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on Central Banking |
| By: | Michael T. Kiley |
| Abstract: | Since the 1990s, monetary policy research has highlighted the properties of policy rules that stabilize inflation and economic activity, the role of inflation targeting in anchoring expectations, and the constraints posed by the effective lower bound (ELB). This paper combines these themes by examining whether explicitly responding to long-run inflation expectations improves policy effectiveness. Using both a small model for intuition and a large-scale policy model for quantitative evaluation, the analysis shows that the proposed approach reinforces inflation anchoring, reduces volatility from slow-moving inflationary forces, and mitigates ELB risks. The findings suggest that policy rules incorporating long-run inflation expectations enhance stability and complement makeup strategies by addressing ELB risks through different channels. Given that central banks already emphasize inflation expectations in their communications, this strategy aligns naturally with existing policy discussions. |
| Keywords: | Monetary policy; Inflation targeting; Anchored inflation expectations; Effective lower bound |
| JEL: | E52 E58 E37 |
| Date: | 2025–04–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-27 |
| By: | GEORGAKAS, IOANNIS |
| Abstract: | Adopting a common European digital currency seems likely to be a powerful monetary tool that will facilitate the implementation of policies such as quantitative easing and interest rate regulation. On the other hand, the risk of destabilisation of the banking system , requires careful planning and public awareness. CBDCs will strengthen the EU geopolitically and seem to have an environmental dimension. The debate within the EU and the ECB is intense both on issues of legitimacy under the European Treaties and on issues of democracy and privacy rights. In practice, this is a technological innovation with serious parallel economic, social and political consequences. |
| Keywords: | CBDCs, Eurozone policy, Monetary Sovereignty, ECB, Personal Data, Privacy |
| JEL: | E42 E52 E58 |
| Date: | 2025–04–18 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124457 |
| By: | Beaudry, Paul (University of British Columbia and NBER); Cavallino, Paolo (Bank of International Settlements); Willems, Tim (Bank of England) |
| Abstract: | This paper presents theory and evidence to advance the notion that very persistent policy‑induced interest rate changes may have only weak effects on activity. This arises when consumption‑savings decisions are not primarily driven by intertemporal substitution, but also by life‑cycle forces. The small impact of persistent rate changes results when intertemporal substitution and asset valuation effects are offset by interest income effects, which affect asset demand. In our framework, knowing the exact location of r* becomes less critical to central banks, as interest rates can be kept away from this level for prolonged periods of time, allowing monetary policy to unconsciously drive trends in real rates. This perspective offers an explanation to a set of puzzles, including why long‑term real rates often move quite closely with short‑term policy rates. |
| Keywords: | Monetary policy; r-star; monetary transmission mechanism; retirement savings; unconventional monetary policy |
| JEL: | E21 E43 E44 E52 G51 |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1117 |
| By: | Döttling, Robin; Lam, Adrian (University of Pittsburgh) |
| Abstract: | We document that the stock prices of firms with higher carbon emissions respond more to monetary policy shocks around Federal Open Market Committee announcements. Theoretically, we show that greater emissions-reduction needs can explain high-emission firms’ heightened sensitivity to monetary policy. Consistent with this channel, we find that (i) the valuation results are stronger among capital-intensive and highly levered firms and (ii) high-emission firms reduce emissions relatively faster on average, but disproportionately slow down these efforts when monetary policy is restrictive. We also examine bond price responses to monetary policy shocks to assess the relevance of differential discount rate effects. |
| Date: | 2025–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:kqdar_v2 |
| By: | Martin S. Eichenbaum; Federico Puglisi; Sergio Rebelo; Mathias Trabandt |
| Abstract: | We show that the response of banks’ net interest margin (NIM) to monetary policy shocks is state dependent. Following a period of low (high) Federal Funds rates, a contractionary monetary policy shock leads to an increase (decrease) in NIM. Aggregate economic activity exhibits a similar state-dependent pattern. To explain these dynamics, we develop a banking model in which social interactions influence households’ attentiveness to deposit interest rates. We embed that framework within a nonlinear heterogeneous-agent NK model. The estimated model accounts well quantitatively for our key empirical findings. |
| JEL: | E44 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33523 |
| By: | Isabel Gödl-Hanisch; Jordan Pandolfo |
