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on Central Banking |
| By: | Betz, Felix; Bofinger, Peter; Dix, Jonas; Streit, Leonie |
| Abstract: | One of the central challenges in identifying the causal effects of monetary policy is the inherent endogeneity of its conduct. This paper introduces a novel identification strategy that leverages LLMs to detect monetary policy shocks from newspaper coverage following European Central Bank (ECB) policy decisions. Based on a dataset of 7, 620 articles from eleven major European newspapers, we classify each policy decision as unexpectedly restrictive, unexpectedly expansionary, or as expected. The resulting narrative-based surprise series captures immediate post-announcement perceptions and shows a close alignment with established High Frequency Identification (HFI) measures with notable exceptions during times of financial turmoil. We subsequently analyze the potential influence of the information effect on our series and find that the majority of identified surprises are unlikely to be driven by information effects. |
| Keywords: | Monetary policy shocks; Natural language processing; Large Language Models |
| JEL: | E52 E58 C88 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21390 |
| By: | Aeimit Lakdawala (Wake Forest University); Jinyoung Seo (Wake Forest University); Myungkyu Shim (Yonsei) |
| Abstract: | How precisely should central banks communicate about the future policy rate path? We study this question in an incomplete information model where the central bank chooses the precision of its communication. The key feature is an endogenous cost of precision: clearer communication makes financial markets respond more strongly to policy path news. A simple overlapping generations framework links this financial market volatility to volatility in the real economy that central banks care about. The benefit of precision is that it helps agents make more informed decisions, and we show how the central bank optimally balances the two. High-frequency monetary policy announcement data provide evidence consistent with the model’s amplification mechanism. |
| Keywords: | central bank communication; forward guidance; communication precision; monetary policy uncertainty; financial market volatility |
| JEL: | E58 E52 E44 D83 E43 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:023050 |
| By: | Milne, Alistair; Niepelt, Dirk; Skeie, David |
| Abstract: | We assess retail central bank digital currency (CBDC) against the objective of the uniformity of money. The central questions that arise are whether CBDC could help support the uniformity of money across public and private monies in day-to-day payments; how it interacts with the unit of account and monetary sovereignty; and how its design choices impact its contribution. |
| Keywords: | Uniformity; Money; Central Bank Digital Money CBDC |
| JEL: | E42 E51 E58 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21448 |
| By: | Ambrocio, Gene; Ferrero, Andrea; Jokivuolle, Esa; McClung, Nigel; Ristolainen, Kim |
| Abstract: | We study the tradeoff between a lower frequency of zero lower bound (ZLB) episodes and a loss of credibility for a central bank in relation to an increase of its inflation target. First, we present novel evidence on the relevance of both sides of the tradeoff for changing the inflation target from a survey of economists. Second, we analyze the ZLB-credibility tradeoff in a New Keynesian model featuring an occasionally-binding constraint on the nominal interest rate and a share of agents who form their expectations adaptively, which is negatively related to the degree of credibility of the central bank. For a given level of the inflation target, the ZLB frequency is higher for lower levels of credibility. A target raise aiming to reduce the ZLB frequency may backfire if a simultaneous loss of credibility occurs. |
| Keywords: | Expert survey |
| JEL: | C38 E31 E52 E58 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21368 |
| By: | Collard, Fabrice; Assenza, Tiziana; Guney, Dogukan; Wangner, Philipp |
| Abstract: | Do central banks decide systematically how much to communicate when explaining their policy decisions? Using all U.S. Federal Open Market Committee policy statements since 1994, we measure communication effort through the change in Shannon entropy and estimate a forward-looking communication rule. We find that communication is systematic: the Federal Reserve communicates more when inflation is expected to exceed target and output is expected to fall below potential. This finding is robust across a variety of sensitivity exercises. We then develop a New Keynesian model with imperfect information showing that systematic communication acts as a second policy instrument, stabilizing expectations and complementing interest-rate policy, especially at the zero lower bound. |
| Keywords: | Central Bank Communication; Monetary Policy; Systematic Rules |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:131951 |
| By: | Carlos Giraldo (Fondo Latinoamericano de Reservas - FLAR); Iader Giraldo-Salazar (Fondo Latinoamericano de Reservas - FLAR); Jose E. Gomez-Gonzalez (Department of Finance, Information Systems, and Economics, City University of New York – Lehman College); Jorge M Uribe (Universitat Oberta de Catalunya) |
