|
on Central Banking |
| By: | Naveed Javed; James Morley |
| Abstract: | We consider empirically how fiscal stance influences the potency of monetary policy. New Zealand provides a compelling laboratory to study this form of monetary-fiscal interaction given its stable history of inflation targeting and substantial changes in its fiscal stance due to global forces acting on a small open economy (SOE). A simulation-based Bayesian Local Projection (BLP) framework is developed to estimate the macroeconomic effects of a narrative measure of monetary policy shocks when there are many possible omitted variables, especially in this SOE setting. Our BLP approach incorporates a novel shape prior on impulse response functions to help manage the substantial bias-efficiency tradeoffs given the relatively small effective sample sizes when considering nonlinearities inherent in policy interactions. For a smooth-transition regime-switching model with an endogenously-estimated threshold parameter, we find that monetary policy is clearly more potent, especially in terms of out-put and inflation, when there is a high degree of fiscal consolidation. Consistent with the fiscal theory of the price level, our results for a more general model that also allows for sign asymmetries suggest the effects of expansionary versus contractionary monetary policy shocks on output, inflation, and the exchange rate are actually reasonably symmetric, implying that the potency of monetary policy is more related to monetary-fiscal dominance than coordination. |
| Keywords: | monetary-fiscal interactions, Bayesian local projections, fiscal theory of the price level |
| JEL: | C32 E52 E58 E63 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-75 |
| By: | Luigi Bocola; Gastón Chaumont; Alessandro Dovis; Rishabh Kirpalani |
| Abstract: | We develop a model for fiscal and monetary policy determination in the tradition of Sargent and Wallace (1981). Ex-ante, the government has incentives to delegate monetary policy to a central bank with an inflation targeting mandate. Ex-post, however, the government faces temptations to revoke the mandate to generate seigniorage revenues. The likelihood that the government will adhere to its commitment depends on shocks to fiscal fundamentals and the costs of reneging on the mandate. The economy endogenously transitions between a “monetary-dominant” regime where monetary policy adheres to its commitment and a “fiscal-dominant” regime where the fiscal authority interferes with monetary policy. These two regimes sharply differ in their implications for the comovement of inflation and debt-to-GDP ratios. We use the model as a measurement device to interpret the fiscal and monetary history in Colombia, Chile, and the U.S. |
| JEL: | E0 E50 E6 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35691 |
| By: | Christopher Ashwell; Aleksandar Vasilev |
| Abstract: | This paper studies the relationship between unconventional monetary policy and the wider macroeconomic variables in the UK. Using VAR and subsequent impulse response analysis, the impact of shocks to bond yields, which are used as a representation of unconventional monetary policy, the impact of unconventional monetary policy is assessed. The model used includes variables of 5- and 10-year bond yields, and variables representing GDP per capita, inflation, interest rates and net exports. The results of the impulse response analysis show the effectiveness of unconventional monetary policy in both an expansionary- and a contractionary use. The response to 5-year yield increases result in positive GDP per capita growth whereas an increase in 10-year yields result in a negative effect on GDP per capita. The results on inflation for increases in both bond yield types result in low levels of inflation. However, both bonds predict periods of deflation, especially the 10-year bond. The results of 5-year yield increases are in line with the literature and predict net exports to fall. However, the increase in 10-year yields has predicted periods of increased net exports. Overall, the empirical results suggest unconventional monetary policy is an effective tool for central banks. |
| Keywords: | Unconventional Monetary Policy, Yield Curve, Quantitative Easing, Forward Guidance. |
| JEL: | C32 E43 E52 E58 |
| Date: | 2026–01–06 |
| URL: | https://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2026_06 |
| By: | Alexander Goetz; Lucas Kyriacou; Florence Miguet Heimlicher; Stefanie Siegrist |
| Abstract: | This paper investigates the impact of monetary policy announcements (MPAs) on household inflation expectations using microdata from the Swiss Consumer Sentiment Survey. Employing an event study approach, we reveal an asymmetric response: while policy rate hikes or decisions to keep rates constant reduce household inflation expectations, rate cuts fail to elicit a reaction. The effect is particularly robust for short-term expectations, with a much less clear-cut influence on long-term expectations. Households across the expectation distribution - both moderate and extreme - react to announcements, indicating a broad impact. We find that household reactions are driven primarily by the anticipated component of policy rate changes, whereas surprising moves tend to be interpreted as signals of new information regarding inflationary pressure. Finally, we report that demographic heterogeneity matters: the effect of MPAs is driven by German-speaking households and tertiary-educated individuals, while others show no consistent response, underscoring the importance of targeted communication strategies for effective monetary policy transmission. |
| Keywords: | Household inflation expectations, Household heterogeneity, Event study, Monetary policy, Central bank communication, Reaction to news |
| JEL: | E31 E52 E71 D84 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-11 |
| By: | Mathias Drehmann; Xuewen Fu |
| Abstract: | How far can central banks shrink their balance sheets? The answer sets the limits to quantitative tightening (QT), and depends critically on the demand for reserves and whether the drivers widely thought to have increased it over the past decade actually do so. We assess the impact of three such drivers: post-crisis liquidity regulation, monetization frictions, and fragmented interbank markets. Building on the canonical Poole (1968) model, we show that these drivers tend to reshape, rather than horizontally shift, reserve demand. Liquidity regulation, such as the Liquidity Coverage Ratio (LCR), does not raise reserve demand when banks can substitute reserves with other high-quality liquid assets (HQLA). Over some regions of the curve, the LCR even reduces demand. Frictions in monetizing non-reserve HQLA into reserves change both the slope of the reserve demand curve and the satiation point when demand flattens. With fragmented interbank markets, the mapping from aggregate reserve supply to the interbank rate becomes non-unique. In this case, the effective reserve demand curve also shifts outward on impact of negative supply shocks, and the more so, the greater the initial level of supply. These findings have direct implications for balance sheet normalization, especially for central banks operating floor or ample reserves frameworks near the satiation point of the reserve demand curve. |