| Abstract: | We provide empirical evidence on banks’ market power in financial services and its implications for monetary policy transmission through deposit rates. Banks with market power in financial services charge higher fees for their service and also offer lower deposit rates with less pass-through from monetary policy. We argue that this is the result of product tying: consumers must open a deposit account to access a bank’s financial services. We develop and calibrate a quantitative model of the U.S. banking industry where banks generate non-interest income from services in addition to a standard loan-deposit model. Counterfactuals emphasize the importance of non-interest income for credit supply, financial stability, and deposit pricing. |
| Keywords: | monetary policy, banks, pass-through, market power, product tying. |
| JEL: | D43 E44 E52 G21 G51 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11847 |
| By: | Volker Hahn (University of Konstanz); Michal Marencak (National Bank of Slovakia) |
| Abstract: | Consumers’ perceptions of current inflation rates depend disproportionately strongly on changes in food prices. We construct a new Keynesian model with bounded rationality that is compatible with this finding. We calibrate the model to the UK and show that, in combination with heterogeneity in sectoral price stickiness, bounded rationality leads to larger real effects of monetary-policy shocks. Moreover, price misperceptions make consumers overestimate the magnitude of aggregate real fluctuations. Consumer welfare is maximized by a central bank that takes core inflation and food prices into account in its monetary-policy making. |
| JEL: | D01 E70 E52 E50 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1119 |
| By: | Takagi, Shinji |
| Abstract: | The paper explores Japanese monetary policy under the classical gold standard (1897-1914), while providing a succinct exposition of the distinguishing features of the Japanese gold standard regime. The paper, explaining how the Bank of Japan conducted monetary policy, finds that, as a general practice, (i) it used fiduciary issues to offset movements in monetary gold so as to stabilize the supply of currency; (ii) it moved the discount rate in the same direction as the government moved the extra issue tax rate; and (iii) it raised the discount rate in response to an increase in gold outflows. The rules-of-the-game-like behavior of discount rate policy, motivated by the central bank's mandate to preserve gold convertibility, was robust and consistent, challenging the semi-consensual view that violations of the rules were frequent and pervasive under the classical gold standard. |
| Keywords: | classical gold standard, rules of the game, Japanese monetary policy, Japan under the classical gold standard, Bank of Japan discount rate policy |
| JEL: | F33 F55 E42 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:agi:wpaper:02000096 |
| By: | Benetton, Matteo; Gavazza, Alessandro; Surico, Paolo |
| Abstract: | This paper examines how central bank policies influence mortgage pricing in the United Kingdom. It shows that lenders price discriminate by offering two-part tariffs of interest rates and origination fees, and during unconventional monetary policies like the Funding for Lending Scheme, lenders reduced interest rates while increasing fees. Using a model of mortgage demand and lender competition, we find that central bank policies increased mortgage lending. Additionally, banning origination fees would reduce lending, as fees help lenders capture surplus while allowing them to price discriminate across borrowers with different sensitivities to rates and fees. |
| JEL: | E43 E52 E58 G21 G28 R31 |
| Date: | 2025–03–10 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126188 |
| By: | Javier Bianchi; Louphou Coulibaly |
| Abstract: | What is the optimal monetary policy response to tariffs? This paper explores this question within an open-economy New Keynesian model and shows that the optimal monetary policy response is expansionary, with inflation rising above and beyond the direct effects of tariffs. This result holds regardless of whether tariffs apply to consumption goods or intermediate inputs, whether the shock is temporary or permanent, and whether tariffs address other distortions. |
| JEL: | E24 E44 E52 F13 F41 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33560 |
| By: | Serebriakova, Alexandra (Sasha); Polzin, Friedemann; Sanders, Mark |
| Abstract: | A swift transition to renewable energy sources in the European Union is necessary for mitigating climate change. However, in a period of higher ECB policy rates meant to combat inflation, it is unclear how monetary policy impacts renewable energy installation. Prior research shows heterogeneous effects of policy rates on sectors with varying industrial characteristics, meaning that renewable technologies may be hit disproportionately by monetary contractions due to their investment requirements, life-cycle stage, and/or dependence on external finance. This paper uses fixed effects panel analysis of 27 European countries to look at the interactions between installed capacity of 10 utility-scale energy technologies, their characteristics, and monetary policy. Over the period of 2001-2021, fossil fuel, hydropower and nuclear technologies were positively affected by monetary contractions, while a 25 basis point rise in policy rates was associated with an 8% decrease in the new installed capacity of wind offshore plants, and a 26.5% decrease for solar PV. Significant interaction effects using measures of investment intensity and external finance dependence for energy technologies, yield evidence in favour of the interest rate and balance sheet channels of monetary policy transmission. To address endogeneity concerns, we use a two-stage least squares (2SLS) approach in an LCOE specification for the interest rate channel in the energy sector which confirms these findings. Our results suggest the existence of an unintended bias in contractionary monetary operations and central banks should consider flanking policies (such as preferred interest rates) to offset the disadvantage for renewables. |