| Abstract: | This paper examines whether bank ownership shapes the international transmission of monetary policy through the bank lending channel. Specifically, it investigates whether foreign subsidiaries respond differently from domestic banks to U.S. monetary policy shocks. Using a large bank-level dataset covering 2, 039 institutions across 116 countries over the period 2001–2020, we combine detailed balance sheet information with an exogenous measure of U.S. monetary policy shocks. Our results indicate that foreign-owned banks seem to adjust their lending more strongly in response to U.S. monetary policy shocks than domestic banks. However, this effect is highly heterogeneous across banks and therefore not statistically significant. These findings hold regardless of whether lending persistence is explicitly modeled or not. Overall, the evidence downplays the role of internal capital markets in driving the international credit channel of monetary policy over yearly horizons. More broadly, results point suggest that foreign ownership appears to play a secondary role relative to broader balance sheet characteristics and exposure to global financial conditions |
| Keywords: | International bank lending channel; Monetary policy spillovers; Foreign bank ownership; Global financial cycle; Bank lending; Cross-border banking |
| JEL: | F34 G21 E52 F42 |
| Date: | 2026–06–04 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:023051 |
| By: | Christopher Johns; Aaron Mehrotra; Fabrizio Zampolli |
| Abstract: | Using high-frequency euro area monetary policy shocks and panel local projections for the period 2001-2020, this paper examines how macroeconomic variables respond based on the level and the maturity structure of public debt. The results show that public debt plays a significant role in influencing monetary policy transmission. Higher public debt is associated with a weaker response of prices and inflation expectations to tighter monetary policy, while output declines at least as much as in low-debt economies. The maturity structure of debt also matters in a non-linear way: debt at intermediate maturities is associated with weaker effects, whereas debt at very short and long maturities is associated with stronger effects. Fiscal responses indicate a lack of contemporaneous fiscal backing, as primary balances tend to deteriorate following monetary tightening. Finally, for non-euro area European economies, the paper introduces a novel dataset on public debt maturity profiles and shows that spillovers from euro area monetary policy depend on the maturity structure in the receiving economy. |
| Keywords: | monetary policy transmission, government debt, debt maturity, policy spillovers |
| JEL: | E31 E52 E62 E63 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1365 |
| By: | Atak, Alev; Kısacıkoğlu, Burçin |
| Abstract: | The Federal Reserve's public statements do not directly reflect the FOMC's internal deliberations. The committee filters the message before releasing it, and the filter behaves differently when the policy rate is constrained. We compare meeting-level monetary policy stance indices built from FOMC transcripts and post-meeting statements across 128 meetings between 2004 and 2019, and measure the gap between them. In unconstrained periods, the public message leans modestly more hawkish than the deliberation behind it, consistent with the Fed protecting its credibility while conventional policy still has room to operate. At the effective lower bound, the sign flips, and statements turn substantially more dovish than the internal discussion. The reversal is not an artifact of forward guidance or quantitative easing language, and communication takes on a more direct role when the rate instrument is constrained. Using staff economic projections as an intermediate benchmark, we show that the regime-dependent shift comes from deliberation, not from public communication. We also show that measured stance gap predicts later revisions in the Fed's statements, since the FOMC initially communicates with a bias but the statement gradually catches up to the internal view. Statement-based text measures are not transparent proxies for internal policy preferences, particularly across policy regimes. |
| Keywords: | Central bank communication |
| JEL: | D83 E52 E58 G14 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21538 |
| By: | Alice Albonico; Guido Ascari; Qazi Haque; Kostas Mavromatis; Andra Smadu |
| Abstract: | We develop and estimate an open economy DSGE model for the euro area in which imported energy, priced in foreign currency, enters both consumption and production. Global energy prices and the exchange rate therefore jointly determine domestic inflation. We find that energy and exchange-rate disturbances account for the bulk of short-run volatility in headline euro area inflation, with energy price shocks driving most of the post-pandemic surge. Because energy and non-energy goods are poor substitutes, an adverse energy price shock raises import values, deteriorating the trade balance and depreciating the real exchange rate through the net-foreign-asset and UIP channels. The exchange-rate channel strengthens monetary transmission and improves the short-run inflation-output trade-off relative to a non-energy economy. Optimal policy can exploit this channel rather than looking through energy price shocks. However, the case for looking through such shocks becomes stronger when the central bank assigns a greater weight to output gap stabilization and prices become stickier. |
| Keywords: | Monetary policy; Inflation; Energy;Bayesian estimation. |
| JEL: | E52 E31 E32 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:863 |
| By: | Jessica Piccolo; Alessia Russo; Eleonora Granziera; Efrem Castelnuovo |
