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on Monetary Economics |
| By: | Coleman, Winnie; Nautz, Dieter |
| Abstract: | This paper investigates the determinants of inflation target credibility (ITC) using a unique survey we designed to measure the credibility of the ECB's inflation target. Containing over 200, 000 responses from German consumers collected between January 2019 and November 2024, our dataset enables us to estimate the effect of both positive and negative deviations of inflation from the 2% target on ITC. In contrast to the symmetry of the ECB's inflation target, we find that ITC is asymmetric, i.e. consumers respond significantly and plausibly signed to target deviations only when inflation is above target. When inflation is below target, however, the credibility of the inflation target cannot be improved by raising the inflation rate to close the gap. |
| Keywords: | Credibility of Inflation Targets, Consumer Inflation Expectations, Expectation Formation |
| JEL: | D84 E31 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfswop:315475 |
| By: | Monique Reid; Pierre Siklos |
| Abstract: | Lars Svensson (1997) argued that inflation targeting should be called inflation forecast targeting, capturing the fact that monetary policy is necessarily forward looking. Inflation forecast performance is therefore a critical element for good conduct in monetary policy. As more measures of inflation expectations have become available, it is worth asking whether some are better than others at forecasting inflation and whether the long-held belief that forecast averaging outperforms individual forecasts continues to hold. We consider five sources of inflation forecasts for South Africa, including three unique quarterly surveys of firms, financial analysts and trade unions. We find that a linear combination of forecasts obtained from a factor model can improve the accuracy of forecasting over alternative forms of aggregation. |
| Date: | 2025–03–14 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11077 |
| By: | Sushant Acharya; Ozge Akinci; Silvia Miranda-Agrippino; Paolo Pesenti |
| Abstract: | As covered in the first post in this series, the international transmission of monetary policy shocks features positive output spillovers when the so-called expenditure-switching effect is sufficiently large. Departing from textbook analysis, this post zooms in on the implications of differences across market participants with respect to their consumption preferences and ability to insure against income risk. The key message is that these features can, at least theoretically, change the impact of spillovers from positive to negative as well as alter their overall magnitude. These aspects of the international transmission mechanism are especially relevant when addressing spillovers from advanced to emerging economies. |
| Keywords: | Global spillovers |
| JEL: | E32 E44 F41 |
| Date: | 2025–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99794 |
| By: | Bogdan Stanišic (National Bank of Serbia) |
| Abstract: | Payment using cashless payment instruments, such as payment cards or instant payments, is a process familiar to all users of these payment instruments in Serbia. When making a payment, all the customer needs to do is to tap, insert, or swipe the card through a POS terminal, or display or scan an IPS QR code, and the transaction will be executed. On the other hand, the service of accepting these and similar payment instruments is not widely known to the public, at least not to the same extent as the statistical data related to cashless payments. Understanding the processes that occur in the background and the participants involved is of great importance for setting more efficient hypotheses and making better decisions regarding enabling the acceptance of cashless payment instruments. The explanation of the basic elements related to the acceptance of payment instruments in this paper aims to provide additional information based on which the wider and professional public can better understand the process of accepting cashless instruments, their possibilities, and characteristics. The information provided can help merchants and other market players in making adequate and optimal business decisions when it comes to the method of accepting and using cashless payments. The paper describes the infrastructure that a merchant can use when accepting cashless payments, the payment instruments most commonly used by consumers in Serbia, specific business models, the roles of payment service providers in the overall acceptance process, as well as the transaction flow initiated by different payment instruments. This way, all interested market participants, especially merchants, can take a broader view of the cashless payment acceptance system and independently draw comprehensive conclusions about the costs, type of instrument, and acceptance model they are considering. |
| Keywords: | payments, payment services, cards, mobile phones, IPS, acceptance, development, digitalisation, National Bank of Serbia, Serbia |
| JEL: | F30 G15 G20 G30 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nsb:bilten:31 |
| By: | Ekaterina Pirozhkova; Nicola Viegi |
| Abstract: | This paper studies the bank lending channel of monetary policy transmission in South Africa where the bank loan-level data, which are typically used for this type of analysis, are unavailable. Supply-side changes in credit provision are measured with data on the composition of home-loan supply by banks versus nonbanks. High-frequency surprises in forward rate agreements are used to instrument for exogenous shifts in monetary policy in a proxy-structural vector autoregression model. The bank lending channel is found to be operative, as banks reduce the supply of home loans following monetary tightening, with a negative effect on the housing market. The effectiveness of the deposits channel is shown: banks widen the deposit spread after monetary tightening, and the volume of deposits shrinks. As retail deposits provide a unique, stable source of funding for banks, the deposits channel underlies the operativeness of the bank lending channel in South Africa, consistent with theory. |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11072 |
| By: | Monique Reid; Dieter von Fintel; Anis Foresto |
