|
on Central Banking |
| By: | Christoph Grosse Steffen; Stéphane Lhuissier; Daniel J. Lewis |
| Abstract: | Central bank communications frequently contain information about financial-market backstops that affect monetary policy transmission. We identify these transmission protection surprises in the euro area, alongside policy stance and central bank information surprises, by exploiting heteroskedasticity in minute-by-minute asset price movements. Unlike standard factor models, our approach allows active policy dimensions and their impacts to vary across events. Event-specific decompositions quantify the narrative record and reveal substantial heterogeneity of effects across announcements. We show that transmission protection is a distinct dimension of central bank announcements, with financial-market effects separate from both policy stance and information shocks. |
| Keywords: | Monetary Policy, High-Frequency Identification, Central Bank Communication, Information Effects, Financial Stability, Transmission Protection |
| JEL: | E52 E58 F45 G12 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1061 |
| By: | Diego Rodrigues (Université du Québec à Montréal (UQAM)); Tim Willems (Bank of England and Centre for Macroeconomics) |
| Abstract: | By setting interest rates, monetary policy affects the cost of carrying inventories – giving rise to a ‘cost-of-carry channel’ of monetary policy transmission. Via a simple model, we show that higher inventory carrying costs drive firms, especially those holding larger inventories, to cut their prices. We test this hypothesis using data from the US goods, housing, and oil markets – finding robust evidence supporting the cost-of-carry channel. We then introduce this channel into a New Keynesian setup and show that it makes optimal policy more focused on inflation stabilisation when inventories are more plentiful – the reason being that the central bank faces a more favourable sacrifice ratio in such an environment. |
| Keywords: | Inventories;monetary policy;monetary transmission mechanism;inflation. |
| JEL: | E30 E31 E32 E52 E58 |
| Date: | 2025–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023275 |
| By: | Agnès Bénassy-Quéré; Matthieu Bussière; Thaïs Masseï; Arthur Saint-Guilhem |
| Abstract: | We assess the degree of heterogeneity in monetary policy transmission (MPT) across euro area countries for the period 2000–2025. Using monthly local projections, we estimate the effects of monetary policy on a broad set of transmission variables at both euro area and national levels. First, we find limited heterogeneity of output and inflation responses to monetary policy shocks, despite asymmetric responses of mortgage market-related variables. Second, key structural differences, such as households’ indebtedness, debt maturity, interest rate rigidity and sectoral composition, do shape heterogeneities in MPT across euro area countries, according to our results. Considered jointly, though, these differences partly offset one another, leading to a relatively homogeneous transmission of monetary policy. Third, a monthly FAVAR estimation confirms and broadens our local projections results: asymmetry remains contained for output and inflation, but it is higher for sovereign spreads, food prices, credit variables and our consumption proxy. Finally, a rolling-window estimation of the FAVAR model shows that time-varying heterogeneity in MPT is characterized by temporary and crisis-driven divergences that consistently revert to a low baseline, reflecting key monetary policy interventions rather than deeper structural economic divergences. Unconventional monetary policies play a central role in this pattern: they tend to reduce country divergences during crisis periods, impacting more strongly the countries most affected, hence operating, by design, as a heterogeneous policy shock according to our main metric. |
| Keywords: | Monetary Policy Transmission, High-Frequency Identification, Local Projections, FAVAR |
| JEL: | C32 C38 F45 E52 E31 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1062 |
| By: | Eric Tong (Bank of England); Rennae Cherry (Bank of England) |
| Abstract: | We identify central bank communication shocks designed to measure how policy messages reach households. The shocks are constructed from central bank text, where policy messages originate, and newspaper narratives, through which households encounter them. We compare central bank narratives with pre-announcement newspaper narratives and decompose the resulting narrative surprises into stance and information communication shocks. Applying the framework to the Bank of Canada, the Bank of England, and the Federal Reserve, we find that central bank narratives shape media coverage and move households’ one-year-ahead inflation expectations. Tighter stance communication shocks lower inflation expectations, while expansionary information communication shocks raise them, especially when households’ attention is high. Conventional shocks identified with high-frequency asset-price moves do not deliver these responses, underscoring the importance of measuring central bank communication as households experience it. Taken together, the results qualify the view that central bank communication rarely reaches the public, but also show that its effects depend on how central bank messages are received and perceived. |
| Keywords: | Central bank communication;event-study;textual analysis;households’ inflation expectations |
| JEL: | E31 E52 E58 |
| Date: | 2026–07–10 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023316 |
| By: | Manuel Gloria (Bank of England); Chiara Punzo (Bank of England) |