| Abstract: | We design a novel survey to study how education shapes households' joint beliefs about inflation, unemployment, and monetary policy transmission. College-educated respondents perceive the inflation-unemployment trade-off and hold views similar to professional forecasters, while less educated respondents favor supply-side narratives. When exposed to hypothetical monetary policy interventions, the more educated update expectations and adjust consumption and saving in line with standard models, whereas the less educated display greater rigidity. This education gradient persists after controlling for information sources, financial literacy, and institutional trust, pointing to differences in abstract reasoning. Open-ended responses are consistent with college-educated households holding mental models aligned with standard macroeconomic theory. |
| Keywords: | household expectations, education, mental models, monetary policy transmission, belief heterogeneity, survey data. |
| JEL: | D83 D84 E31 E52 I21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12784 |
| By: | Alice Albonico; Guido Ascari; Qazi Haque; Kostas Mavromatis; Andra Smadu |
| Abstract: | We develop and estimate an open economy DSGE model for the euro area where global energy prices and the exchange rate jointly determine domestic inflation, because imported energy, priced in foreign currency, enters both consumption and production. Energy and exchange-rate disturbances account for the bulk of short-run volatility in headline euro area inflation, with energy price shocks driving most of the post-pandemic surge. Because energy and non-energy goods are poor substitutes, an adverse energy price shock raises import values, deteriorating the trade balance and depreciating the real exchange rate through the net-foreign-asset and UIP channels. The exchange-rate channel strengthens monetary transmission and improves the short-run inflation-output trade-off relative to a non-energy economy. Optimal policy can exploit this channel rather than looking through energy price shocks. The case for looking through such shocks becomes stronger when the central bank assigns a greater weight to output gap stabilization and prices become stickier. |
| Keywords: | Monetary policy, Inflation, Energy, Bayesian estimation. |
| JEL: | E52 E31 E32 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:577 |
| By: | Donald Kohn (The author holds the Robert V. Roosa Chair in International Economics and is a senior fellow at the Brookings Institution.) |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:26-e-09 |
| By: | Eric Cuijpers |
| Abstract: | How do unexpected changes in macroprudential capital buffer requirements impact bank valuation, measured by price-to-book ratios? This study addresses this question by constructing macroprudential capital buffer †surprises†from market reactions to buffer announcements and estimating their effects, using panel local projections, on the price-to-book ratios of a panel of large European banks. The analysis shows that unexpected buffer surprises are associated with a short-run decline in price-to-book ra-tios, followed by a sustained increase in the weeks following the announcement. Such an increase is consistent with market recognition of reduced risk, despite higher buffer requirements that could lower distributable resources, suggesting that the risk channel dominates the payout channel in the valuation of large European banks. |
| Keywords: | Capital regulation; Macroprudential policy; Bank valuation |
| JEL: | G21 G28 G32 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:864 |
| By: | Allan Pedersen |
| Abstract: | Europe's 2026 review of MiCA is usually framed as one choice for the euro stablecoin. The real question is the mix. A trilemma (par stability, private credit, no public backstop) lets a single token hold only two of the three; the corner that reaches for all three is structurally unstable, for reasons of coordination that no calibration fixes. But at the level of the system the three coherent designs are not rivals: they are lanes that can run in parallel, narrow money (a privately issued claim on the central bank), bank money (bank-issued tokens and tokenised deposits), and a public anchor (a digital euro and on-chain central-bank money). This note weighs each against six EU objectives, shows that the best mix turns on which objectives are prioritised, and offers a conditional sequenced portfolio, with one unconditional conclusion: close the incoherent non-bank corner. |
| Keywords: | stablecoins; e-money tokens; MiCA; narrow banking; central bank digital currency; tokenised deposits; monetary sovereignty; disintermediation |
| JEL: | E42 E58 G21 G28 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:pmt:wpaper:3 |
| By: | Hördahl, Peter; Kısacıkoğlu, Burçin; Xia, Fan Dora |
| Abstract: | Bond yields react to macroeconomic surprises, but the magnitude of this responsiveness depends on macroeconomic forecast disagreement and monetary policy uncertainty. Using intraday responses of US Treasury futures to surprises in macroeconomic data releases, we find that greater forecast disagreement about an economic indicator prior to its release dampens the yield curve response, while higher monetary policy uncertainty amplifies it. An exception is inflation surprises: prior to the post-COVID inflation surge, bond yield reactions to inflation surprises were not amplified by short-rate uncertainty. We use a model with Bayesian learning to rationalize these findings. Specifically, large forecast disagreement indicates a weak link between the macroeconomic variable and future monetary policy, reducing the information value of macro news to forecast monetary policy. In contrast, during periods of high monetary policy uncertainty, macro news becomes more informative. Before the post-COVID inflation surge, investors may have perceived that the Federal Reserve placed little emphasis on its price stability mandate, which could have muted the yield curve response to inflation news even when short rate uncertainty was high. The proposed model generates distinct, empirically testable effects of disagreement and monetary policy uncertainty on yield responses which, when extended to allow time-varying signal precision, accounts for the post-COVID shift in inflation sensitivity within a single unified framework. |