| Keywords: | Monetary policy, renewable energy, interest rates, transmission channels, energy transition |
| JEL: | E43 Q42 O16 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:316394 |
| By: | Cantore, Cristiano; Leonardi, Edoardo |
| Abstract: | How does the monetary and fiscal policy mix alter households’ saving incentives? To answer these questions, we build a heterogenous agents New Keynesian model where three different types of agents can save in assets with different liquidity profiles to insure against idiosyncratic risk. Policy mixes affect saving incentives differently according to their effect on the liquidity premium- the return difference between less liquid assets and public debt. We derive an intuitive analytical expression linking the liquidity premium with consumption differentials amongst different types of agents. This underscores the presence of a transmission mechanism through which the interaction of monetary and fiscal policy shapes economic stability via its effect on the portfolio choice of private agents. We call it the self-insurance demand channel, which moves the liquidity premium in the opposite direction to the standard policy-driven supply channel. Our analysis thus reveals the presence of two competing forces driving the liquidity premium. We show that the relative strength of the two is tightly linked to the policy mix in place and the type of business cycle shock hitting the economy. This implies that to stabilize the economy, monetary policy should consider the impact of the self-insurance on the liquidity premium. |
| Keywords: | monetary–fiscal interaction; HANK; government debt; liquidity |
| JEL: | E12 E52 E62 E58 E63 |
| Date: | 2025–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:127221 |
| By: | Albuquerque, Daniel (Bank of England); Lazarowicz, Thomas (University College, London); Lenney, Jamie (Bank of England) |
| Abstract: | The simultaneous rise in housing rents and interest rates over 2022–24 brought scrutiny to the interaction between monetary policy and the housing market. We start by providing evidence on this interaction using data from the United Kingdom and a high frequency identification. Our main empirical finding is that house prices and rents do not move together after an increase in interest rates. House prices fall strongly but gradually, reaching their trough after one year, while nominal rents are stable for one to two years, before eventually falling. Next, we develop a quantitative Heterogeneous Agent New Keynesian model that includes housing and rental sectors. In particular, we model individual landlords as the marginal providers of rental housing. We use the model to examine the housing channel of monetary policy where we find: (1) the housing channel is large and falls disproportionality on mortgagors; (2) deviations from rational expectations mean landlords largely fail to pass on mortgage costs and act more like wealthy hand to mouth; (3) these behavioural biases dampen the potential trade-off between prices and output induced by the rental market; and (4) that it may be optimal for monetary policy makers to look through and accommodate housing supply shocks. |
| Keywords: | Monetary policy; housing; heterogeneous agents |
| JEL: | D31 E21 E52 R21 |
| Date: | 2025–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1115 |
| By: | Matt Darst; Sotirios Kokas; Alexandros Kontonikas; José-Luis Peydró; Alexandros Vardoulakis |
| Abstract: | We show that the effectiveness of unconventional monetary policy is limited by how banks adjust credit supply and manage liquidity risk in response to fragile non-bank funding. For identification, we use granular U.S. administrative data on deposit accounts and loan-level commitments, matched with bank-firm supervisory balance sheets. Quantitative easing increases bank fragility by triggering a large inflow of uninsured deposits from non-bank financial institutions. In response, banks that are more exposed to this fragility actively manage their liquidity risk by offering better rates to insured deposits, while cutting uninsured rates. Doing so, they shift away from uninsured to insured deposits. Importantly, on the asset side, these banks also reduce the supply of contingent credit lines to corporate clients. This tightening of liquidity provision has real effects, as firms reliant on more exposed banks experience a reduction in liquidity insurance stemming from credit lines, leading to lower investment. Our analysis reveals that the fragility of deposit funding can disrupt the complementarity between deposit-taking and the provision of credit lines. |
| Keywords: | Bank fragility; Liquidity risk; Liquidity Insurance; Deposits; Credit lines; Quantitative Easing; Quantitative Tightening; Non-banks |
| Date: | 2025–04–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-30 |
| By: | Urban Jermann; Haotian Xiang |