| Abstract: | We develop a DSGE model that incorporates state-dependent commercial bank capital requirements as a source of non-linearity. The presence of non-bank financial institutions (NBFI) amplifies the contractionary effects of monetary policy, primarily through the asset price channel. The amplification effect is strongest in the left tail of the GDP distribution and remains pronounced under zero lower bound conditions. The short-run vulnerabilities exposed by NBFIs contrast with their long-run benefits: a greater share of NBFI lending is associated with higher welfare. |
| Keywords: | Non-bank financial institutions;financial frictions;bank capital;macroprudential policy;monetary policy;GDP-at-risk |
| JEL: | E32 E58 G23 |
| Date: | 2025–11–21 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023278 |
| By: | Cristiano Cantore; Matteo Gatto; Francesco Saverio Gaudio; Pascal Meichtry |
| Abstract: | This paper studies how the prevailing level of public debt shapes the transmission of fiscal and monetary policy shocks in a tractable heterogeneous three-agent New Keynesian model. When households rely on the liquidity services of government bonds to self-insure against idiosyncratic risk, higher public indebtedness amplifies the deterioration in debt sustainability after expansionary government spending shocks. In such economies, fiscal expansions weaken precautionary bond demand, requiring the central bank to keep real interest rates higher for longer and thereby raising debt servicing costs and narrowing fiscal space. By contrast, the transmission of monetary expansions is largely invariant to the initial debt level, as such shocks have little effect on the insurance value of government bonds. These results highlight the central role of the liquidity premium and self-insurance motive in linking initial public indebtedness to long-run fiscal sustainability. |
| Keywords: | Monetary–Fiscal Interactions, Heterogeneity, Liquidity, Self-Insurance, Government Debt, Debt Sustainability |
| JEL: | E21 E52 E58 E62 E63 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1055 |
| By: | Benjamin Straus; Stéphane Surprenant; Kerem Tuzcuoglu |
| Abstract: | In this note we examine how monetary policy affects housing demand, supply and prices in Canada, and whether these effects vary with labour market conditions. Using state-dependent local projections identified with narrative monetary policy shocks, we find that lower interest rates have larger effects when unemployment is low. Easing boosts resales quickly, raises housing starts with a delay, and increases house prices persistently. Because demand tends to respond more strongly than supply, monetary policy appears unable to alleviate housing affordability pressures and may instead intensify them when labour market conditions are strong. |
| Keywords: | Monetary policy; Monetary policy framework and transmission |
| JEL: | C C3 C32 E E5 E52 R R3 R31 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-35 |
| By: | Benjamin Hemingway (Bank of England) |
| Abstract: | Rapid innovation in digital payments and the advent of new forms of privately issued digital money have increased interest in the concept of singleness of money. This paper provides an analytical framework for studying the singleness of money consisting of a three-period banking model where banks choose both the unit of account of their debt and whether it can be used as a medium of exchange. The paper suggests that small deviations from singleness may still be consistent with the efficient allocation, consistent with the fact that small deviations from par already arise today (for example, ATM withdrawal fees). However, inefficient equilibria are more likely to occur if the newly introduced forms of digital money are issued by private entities with distinct business models from incumbent financial institutions. The model also highlights the stabilising roles of both cash and central bank reserves in promoting the singleness of money. Reserves ensure issuers share a consistent asset base, while cash provides a backstop by enabling interoperability through central bank money. |
| Keywords: | Banking;money;singleness;unit of account. |
| JEL: | E41 E42 E58 |
| Date: | 2026–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023296 |
| By: | Flores Zendejas, Juan; Nodari, Gianandrea |
| Abstract: | This article explores how profit-seeking behavior among central banks shaped their adherence to the gold exchange standard during the interwar period, focusing on the case of Chile. Existing literature has emphasized ideology, credibility, and political considerations to explain monetary orthodoxy. However, it has largely overlooked the role of financial incentives embedded in the structure of the gold exchange regime. Drawing on new archival evidence, particularly the minutes of the Central Bank of Chile’s Board of Directors, we show that the institution actively managed its foreign reserves to maximize returns by placing them in correspondent banks in London and New York. This proactive strategy was encouraged by institutional design and shareholder expectations but created vulnerabilities by reducing reserve liquidity and increasing exposure to currency and counterparty risk. These fragilities became evident during the sterling crisis of 1931, when Chile incurred severe losses and was unable to act as a lender of last resort, leading to its abandonment of the gold standard in 1932. The Chilean case reflects broader practices among European and Latin American central banks, revealing how profitability considerations shaped monetary behavior and contributed to systemic fragility. |
| JEL: | E58 F33 N16 N26 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:gnv:wpaper:unige:195486 |
| By: | Michael Ellington (University of Liverpool Management School); Costas Milas (University of Liverpool Management School); Ryland Thomas (Bank of England) |