| Abstract: | With the adoption of inflation targeting in South Africa in 2000, the Bureau for Economic Research (BER) began to collect inflation expectations survey data on behalf of the South African Reserve Bank. This respected survey is rich by international standards and has contributed valuable insights to policy, academic and private sector analyses. International trends towards greater reliance on microdata within macroeconomics are, however, placing slightly different demands on the survey, and access to complementary datasets has offered new opportunities to enhance it. In this pilot study, we link the inflation expectations survey data of firms to a spatial tax panel dataset. We investigate whether the survey sample adequately represents the structure of the South African economy and offer a series of survey weights to be added to the micro dataset. The results show that the BER has maintained an adequate level of representativity over the life of the survey, but we recommend that sample weights be estimated periodically to ensure that representativity is ensured institutionally. The sample weights can also support targeted recruitment in future. Finally, through careful documentation we hope to enable other researchers to pursue questions that benefit from linking the inflation expectations data with other datasets. |
| Date: | 2024–10–21 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11068 |
| By: | Khuderchuluun Batsukh; Nicolas Groshenny; Naveed Javed |
| Abstract: | We highlight the importance of high and low states of household debt for the transmission of monetary policy in Australia during the period from 1994Q1 to 2019Q3. Using a state-dependent local projection model, we demonstrate that the impact of a monetary policy shock varies depending on the level of household debt. In particular, in low household debt conditions, output, investment, house prices, household debt-to-GDP, and debt-to-asset increase significantly to an expansionary monetary shock, while the responses of these variables are largely muted when the households are in a high-debt state. We infer from our results that the “home equity loan channel†may be active when household indebtedness is moderate, but inactive when it is high. We conjuncture that this channel likely played a crucial role in the transmission of monetary policy in Australia, and potentially accounted for the diminished effects of monetary policy under high household debt conditions. |
| Keywords: | household debt, monetary policy, home equity loans |
| JEL: | E21 E32 E52 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-13 |
| By: | Dragan Dživdžanovic (National Bank of Serbia) |
| Abstract: | This paper examines a phenomenon known as cheapflation on the example of Serbia in the 2022-2024 period. Cheapflation is the tendency of prices of cheaper brands to rise at a higher rate than those of more expensive brands of the same products during the periods of increased inflationary pressures. For research purposes, we used monthly microdata on the prices of various brands of a wide range of food and beverage products. Based on this data, brands within products were classified into quartile groups, from the cheapest to the most expensive ones. Synthetic consumer price indices were then created, consisting only of the cheapest and most expensive brands. The results show that Serbia experienced cheapflation, as the prices of the cheapest brands rose 4.5 pp faster than the the prices of the most expensive brands, on average, over the three-year period. The paper also confirmed an accompanying tendency: in the beginning, significant inflationary pressures are dominantly driven by the price increases of the cheapest brands, while the gap between the prices of cheaper and more expensive brands widens the most during the period of the strongest inflationary pressures. Examining this phenomenon is important because of the redistributive effects of inflation, as well as because of the impact that public perception of price increases can have on monetary policy through the expectations channel. |
| Keywords: | cheapflation, inflation, demand elasticity, quartile, brands, cumulative growth |
| JEL: | F21 G15 G24 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nsb:bilten:28 |
| By: | Julian A. Parra-Polania; Constanza Martínez-Ventura |
| Abstract: | We examine the optimal design of central bank digital currencies (CBDCs) by focusing on two key features: the anonymity-security trade-off and the remuneration (i.e., interest rate). Building on the extended model by Agur et al. (2022), which accounts for potential negative externalities associated with the anonymity of payment methods, we incorporate the possibility of multiple CBDCs into the framework. Our findings reveal that with optimally designed CBDCs and when anonymity costs are significant, a cashless economy is the preferred choice for the central bank. Furthermore, irrespective of anonymity costs, an economy with cash and one or more CBDCs is welfare dominated by a cashless economy with one additional CBDC. These results underscore the exibility and welfare-enhancing potential of CBDCs compared to cash in modern payment systems. **** RESUMEN: Analizamos el diseño óptimo de las monedas digitales de los bancos centrales (CBDC), centrándonos en dos características clave: la disyuntiva entre anonimato versus seguridad y la remuneración (tasa de interés). Con base en el modelo extendido de Agur et al. (2022), que considera las posibles externalidades negativas asociadas con el nivel de anonimato de los métodos de pago, incorporamos la posibilidad de múltiples CBDCs. Nuestros hallazgos revelan que con CBDCs óptimamente diseñadas, y cuando los costos de la anonimato son relativamente altos, una economía sin efectivo es la opción preferida del banco central. Adicionalmente, independientemente de los costos de la anonimato, una economía con efectivo y una o más CBDCs es menos preferida, en términos de bienestar social, que una economía sin efectivo y con una CBDC adicional. Estos resultados resaltan la flexibilidad y el potencial de mejora del bienestar de las CBDCs en comparación con el efectivo en los sistemas de pago modernos. |
| Keywords: | CBDC, optimal design, anonymity, security, digital currency, cashless economy, CBDC, diseño óptimo, anonimato, seguridad, monedas digitales, economía sin efectivo |
| JEL: | D60 E41 E42 E43 E58 G21 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1311 |
| By: | Simon Freyaldenhoven; Shikun Ke; Dingyi Li; Jose Luis Montiel Olea |