| Keywords: | reserve demand, balance sheet normalisation, Liquidity Coverage Ratio, interbank market fragmentation, monetary policy implementation |
| JEL: | E41 E43 E52 E58 G21 G28 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1372 |
| By: | Birta B. Haraldsdottir; Bjarni G. Einarsson |
| Abstract: | We apply a sufficient statistics framework to detect nonoptimal monetary policy decisions in Iceland. The method relies on two sufficient statistics: (1) forecasts of policy objectives and (2) impulse responses of those objectives to monetary policy shocks. The weighted product of these two sufficient statistics forms the gradient of the policy maker’s loss function. The Optimal Policy Perturbation (OPP) statistic, derived from this gradient, provides the test for optimization failures. Our results suggest that the Central Bank of Iceland’s key interest rate has, on average, been set too low over the past two decades. There are two notable deviations from optimality: the periods leading up to the financial crisis and following the Covid-19 pandemic. |
| JEL: | E31 E32 E43 E52 E58 E61 E65 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:ice:wpaper:wp101 |
| By: | Ambrogio Cesa-Bianchi (Bank of England); Andrea Ferrero (University of Oxford); Shangshang Li (University of Liverpool) |
| Abstract: | In response to an unanticipated monetary policy tightening in the US, the demand/financial channel of the international transmission of the shock dominates over the expenditure‑switching effect. For a typical small open economy with flexible exchange rates, credit spreads increase, while real GDP and exports fall despite a depreciation of the local currency. In an estimated two‑country open economy model, financial and pricing frictions that assign a prominent role to the global reserve currency are key to account for the empirical evidence. Model‑based counterfactual policy analysis suggests that, even in the presence of a global financial cycle, the exchange rate regime matters. The volatility of output and inflation is an increasing function of the weight associated to the stabilisation of the exchange rate in the monetary policy rule. The introduction of countercyclical policy instruments that target either domestic credit or capital flows dampens economic fluctuations. In a fixed exchange rate regime, either instrument can limit the negative spillovers of foreign monetary policy shocks on real economic activity, but not on inflation. |
| Keywords: | Exchange rates flexibility;currency invoicing;dilemma;expenditure‑switching;foreign exchange liabilities;global financial cycle;trilemma. |
| JEL: | E44 E58 F32 F42 |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023263 |
| By: | Brent Bundick; Nicolas Petrosky-Nadeau |
| Abstract: | Since employment dynamics are persistent, a central bank’s dual mandate to promote maximum employment and price stability naturally generates history dependence in monetary policy. This history dependence under a dual mandate flattens the reduced-form Phillips curve, reduces the volatility of inflation in response to demand shocks, and improves outcomes at the zero lower bound. Moreover, we show that a dual mandate can be observationally equivalent to average inflation targeting following a demand shock. However, this equivalence breaks down in the presence of supply shocks. We first illustrate these findings analytically and then examine their quantitative importance in a model with nominal rigidities and labor search frictions calibrated to match U.S. business-cycle moments. An employment mandate can naturally provide the benefits associated with history-dependent policy frameworks. |
| Keywords: | inflation; monetary policy; dual mandate |
| JEL: | E32 E52 J64 |
| Date: | 2026–08–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103696 |
| By: | Pablo D. Azar; Maryam Farboodi; Nish Sinha |
| Abstract: | We study how stablecoins impact global capital flows by constructing a novel wallet-level dataset linking geotagged Ethereum Name Service registrations to stablecoin transactions around banking restrictions, currency crises, sanctions, and monetary disruptions. We find that crisis-country wallets experience significant increases in USD stablecoin inflows and receipt activity during crisis weeks. Motivated by this evidence, we develop a small-open-economy New Keynesian model in which household adoption of programmable stablecoins weakens the government’s enforcement technology for capital controls by making capital mobility endogenous. The empirical evidence validates the model’s central assumption that flight pressure increases stablecoin adoption. Stablecoins therefore tighten the Mundell–Fleming trilemma by reducing the government’s ability to sustain independent monetary policy under a fixed exchange-rate regime. |
| Keywords: | Mundell–Fleming trilemma; capital controls; blockchain; stablecoins; financial infrastructure |
| JEL: | F32 F33 F38 E58 G28 |
| Date: | 2026–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103702 |
| By: | Anna CIeslak; Stephen Hansen; Hao Pang |
| Abstract: | We review recent research on how the Fed's risk-management approach shapes the overall policy stance and how it affects financial market conditions. The evidence shows that the policy stance contains a forward-looking, conditional component that has long been an integral part of the Fed's policymaking toolkit. Asymmetric forward-looking policy tilts—motivated by risk-management considerations and revealed via the Fed’s communication—complement and extend beyond the effects of direct policy actions. Drawing on the transcripts of FOMC meetings between 1976 and 2019, we provide an institutional history of the tilt and its connection to how the Committee’s thinking about risk evolved over decades. Going back at least to the early 1990s, the Fed has relied on tilts not only to steer market expectations but, equally importantly, to stabilize risk premia and maintain easy financial conditions. We discuss successes and challenges associated with communication via tilts and draw lessons for the renewed debate over the form and extent of central bank forward-looking guidance. |