| Abstract: | We provide evidence that quantitative easing (QE) and quantitative tightening (QT) policies are state contingent. Using 60 years of UK data on public-sector debt sales to the banking system we identify a novel bank funding shock that indicates the impact of unconventional monetary policies changes significantly over time, and that regimes are non-recurrent. Our approach also permits an appraisal of state contingency at different stages of transmission. Over successive QE rounds, we find the responsiveness of government bond yields to a given amount of QE falls. However, demand becomes more responsive to yield changes, while inflation exhibits more persistence and greater sensitivity to the output gap. In the presence of such state contingencies, our results suggest careful monitoring is needed when assessing the impact of QE policies. |
| Keywords: | Quantitative easing;quantitative tightening;unconventional monetary policy;bank funding;vector autoregression |
| JEL: | C11 C32 E52 E58 |
| Date: | 2026–05–29 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023307 |
| By: | Hylton Hollander (University of Cape Town); Clinton Joel (National Treasury) |
| Abstract: | Most inflation-targeting central banks target a small but positive underlying rate of inflation, often called trend inflation1. Yet its appropriate level remains uncertain. The extended deliberation in South Africa to move from a 3 - 6% target band to a 3% point target (with a ±1% tolerance band) illustrates this tension. In our working paper (Trend Inflation and the Costs of Price Dispersion in a Fiscal DSGE Model), we examine the role of trend inflation in an economy and argue that, all else equal, lower trend inflation is better for the economy. |
| Keywords: | Trend inflation, monetary policy, price dispersion, Phillips curve, sacrifice ratio |
| JEL: | E30 E52 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:rza:ersawp:275 |
| By: | David Ronicle (Bank of England) |
| Abstract: | This paper presents the first in-depth empirical assessment of the Bank of England’s ‘overfunding’ policy, a neglected historical episode that may offer insights about quantitative tightening. Overfunding – government bond issuance in excess of fiscal financing needs – was used as an active monetary policy tool in the early 1980s to slow money growth. Exploiting high frequency issuance announcements and a novel external instrument derived from money market segmentation, I show that overfunding shocks had countervailing effects on asset prices. Excess gilt issuance raised long-term yields, via a portfolio balance channel, but reduced short-term rates, potentially through signalling effects. These offsetting forces led to limited effects on inflation and monetary aggregates. This offers a valuable insight for policymakers now – that the different channels of quantitative tightening can be exploited to calibrate the aggregate effects of balance sheet unwind. |
| Keywords: | Quantitative tightening;balance sheet policies;bond supply;term premia;signalling;monetary targeting |
| JEL: | E44 E52 E58 G12 N14 |
| Date: | 2026–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023305 |
| By: | Aniruddha Rajan (Bank of England); Francesc Rodriguez-Tous (Bayes Business School, City St. George’s, University of London); Francesc Salgado-Moreno (Bank of England) |
| Abstract: | We study how monetary policy affects the fixation structure of mortgage contracts, a feature that is crucial for how household consumption adjusts following changes in policy rates. Using loan‑level data covering the universe of residential mortgages in the UK, we show that lenders do not adjust the relative supply of mortgages with different fixation lengths in response to changes in the level of interest rates, but they do so following changes in the term spread. Monetary policy‑induced increases in the slope of the yield curve cause lenders to increase the supply of longer‑fixation mortgages. This effect is particularly strong for lenders with a greater share of fixed‑rate mortgages in their existing portfolios – consistent with an interest rate risk management motive – as well as during expansionary monetary policy episodes. When monetary policy is contractionary, however, increases in the term spread lead banks to increase the supply of shorter as compared to longer‑fixation mortgages. Finally, we find that the choice of monetary policy instrument has material – and directionally opposing – implications for the supply of mortgages at different fixation lengths. |
| Keywords: | Monetary policy;bank lending;household finance;mortgages;local projections |
| JEL: | E43 E52 G21 G51 |
| Date: | 2025–11–28 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023280 |
| By: | Mridula Duggal (Bank of England) |
| Abstract: | This paper studies how inflation expectations respond to monetary-policy regime changes. I develop a New Keynesian model with trend inflation and adaptive learning in which adopting inflation targeting (IT) is a downward shift in the central bank’s inflation objective. Under rational expectations, expected inflation adjusts on impact. Under adaptive learning, beliefs update gradually and expectations adjust only partially between announcement and implementation. I then use professional-forecaster surveys for 32 countries and exploit staggered IT adoption to trace expectations and realised inflation around regime transitions. Empirically, inflation declines following adoption, while survey expectations exhibit little systematic adjustment. The results indicate that inflation leads expectations, at odds with the canonical New Keynesian rational-expectations prediction, and imply that – following the adoption of IT – credibility can be built over time as policy delivers lower inflation outcomes. |
| Keywords: | Inflation expectations;monetary policy;subjective expectations;adaptive learning;inflation;regime shifts |
| JEL: | D83 D84 E52 E58 |
| Date: | 2026–03–20 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023297 |