| Abstract: | What does the Fed talk about in its monetary policy discussions? We introduce a new statistical methodology to analyze text documents, and we use that methodology to recover the topics discussed during FOMC meetings. Topic models are a simple and popular tool for the statistical analysis of textual data. Their identification and estimation are typically enabled by assuming the existence of anchor words; that is, words that are exclusive to specific topics. In this paper we show that the existence of anchor words is statistically testable: There exists a hypothesis test with correct size that has nontrivial power. This means that the anchor-words assumption cannot be viewed simply as a convenient normalization. Central to our results is a simple characterization of when a column-stochastic matrix with known nonnegative rank admits a separable factorization. We test for the existence of anchor words in two different datasets derived from monetary policy discussions in the Federal Reserve and reject the null hypothesis that anchor words exist in one of them. |
| Keywords: | Anchor Words; Topic Models; Nonnegative Matrix Factorization; Hypothesis Testing |
| JEL: | C39 C55 |
| Date: | 2025–03–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:99851 |
| By: | Marco Garofalo; Giovanni Rosso; Roger Vicquéry |
| Abstract: | This paper studies the effect of financial sanctions on the dominance of the US dollar in global credit markets. In the aftermath of the invasion of Crimea in 2014, sanctions imposed by both the US and the EU restricted the provision of financial services to Russian firms. We document how, between 2014 and 2021, the share of global cross-border credit to Russia denominated in US dollars declined from 65% to 25%, while the share denominated in euros rose from 20% to 45%. Relying on confidential bank-level data covering the universe of global banks located in the UK, we show that this shift was driven by banks previously lending to Russia in US dollars, and that banks shifted to euro lending to Russia regardless of whether their ultimate owner was based in a sanctioning jurisdiction or not. We argue that this euroisation relates to an increase in the relative “settlement risk” of US dollar claims, in the context of US extra-territorial sanctions targeting the dollar payment system. We rationalise our findings in a three-country model with financial intermediaries, where sanctions are introduced as both jurisdiction and currency-circuit specific frictions. |
| Date: | 2025–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1079 |
| By: | Jaison R. Abel; Richard Deitz; Benjamin Hyman |
| Abstract: | After a period of particularly high inflation following the pandemic recession, inflationary pressures have been moderating the past few years. Indeed, the inflation rate as measured by the consumer price index has come down from a peak of 9.1 percent in the summer of 2022 to 3 percent at the beginning of 2025. The New York Fed asked regional businesses about their own cost and price increases in February, as well as their expectations for future inflation. Service firms reported that business cost and selling price increases continued to moderate through 2024, while manufacturing firms reported some pickup in cost increases but not price increases. Looking ahead, firms expect both cost and price increases to move higher in 2025. Moreover, year-ahead inflation expectations have risen from 3 percent last year at this time to 3.5 among manufacturing firms and 4 percent among service firms, though longer-term inflation expectations remain anchored at around 3 percent. |
| Keywords: | inflation expectations; prices; costs |
| JEL: | E3 R0 |
| Date: | 2025–03–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99651 |
| By: | Georgarakos, Dimitris; Kenny, Geoff; Laeven, Luc; Meyer, Justus |
| Abstract: | We field a series of experiments in a population-representative survey of European consumers to examine their attitudes towards the possible introduction of a digital euro. First, we show that a short video explaining the key features of the digital euro is effective in changing consumers’ beliefs about such a new form of payment and increases the likelihood of adoption by 12pp relative to a control group that is not shown the video. Second, we find that on aggregate consumers would allocate a relatively small fraction from a positive wealth shock to digital euros and their allocation to other liquid assets would be little affected. Third, holding limits in the range of €1, 000 to €10, 000 have insignificant differential effects on the composition of liquid asset holdings. We also show that a non-trivial fraction of consumers report that they will not adopt the digital euro due to strong preferences for existing forms of payment. JEL Classification: E41, E58, D12, D14, G51 |
| Keywords: | Central Bank Digital Currencies (CBDC), consumer expectations survey, household expectations, household finance, money, payments, Randomized Control Trial (RCT) |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253035 |
| By: | Marco Del Negro; Ibrahima Diagne; Keshav Dogra; Pranay Gundam; Donggyu Lee; Brian Pacula |
| Abstract: | We use an estimated medium-scale HANK model to investigate how the tradeoff between stabilizing inflation and consumption volatility varies for households with different levels of wealth. Consumption for the rich is mostly affected by demand shocks via their exposure to highly procyclical profits—for them, stabilizing consumption and inflation coincide. The poor are more vulnerable to supply shocks, hence aggressively stabilizing inflation is costly in terms of their consumption volatility. While they dislike inflation because it erodes real wages, they are hurt even more by an aggressive monetary policy response to inflation, which reduces real wages further while increasing unemployment. |
| Keywords: | inflation; inequality; monetary policy; HANK model |
| JEL: | E12 E31 E52 E58 |
| Date: | 2025–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99759 |
| By: | Mark A. Carlson; Mary-Frances Styczynski |
| Abstract: | The Federal Reserve’s discount window is a tool that can provide reserves to banks at a rate set by the Federal Reserve, the discount rate. During the past several years, there have been large fluctuations in the level of reserves in the banking system and in the level discount rate relative to other interest rates. In this paper, we explore how banks’ holdings of reserves, especially relative to the amount of reserves that banks prefer to hold, and the interest rate available at the discount window influence borrowing at the window. We find that banks borrow more when their reserves are low and when the discount rate is relatively attractive, although the size of these effects depends on a bank’s size, FHLB membership status, and financial condition. |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-15 |
| By: | Masataka Mori; Juan M. Sanchez |
| Abstract: | An analysis of 2022 survey data found that only about 4.3% of U.S. households owned cryptocurrency and an even smaller proportion held large amounts. |
| Keywords: | cryptocurrencies |
| Date: | 2025–03–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:99689 |