| Keywords: | risk management; uncertainty; monetary policy; asset prices; large language models; text as data |
| JEL: | E52 E58 C55 |
| Date: | 2026–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:103760 |
| By: | Ludovica Ambrosino (London Business School); Jenny Chan (Bank of England); Silvana Tenreyro (London School of Economics) |
| Abstract: | How does higher productivity affect inflation? Productivity shifts both supply and demand (through real incomes), and its effect on inflation depends on their relative magnitude and timing, as well as on the monetary policy response. We distinguish between a one-off level shock that increases productivity temporarily (relative to trend) and a persistent rise in productivity growth. A one-off, temporary increase in productivity lowers marginal costs and raises potential output, generating downward pressure on the price level. Once prices adjust however, inflation returns to target. By contrast, higher productivity growth raises expected permanent income and stimulates investment and consumption, increasing the natural real rate. Absent a tightening of monetary policy, inflationary pressures may emerge. Anticipation effects are central: if demand rises ahead of realised supply gains, inflation can increase despite higher productive capacity. In an open economy, the sectoral incidence of the shock also determines the impact on inflation. In summary, the inflationary consequences of productivity gains are a priori ambiguous and depend on the balance and timing of demand and supply responses, the composition of demand, and crucially, the monetary policy response. |
| Keywords: | Monetary policy;productivity;inflation;natural rate of interest |
| JEL: | E3 E4 E5 F4 O4 |
| Date: | 2026–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023542 |
| 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: | We study the impact of inflation on bank asset allocation. Utilizing a Distributed Lag Non-linear Model (DLNM) within a panel data framework, we analyze a comprehensive dataset of commercial banks across 63 emerging and developing economies from 2000 to 2021. Our empirical strategy isolates the marginal effects of country-standardized inflation on the share of investments relative to total assets, while controlling for bank heterogeneity and macroeconomic cycles via a two-way fixed effects specification. Results show a remarkable asymmetry in bank portfolio dynamics following low and high relative inflation. While asset allocation remains relatively insensitive to mild business cycle fluctuations and moderate deflationary environments, extreme positive inflationary environments trigger a severe, compounding structural effect. Specifically, when inflation exceeds two standard deviations above the domestic historical mean, banks persistently reallocate their portfolios toward investments. Crucially, this effect does not quickly dissipate but accelerates over time, reaching its maximum magnitude at a five-year lag horizon. These findings suggest that extreme inflation inadvertently crowds out traditional private sector lending and impairs monetary policy transmission, underscoring the need for macroprudential oversight by central banks and proactive asset-liability management by financial institutions to mitigate long-tail duration risks. |
| Keywords: | Bank Asset Allocation; Inflationary Shocks; Emerging Markets; Distributed Lag Non-linear Models; Monetary Transmission |
| JEL: | E31 G21 E44 C23 |
| Date: | 2026–09–02 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:023577 |
| By: | Koundouros, Andreas; Nautz, Dieter |
| Abstract: | Inflation misperceptions of consumers complicate the conduct and communication of monetary policy and can undermine the credibility of the central bank's inflation target. This paper empirically investigates the determinants of inflation misperceptions by extending a rational inattention model to incorporate distorted signals from salient prices. We estimate the model using rich micro-level panel data for the euro area drawn from the ECB Consumer Expectations Survey. We find that consumers misperceive inflation both because they are inattentive to inflation and because they overweight food price inflation relative to headline inflation. In contrast, distortions stemming from energy prices are not significant. Financially literate consumers exhibit lower inflation misperceptions and greater attention to inflation, while women have more pronounced inflation misperceptions and place larger weights on salient prices. Finally, we show that attention to inflation is higher and misperceptions are lower in response to inflationary than to disinflationary news. |
| Keywords: | Inflation misperceptions, rational inattention, salient prices, inflationary news, financial literacy, gender differences, ECB Consumer Expectations Survey |
| JEL: | E31 E58 E71 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:fubsbe:343039 |
| By: | Martin Summer (Oesterreichische Nationalbank, Economic Studies Division) |
| Abstract: | Would widely adopted stablecoins affect the price level, and through which channels? We analyse this question in the monetary general-equilibrium framework of Dubey and Geanakoplos, in which payment capacity—money, bank credit and the spendable share of government bonds—determines nominal outcomes. Stablecoins backed by government debt open a channel of inflationary finance: the existing bond stock becomes spendable (a stock effect) and newly issued debt arrives spendable (a flow effect), with the price level rising in the payment capacity so created and in the breadth of adoption. Monetary policy can offset the rise, but only at the cost of suppressing the trade that bank credit finances. Beyond these bounded effects, current regulatory design does not close an escalation path on which stablecoins become a competing outside money, putting nominal determinacy at risk. Whether these effects materialise is largely a policy choice: they require adoption in ordinary payments, which regulation currently shapes. |
| Keywords: | stablecoins, inflation, public and private money, monetary architecture |
| JEL: | E31 E42 D52 E44 G21 G28 |
| Date: | 2026–09–03 |
| URL: | https://d.repec.org/n?u=RePEc:onb:oenbwp:280 |
| By: | Huberto M. Ennis; Alexander L. Wolman |