| By: | Mr. Philip Barrett |
| Abstract: | I analyze multi-horizon market forecasts for macroeconomic variables in Brazil from 2010 to 2026, using a structural macroeconomic model to interpret stated beliefs as the outcomes of a coherent belief system. This produces time-varying beliefs about policy rules, transmission mechanisms, and structural shocks. Beliefs about the monetary policy rule vary in two distinct dimensions, with the perceived target and Taylor response coefficients showing independent variation. Monetary transmission is seen as weak; the perceived Philips and IS curves are very flat. Markets see fiscal policy as increasingly unresponsive to higher debt. The perceived inflation target is unchanged after an unexpected monetary tightening, but the perceived response to inflation increases, with larger effects for monetary surprises and smaller for news shocks. |
| Keywords: | Expectations; Inflation; Monetary Policy; Fiscal Policy; Credibility |
| Date: | 2026–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/173 |
| By: | Ruslana Datsenko (Bank of England); Martin B Holm (University of Oslo and CEPR) |
| Abstract: | Monetary policy is usually evaluated through aggregate output and inflation, with less attention to how it reallocates innovative investment across firms. Existing evidence shows that higher rates reduce innovation, but the firms driving this response remain unclear. Combining Norway’s research and development (R&D) survey with administrative data and narrative monetary shocks for 2001–18, we estimate heterogeneous firm responses. Contractionary policy reduces R&D most in high-growth firms with recent equity issuance, consistent with the asset-price channel of monetary transmission. Standard debt-based measures explain little heterogeneity. Monetary policy therefore has long-run real effects primarily by reducing R&D in high-growth innovative firms. |
| Keywords: | Monetary policy;innovation;productivity;research and development |
| JEL: | E52 O31 |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023314 |
| By: | Fernandez-Gallardo, Alvaro; Lloyd, Simon; Manuel, Ed |
| Abstract: | We estimate the causal effects of macroprudential policies on the entire distribution of GDP growth for advanced European economies using a narrative-identification strategy in a quantile-regression framework. While macroprudential policy has near-zero effects on the center of the GDP-growth distribution, tighter policy brings benefits by reducing the variance of future growth, significantly boosting the left tail while simultaneously reducing the right. Assessing a range of channels through which these effects materialize, we find that macroprudential policy particularly operates through ‘credit-at-risk’: it reduces the right tail of future credit growth, dampening booms, in turn reducing the likelihood of extreme GDP-growth outturns. |
| Keywords: | growth-at-risk;macroprudential policy;narrative identification;quantile local projections |
| JEL: | E32 E58 G28 |
| Date: | 2026–07–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:140592 |
| By: | Michael McMahon (University of Oxford, CEPR); Matthew Naylor (Bank of England, University of Oxford); Ryan Rholes (University of Mississippi); Peter Rickards (Reserve Bank of Australia, University of Oxford) |
| Abstract: | We examine how central banks can effectively communicate forecast uncertainty in a two-part experimental study. Part I tests how different visual media – fan charts, dot plots, box-and-whisker plots, speedometers, and ranges – communicate uncertainty to both the general public and expert audiences. We find that fan charts are well understood and perform best at jointly conveying both expectations and uncertainty. Part II implements a novel dynamic information experiment with 1, 600 UK participants across four stages, examining the effects of uncertainty communication on expectations and uncertainty perceptions over time. We find that while point forecasts anchor expectations marginally more than fan charts initially, forecast errors significantly de-anchor expectations, particularly for ‘unlucky’ errors that move inflation away from target. Critically, fan charts materially mitigate this de-anchoring, acting as an ‘insurance policy’ that helps protect central bank reputation. We also document that the public consistently underestimates the degree of uncertainty, and that communicating uncertainty via fan charts helps the public learn more realistic uncertainty perceptions. Our findings have important implications for central bank communication strategies. |
| Keywords: | Central bank communication;forecast uncertainty;fan charts;expectations;anchoring |
| JEL: | C91 D83 E52 E58 |
| Date: | 2026–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023318 |
| By: | Cyn-Young Park (The South East Asian Central Banks (SEACEN) Research and Training Centre); Kwanho Shin (Korea University) |
| Abstract: | This paper examines whether the early diffusion of artificial intelligence (AI) is visible in productivity and price outcomes relevant to monetary policy. We combine firm-level information on AI adoption from Korea’s Survey of Business Activities with annual industry- and region-level data for 2017–2023. We construct value-added- and employment-weighted measures of AI intensity and use their 2019 values as predetermined measures of initial AI intensity. Both measures strongly predict the cross-sectional distribution of AI intensity in 2023. We then estimate reduced-form panel regressions that compare 2023 outcomes across industries and regions with different initial levels of AI intensity, controlling for unit and year fixed effects. We find no systematic evidence that more AI-intensive industries or regions experienced stronger output or labour-productivity growth in 2023. Industry-level