| By: | Giovanni Di Bartolomeo; Carolina Serpieri |
| Abstract: | Uncertainty is a challenge for monetary policy. This paper introduces local model uncertainty into a behavioral New Keynesian DSGE framework to derive robust optimal monetary policies. We consider two potential forms of agents' heterogeneity, which refer to two mechanisms of expectation formation used by a fraction of (boundedly rational) agents to generate their beliefs. In contrast, the rest of the population rationally forms its expectations. The central bank ignores the fraction of boundedly rational agents and the mechanism they use to form their expectations. Non-Bayesian robust control techniques are adopted to minimize a welfare loss derived from the second-order approximation of agents' utilities. |
| Keywords: | Brainard Principle; Monetary Policy; Bounded Rationality; Expectation Formation; Non-Bayesian Robust Control |
| JEL: | E52 E58 D84 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:sap:wpaper:wp261 |
| By: | Sushant Acharya; Ozge Akinci; Silvia Miranda-Agrippino; Paolo Pesenti |
| Abstract: | In the literature on monetary policy spillovers considered in the two previous posts, countries that would otherwise operate independently are connected to one another through bilateral trade relationships, and it is assumed that there are no frictions in currency, financial, and asset markets. But what if we introduce a number of real-world complexities, such as a dominant global currency and tight linkages across international capital markets? Given these additional factors, is it still possible to draw generalized conclusions about international policy spillovers—and can we still think of them as a fundamentally bilateral phenomenon? In our third and final post, we explore these questions by focusing on two key elements in the determination of international policy spillovers: the U.S. dollar and the Global Financial Cycle. |
| Keywords: | Global spillovers |
| JEL: | E32 E44 F41 |
| Date: | 2025–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99795 |
| By: | Romain Bouis; Mr. Damien Capelle; Mr. Giovanni Dell'Ariccia; Christopher J. Erceg; Maria Soledad Martinez Peria; Mouhamadou Sy; Mr. Ken Teoh; Mr. Jerome Vandenbussche |
| Abstract: | Trade-offs between price and financial stability can occur when inflation is above target and financial stress is rising. Use of central bank liquidity tools and other financial stability policies may, under some circumstances, allow central banks to maintain their inflation fighting stance, while addressing financial stress. However, challenges in deploying these tools and specific country characteristics may hinder central banks’ ability to achieve both price and financial stability. In such circumstances, central banks should account for financial stress increasing downside risks to activity, allow for slower disinflation using monetary policy flexibility, and communicate that deviations from the medium-term inflation target are temporary. Countries with weak central bank credibility, high exposure to exchange rate movements, and limited fiscal space face extra challenges in managing these trade-offs and might have to rely on foreign exchange interventions, macroprudential policies, capital flow measures, and international liquidity tools. |
| Keywords: | Monetary Policy; Financial Stability; Policy Coordination; monetary policy tightening; liquidity from the discount window; monetary policy flexibility; resolution framework; asset purchase; Financial sector stability; Price stabilization; Inflation; Liquidity; Global |
| Date: | 2025–04–11 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfsdn:2025/003 |
| By: | Sushant Acharya; Ozge Akinci; Silvia Miranda-Agrippino; Paolo Pesenti |
| Abstract: | Understanding cross-border interdependencies and inspecting the international transmission mechanism of policy shocks is the raison d’être of open-economy macroeconomics as an intellectual discipline. The relevance for the policy debate is pervasive: over and over in the history of the international monetary system national policymakers have pointed at — and voiced concerns about—the effects of policy actions undertaken in foreign countries on the outlook and financial conditions in their own domestic economies. The most recent example involves the spillovers of tighter monetary policies aimed at addressing the inflationary spikes associated with the COVID-19 pandemic. In this three-part series, we provide a non-technical introduction to the multifaceted literature on global spillovers, building in particular on our own research. This post introduces the subject and offers an overview of the classic transmission channels. |
| Keywords: | spillovers |
| JEL: | E32 E44 F41 |
| Date: | 2025–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99793 |
| By: | Stefan Avdjiev; Leonardo Gambacorta; Linda S. Goldberg; Stefano Schiaffi |
| Abstract: | The period after the Global Financial Crisis (GFC) was characterized by a considerable risk migration within global liquidity flows, away from cross-border bank lending towards international bond issuance. We show that the post-GFC shifts in the risk sensitivities of global liquidity flows are related to the tightness of the balance sheet (capital and leverage) constraints faced by international (bank and nonbank) lenders and to the migration of borrowers across funding sources. We document that the risk sensitivity of global liquidity flows is higher when funding is provided by financial intermediaries that are facing greater balance sheet constraints. We also provide evidence that the post-GFC migration of borrowers from cross-border loans to international debt securities was associated with a decline in the risk sensitivity of global liquidity flows to EME borrowers. |
| Keywords: | global liquidity; international bank lending; international bond flows; emerging markets; advanced economies |
| JEL: | G10 F34 G21 |
| Date: | 2025–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99824 |
| By: | András Borsos (Magyar Nemzeti Bank, Complexity Science Hub Vienna and University of Oxford); Adrian Carro (Banco de España and University of Oxford); Aldo Glielmo (Banda d’Italia); Marc Hinterschweiger (Bank of England); Jagoda Kaszowska-Mojsa (University of Oxford, Narodowy Bank Polski and Polish Academy of Sciences); Arzu Uluc (Bank of England) |