| Abstract: | The Federal Reserve implements monetary policy using an ample reserves system, which does not require active management of the total quantity of reserves to maintain interest rate control. The distribution and the diffusion of reserves across banks, and groups of banks, is a key factor in determining the (minimum) ample level of reserves consistent with that objective. If large portions of the outstanding amount of reserves can become effectively "trapped" in segments of the banking system, then the total level of reserves needed to achieve the intended objective may be higher. We propose a Markovian framework to study the weekly flow of reserves across groups of banks between 2010 and 2024. We group banks according to types (foreign and domestic, large and small) and Fed districts. The diffusion process depends on how reserves flow in and out of the system. We compute counterfactuals which shed light on the way the distribution of reserves would adapt to plausible changes in conditions. In general, the distribution of reserves tends to be highly persistent during periods of abundant reserves, but redistribution intensifies when reserves reach lower (yet, still ample) levels. |
| Keywords: | Banking; Federal Reserve; Central Bank Balance Sheet |
| Date: | 2026–09–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:103733 |
| By: | Mr. Suman S Basu; Pablo Winant |
| Abstract: | We propose a tractable small-open-economy model in which uncovered interest parity premia on foreign exchange (FX) markets arise from the endogenous lack of insurability of exchange rate risks. Asymmetric information about monetary policy can make the tails of the exchange rate distribution uninsurable in FX hedging markets, which in turn generates premia in FX spot markets because of the risk aversion of lenders holding the external debt. There is a role for government intervention because of an information sensitivity externality: agents do not internalize that their actions can reduce the insurability of exchange rates. The model predicts that premia may be amplified by weaknesses in monetary, fiscal, and financial policy frameworks, and can be reduced through reforms which reduce the sensitivity of exchange rates to private information. The constrained efficient policy depends on the composition of external lenders and may include delegation of monetary policy to an “aloof central banker”, constraints on fiscal policy, more active use of macroprudential tools, and institutions which limit asymmetric information. |
| Keywords: | foreign exchange market; asymmetric information; monetary policy; fiscal policy; macroprudential policies |
| Date: | 2026–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/188 |
| By: | Frederic Boissay; Harald Uhlig |
| Abstract: | We examine the role of central bank reserves and public liquidity when secondary markets may freeze. Central bank reserves help intermediaries purchase assets during stress but crowd out investment. Under laissez-faire, intermediaries hold insufficient reserves, overlooking how aggregate liquidity reduces freeze risk. We propose a "market-backstop principle", akin to Bagehot’s principle for intermediaries. It combines state-contingent buyer-of-last-resort interventions to restore trading with modest liquidity requirements to limit moral hazard. The welfare benefits of restoring market functioning exceed the fiscal costs of interventions. We explore implications for the size and composition of central bank balance sheets. |
| JEL: | E44 E58 G01 G21 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35548 |
| By: | Sara Casella; Jesús Fernández-Villaverde; Stephen Hansen; Ryohei Oishi; Minchul Shin |
| Abstract: | Standard macroeconomic data do not cleanly separate the systematic and nonsystematic components of monetary policy. We show that incorporating unstructured text data into the structural estimation of a DSGE model can sharpen this distinction. We augment a standard state-space model with a non-core measurement block that links structural shocks to time series derived from FOMC transcripts, using a spike-and-slab prior to let the data select which series are informative. In a medium-scale New Keynesian model for the U.S., incorporating text improves predictive performance and materially alters structural inference: the new model estimates a lower response of the policy rate to inflation, higher price stickiness and lower price indexation, implying a flatter and less backward-looking price Phillips curve. |
| JEL: | C11 C32 C55 E37 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35487 |
| By: | Stefania D'Amico; Thomas B. King; Francisco Torralba |
| Abstract: | The public pays close attention to Federal Reserve communications about future monetary policy, but it remains an open question how those communications shape the public’s expectations for the path of policy rates. We explore how market expectations adjust to the information provided in the “dot plot” of the Summary of Economic Projections, which contains the Federal Open Market Committee’s assessment of the appropriate future path of the federal funds rate. The results shed light on the market interpretation of forward guidance and its efficacy as a communication tool. We find that financial markets respond to the Federal Reserve’s “dot plot” projections by adjusting their expectations for future interest rates, but only partially and gradually, reflecting the understanding that these projections are conditional forecasts rather than firm commitments. Over time, both market expectations and FOMC projections for interest rates tend to converge, showing that the dot plot is informative to market participants. This gradual adjustment highlights the dot plot’s role as a communication tool that shapes, but does not dictate, market expectations. |
| Keywords: | Summary of Economic Projections (SEP); SEP federal funds rate projections; interest rate expectations; market reaction; forward guidance |
| JEL: | E43 E58 G13 |
| Date: | 2026–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103737 |
| By: | Drishan Banerjee; Galina Hale; Harrison Shieh |
| Abstract: | Post-pandemic inflation raised fears that U.S. monetary tightening would trigger a repeat of the 1982 sudden stop in capital flows to emerging economies. Yet as of 2026 no global recession has followed. We establish three stylized facts distinguishing the 1980s from the 2020s, beyond the shift to flexible exchange rates: monetary policy effectiveness, fiscal space, and external vulnerabilities. We rationalize them in a Mundell-Fleming framework with a fiscal space constraint, which predicts a central role for fiscal space in transmitting foreign currency risk-free rate increases. Cross-country evidence confirms that fiscal space shapes economic performance post-tightening. |
| JEL: | F34 F42 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35673 |
| By: | Jens H. E. Christensen; Glenn D. Rudebusch |