| Keywords: | Macroeconomic news; Forecast dispersion; Policy uncertainty; Bond yields; Bayesian learning |
| JEL: | E43 E44 G14 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21501 |
| By: | De Grauwe, Paul; Ji, Yuemei |
| Abstract: | Our perceptions and our forecasts are often systematically biased. These biases affect economic activity. In this paper we model some aspects of these biases. To do so we use a behavioural macroeconomic model. In this model agents have cognitive limitations, preventing them from having rational expectations. Instead, they use simple forecasting rules (heuristics). Rationality is introduced by assuming that these agents learn from their mistakes and are willing to switch to different rules if these are found out to perform better. We apply this model to analyze how systematic optimistic and pessimistic forecasts of the output gap affect the economy and the transmission of monetary policies. A key insight provided by this analysis is that an increased polarization between optimistic and pessimistic forecasts has the effect of creating agnosticism about the true value of the equilibrium output gap. This also leads to a dominance of purely extrapolative forecasting by economic agents who “fail to see the light†, which in turn enhances the volatility of the business cycle and of inflation. It also reinforces the need for the central bank to stabilize output movements, beyond the need for inflation stabilization. |
| Keywords: | Monetary policy; Behavioral macroeconomics; Biased beliefs |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21366 |
| By: | William A. Barnett (Department of Economics, University of Kansas, Lawrence, KS 66045, USA and Center for Financial Stability, New York City, NY, USA); Van H. Nguyen (Department of Economics, Lawrence University of Wisconsin, Appleton, WI 54911, USA) |
| Abstract: | This paper revisits the issue of money measurement in the context of a New Keynesian framework with sticky prices and monopolistic competition, where money matters. We adopt the framework for a small open economy with home bias in consumption from Faia and Monacelli (2008) and follow Belongia and Ireland (2014) in their closed economy New Keynesian model by adding commercial banks in the financial sector. We construct various measures of money supply, including the traditional simple-sum and the Divisia index, originated by Barnett (1980). Through simulation of equilibrium dynamics with various shocks and variation of parameters, we find that the Divisia index tracks the movement of money most closely to the aggregation theoretic benchmark, followed by the monetary base, while simple sum often fails to match the correct trend. In a classical model with perfect competition and perfect markets with no rigidities, the tracking advantage of Divisia is derivable, as in Barnett (1980). But in the New Keynesian model, the aggregation theoretic proof is compromised and best investigated empirically. We further analyze the impact of openness on the volatility of macroeconomic variables. We find that as the small economy becomes more open, domestic inflation and nominal interest rates are more volatile, while terms of trade and exchange rates become more stable. In this regard, the Divisia index and the monetary base, without payment of interest on reserves, follow the correct trend, while the simple-sum, again, does not. |
| Keywords: | Measurement of money supply; Divisia monetary aggregates; open-economy macroeconomics; monetary policy; New Keynesian model; small open economy |
| JEL: | E31 E32 E41 E47 E51 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:kan:wpaper:202615 |
| By: | Diego M. Hager; Samuel Reynard |
| Abstract: | We present a microfounded information mechanism that causes monetary policy transmission lags to be endogenously variable, even when firms are rational and face no exogenous costs of changing prices. Firms must form two distinct expectations, namely, a forecast of future demand and a nowcast of the current unobserved state, because information arrives at different frequencies. We model this setting as a partial-equilibrium, continuous-time optimal stopping problem in which firms receive a continuous noisy signal and a discrete precise signal. Because exercising the timing option to reprice has a sunk opportunity cost, an endogenous inaction region emerges; firms rationally delay adjustment until the discrete signal provides sufficient actionable information. The resulting dynamics reproduce observed Swiss price-adjustment patterns and the highly variable transmission lags of monetary policy. Thus, the framework provides a rational-agent microfoundation for lag heterogeneity. |
| Keywords: | Information frictions, State-dependent pricing, Monetary policy lags |
| JEL: | E31 E52 D84 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-08 |
| By: | Wickens, Michael R. |