| Abstract: | Over the past decade, agent-based models (ABMs) have been increasingly employed as analytical tools within economic policy institutions. This paper documents this trend by surveying the ABM-relevant research and policy outputs of central banks and other related economic policy institutions. We classify these studies and reports into three main categories: (i) applied research connected to the mandates of central banks; (ii) technical and methodological research supporting the advancement of ABMs; and (iii) examples of the integration of ABMs into policy work. Our findings indicate that ABMs have emerged as effective complementary tools for central banks in carrying out their responsibilities, especially after the extension of their mandates following the global financial crisis of 2007-2009. While acknowledging that room for improvement remains, we argue that integrating ABMs into the analytical frameworks of central banks can support more effective policy responses to both existing and emerging economic challenges, including financial innovation and climate change. |
| Keywords: | agent-based models, central bank policies, monetary policy, financial stability, prudential policies, payment systems |
| JEL: | C63 E27 E37 E42 E58 G10 G21 G23 G51 Q54 R21 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bde:opaper:2503e |
| By: | David M. Arseneau; Mark A. Carlson; Kathryn Chen; Matt Darst; Dylan Kirkeeng; Elizabeth C. Klee; Benjamin A. Malin; Matthew Malloy; Friederike Niepmann; Emilie O'Malley; Mary-Frances Styczynski; Melissa Vanouse; Alexandros Vardoulakis |
| Abstract: | A core task of central banks is to provide liquidity to banks, with the goal of facilitating monetary policy implementation, ensuring the smooth functioning of the payment system, and promoting financial stability. While central banks around the world pursue these goals, the design of liquidity facilities differs across countries. This note provides an overview of liquidity facilities around the world that resemble the Federal Reserve’s discount window as well as intraday credit, comparing and contrasting setups in different countries. |
| Date: | 2025–02–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-02-26-1 |
| By: | Martin Ertl (Institute for Advanced Studies, Vienna); Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business) |
| Abstract: | We explore the natural rate of interest, shortly r*, in emerging economies. If economic growth originates from convergence, then growth, say, from technological progress will be lower than we find in the data and, hence, r* will be lower. Ignoring convergence upwardly biases our estimates of r*. We extend the New Keynesian small open economy model to incorporate convergence effects and estimate it using Bayesian techniques for four emerging economies in Central and Eastern Europe: Poland, Czech Republic, Hungary and Romania. Empirical evidence of the rapid catching-up of our sample economies during the period from 2003 to 2019 assists in specifying the model estimation. Our findings confirm a decline in r* over the past decades. Accounting for capital deepening reveals meaningful differences in estimated r*, with non-negligible implications for monetary policy in emerging economies. |
| Keywords: | natural rate of interest, convergence, New Keynesian DSGE model, Central and Eastern Europe |
| JEL: | E3 E4 E5 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp376 |
| By: | Parush Arora (Ashoka University); Derek Tran (Economist, Amazon.com Inc.) |
| Abstract: | This paper uses loan-level transactions from the Paycheck Protection Program (PPP) to understand how a bank’s decision to borrow funds from the discount window (DW) affected its lending behavior during the COVID-19 crisis. Implementation of the PPP can be seen as an exogenous shock to the liquidity demand for banks, independent of their financial conditions. By exploiting this independence, we find a causal relationship between use of DW and the number of PPP loans extended by large banks but not small banks. While both types used the DW in the absence of a long-term funding source, usage of the DW almost doubled PPP lending for large banks. After the establishment of a long-term funding source, however, this effect was reduced to 69% due to substitution away from the DW. These findings suggest that in the presence of an unexpected liquidity shock, the DW plays a critical role in extending short-term liquidity to the banking sector. |
| Date: | 2024–11–04 |
| URL: | https://d.repec.org/n?u=RePEc:ash:wpaper:132 |
| By: | Aryo Sasongko (Bank Indonesia); Cicilia Anggadewi Harun (Bank Indonesia); Geyana Ledy Fista (Bank Indonesia); Kusfisiami Wima Mustika (Bank Indonesia); Aninditha Kemala Dinianyadharani (Bank Indonesia); Karanissa Larasati (Bank Indonesia); Puput Kurniati (Bank Indonesia); Dila Safitri (Bank Indonesia) |
| Abstract: | This study examines the formation of interest rates in the government bond market and the price discovery process in the foreign exchange market through yield curve models and supply-demand curves to support pro-market monetary operations. Using the Nelson-Siegel model and its extensions, the study aims to establish more accurate yield curve parameters through conventional methods (first algorithm), determine short- and long-term interest rates (second algorithm), and ensure a positive slope for the yield curve (third algorithm). The results from the yield curve model demonstrate that this approach is effective under conditions of steepening, inverting curves, and negative interest rates. Furthermore, the creation of the supply and demand curve model and the simulation results explain the formation of foreign exchange rates and the impact of triple interventions. Foreign exchange spot transactions, domestic non-deliverable forwards, and government securities are reflected in the cleared volume indicator (µ) and the demand volume multiplier. Efforts to stabilize the market, such as central bank announcements, are reflected in the parameter σ. |
| Keywords: | yield curve, supply-demand curve, price discovery, price formation, promarket monetary operations, exchange rate interventions |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idn:wpaper:wp092024 |
| By: | Danny Hermawan (Bank Indonesia); Cicilia Anggadewi Harun (Bank Indonesia); Wicaksono Aryo Pradipto (Bank Indonesia); Yulian Zifar Ayustira (Bank Indonesia); Alvin Andhika Zulen (Bank Indonesia); Amin Endah Sulistiawati (Bank Indonesia); Ade Dwi Aryani (Bank Indonesia); Sintia Aurida (Bank Indonesia) |