| Abstract: | We study capital regulation in a dynamic model for bank deposits. Capital regulation addresses banks’ incentive for excessive leverage that dilutes depositors, but preserves some dilution to reduce bank defaults. We show theoretically that capital regulation is subject to a time inconsistency problem. In a model with non-maturing deposits where optimal withdrawals make deposits endogenously long-term, we find commitment to have important effects on the optimal level and cyclicality of capital adequacy. Our results call for a systematic framework that limits capital regulators’ discretion. |
| JEL: | E44 G21 G28 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33578 |
| By: | Kohei Maehashi (Bank of Japan); Daisuke Miyakawa (Waseda University); Takatoshi Sasaki (Bank of Japan); Taihei Sone (Bank of Japan) |
| Abstract: | Using trade repository data on transaction records of Japanese yen-denominated overnight index swap, we estimate individual market participants' expectations on future interest rates and document their time-variant distribution with its higher order moments. By leveraging this novel information, we implement quantitative exercises to verify the state-dependent effects of the Bank of Japan (BoJ)'s outright purchase of Japanese Government Bonds (JGBs) on the JGB yields conditional on the moments of this expectation distribution. We find that the BoJ's fixed-rate purchase operation resulted in a larger reduction of the JGB yields when the expectation distribution on future interest rates was skewed more positively. This empirical result implies the usefulness of the estimated expectation distribution for central banks to conduct market operations effectively. |
| Keywords: | Interest rate expectations; Skewness; Granular data; Trade repository; Overnight index swap; Market operations |
| JEL: | E43 E58 G15 G20 |
| Date: | 2025–05–16 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp25e07 |
| By: | Jennie Ebihara; Ryuichiro Izumi (Department of Economics, Wesleyan University) |
| Abstract: | We study how the speed of withdrawals affects bank fragility by examining two dimensions: unpredictability in outflows and frictions in the timing of policy intervention. We extend Ennis and Keister (2009) by introducing uncertainty into the policymaker’s ex-post suspension problem. When withdrawals are more unpredictable, the policymaker intervenes earlier, making the bank less fragile. In contrast, the frequency of intervention opportunities may have a non-monotonic effect: a modest decrease delays suspension and increases fragility, but when opportunities become sufficiently infrequent, the authority suspends earlier to avoid costly delays. |
| Keywords: | Fast bank runs, Suspensions, Ex-post optimal intervention |
| JEL: | G21 G28 E58 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:wes:weswpa:2025-004 |
| By: | Camilo Gómez; Carlos Andrés Quicazán-Moreno; Hernando Vargas-Herrera |
| Abstract: | Following the pandemic, the Colombia’s financial system experienced a pronounced credit cycle, with significant real growth in consumer loans followed by a deceleration from late 2022. This paper uses granular loan-level data to analyse how financial intermediaries adjusted the credit risk composition of new loans throughout this cycle. It examines the implications of these shifts for loan supply dynamics and financial conditions. Additionally, the study explores the interaction between credit risk composition and monetary policy transmission during the 2021–24 period. As monetary tightening led to rising lending rates, changes in loan composition—particularly the increased share of riskier borrowers—amplified the observed transmission of policy rates to average lending costs, especially in the consumer credit segment. The findings highlight the importance of credit risk dynamics in assessing monetary policy effectiveness and demonstrate the value of disaggregated data in understanding macro-financial conditions. *****RESUMEN: Tras la pandemia, el sistema financiero de Colombia experimentó un marcado ciclo de crédito, con un significativo crecimiento real en los préstamos de consumo, seguido de una desaceleración a partir de finales de 2022. Este estudio utiliza datos granulares a nivel de préstamo para analizar cómo los intermediarios financieros ajustaron la composición del riesgo crediticio en los nuevos préstamos a lo largo de este ciclo. Se examinan las implicaciones de estos cambios en la dinámica de la oferta de crédito y las condiciones financieras. Además, el estudio explora la interacción entre la composición del crédito y la transmisión de la política monetaria durante el período 2021–24. Dado que el endurecimiento monetario elevó las tasas de interés de los préstamos, los cambios en la composición del crédito—particularmente el aumento en la participación de prestatarios más riesgosos—amplificaron la transmisión de las tasas de política a los costos de financiamiento promedio, especialmente en el segmento de crédito de consumo. Los resultados destacan la importancia de la dinámica del riesgo crediticio en la evaluación de la efectividad de la política monetaria y demuestran el valor de los datos desagregados para comprender las condiciones macrofinancieras de la economía. |
| Keywords: | Monetary Policy Transmission, Credit Cycle, Loan Composition, Risk Taking, Transmisión de la política monetaria, Ciclo de crédito, Composición de la cartera, Toma de riesgo |
| JEL: | E43 E52 G21 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1313 |