| Abstract: | The theoretical literature on monetary policy favours the use of rules over discretion and most macroeconomic models include an interest rate rule. Since John Taylor's seminal paper published in 1993 the Taylor rule has been the preferred specification of the rule. It is based on evidence for the period 1987-1992 where it explains the Fed funds rate well. The issue addressed in this paper is whether the Fed ever actually followed the original Taylor rule and, in particular, the Taylor Principle of raising the real Fed funds rate to control inflation. And if, as we found, it neither followed the original rule nor adhered to the Taylor principle, what were the main factors that determined the administered Fed funds rate and why might the Fed have chosen to use its discretion rather than follow the original rule and the Taylor Principle? Using time-vary coefficient estimates of a number of versions of the Taylor rule, it is shown that in all of these versions the contribution of inflation in the determination of the Fed funds rate has steadily declined - especially after the financial crisis - thereby breaching the Taylor principle. It seems, therefore, that the Fed has used discretion rather than following the original Taylor rule. The main reason for this seems to be the Fed's dual mandate. Nonetheless, apart from 2021-2022 the Fed has maintained inflation close to its 2 per cent target. We also find that the concern over whether fiscal dominance would result in high interest rates undermining debt solvency is not born out by the evidence. |
| Keywords: | Discretion; Debt sustainability |
| JEL: | E12 E52 E62 C32 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21473 |
| By: | Jonathan D. Rose; David C. Wheelock |
| Abstract: | The tradition of Federal Reserve independence is encoded in statute in important ways but is also rooted in norms and practices. To articulate this tradition, we discuss how those norms and practices emerged historically from compromises over the concentration of power, actions taken by political leaders and Fed officials to define the boundaries of the Fed’s independence, and in reaction to evolving monetary theories and practices. We argue that understanding these historic roots provides essential context for evaluating challenges to the Fed's independence today and in the future. |
| Keywords: | Federal Reserve; central bank independence; monetary policy |
| JEL: | N12 E58 |
| Date: | 2026–07–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:103485 |
| By: | Allan Pedersen |
| Abstract: | The endogenous-money debate is settled operationally: central banks set the price of reserves and accommodate the quantity, as the post-Keynesian literature argued and the Bank of England's 2014 account states publicly. Yet the codified rule-book (Basel risk-weights, the legal definition of money, stress-test taxonomies, the mandate) was written on opposite, veil-view assumptions and not rewritten. What does that lag do to supervision? Codified categories, the paper argues, shape the surveillance regime: a category-system makes some risks countable and others unrepresentable, so codified doctrine works as an epistemic immune system, specialised against the prior crisis and blind to risks of a different kind. Doctrine does not decide which settlement is codified (material interests and path dependence do that); the contribution is downstream, in the sociology of ignorance. It separates doctrinal blindness, where a risk has no category, from motivated blindness, where a recognised risk goes unwatched because a coalition benefits, distinguished in the record by a missing versus a suppressed category. The dependent variable, the distribution of supervisory attention, has four observable proxies. The mechanism is shown in three historical episodes and a set of contemporary gaps; a discriminating archival case (Competition and Credit Control 1971 and the Secondary Banking Crisis) is specified for a companion paper. |
| Keywords: | endogenous money; monetary doctrine; financial supervision; sociology of ignorance; classification; macroprudential policy; central banking; path dependence |
| JEL: | B22 B31 E42 E58 G28 N20 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:pmt:wpaper:1 |
| By: | Bauer, Michael; Känzig, Diego; Rudebusch, Glenn |
| Abstract: | Putting a price on carbon emissions helps mitigate climate change but may also raise overall price inflation. Using high-frequency event studies based on regulatory news in the European carbon market, we show that carbon price surprises generate significant increases not only in energy futures prices, but also in inflation swap prices and breakeven inflation rates. These measures of market-based inflation expectations respond positively at both short and long horizons, with significant effects up to ten years out. Such long-lived inflationary consequences of climate policy are relevant for central banks. However, despite the sustained increases in market-based inflation expectations, forward-looking nominal interest rates show no meaningful response to the carbon policy shocks, suggesting that investors do not anticipate that the European Central Bank will lean against the inflationary effects of higher carbon prices. |
| JEL: | E31 E52 H23 Q54 Q58 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21355 |
| By: | Eichengreen, Barry |
| Abstract: | Although the U.S. dollar remains the dominant currency used in cross-border transactions, policymakers worldwide are increasingly uncomfortable with their financial dependence on the greenback. Their worries are heightened by developments such U.S. efforts to promote the issuance and use of dollar-linked stablecoins, which aspire to cement dollar dominance. This paper asks how countries, and Asian countries in particular, should respond to the challenge. It recommends a diversified strategy whereby governments and central banks explore the development of stablecoins linked to other currencies, link their fast-payment systems, pilot interoperable central bank digital currencies, and explore digital correspondent banking through tokenized bank deposits. |