price effects are also statistically insignificant and vary across price measures. At the regional level, however, employment-weighted AI intensity is positively associated with overall consumer price inflation, while restaurant price inflation is higher under both measures of AI intensity. These findings suggest that the supply-side benefits of AI had not yet become visible in aggregate productivity by 2023, whereas inflationary pressures may have emerged in some locally determined consumer services. This pattern is consistent with demand responding before productivity gains are fully realised, although our empirical design does not identify the underlying mechanism. The findings have important implications for monetary policy: during the early stages of AI diffusion, central banks should not assume that anticipated productivity gains will immediately expand effective supply or alleviate inflationary pressures. We discuss the implications of this transitional asymmetry for central banks in Asian economies, where rapid AI adoption may coincide with persistent supply constraints and sector-specific price pressures. |
| Keywords: | Artificial Intelligence (AI), AI Adoption, Productivity Growth, Inflation, Monetary Policy and Central Banking |
| JEL: | E31 E52 O33 O47 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:sea:wpaper:wp63 |
| By: | Federico D'Amario (Bank of England); Sebastian de-Ramon (Bank of England); William Francis (Bank of England) |
| Abstract: | Strong bank capitalisation provides long‑run financial‑stability benefits. However, transitioning to higher capital levels may involve short‑run costs. We analyse the effects of prudential capital changes on lending behaviour, macroeconomic outcomes, and banking competition using UK data within a structural VAR framework with sign and narrative restrictions. Narrative constraints draw on the UK regulator’s 2014–15 stress tests and the 2016 annual cyclical scenario. Impulse responses indicate that banks primarily adjust by reducing risk-weighted assets rather than raising new equity. Higher capital requirements entail negligible long-run costs, with modest short-run macroeconomic effects consistent with other VAR studies on bank capital. These impacts are driven by a contraction in lending and increase in spreads across sectors. We find that effects of altering prudential capital requirements are state dependent. Altering during recessions, as compared with expansions, amplifies short-run contractions, but these are more short-lived, with output recovering more quickly. Indicators of market power (Boone, HHI, Lerner) suggest that tighter capital requirements temporarily reduce banking competition. |
| Keywords: | Bayesian VAR models;narrative restrictions;financial stability;bank competition;state‑dependent local projections |
| JEL: | C11 C32 E32 G21 G28 |
| Date: | 2026–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023294 |
| By: | Xu Lu; Yang Song; Yao Zeng |
| Abstract: | How slow are bank transfers, and how do transfer delays affect deposit demand? Using transaction-level data from millions of depositors, we measure transfer delays by matching debits and credits across accounts held by the same depositor. Shorter delays correlate with more transfers and lower balances. Exploiting county-level exposure to Zelle’s staggered rollout, we find that faster payments reduce delays and deposit growth. Calibrating a deposit-management model, we find that transfer delays raise deposit demand, and the magnitude of this effect varies with interest rates and consumption volatility. Payment frictions therefore shape transactional deposit demand and monetary transmission. |
| JEL: | E41 E42 E52 E58 G21 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35638 |
| By: | Gert Bijnens; John Hutchinson; Arthur Saint-Guilhem |
| Abstract: | This paper examines the effects of cryptocurrency regulation on price deviations in the Bitcoin market, focusing on regulatory implementations rather than announcements. I construct a unique database of regulations across 28 countries since 2009, categorized into seven types, and analyse Bitcoin price data since September 2013. Our findings indicate that the Law of One Price does not hold in the Bitcoin market. Contrary to initial conjectures, more regulated markets exhibit higher price convergence with the USD benchmark. According to the type of regulation, this result is mixed. Regulations enhancing reliability and transparency, such as the expansion of securities laws, banking and payment regulations, and the implementation of regulatory sandboxes foster price convergence. In contrast, partial bans—primarily targeting banks—exacerbate price divergence, underscoring the significant role of financial institutions in the Bitcoin market. Additionally, anti-money laundering/countering the financing of terrorism (AML/CFT) laws reduce local prices regardless of USD price level, suggesting the cryptoasset's use in illicit activities.. |
| Keywords: | Labour Hoarding, Monetary Policy Transmission, Firm-Level Heterogeneity, Employment Adjustment, Financial Constraints |
| JEL: | E52 J23 E32 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1053 |
| By: | Krishan Shah (Bank of England); Philip Bunn (Bank of England); Marko Melolinna (Financial Conduct Authority) |
| Abstract: | Many firms use required rates of return on investment – or hurdle rates – to evaluate the attractiveness of their investment projects. This paper examines the adjustment of these hurdle rates to a tightening in monetary policy. Using new survey evidence from the 2022–23 hiking cycle, we find that hurdle rates for UK firms tend to be high and that they responded sluggishly to increases in interest rates over this period. Firms who use external finance to fund investment were more likely to have adjusted their hurdle rates in response to higher interest rates; but even for these firms, only around half of the increase in cost of capital was passed into hurdle rates. Using high-frequency monetary policy shocks over a longer period of time, we show that firms with sticky hurdle rates reduce investment by less in response to contractionary policy shocks than firms that update their hurdle rates more frequently. |