| Abstract: | Following decades of secular decline, many estimates of r∗—the natural or steady-state short-term real interest rate—have risen roughly 1 percentage point since 2020 in the United States. The most prominent explanations attribute this reversal to heightened expectations of rising government debt and faster productivity growth from artificial intelligence (AI). However, a high-frequency event study finds that news about fiscal and AI developments does not explain this increase. Furthermore, contrary to earlier evidence that persistent shifts in longer-term yields occurred around monetary policy meetings, we find that monetary policy news does not account for the recent rise in r∗. |
| Keywords: | r star; fiscal policy; artificial intelligence; monetary policy |
| JEL: | C32 E43 E52 G12 |
| Date: | 2026–08–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103705 |
| By: | Krishan Shah (Bank of England); Phillip Bunn (Bank of England); Jonathan Haskel (Imperial College Business School, London) |
| Abstract: | This paper investigates the role of the credit channel of monetary policy transmission in the 2022–23 tightening cycle in the UK. Using novel firm survey data, we validate three predictions of a simple model of the credit channel: firstly, firms using external finance report a higher cost of capital than those using internal funds; secondly that firms using external finance see a larger rise in their cost of borrowing for a given increase in the policy interest rate than those using internal funds; and finally that firms reliant on external financing for investment report reducing investment by more than the internally funded firms when baseline interest rates rise. Our results suggest that credit channel effects may account for up to a quarter of the total impact that monetary policy has on investment. |
| Keywords: | Credit channel;monetary policy;firms;investment;survey data. |
| JEL: | D25 D22 E22 E52 |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023260 |
| By: | Jonathan Hambur; Martin McCarthy; Sam Munn; Emily Shaw |
| Abstract: | Households' expectations for future interest rates influence their decisions and play a key role in the transmission of monetary policy, yet they remain understudied. Our paper analyses household survey microdata for Australia. Firstly, using a regression discontinuity design, we show that household interest rate expectations respond to monetary policy announcements. This finding differs from previous literature finding no effect of announcements in the United States. Secondly, we document how household interest rate expectations develop over time and differ across demographic groups. We show that household expectations differ greatly from that of market participants and professional forecasters, with the largest gaps among young people, lower-income earners, and renters. Household recall of, and attention to, economic news plays an important role in their expectations, and this differs across time and groups in a way somewhat consistent with rational inattention models. |
| Keywords: | expectation formation, interest rate expectations, monetary policy announcements |
| JEL: | D84 E43 E52 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-76 |
| By: | Poinelli, Andrea; Pelizzon, Loriana; Tomio, Davide; Nguyen, Benoit; Linzert, Tobias |
| Abstract: | Sovereign bond markets are a cornerstone of the financial system, and their functioning is tightly linked to repo markets, where investors finance long positions and source bonds for short sales. We show, theoretically and empirically, that repo prices are set in the cash bond market: when demand for cash bonds exceeds available supply, arbitrageurs accommodate the excess by shorting bonds and borrowing them in the repo market, opening a wedge between the policy and repo rates, i.e., generating specialness. An elastic supply of collateral, in turn, limits how much of the excess demand is capitalized into bond prices. Using regulatory data covering the universe of repos backed by German sovereign bonds, we identify the final borrowers and lenders of securities and estimate the first demand and supply elasticities for a repo market. Supply, dominated by the public sector, accounts for 87% of the aggregate elasticity. Demand, driven by hedge funds, is strongly inelastic: a 10% increase in borrowing costs reduces their borrowing by only 1%. Despite being among the most price-elastic investors in cash bond markets, hedge funds are inelastic in repo, as their borrowing sustains relative-value positions whose size is pinned by the preferred-habitat demand they intermediate: their elasticity is inherited from their cash-market counterparties rather than being a primitive. Specialness thus emerges as the equilibrium price of cash-market demand pressure-of which collateral scarcity from central bank purchases is a special case-tying safe-asset pricing and the transmission of monetary policy to the same imbalances in the cash bond market. |
| Keywords: | Monetary Policy, Repo Market, Bond Market, Safe Assets |
| JEL: | E51 E52 E58 G21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewp:343098 |
| By: | Jeffery (Jinfan) Chang; Wei Xiong |
| Abstract: | This paper investigates why China’s recurrent credit expansions have coincided with persistently weak inflation. We argue that this pattern reflects the country’s production-oriented monetary regime. At the aggregate level, faster monetary-financial expansion temporarily raises PPI inflation but depresses it over longer horizons. At the sectoral level, liability growth among listed industrial firms is followed by weaker producer prices, lower profitability, higher leverage, rising inventories, and reduced capacity utilization. We also find asymmetric supply-chain transmission: downstream liability growth raises upstream PPI inflation, while upstream liability growth does not generate a corresponding downstream price response. These findings indicate that credit expansion in China tends to sustain production and balance sheets rather than stimulate final demand. As a result, monetary policy operates less as a conventional tool for demand management and durable reflation, and more as a mechanism for preserving production capacity and supporting growth. |
| JEL: | E5 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35562 |
| By: | Mahmoud Fatouh (Bank of England, Prudential Policy Directorate); Simone Giansante (dSEAS, University of Palermo, Italy); Meryem Duygun (Nottingham University Business School, University of Nottingham, UK) |