| Keywords: | Dollar; Stablecoins; Asia |
| JEL: | F0 F30 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21372 |
| By: | Fabio Gómez-Rodríguez (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | Shocks are neither persistent nor transitory; what can be persistent or transitory are their effects. This seemingly subtle distinction has direct consequences for monetary policy: conflating the duration of an event with the duration of its effects can lead to underestimating or overestimating how long the Monetary Policy Rate should respond. This essay develops the argument and illustrates it with two examples relevant to Costa Rica: the effects of global shocks on inflation, where the nominal exchange rate acts as a reverting mechanism, and the effects of oil-price shocks, whose second-round effects sustain inflationary pressures long after the initial shock has dissipated. The paper concludes with communication and policy recommendations for the Central Bank of Costa Rica. ***Resumen: Los choques no son persistentes ni transitorios; lo que puede serlo son sus efectos. Esta distinción, aparentemente sutil, tiene consecuencias directas para la política monetaria: confundir la duración de un evento con la duración de sus efectos puede llevar a subestimar o sobreestimar cuánto tiempo debe responder la Tasa de Política Monetaria. El presente ensayo desarrolla esta idea y la ilustra con dos ejemplos relevantes para Costa Rica: los efectos de los choques globales sobre la inflación, donde el tipo de cambio nominal opera como mecanismo de reversión, y los efectos de los choques del precio del petróleo, cuyos efectos de segunda ronda prolongan las presiones inflacionarias mucho después de que el choque inicial haya desaparecido. Se concluye con recomendaciones de comunicación y de política para el Banco Central de Costa Rica. |
| Keywords: | persistent effects, transitory effects, monetary policy, global shocks, exchange-rate pass-through, efectos persistentes, efectos transitorios, política monetaria, choques globales, traspaso del tipo de cambio |
| JEL: | E31 E52 E58 F41 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:apk:epolec:2602 |
| By: | Susan Jiménez-Montero (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | The document characterizes the Central Bank of Costa Rica’s approach to short-term inflation forecasting within the context of an inflation-targeting regime, highlighting its importance as a key input for medium term projections that inform the monetary policy decision-making process. This essay describes (i) the rationale for forecasting under inflation targeting, (ii) the transmission mechanism and the relevant horizon, (iii) the set of methodologies employed—univariate models, Bayesian techniques, factor models (FAVAR), and item-level CPI models—and (iv) the integration and validation process that transforms statistical results into a coherent economic forecast, which feeds into the macroeconomic model and policy recommendations, as well as institutional outputs such as the Monthly Economic Developments Report (IMCE) and the Monetary Policy Report (IPM). Finally, it emphasizes the dynamic nature of the forecasting system, including the exploration of machine learning techniques as a complement to traditional econometric approaches. ***Resumen: Este documento caracteriza el proceso que se implementa en el Banco Central de Costa Rica (BCCR) para la elaboración de pronósticos de inflación de corto plazo en el contexto de un régimen de metas de inflación. Se destaca su importancia como insumo fundamental para generar pronósticos de mediano plazo que informan la toma de decisiones de política monetaria. Este ensayo describe (i) la racionalidad del pronóstico bajo metas de inflación, (ii) el mecanismo de transmisión y el horizonte relevante, (iii) la batería de metodologías empleadas—modelos univariados, técnicas bayesianas, modelos de factores (FAVAR) y modelos por artículo del IPC—y (iv) el proceso de integración y validación que transforma resultados estadísticos en un pronóstico económico coherente, que alimenta el modelo macroeconómico y la recomendación de política, así como productos institucionales como el Informe Mensual de Coyuntura Económica (IMCE) y el Informe de Política Monetaria (IPM). Finalmente, se resalta el carácter dinámico del sistema de pronóstico, y la exploración de nuevos modelos y técnicas como por ejemplo de machine-learning como complemento a los enfoques econométricos tradicionales. |
| Keywords: | inflation targeting, monetary policy, inflation forecasting, expected inflation, forecasting models, persistent effects, metas de inflación, pronóstico de corto plazo, inflación esperada, gobernanza, política monetaria |
| JEL: | E52 E37 C53 C32 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:apk:epolec:2603 |
| By: | Reis, Ricardo |
| Abstract: | This short note explains the challenges with shrinking the Fed’s balance sheet. It argues that policies to reduce the balance sheet are synonymous with policies that reduce the demand for bank reserves. At the same time, controlling money market volatility while keeping the balance sheet as small as possible requires that the central bank commits to an elastic supply of reserves. Objections to having a standing repurchase facility open to banks that appeal to stigma ultimately refer to supervisory failures that can and should be corrected. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21417 |