| Abstract: | With the constant diruptions in the economy stemmed from global market turbulence, technological changes, and shift toward a more sustainable way of life, understanding banking behavior become a priority to maintain financial stability. This study examines the credit allocation behavior of banks in Indonesia, influenced by economic conditions, regulatory frameworks, technological advancements, and sector-specific challenges. Bank credit plays a vital role in macroeconomic stability, and economic fluctuations impact banks procyclical credit behavior. The Indonesian banking sector faces complex pressures and sectoral risks, emphasizing the need for solid policies from Bank Indonesia to maintain financial system stability. This research addresses two main questions: how client relationships affect credit supply decisions and how structural changes such as interest rates, climate change, and cybersecurity influence bank behavior. Utilizing primary and secondary data as well as machine learning (ML) methods, the study reveals insights into credit supply practices in Indonesian banks and the potential of big data and ML for a detailed assessment of credit distribution patterns. The findings highlight the importance of stricter oversight, technological integration, and sectorspecific strategies, especially for SMEs and high-risk sectors such as tourism and mining. The study emphasizes integrating green finance, RegTech, and SupTech to enhance banking sector resilience and align credit activities with sustainability goals. By applying these insights, Indonesia can create a stable credit environment, support economic growth, and ensure banks are prepared to manage evolving risks in the financial landscape. |
| Keywords: | bank behavior, credit growth, credit supply, machine learning |
| JEL: | E51 G21 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idn:wpaper:wp112024 |
| By: | Roberto Duncan; Enrique Martínez García; Luke Miller |
| Abstract: | In August 2020, the Federal Reserve replaced Flexible Inflation Targeting (FIT) with Flexible Average Inflation Targeting (FAIT), introducing make-up strategies that allow inflation to temporarily exceed the 2% target. Using a synthetic control approach, we estimate that FAIT raised CPI inflation by about 1 percentage point and core CPI inflation by 0.5 percentage points, suggesting a moderate impact net of food and energy and a largely temporary effect. Short- to medium-term inflation expectations increased by approximately 0.8 percentage points, while long-term expectations remained anchored. The effects of FAIT on economic activity were, if anything, minimal. Our results are robust across multiple specifications, including alternative price indices, synthetic control estimators, control groups and adjustments for global supply chain pressures, economic activity, fiscal policy, commodity prices, interest rates and monetary aggregates. The differing macroeconomic outcomes under FAIT versus a counterfactual FIT characterized by moderate inflationary effects, negligible real effects and anchored long-term expectations, are consistent with the hypothesis of a steeper-than-expected post-pandemic Phillips curve in the New Keynesian model. |
| Keywords: | flexible average inflation targeting; flexible inflation targeting; monetary policy counterfactuals; Phillips curve slope; inflation expectations anchoring; synthetic control method |
| JEL: | C32 C54 E52 E58 E61 E65 |
| Date: | 2025–04–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99826 |
| By: | Natsuki Arai; Shian Chang |
| Abstract: | This paper analyzes the Federal Open Market Committee (FOMC) policymakers' economic projections with identities published after 2007 and presents three sets of results. First, the dispersion of projections across policymakers is associated with the regional economic conditions they represent and their monetary policy preferences. Second, the policymakers' reaction function is consistent with the Taylor rule and satisfies the Taylor principle for stability. Their projections align with Okun's law and the Phillips curve. Finally, the efficiency evaluations to test the unpredictability of forecast errors and revisions indicate that the efficiency is rejected by many policymakers, with rejections concentrated in the years following the Great Recession. |
| Keywords: | FOMC, Individual Projections, Regional Influence, Policy Preference, Forecast Efficiency |
| JEL: | C53 E43 E47 E58 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:gwc:wpaper:2025-003 |
| By: | Sophia Cho; John C. Williams |
| Abstract: | Estimates of the natural rate of interest, commonly called “r-star, ” garner a great deal of attention among economists, central bankers, and financial market participants. The natural interest rate is the real (inflation-adjusted) interest rate expected to prevail when supply and demand in the economy are in balance and inflation is stable. The natural rate cannot be measured directly but must be inferred from other data. When assessing estimates of r-star, it is important to distinguish between real-time estimates and retrospective estimates. Real-time estimates answer the question: “What is the value of r-star based on the information available at the time?” Meanwhile, retrospective estimates answer the question: “What was r-star at some point in the past, based on the information available today?” Although the latter question may be of historical interest, the former question is typically more relevant in practice, whether in financial markets or central banks. Thus, given their different nature, comparing real-time and retrospective estimates is like comparing apples to oranges. In this Liberty Street Economics post, we address this issue by creating new “synthetic real-time” estimates of r-star in the U.S. for the Laubach-Williams (2003) and Holston-Laubach-Williams (2017) models, using vintage datasets. These estimates enable apples-to-apples comparisons of the behavior of real-time r-star estimates over the past quarter century. |
| Keywords: | natural rate of interest; real time estimation; Laubach-Williams model; Holston-Laubach-Williams model; R-Star |
| JEL: | C32 E43 |
| Date: | 2025–03–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99638 |
| By: | Hilde C. Bjornland; Jamie L. Cross; Jonas Holz |
| Abstract: | This paper examines how central banks respond to supply-side shocks and investigates the trade-offs they face in stabilizing inflation and output. To do so we develop a dual external instrument proxy structural vector autoregressive (SVAR) model to disentangle the macroeconomic effects of oil supply news and monetary policy shocks. Our identification strategy, which combines multiple external instruments with sign restrictions, enables a sharp distinction between structural shocks, allowing us to analyze their dynamic effects and construct policy counterfactuals for different central bank objectives. We find that both oil supply and monetary policy shocks significantly influence U.S. output and inflation. Moreover, while monetary policy can mitigate some of the output losses caused by oil price shocks, it cannot fully offset their inflationary effects. Finally, we estimate that the Federal Reserve’s historical response aligns closely with a policy that places twice as much weight on inflation stabilization than on output stabilization. |
