dual‑circuit money, issuance rules |
| JEL: | E02 E4 E42 E5 E51 E52 E58 E59 H11 H55 K10 P16 |
| Date: | 2026–05–03 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129031 |
| By: | K. Peren Arin; Ozan Eksi; Neslihan Kaya Eksi; Moo-Sung Kim |
| Abstract: | We examine the international transmission of US monetary policy shocks to European firms using high-frequency identification and granular firm-level panel data. Exploiting monetary policy surprises around FOMC announcements combined with firm-level data across eight European economies over 2004-2024, we document a sharp divergence in spillover effects. A contractionary US monetary shock significantly reduces investment rates and sales growth among UK firms, with investment declining by approximately 4% and sales growth by around 0.7-0.8% at peak, with effects persisting for two to four years. By contrast, Continental European firms, whether members of the euro area or independent-currency economies such as Sweden and Switzerland, do not exhibit a significant response. Heterogeneity analysis reveals that large and small UK firms bear broadly similar average burdens, with large firms showing more precisely estimated responses, while leverage does not systematically differentiate transmission. The UK-EU divergence is not explained by the exchange rate regime: the null result for Continental Europe extends to non-euro countries, pointing instead to the exceptional depth of UK-US financial integration, and the centrality of London in global dollar funding markets. |
| Keywords: | monetary policy spillovers, firm-level heterogeneity, international transmission channels |
| JEL: | E52 F43 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-33 |
| By: | Gustav Olaf Yunus Laitinen-Fredriksson Lundstr\"om-Imanov |
| Abstract: | We develop a unified microeconomic and monetary theory of artificial intelligence inference costs and their pass-through to inflation, welfare, and optimal monetary policy. We introduce the Inference-Cost Phillips Curve (ICPC), an augmented New Keynesian Phillips curve in which firm-level marginal costs of producing differentiated goods include a non-trivial AI inference component lambda-bar, and prove a closed-form structural slope kappa*_inf = lambda-bar * kappa, where kappa is the standard Calvo-Yun slope. We derive a welfare-relevant Hicks-Kaldor decomposition of consumer welfare under inference-cost shocks, prove a generalized Taylor principle for the inference-augmented economy, and characterize the optimal monetary policy response coefficient psi*_inf = (1 + phi*rho) * lambda-bar * kappa under commitment. A second-order welfare loss formula closes the model in closed form. We confront the theory with U.S. monthly data 2022:M01-2026:M04 using a two-step GMM estimator with Newey-West HAC standard errors and Hansen J-test, recovering an empirical slope kappa-hat_inf = 0.087 (HAC s.e. 0.021) which lies within one standard error of the structural prediction. A scaling regression over 50 rolling-window subwindows yields b-hat = 0.987 (R^2 = 0.998), consistent with a near-unit-elasticity pass-through. A G7 reduced-form panel with Driscoll-Kraay HAC standard errors yields b-hat^G7 = 0.094 (s.e. 0.026), and a Wald test fails to reject cross-country homogeneity (p = 0.78). The framework provides a single equilibrium scaffold for the joint study of AI inference cost dynamics, monetary policy under generative-AI shocks, and the welfare cost of inference-driven inflation. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.20281 |
| By: | Stefan Tanevski |
| Abstract: | The aim of this study is to empirically investigate the existence of a sectoral asset price channel of monetary policy in the region of the six republics of former Yugoslavia. The study constructs sectoral indices for the entire region, building on the idea that one regional stock exchange may provide more efficiency for the listed companies in the region, while monetary policy relevance for it may be sector-specific. We employ panel vector autoregressive model to observe impulse responses of sectoral indices to innovations in monetary policy, while then disentangle the long- from the short-run relationships per index through a Pooled Mean Group estimation. Overall, we document presence of the asset price channel in the finance and telecom sectors, likely driven by the established multinational corporate networks fostering sub-market regionalization. Yet, this is not the case for the manufacturing and electricity sectors, which may imply that local stock markets are yet too fragmented and space for a more efficient regional stock market, either in the true sense of the word or, more realistically, though enhanced regional cooperation of the stock exchanges certainly exists. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.14575 |
| By: | Moritz Pfeifer; Gunther Schnabl |
| Abstract: | This paper reassesses whether the euro area satisfies the criteria of an optimum currency area. It contrasts early hopes of convergence with subsequent developments marked by persistent heterogeneity across member states. Differences in economic structures, fiscal policies, and financial cycles have produced asymmetries that a single monetary policy cannot offset. Labor mobility and fiscal integration remain limited, shifting adjustment burdens onto prices, wages, and financial flows. Credit expansion and later retrenchment amplified divergence, culminating in the sovereign debt crisis. Since then, cohesion has relied heavily on unconventional monetary policies and fiscal support mechanisms, with notable effects on inflation dynamics, growth performance, and income distribution. The analysis concludes that the euro area has not evolved toward optimality and faces rising risks unless institutional reforms or structural changes are undertaken. |
| Keywords: | optimum currency area, European Monetary Union, economic convergence |
| JEL: | E52 F33 F45 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12675 |