| Abstract: | We assess the real economy impact of the Bank of England’s quantitative easing (QE) operations through the corporate bond market between 2009 and 2021. Using difference-in-difference exercises on secondary market yields, and the cost of borrowing and issuance in the primary market, we document increased issuance of investment-grade bonds with long maturity resulting from the lower cost of borrowing caused by QE. Corporates directed additional funds towards share buybacks and reduced bank borrowing rather than increasing real investment. We also isolate the marginal impact of purchases under the Corporate Bond Purchase Scheme (CBPS), the direct effect, from the total effect (arising from all purchases) of QE on the corporate bond market. We find that yields of eligible bonds fell by 40–60 basis points relative to ineligible bonds. However, this fall did not translate into a lower cost of borrowing or higher issuance in the primary market. |
| Keywords: | Quantitative easing;corporate bond purchase scheme;bond issuance;bond yields;cost of borrowing. |
| JEL: | E22 E58 G12 G30 Q51 |
| Date: | 2025–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023256 |
| By: | Giovanni Covi (Bank of England); Tihana Škrinjarić (Bank of England) |
| Abstract: | This study develops a stochastic balance sheet based microstructural banking model to quantify the dynamic interplay between solvency and liquidity risks – two traditionally distinct dimensions in stress testing. By incorporating endogenous bank reactions, feedback loops, and amplification mechanisms, the model captures how management responses to shocks can escalate financial distress, potentially leading to insolvency and illiquidity. We apply the model to granular loan and security exposure data from UK banks over 2015–24, estimating capital and liquidity at risk and deriving a systemic default probability indicator. Results indicate an average one-year bank default probability of 0.7%, consistent with market-implied estimates but diverging during stress episodes. Amplification effects, driven by balance sheet constraints and behavioural responses, account for approximately one third of default risk on average. Counterfactual analyses further evaluate the effectiveness of capital requirements and identify optimal capital levels under hypothetical stress scenarios. |
| Keywords: | Banking stability;solvency-liquidity interactions;financial contagion;macroprudential stress test |
| JEL: | D85 G21 G32 L14 |
| Date: | 2025–08–29 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023262 |
| By: | Kaniska Dam; Rajdeep Sengupta |
| Abstract: | This paper examines the relationship between bank capital and reliance on insured deposit funding. Contrary to the conventional moral-hazard view underlying risk-based capital regulation, U.S. bank data reveal a robust negative association between capital and the share of insured deposits. We develop a delegated-monitoring model in which banks choose between insured and uninsured deposit financing. Although monitoring increases with capital under both funding regimes, its sensitivity to capital is greater when deposits are uninsured, strengthening the relative attractiveness of uninsured funding for well-capitalized banks. Our contribution is to show that the relationship between bank capital and deposit insurance depends not only on the direct effect of capital on risk-taking, but also on how capitalization changes a bank’s incentives to monitor under different funding arrangements. |
| Keywords: | bank monitoring; deposit insurance; bank capital |
| JEL: | C78 D82 G11 |
| Date: | 2026–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:103726 |
| By: | Jess Benhabib; Pengfei Wang; Yi Wen |
| Abstract: | This paper incorporates the Lucas (1973) island model into a standard DSGE framework. It demonstrates that self-fulfilling stochastic inflation equilibria, which are driven by intrinsic uncertainty or pure sentiments, can exist under rational expectations. Furthermore, it shows that these sentiment-driven stochastic equilibria exhibit monetary non-neutrality, even when the fundamental equilibrium is unique and monetarily neutral. As the aggregate price or inflation rate can appear to fluctuate independently of the money supply, our model explains the complex relationship between inflation and the money supply in the real world, where the basic quantity theory of money often seems invalid. |
| JEL: | D8 D84 E03 E32 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35563 |
| By: | Kazuhiro Hiraki; Meryem Rhouzlane |
| Abstract: | A key objective of exchange rate pegs is to achieve price stability by stabilizing the value of the currency. However, the effectiveness of an exchange rate peg as a nominal anchor crucially depends on its operational design. This note provides guidance on how different exchange rate peg arrangements—such as bilateral exchange rate pegs, pegs to a basket of currencies, crawling pegs, and currency bands—can be effectively implemented. Specifically, the note focuses on operational considerations relevant to ensuring long-run price stability, such as choosing an appropriate anchor currency, setting the rate of crawl, and designing bands. The note also discusses how to conduct monetary and foreign exchange operations consistent with the chosen exchange rate peg arrangement. |
| Keywords: | nominal anchor; exchange rate peg; crawling peg; basket peg; band; uncovered interest rate parity |
| Date: | 2026–08–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfhtn:2026/006 |
| By: | Martin Bodenstein; Junzhu Zhao |
| Abstract: | We investigate Barro's random walk hypothesis according to which distortionary labor taxes should follow a random walk for any stochastic process of government expenditures, see Barro (1979). When agents experience cognitive discounting as in Gabaix (2020), they perceive government debt as wealth, and the random walk result breaks down except for knife-edge combinations of limited rationality by policymakers and the private sector. For these specific parameter values, the result can reemerge, but minor deviations from these knife-edge combinations lead to stationary equilibrium dynamics, reflecting the wealth effect of government debt. However, the dynamics turn explosive when policymakers discount the future excessively. Our results extend to other models with limited foresight such as Blanchard (1985), Weil (1989), or Woodford (2019). |
| Keywords: | monetary policy; fiscal policy; limited foresight |
| JEL: | D91 E12 E52 E62 E63 E70 |
| Date: | 2026–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103681 |
| By: | Freddy Cepeda-Lopez; Fredy Gamboa; Javier Miguelez-Márquez |