| Keywords: | Investment;interest rates;monetary policy;discount rates |
| JEL: | E22 E52 G31 |
| Date: | 2025–12–12 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023284 |
| By: | Stéphane Dupraz |
| Abstract: | Central banks typically rely on the following heuristic: Look through transitory supply shocks to stabilize the output gap, but pivot toward inflation stabilization when supply shocks become persistent. Yet standard macroeconomic models provide little support for this heuristic. They justify it for markup shocks—a particular type of supply disturbance—but imply that, for the most common supply shocks, such as productivity, labor supply, or energy prices, stabilizing the output gap remains close to optimal even when these shocks are persistent. What, then, rationalizes a hawkish response to persistent supply shocks? This paper shows that, contrary to conventional wisdom, the risk that inflation expectations de-anchor is not sufficient. Even when expectations are backward-looking, output-gap stabilization remains close to optimal. Instead, real wage rigidity emerges as the key mechanism. When real wages are sufficiently rigid, stabilizing the output gap becomes substantially more costly, and optimal policy shifts toward inflation stabilization in response to persistent supply shocks, regardless of whether expectations can de-anchor. These findings suggest that monitoring real wage rigidity may be at least as important as monitoring inflation expectations when assessing the need for a hawkish policy pivot. |
| Keywords: | Supply Shocks ; De-Anchoring ; Real Wage Rigidity |
| JEL: | E52 E31 E58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1054 |
| By: | Gockel, Christine; Strohsal, Till |
| Abstract: | We study how inflation expectations can be anchored through different forms of communication and whether such anchoring survives political change. Using a two-wave panel RCT around the 2025 German federal election, we show that providing the ECB's target and projections lowers expectations by about 100 basis points. We then introduce a teaching-style intervention explaining the ECB's institutional role using simple language and an intuitive metaphor, which proves equally effective. Treatment effects persist through the election, and partisan polarization remains modest. Our results suggest that well-designed communication - combining quantitative information with clear explanations of institutional responsibility - can durably anchor beliefs even in changing political environments. |
| Keywords: | elections, anchoring, inflation expectations, central bank communication, survey experiment, randomized controlled trial (RCT) |
| JEL: | E31 E42 E52 D84 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:fubsbe:342441 |
| By: | José-Luis Peydró (LUISS University and EIEF); Francesc Rodriguez-Tous (Bayes Business School); Jagdish Tripathy (Bank of England); Arzu Uluc (Bank of England) |
| Abstract: | This paper provides an overview of evidence from a range of country-specific studies on the effectiveness of borrower-based macroprudential tools which limit household leverage at the borrower level. Most studies find these measures effective in breaking the self-enforcing loop between household leverage and house prices. These measures have beneficial effects in terms of lower defaults and less volatile house price dynamics during periods of economic distress. Their effects are heterogeneous across borrower types, with stronger impacts where leverage requirements are higher, such as among first-time buyers. Studies point to restrictions on household leverage having downstream effects on job search, location choice, homeownership, and exposure to income shocks. Looking ahead, further research is required to conduct a comprehensive cost-benefit analysis of these measures, to adapt them to increased use of technology in financial intermediation, and to examine their broader societal effects, including political outcomes and mental health. |
| Keywords: | Macroprudential policy;borrower-based tools;distributional consequences;financial stability;wealth inequality. |
| JEL: | E58 G01 G21 G51 R2 |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023273 |
| By: | Negar Mohammadi Jazi (London School of Economics); Felipe Netto (Bank of England) |
| Abstract: | We analyse how risk-based capital requirements shape competition and credit allocation in the UK unsecured Small and Medium-sized Enterprises (SME) lending market using confidential loan-level data. Motivated by empirical patterns, we develop and estimate a structural model with screening, asymmetric information, and imperfect competition, in which banks and non-bank lenders differ in regulatory treatment. We estimate lender-specific costs and screening precision, and show how these features jointly account for the observed lender market shares across borrower risk and loan size segments. Our results indicate that regulation interacts with heterogeneity in information processing and costs to shape equilibrium pricing and credit allocation, with non-bank lending reflecting not only regulatory differences but also comparative advantages in screening technology. Our model provides a quantitative framework for evaluating regulatory policy in markets with both regulated and non-regulated intermediaries. |
| Keywords: | Small business lending;asymmetric information;non-bank financial intermediaries;screening;capital regulation |
| JEL: | G20 G21 G23 G28 |