| Keywords: | proxy-SVAR, monetary policy instrument, oil price instrument, counterfactual analysis, monetary policy trade-offs |
| JEL: | C32 E31 E43 Q41 Q43 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-19 |
| By: | Ivan Radanovic (National Bank of Serbia) |
| Abstract: | The aim of this paper is to analyse the prospects of cross-border linking of instant payment systems. The core idea behind such linking is to make cross-border payments faster, more secure and cheaper for end-users, in line with the G20’s October 2020 plan to facilitate cross-border payments. This should be achieved by addressing persistent issues such as high costs, low speed, and insufficient transparency in these payments. Due to its comparative advantages, cross-border linking of instant payment systems is expected to replace the current model of cross-border payments via correspondent banking in the future. Compatibility between different payment systems requires that exchanged information are structured in a largely or entirely identical manner. The basis for ensuring compatibility lies increasingly in the use of electronic messages under the ISO20022 standard. A part of the paper is dedicated to the characteristics of the NBS IPS system, which relies on this message format, owing to which it is compatible with the European Central Bank’s TIPS system. The paper employs descriptive, comparative, and case-study methods to explore the features of current initiatives for cross-border linking of payment systems. It studies recent developments of this concept of linking, particularly paying attention to the characteristics of pan-European linking via the European Central Bank’s TIPS system, based on the SEPA payment scheme rules defined by the European Payments Council. The final section discusses the potential linking of the Serbian and pan-European instant payment infrastructures, which, in addition to technical interoperability between the two payment systems, requires Serbia to be part of the SEPA geographical area. At the end of 2024, a request to join this area was submitted to the European Payments Council with a response expected in March 2025. |
| Keywords: | instant payments, cross-border payments, integration, linking, TIPS, SEPA |
| JEL: | E42 F02 G15 G28 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nsb:bilten:29 |
| By: | Sophia Chen (International Monetary Fund); Deniz Igan (Bank for International Settlements and CEPR); Do Lee (New York University); Prachi Mishra (Ashoka University) |
| Abstract: | U.S. inflation surged in 2021-22 and has since declined, driven largely by a sharp drop in goods inflation, though services inflation remains elevated. This paper zooms into services inflation, using proprietary microdata on wages to examine its relationship with service sector wage growth at the Metropolitan Statistical Area (MSA) level. We estimate the wage-price pass-through with a local projection instrumental variable model that exploits variation in labor market tightness across MSAs. Our findings reveal a positive and significant relationship between wages and price growth, with a lag. This suggests that the effects of tight labor markets are persistent and may influence the pace of progression toward the inflation target. |
| Keywords: | inflation; Labor Market Conditions; Wages |
| Date: | 2024–10–14 |
| URL: | https://d.repec.org/n?u=RePEc:ash:wpaper:127 |
| By: | Bill Dupor; Marie Hogan |
| Abstract: | By December 2022, the price level of personal consumption expenditures on core goods and services had risen more than 10 percent over the preceding two years. This paper studies consumption price and quantity changes at the disaggregate level using a generalization of Shapiro’s (2024) inflation decomposition method. Categories with inflation and consumption growth innovations that positively co-move are labeled as experiencing current demand-pull inflation. Negative co-movement in the two innovations indicates current supply-push inflation. Category inflation is then decomposed into supply and demand (both current and the expected effect of past shocks) as well as trend. We benchmark the technique using a classic supply disruption, the 1973 oil embargo. 75 percent of non-trend inflation immediately following the embargo was supply-push. In contrast, 33 percent of non-trend inflation was supply-push following the pandemic lockdown. Restricting attention to categories with market-based prices, this falls to 26 percent. |
| Keywords: | inflation; supply; demand |
| JEL: | E30 |
| Date: | 2025–03–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:99767 |
| By: | Donni Fajar Anugrah (Bank Indonesia); Novi Maryaningsih (Bank Indonesia); Andi Widianto (Bank Indonesia); Tri Kurnia Ayu S. (Bank Indonesia); Fickry Widya N. (Bank Indonesia); Arief N. Rachman (Bank Indonesia); Minda Putri Dwinanda (Bank Indonesia); Citra Amanda (Bank Indonesia); Eunike Vrigie Ruth Y. (Bank Indonesia); Tio Angie P. Samosir (Bank Indonesia); Naufal Alfaraby Winandita (Bank Indonesia); Shania Rahmi (Bank Indonesia) |
| Abstract: | In the midst of the rapid development of the digital economy in Indonesia, Indonesia continues to strive to keep domestic prices stable. One of a part of digitalization development is the presence of e-commerce, which has the potential to reduce the inflation rate through various channels. Changes in producer and consumer behavior that shift to online markets create a more competitive and transparent market environment. The development of ecommerce is also inseparable from innovations in the financial sector, especially digital payment systems, which are an important component in contributing to the fluidity of e-commerce transactions. However, the behavioral changes that occur can cause bias in the calculation of the consumer price index. We analyze the impact of digitalization through ecommerce on inflation in Indonesia on a national and regional scale. This study also analyzes the impact of payment systems on e-commerce and seek out the possibility of bias in the calculation of inflation. The method used is GMM (Generalized Method of Moments) with a panel data range of 34 provinces from 2018-2023 with monthly frequency. The results of the quantitative analysis are also supported by the findings of the field study. The results of this study show that digitalization through e-commerce consistently has a significant negative effect on national and regional core inflation. The study also finds a positive impact of payment systems on e-commerce transactions and finds bias in inflation calculation. In-depth regional analysis from the representative provinces of North Sumatra, East Java, and South Sulawesi also supports the findings of this study. Based on the results of this study, it is important for Bank Indonesia as a monetary policy maker to strengthen its strategic plan in utilizing digitalization through e-commerce as an effort to control inflation in Indonesia. |