| Abstract: | This paper analyzes the intraday timing of transactions in Colombia's large-value payment system (CUD) from 2018 to 2025, focusing on how changes in reserve requirements affect liquidity management by financial institutions. Using high-frequency transaction data, we document that reductions in reserve requirements in April 2020 and September 2024 are associated with a shift of settlement activity toward later hours of the day. The effects are heterogeneous, as smaller institutions remain more dependent on marginal liquidity and incoming payments in an interdependent payment network. We also find that the launch of the new Central Securities Depository (DCV) system in April 2024, along with changes in payment volume and value, further reinforces the move toward later settlements. Greater reliance on intraday repos relative to reserves has also reduced early-day activity while improving liquidity management later in the business day. |
| Keywords: | Payment clearing and settlement systems, intraday liquidity management, reserve requirements |
| JEL: | C5 E42 E58 G20 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1373 |
| By: | Francesco Bianchi; Qingyuan Fang; Leonardo Melosi; Anna Rogantini Picco |
| Abstract: | The current euro area policy framework conflates short-run stabilization with long-run fiscal sustainability, exposing members to deflationary and inflationary tail risks. We employ an estimated euro area model to analyze an alternative framework that separates these objectives. A centralized Treasury issues Eurobonds to finance countercyclical stabilization, while national governments retain responsibility for long-term fiscal sustainability. The Treasury can coordinate with the monetary authority in case of a large recession, with no need to suspend fiscal rules at the national level. The arrangement functions as an automatic stabilizer, eliminating the tail risks of deflation and fiscal stagflation. |
| JEL: | E30 E50 E62 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35510 |
| By: | Thomas W L Norman (Magdalen College, Oxford); Tim Willems (Bank of England and Centre for Macroeconomics) |
| Abstract: | The fiscal theory of the price level (FTPL) posits that the price level adjusts to ensure the Government’s budget equation is met in equilibrium, but is silent on the exact adjustment mechanism. By modelling the Government as a large, satiable player in a game with households, we demonstrate that the FTPL’s outcome can be understood as a 'dividend equilibrium', achieved via price level driven revaluation of initial debt. It coincides with the Core (ensuring stability) and the unique outcome consistent with players receiving their Shapley Value. The price level adjustment envisioned by the FTPL thus emerges endogenously as the sole stable outcome when agents are compensated according to their marginal contributions, rather than it being imposed as an assumption. This provides a formal foundation for non-Ricardian fiscal policies, central to the FTPL. |
| Keywords: | The Core;Shapley Value;the fiscal theory of the price level |
| JEL: | D51 E31 E62 |
| Date: | 2025–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023259 |
| By: | Mateo Agustín Fernández (Department of Economics, Universidad de San Andrés) |
| Abstract: | This thesis studies how reserve accumulation stance shapes debt dynamics in emerging economies, using global financial shocks as a plausibly exogenous source of variation in external borrowing conditions. Using a quarterly panel of 38 emerging markets over 2000Q1–2023Q4, I classify reserve stance into Under, Adequate, and Over regimes based on the IMF’s Assessing Reserve Adequacy metric and exploit the Excess Bond Premium as a global risk shock. The empirical analysis combines state-dependent local projections, LP–2SLS specifications, and a sensitivity-based proxy approach. The reduced-form results show that reserve stance shapes the pass-through of global shocks to sovereign spreads: under-accumulation amplifies the spread response, whereas over-accumulation dampens it. The LP–2SLS estimates show that the short-run semi-elasticity of external debt to spreads is positive in the Adequate regime, with a positive Over-accumulation differential, indicating that attenuated pass-through to spreads is associated with stronger transmission to external debt. The sensitivity-based approach further shows that, in the benchmark exercise, countries whose spreads are more sensitive to the common shock exhibit more muted debt responses. However, once within-state heterogeneity is allowed, countries with higher spread sensitivity exhibit stronger debt responses in the Under and Adequate regimes, whereas in the Over regime the relationship turns negative. These results suggest that reserve accumulation affects debt dynamics by altering both the transmission of global shocks to borrowing costs and the subsequent debt adjustment. An extension to additional macroeconomic outcomes shows that reserve stance affects the composition of macroeconomic adjustment: the Over regime is associated with a substantially smaller depreciation and a more muted trade-balance adjustment, but also with a larger short-run contraction in real activity and a higher medium-horizon price-level response. |
| Keywords: | international reserves, sovereign spreads, external debt, local projections, emerging markets |
| JEL: | E44 F34 F41 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:sad:ypaper:23 |
| By: | Mingli Chen (University of Oxford); Rama Cont (University of Warwick); Andreas Joseph (Bank of England); Michael Kumhof (Bank of England); Xinlei Pan (University of California (Berkeley)); Wei Xiong (University of Oxford); Xuan Zhou (Reserve Bank of Australia) |
| Abstract: | We propose deep reinforcement learning (DRL) as a general approach to bounded rationality in dynamic stochastic general equilibrium (DSGE) models. Agents are represented by deep artificial neural networks and learn to maximise their intertemporal objective function by interacting with an a priori unknown environment. Applying this approach to a model from the adaptive learning literature, DRL agents can learn all equilibria irrespective of local stability properties. However, learning is slow and may be unstable without the imposition of early stopping criteria. These findings can have implications for the use and interpretation of DRL agents and of DSGE models more generally. |
| Keywords: | Artificial intelligence;deep reinforcement learning;adaptive learning;monetary policy;fiscal policy;multiple equilibri |
| JEL: | C14 C52 D83 E52 E62 |
| Date: | 2025–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023264 |
| By: | Alvaro Contreras (Boston University); Peter Eccles (Financial Conduct Authority); Paolo Siciliani (Bank of England) |