| Date: | 2026–06–19 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023313 |
| By: | Deborah Gefang; Stephen G. Hall; George S. Tavlas |
| Abstract: | We examine how macroeconomic and geopolitical developments in the United States, the euro area, and China affect the currency composition of central banks' foreign exchange reserves. Using an unbalanced panel of reserve shares for 53 countries over 1999-2023, we estimate a constrained system of equations that explicitly imposes the adding-up restriction on reserve shares. The results indicate substantial persistence in reserve holdings and significant cross-currency dependence, supporting a system-wide dynamics of reserve composition. In the country fixed-effects specification (1) issuer economic size, (2) uncertainty, (3) sanctions, (4) trade linkages, and (5) issuer credibility are significantly associated with reserve allocation across currencies. With the inclusion of year fixed effects, the persistence and cross-currency dependence remain, while trade linkages and sanctions emerge as the most important determinants of reserve composition. The results highlight the importance of accounting for the compositional nature and interdependence of reserve shares when examining the determinants of global reserve holdings. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.24468 |
| By: | Jenny Chan (Bank of England); Sebastian Diz (Central Bank of Paraguay); Derrick Kanngiesser (Independent Researcher) |
| Abstract: | We study a New Keynesian model where production inputs and pricing decisions are made under information frictions. Firm production is constrained by inputs that are chosen before shocks are realized, based on firms’ expectations of future demand. We show that the assumption of real rigidities versus nominal rigidities is not innocuous, as assuming the presence of either or both affects the pass-through of demand shocks to aggregate output and inflation. When the choice of production inputs is made under imperfect information about demand shocks, the impact on inflation is amplified while the impact on output is dampened. When both production inputs and pricing decisions are made under imperfect information about demand shocks, the pass-through to output is amplified while the impact on inflation is dampened. Additionally, we show that expectations about demand can behave similarly to a supply shock, as these expectations influence the natural level of output and enter the New Keynesian Phillips curve in a manner analogous to a cost-push shock. Empirical evidence suggests that inflation falls following a positive surprise in industrial production, consistent with the model version featuring real rigidities. |
| Keywords: | Information frictions;New Keynesian;real rigidities |
| JEL: | E31 E31 E52 E58 |
| Date: | 2025–11–21 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023277 |
| By: | Tsutomu Watanabe |
| Abstract: | For decades, Japanese inflation expectations were anchored near zero, helping stabilize prices but also making it harder for the Bank of Japan to escape deflation. That zero-percent anchor has now largely disappeared. Yet a new anchor at the BOJs 2 percent target has not taken its place. Japan is therefore caught between inflation anchors, leaving expectations—and potentially prices and the yen—more vulnerable to shocks. Establishing a credible 2 percent anchor is now a key challenge for monetary policy. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:26-014e |
| By: | Walter Beckert (Bank of England); Peter Eccles (Bank of England); Paolo Siciliani (Bank of England) |
| Abstract: | This paper investigates the relationship between the optimal level minimum capital requirements aimed at preventing moral hazard by banks and banks’ incentives to invest in process innovation aimed at improving operational efficiency. We extend Hellmann et al (2000)’s dynamic model of banking competition to show that the imposition of minimum effective capital requirements aimed at preventing excessive risk-taking by banks supports, rather than hinders, investment in process innovation, thanks to the longer time horizon over which banks can expect to benefit from the efficiency improvement thereof. This is because investments in process innovation will be more valuable if banks act prudently. This in turn reduces the incentive for moral hazard with implications for the optimal level of minimum capital requirements. |
| Keywords: | Process innovation;optimal level of capital requirements;moral hazard;bank competition |
| JEL: | G21 G28 O31 |
| Date: | 2026–06–05 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023310 |
| By: | Elio Cucullo (Bank of England and Bayes Business School); Andrew Clare (Bayes Business School); Angela Gallo (Bayes Business School) |
| Abstract: | We study the overnight bilateral gilt repo market to assess how global non-bank financial institutions (NBFIs) supply liquidity to large UK banks. Using proprietary transaction-level data from the Bank of England, we show that, in this segment, NBFIs provide substantially more liquidity than traditional interbank lenders, with volumes 6 to 12 times larger. We compute a relative pricing measure, the Spread-of-Spread (SoS), to capture the NBFI premium over the interbank repo lending. We document that before 2022, NBFI funding was cheaper than the interbank market, with the average SoS at -7 basis points, but became more expensive and volatile thereafter, averaging around 10 basis points. We document two mechanisms: an opportunity-cost channel where higher short-term rates lead NBFIs to pass higher liquidity cost onto banks, and a balance-sheet constraint channel, whereby monetary tightening heterogeneously compresses NBFIs balance-sheet capacity, increases the shadow cost of liquidity, and amplifies the persistence of volatility in the SoS. |