| Keywords: | Digitalization, Inflation, E-Commerce, GMM |
| JEL: | E31 O33 L81 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idn:wpaper:wp012024 |
| By: | Fernando M. Martin |
| Abstract: | This analysis examines the role that deficit financing, which was used to pay for federal COVID-19 assistance, may have played in recent inflation. |
| Keywords: | fiscal policy; deficit financing; COVID-19; inflation |
| Date: | 2025–03–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:99670 |
| By: | Aryo Sasongko (Bank Indonesia); Cicilia Anggadewi Harun (Bank Indonesia); Rahutomo Anugrah Dewanto (Bank Indonesia); Wahyu Widianti (Bank Indonesia); Geyana Ledy Fista (Bank Indonesia); Kusfisiami Wima Mustika (Bank Indonesia); Astrika Erlin (Bank Indonesia); Ibrahmi Adrian Nugroho (Bank Indonesia); Putra Prima Raka (Bank Indonesia); Misbahol Yaqin (Bank Indonesia) |
| Abstract: | TThis study explores the impact of primary dealer system implementation on counterparty connections, prices, liquidity, and concentration risk in the Indonesian Money market. Using transaction data of interbank money market instruments, we find that the implementation of the primary dealer system increases the degree of centrality (number of counterparty connections) in the Indonesian Repo and time deposit markets. The implementation of primary dealers also leads to an increase in nominal transactions of Bank Indonesia Rupiah Securities (SRBI). The simulation results of primary dealer selection by clients show that the greater the demand of banks participating in monetary operations with limited primary dealer liquidity, the faster the orders are concentrated on primary dealers with large liquidity. Vice versa, the smaller the demand of banks participating in monetary operations with large liquidity, the orders tend to be scattered. The larger the order size of banks participating in monetary operations, the faster orders are concentrated in primary dealers with large liquidity. Vice versa, the smaller the order size of banks participating in monetary operations, the orders tend to be scattered. |
| Keywords: | Primary dealer, concentration risk, liquidity, interest rate, counterparty connection |
| JEL: | E43 G21 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idn:wpaper:wp102024 |
| By: | Sangyup Choi (Yonsei University); Jongho Park (Soongsil University); Kwangyong Park (Sogang University) |
| Abstract: | What accounts for cross-country heterogeneity in exchange rate responses to U.S. monetary policy shocks? Using high-frequency data around Federal Open Market Committe (FOMC) announcements, we document that countries with deeper financial markets—proxied by the size of foreign portfolio liabilities—experience larger currency depreciations following U.S. monetary tightening. This effect is particularly strong for forward guidance shocks relative to conventional interest rate surprises. To rationalize these findings, we extend the gradual portfolio adjustment model by introducing a forward-looking news shock and allowing portfolio adjustment costs to decline with financial market depth. The model replicates our empirical findings, offering a unified explanation for heterogeneous short-run exchange rate dynamics. |
| Keywords: | Exchange rates; Monetary policy spillovers; Portfolio adjustment frictions; Forward guidance; Daily data |
| JEL: | E52 F31 F41 G11 G17 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2025rwp-240 |
| By: | Hempell, Hannah S.; Rancoita, Elena; Coi, Claudio Corte; Dadoukis, Aristeidis |
| Abstract: | Targeted longer-term refinancing operations (TLTROs)helped supporting bank lending to firms and to households in the course of the COVID-19 pandemic. The use of TLTRO funding for mortgage loans to households had explicitly not been included into the targeted loan categories of these schemes, thereby, limiting potential unintended side effects on residential real estate markets. This paper, by means of an empirical analysis, assesses the impact of the relaxation of TLTRO III conditions at the beginning of the COVID-19 pandemic on euro area banks' loan portfolio composition. Our findings suggest that the targeted funding instrument under the relaxed pandemic conditions might, to some extent, have contributed to further fuelling residential real estate vulnerabilities, especially for banks in already vulnerable countries. Our results also contribute to the discussion on policy design and the preservation of the targeted nature of such support measures going forward and their interaction with financial stability. JEL Classification: E52, E58, G01, G21, G28 |
| Keywords: | COVID-19 pandemic, residential real estate, TLTRO, unconventional monetary policy |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253040 |
| By: | Markus Behn; Stijn Claessens; Leonardo Gambacorta; Alessio Reghezza |
| Abstract: | We investigate the interaction between monetary and macroprudential policy in affecting banks' lending and risk-taking behaviour using rich euro area credit registry data and exploiting a unique setting that combined a sharp and unexpected monetary tightening with a wave of macroprudential tightening initiated before. While, for the average bank, required capital buffer increases did not significantly reduce lending additionally during the monetary tightening, for those banks that became capital-constrained lending fell by about 1.3-1.8 percentage points more for existing credit relationships and new bank-firm relationships were 2.5-4.4 percentage points less likely to be established, both relative to better-capitalized banks. In addition, such banks were more reluctant to pass higher policy interest rates on to their borrowers and took fewer risks, with a greater reduction in the LTV ratio for newly originated loans, and less reliance on risky assets, such as commercial real estate, as collateral. Our analysis shows that when calibrating monetary and macroprudential policies, it is crucial to account for the effects of policy interactions and the role of bank heterogeneity. |
| Keywords: | bank lending, risk-taking, macroprudential policy, monetary policy |
| JEL: | E5 E51 G18 G21 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1257 |