| By: | Chenard, Antonin; Eichengreen, Barry; Monnet, Eric; Morvillier, Florian |
| Abstract: | We analyze an aspect of the international monetary system that has been the subject of little research: the distinction between foreign exchange reserves held as deposits and held as securities. We assemble new data for 109 countries in the period 1950-2022 based on previously unutilized statistics from central bank annual reports. We show that there has been movement since the late 1990s toward holding a larger share of reserves in the form of securities. Securities now account for almost two-thirds of total foreign exchange reserves, up from one-third a quarter century ago. This shift is concentrated in the decade between the emerging market crises of the late 1990s and the 2008 global financial crisis. It is associated with the accumulation of excess reserves, what central bank reserve managers refer to as the †investment tranche†of their reserve portfolios. |
| Keywords: | International monetary system; Foreign exchange reserves |
| JEL: | F30 F31 F33 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21488 |
| By: | Anev Janse, Kalin; Beetsma, Roel; Li, Andy |
| Abstract: | A genuine European safe asset would be an essential element of a well-functioning EU capital market needed to support EU growth. To shed light on a feasible path towards such an asset, this paper explores the determinants of yield spreads (relative to German bunds) on sovereign and supranational debt, the latter being the debt issued by the ESM, EIB and the EU itself. We deploy proprietary data from the European System of Central Banks (ESCB) on holdings of individual issuers for monetary policy purposes. We discipline the empirical analysis with a simple portfolio balance model, allowing for default and liquidity risk to affect the pay-off distribution. The empirical effects of outstanding debt (the supply-side), ESCB holdings (the demand-side), bond market and asset-specific volatility are quite well in line with the predictions derived from our portfolio balance model. Increases in ESCB holdings of supranational and high-rated sovereign debt push up their spreads, suggesting that the liquidity effect from a reduced free float dominates the reduced default risk. Further, the findings indicate that supranational debt competes with high-rated sovereign debt in investor portfolios, suggesting that the path towards a genuine European safe asset will at best be a slow one resulting from supranational debt gradually expanding its share in investor portfolios. The creation of a genuine European safe asset could be catalyzed through an increase in EU-level investments financed with an expansion of EU debt and backed by an enlarged EU budget with EU own resources. |
| JEL: | G11 G12 G15 H63 E43 E44 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21545 |
| By: | Kengo NUTAHARA; Daichi SHIRAI |
| Abstract: | We investigate the role of money illusion in business cycle fluctuations by modeling households as misperceiving the inflation rates used to convert nominal variables into real variables. These two forms of misperception operate through distinct channels, affecting labor supply and intertemporal demand, respectively. We estimate a medium-scale DSGE model with money illusion using Japanese macroeconomic data for 1995Q1–2019Q4, measuring the monetary policy stance with a shadow rate. Bayesian estimation shows that the model with money illusion outperforms the rational expectations model, and both current and future inflation misperceptions are well supported by the data. Counterfactual exercises and variance decompositions show that the two forms of inflation misperceptions affect shock propagation through distinct channels. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:26-008e |
| By: | Allan Pedersen |
| Abstract: | Are stablecoins a new kind of money, or a new kind of bank? Europe's Markets in Crypto-Assets Regulation (MiCA) has never quite decided. It treats a fiat-backed stablecoin (an e-money token) as a digital wrapper around existing money, yet loads the issuer with much of a bank's prudential machinery. The result is coherent in one case and unstable in another, depending on who issues it. A bank-issued token sits inside the public safety net, and the arrangement holds. A non-bank issuer faces the same bank-grade rules but no safety net: an instrument that promises to be worth one euro, invests in assets that can lose value, and has nothing to fall back on in a panic. Those three features cannot all hold at once. Reading the 2026 review consultation as a live document, the note finds three EU institutions pulling this corner three ways, and argues the review should choose one coherent design, not fine-tune an incoherent middle. |
| Keywords: | stablecoins; e-money tokens; MiCA; regulatory perimeter; private money; lender of last resort; monetary sovereignty; digital euro |
| JEL: | E42 E58 G21 G28 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:pmt:wpaper:2 |
| By: | de Groot, Oliver; Skok, Yevhenii |
| Abstract: | Were either the exceptional defense spending needs of the government or the sharp increase in the cost-of-living of poorer households factors that rationalize the National Bank of Ukraine’s temporary fix of the Hryvnia when Russia invaded in 2022? To test the validity of these explanations, we develop a small open-economy two-agent New Keynesian (SOE-TANK) model of Ukraine featuring: 1) a government that finances military imports and 2) low- and high-income households. We find that the surge in foreign-currency-denominated military spending alone does not justify a temporary exchange-rate peg. However, when the consumption of low income households is close to subsistence levels, we find that the optimal exchange rate regime becomes state-contingent: exchange-rate flexibility is desirable for small shocks, whereas for a large-scale invasion shock, a fixed exchange rate dominates a floating regime with a standard Taylor rule. |