| Keywords: | Banks;non-bank financial institutions;repo market;liquidity. |
| JEL: | C58 G01 G21 G23 |
| Date: | 2026–07–10 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023317 |
| By: | Joan Christine S. Allon-Pineda (Bangko Sentral ng Pilipinas); Eduard Renzo D. Santos (Bangko Sentral ng Pilipinas) |
| Abstract: | Successive supply shocks led to above-target inflation for the Philippines from 2021 to 2023. Formulating the optimal policy response to bring inflation back to target requires central banks to have estimates of the direct and indirect pass through of supply shocks to domestic inflation. We estimate the direct and second round effects of shocks to global oil, global food, and domestic rice prices on various measures of inflation as well as inflation expectations using local projections methodology. In addition, we examine the asymmetry in the pass-through of price increases vis-Ã -vis a price reductions. Global oil and food price shocks produce significant and persistent inflationary responses that trigger further second-round effects and a significant but lagged impact on month-ahead inflation expectations. Decomposing realized inflation, the impact of global oil shocks has historically been larger than food shocks. Second-round effects from oil shocks are larger than its direct effects, while the latter is larger for global food and domestic price shocks. This is consistent with the role of oil as an intermediate good, which is in contrast with both food and rice which are considered final commodities. Assessing the asymmetry of shocks, headline and core inflation were found to respond asymmetrically to oil price shocks, although the effect does not persist for more than a month. Policymakers must continue to monitor the emergence of second-round effects and ensure that inflation expectations are well-anchored, especially during large, positive oil and food price shocks. |
| JEL: | E31 E37 C32 C36 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bhd:dpaper:202506 |
| By: | Roshin Paul P (Indira Gandhi Institute of Development Research); Taniya Ghosh (Indira Gandhi Institute of Development Research) |
| Abstract: | The causes and consequences of Indian households' Inflation Expectations (IE) are investigated using an ad-hoc survey covering 1010 urban households across Delhi, Mumbai, Chennai and Kolkata. This paper verifies the reason for upward bias in the IE of households by collecting their item-wise IE an approach not previously employed in Indian surveys and proposes an alternate method to derive an overall IE with less bias. A significant reduction in the overall IE of households and the disagreement among them was observed when it is calculated as a weighted average of their item-wise IE. Policymakers may adopt this approach as the weighted average of item-level expectations yields a more representative and less biased IE of households. The reduction was more noticeable among women, as well as individuals with lower income and less education. The investigation on the behavior of respondents anticipating higher future inflation found that most households plan to seek higher income, stockpile non-perishable essential goods, and draw down their savings actions that are likely to increase both current inflation and inflation in the near future. Effective expectations management through clear, credible, and forward-looking communication is vital to anchor inflation and ensure macroeconomic stability. |
| Keywords: | Cross sectional survey, Household data, Expectations, Consumer price index, Inflation, Monetary policy |
| JEL: | C83 D84 E31 E52 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2026-009 |
| By: | Olivier Wang |
| Abstract: | I decompose stock returns into a duration-matched Treasury component, identified from monetary policy surprises, and a payoff component. Risk and returns rise much less with duration for stocks than for their matched Treasuries. Stock volatility is dampened by rate insurance: rates fall in bad times, so the bond inside a stock provides insurance against the stock’s payoff risk. Expected stock returns are dampened because the insurance works in reverse: rates rise in good times, so stocks’ payoff gains hedge the losses borne by investors holding net duration, notably government bonds when Ricardian equivalence fails. This framework helps reconcile positive bond premia with negative stock-bond covariance, sheds light on equity anomalies and the collapse of the value premium, implies that fiscal and monetary policy shape bond and equity premia, and motivates a two-factor model that jointly prices stocks and bonds. Rate insurance can even turn the price of long-run risk negative, explaining why long bonds beat long stocks. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35636 |
| By: | George-Marios Angeletos; Chen Lian; Christian K. Wolf; Dalton Rongxuan Zhang |
| Abstract: | The possibility of fiscal dominance in the representative-agent New Keynesian model (RANK) hinges on the assumption that income is perpetually demand-determined: fiscal deficits can drive output and inflation within that model only insofar as they trigger infinitely lasting, self-sustained shifts in aggregate spending and income. Moving to heterogeneous-agent New Keynesian models (HANK) opens the door to a different pathway: classical non-Ricardian effects, due to finite horizons or liquidity constraints. A refinement motivated by the model's intended focus on short-run phenomena—requiring a return to flexible-price outcomes in finite time—arrests the infinite feedback loop between spending and income, leaving only the classical non-Ricardian mechanism, and makes sure that the study of monetary-fiscal interactions is not centered on hard-to-test assumptions regarding beliefs at infinity. |
| JEL: | E5 E6 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35642 |