| Abstract: | Cloud outsourcing may alter competition in banking by allowing smaller competitors to access scalable digital infrastructure. This paper studies the effects of banks’ outsourcing agreements with Cloud Service Providers (CSPs) in the UK banking sector using proprietary bank-provider contract data. We find that CSP spending is associated with lower operating costs and higher deposits, with reduced-form effects concentrated among large institutions. We also find that increases in capital requirements are associated with higher CSP spending, consistent with large institutions using CSP adoption to reduce dependence on legacy IT systems, improve operational efficiency, and strengthen long-term franchise value. We then estimate a structural model of competition in the UK deposit market to quantify depositor-demand effects from CSPs. We find that the demand-side benefits of CSP adoption are substantially larger for small and medium banks and building societies. We use the model to conduct two counterfactual analyses. First, we simulate a scenario in which cloud outsourcing was restricted prior to its widespread adoption. The counterfactual implies higher market concentration, lower market shares for smaller institutions, and lower depositor welfare. Second, we analyse a reduction in capital requirements. While lower capital requirements directly increase welfare through funding-cost effects, they also reduce incentives to invest in CSP adoption, offsetting roughly 32% of the direct welfare gain. Our findings suggest that cloud outsourcing has partly reduced technological barriers to competition in banking markets. |
| Keywords: | Cloud outsourcing;bank competition;process innovation;financial regulation |
| JEL: | G21 G28 O31 D22 |
| Date: | 2026–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023540 |
| By: | Arisa Chantaraboontha (Graduate School of Economics, The University of Osaka) |
| Abstract: | This paper implements a panel VECM to investigate whether fiscal policy plays a significant role in price determination using an annual panel dataset covering advanced and emerging economies from 2010 to 2024. The empirical results indicate that, during normal periods, most fiscal authorities worldwide restore intertemporal budget constraints through fiscal balance adjustments rather than price adjustments, consistent with a Ricardian regime. However, following the onset of the pandemic, fiscal policy in most countries appears to shift toward a non-Ricardian regime, in which the price level adjusts to satisfy the intertemporal budget constraint, providing empirical support for the Fiscal Theory of the Price Level (FTPL). Greater budget transparency is found to moderate inflationary pressures arising from fiscal imbalances during crisis periods, although no significant effect is observed during normal times. Moreover, higher budget transparency helps slow the accumulation of public debt across countries under both normal and crisis conditions. |
| Keywords: | Fiscal Theory of the Price Level, Fiscal Policy, Inflation, Government Debt, Ricardian Regime |
| JEL: | E31 E62 E63 H63 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:osk:wpaper:2611 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | We study the causes and consequences of bank runs. By applying large language models to historical newspapers, we create a comprehensive database of bank runs in U.S. history with information on 3, 984 runs on individual banks from 1863 to 1934. Our novel data allow us to establish that runs are considerably more likely in weak banks but also occur in strong banks, especially in response to negative news about the real economy or the broader banking system. However, runs typically only result in failure for banks with poor fundamentals. Strong banks survive runs through various mechanisms, including signaling strength, interbank cooperation, and temporary suspension. At the local level, runs on banks with poor fundamentals translate into substantially larger declines in deposits, lending, and manufacturing activity than runs on strong banks. Our findings imply that poor fundamentals are central to explaining both when runs occur and when they have severe economic effects, tempering the view that small shocks can generate discontinuous jumps to bad equilibria through self-fulfilling run dynamics. |
| JEL: | G0 G01 G21 N1 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35504 |
| By: | Kevin Hjortshøj O'Rourke (CNRS and Sciences Po); Roger Vicquéry (Bank of England) |
| Abstract: | We present a new global index indicating how fixed the world’s exchange rates are. Our index measures the probability of two units of GDP, randomly selected anywhere in the world, of being involved in a fixed exchange rate arrangement. This approach is invariant to alternative classifications of the Eurozone and is able to account for both direct and indirect exchange rate linkages between countries. In contrast to the 'New Consensus' view, which posits a continuity in exchange rate arrangements from the Bretton Woods era to the present, our index restores the conventional account of international monetary history over the last 70 years. Our findings indicate that global exchange rate regimes are currently nearly three times as flexible as they were prior to the 1971 Nixon shock. Furthermore, our measure partially puts into perspective the view that dollar dominance is now stronger than ever: we find that global anchoring to the US dollar was significantly more prevalent during Bretton Woods, particularly when accounting for indirect links. |
| Keywords: | Fixed exchange rate regimes;Bretton Woods;Nixon Shock;anchor currencies;US dollar dominance |
| JEL: | E5 F3 F4 N2 |
| Date: | 2025–06–27 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023253 |
| By: | Reis, Ricardo |
| Abstract: | This article uses inflation expectations to investigate the mechanisms that linked supply and demand shocks to inflation outcomes during 2021–2024. It describes several theoretical mechanisms through which shocks led to inflation, highlighting the role of expectations in this process. It uses multiple sources of expectations data for the United States, Euro area, and United Kingdom to evaluate each of these channels. Finally, it surveys the literature that has used expectations data to make sense of the 2021–2024 inflation surge. The article applies the results from this investigation to assess how well-anchored inflation expectations were during the surge and at the end of it. |
| Keywords: | inflation disaster;market expectations;surveys;Phillips curve;fiscal theory;doves |
| JEL: | E31 E52 D84 |
| Date: | 2026–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:138478 |