| Keywords: | Central banking; Monetary policy; Emerging markets |
| JEL: | E44 E52 F31 F41 G01 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21509 |
| By: | Denis Gorea; Ding Xuan Ng; Fabrizio Zampolli |
| Abstract: | This paper estimates the macroeconomic and financial effects of fiscal risk shocks using a novel identification from bond yields. We first recover country-specific fiscal risk shocks from a daily Bayesian VAR model in sovereign and safe corporate bond yields, identified via contemporaneous sign restrictions that capture portfolio rebalancing away from government debt toward private safe assets. We then estimate the effects of these shocks using a local-projections framework applied to a monthly panel of twelve economies. Fiscal risk shocks generate stagflationary dynamics. Inflation and inflation expectations rise on impact, while industrial production increases only temporarily before declining persistently. Sovereign yield curves steepen, exchange rates depreciate and equity prices fall. These effects are significantly stronger when monetary policy remains accommodative– leading to persistently negative real interest rates– and when sovereign risk premia are already elevated. |
| Keywords: | fiscal risk, sovereign yields, safe assets, Bayesian VAR, local projections, monetary–fiscal interactions |
| JEL: | E31 E52 E62 G12 H63 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1364 |
| By: | Sariola, Mikko; Viertola, Hannu |
| Abstract: | The Bank of Finland produces forecasts for the Finnish economy using advanced modelling tools. Central to this process is its Aino model, which is a dynamic stochastic general equilibrium (DSGE) model that integrates various aspects of the Finnish economy. The forecasts support policy decisions within the Eurosystem and are updated regularly. This paper describes the forecasting process, main features of the forecasting models used and their key role in economic analysis at the Bank of Finland. |
| Keywords: | Aino model, forecast, Dynamic Stochastic General Equilibrium, DSGE, monetary policy, Finnish economy |
| JEL: | E0 E3 E4 E5 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofecr:341669 |
| By: | Samuel Stockman |
| Abstract: | Between the pandemic and the war in Iran, inflation has become a central issue facing the US economy that is compounding a broader affordability crisis. However, the sector-specific nature of these recent inflationary episodes means that movements in the price level are not evenly distributed and statistics such as consumer price indexes aggregate away meaningful information. These index movements present inflation as an aggregate process when it can be better understood as a structural feature of the economy facilitated by its production networks. This article builds on a new literature using input-output price models to simulate the relative price movements that result from sector-specific price shocks to demonstrate that inflationary processes entail relative price shifts as both their cause and their consequence. It is argued that these relative price movements begin in systemically significant upstream industries and propagate through production networks to produce differential price outcomes that are not captured by price indexes. The conclusions of this article refine the classification of the systemically significant industries found in Weber et. al (2024a) by clarifying the differential relative price movements from a set of systemically significant industries. The implication of these findings is that monetary policy cannot adequately address the causes of recent inflationary episodes and instead policies that target the structural features of the economy are necessary. |
| Keywords: | Inflation; Production Networks; Input-Output Analysis; Relative Prices; Price Stability |
| JEL: | E31 E52 E62 C67 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1118 |
| By: | Groh, Carl-Christian; Pfäuti, Oliver; Saidi, Farzad |
| Abstract: | We study how firms' use of big data shapes the transmission of macroeconomic shocks to investment. Using employer-employee data on job characteristics to measure firm-level data intensity, we show that data-intensive firms respond more strongly to monetary policy shocks. The relationship between data intensity and investment cyclicality is non-linear: it is negative among firms in the lower four quintiles of the data intensity distribution but significantly attenuated among the most data-intensive firms. We develop a theoretical model with endogenous data acquisition to explain these findings. Data raises expected productivity and lowers uncertainty, reducing firms’ investment costs. Because capital and data acquisition are strategic complements, aggregate shocks induce adjustments in data acquisition that amplify investment responses, especially for data-rich firms. Our results imply that changes in firms' access to data — potentially driven by digital markets regulation — can meaningfully affect both the potency of monetary transmission and business cycle fluctuations. |
| Keywords: | Big data; Uncertainty; investment; Monetary policy; Business cycles |
| JEL: | D21 D81 E22 E52 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21379 |