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on Monetary Economics |
| By: | Pablo Andrés Neumeyer; Martín González-Rozada; Can Soylu |
| Abstract: | This paper documents that monetary financing of unfunded fiscal deficits drives inflation in Ethiopia, a country with moderate but persistent inflation, which averaged 14% for the period 2002-2021. We make the case for the fiscal-monetary origin of inflation in two steps. First, we estimate a long-run money demand function for the monetary aggregate M1, which supports the quantity theory of money. Second, we show that over 2002-2021, 98% of the increase in M1 is explained by the growth of the monetary base, which, in turn, is explained by the growth of central bank transfers to the treasury and state-owned enterprises. These transfers account for 91% of the growth of M1 over the period 2002-2021. |
| Keywords: | Inflation, Money Demand, Fiscal Dominance, Ethiopia |
| JEL: | E31 E50 E62 E65 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:udt:wpecon:2025_05 |
| By: | Joseph E. Gagnon (Peterson Institute for International Economics); Steven Kamin (American Enterprise Institute) |
| Abstract: | A rough consensus has evolved around the causes of the COVID-era inflationary spike: the disruption in supply chains; the shift in demand from services to goods; the surge in commodity prices that followed Russia's invasion of Ukraine; and the pandemic fiscal stimulus programs. This paper highlights an additional factor influencing the incidence of pandemic inflation across countries—their long histories of "lived experience" with inflation. The authors show that more than half of the variation in inflation across countries during the 2020-23 period can be explained by their earlier levels of inflation. Even controlling for inflation in the 2016-19 period, countries with higher inflation in the 2000-2015 period had higher COVID-era inflation, and the effect of long-lagged inflation is both economically and statistically significant. These long histories of lived experience dominated other policy measures to control inflation, including inflation targets and central bank independence. The influence of long-lagged inflation history appears to be greatest during periods of heightened volatility; it was less important in explaining the cross-country pattern of inflation during the more tranquil period immediately preceding the pandemic. |
| Keywords: | inflation, expectations, pandemic |
| JEL: | E30 E31 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp25-7 |
| By: | Geiger, Felix; Kanelis, Dimitrios; Lieberknecht, Philipp; Sola, Diana |
| Abstract: | Central bank communication has become a crucial tool for steering the monetary policy stance and shaping the outlook of market participants. Traditionally, analyzing central bank communication required substantial human effort, expertise, and resources, making the process time-consuming. The recent introduction of artificial intelligence (AI) methods has streamlined and enhanced this analysis. While fine-tuned language models show promise, their reliance on large annotated datasets is a limitation that the use of large language models (LLMs) combined with prompt engineering overcomes. This paper introduces the Monetary-Intelligent Language Agent (MILA), a novel framework that leverages advanced prompt engineering techniques and LLMs to analyze and measure different semantic dimensions of monetary policy communication. MILA performs granular classifications of central bank statements conditional on the macroeconomic context. This approach enhances transparency, integrates expert knowledge, and ensures rigorous statistical calculations. For illustration, we apply MILA to the European Central Bank's (ECB) monetary policy statements to derive sentiment and hawkometer indicators. Our findings reveal changes in the ECB's communication tone over time, reflecting economic conditions and policy adaptions, and demonstrate MILA's effectiveness in providing nuanced insights into central bank communication. A model evaluation of MILA shows high accuracy, flexibility, and strong consistency of the results despite the stochastic nature of language models. |
| Keywords: | Central bank communication, monetary policy, sentiment analysis, artificial intelligence, large language models |
| JEL: | C45 E31 E44 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:316448 |
| By: | Dimitrios Kanelis; Lars H. Kranzmann; Pierre L. Siklos |
| Abstract: | We analyze how financial stability concerns discussed during Federal Open Market Committee (FOMC) meetings influence the Federal Reserve’s monetary policy implementation and communication. Utilizing large language models (LLMs) to analyze FOMC minutes from 1993 to 2022, we measure both mandate-related and financial stability-related sentiment within a unified framework, enabling a nuanced examination of potential links between these two objectives. Our results indicate an increase in financial stability concerns following the Great Financial Crisis, particularly during periods of monetary tightening and the COVID-19 pandemic. Outside the zero lower bound (ZLB), heightened financial stability concerns are associated with a reduction in the federal funds rate, while within the ZLB, they correlate with a tightening of unconventional measures. Methodologically, we introduce a novel labeled dataset that supports a contextualized LLM interpretation of FOMC documents and apply explainable AI techniques to elucidate the model’s reasoning. |
| Keywords: | explainable artificial intelligence, financial stability, FOMC deliberations, monetary policy communication, natural language processing |
| JEL: | E44 E52 E58 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-26 |
| By: | Lin William Cong; Simon Mayer |
| Abstract: | We model the competition between digital forms of fiat money and private digital money (PDM). Countries strategically digitize their fiat money — upgrading existing or launching new payment systems (including CBDCs) — to enhance adoption and counter PDM competition. A pecking order emerges: less dominant currencies digitize earlier, reflecting a first-mover advantage; dominant currencies delay digitization until they face competition; the weakest currencies forgo digitization. Delayed digitization allows PDM to gain dominance, eventually weakening fiat money’s role. We also highlight how geopolitical considerations, stablecoins, and interoperability between fiat and private digital money shape the digitization of money and monetary competition. |
| JEL: | E50 E58 F30 G18 G50 O33 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33593 |
| By: | Cao, Jin (Norges Bank); Dubuis, Pierre (Bank of England); Liaudinskas, Karolis (Norges Bank) |
| Abstract: | This paper investigates the link between bank‑firm lending relationships and monetary policy pass‑through, focusing on episodes of low interest rates. Using administrative tax and bank supervisory data ranging from 1997 to 2019, we track the entirety of bank‑firm relationships in Norway. Our analysis shows that when the central bank’s policy rate is relatively low, firms that have maintained a long‑term relationship with their bank experience a lower pass‑through of further policy rate cuts. Specifically, we find that when the policy rate is around 1%, each additional year of relationship decreases the pass‑through of a rate cut by 2.7 percentage points. We propose a theoretical model to rationalise our empirical findings, where state‑dependent differential pass‑through results from the presence of firms’ switching costs and banks’ leverage constraint. The model highlights that the composition of relationship lengths in the economy matters for aggregate monetary policy pass‑through. The proportion of long‑term relationships in the Norwegian economy significantly increased after the global financial crisis. Using the model, we calculate a counterfactual aggregate pass‑through for 2017, a period of monetary easing in a low‑rate environment, assuming this proportion had remained at its pre‑crisis level. |
| Keywords: | Relationship lending; monetary policy pass-through; low interest rates; policy rate; switching costs |
| JEL: | E43 E50 E52 E58 G21 |
| Date: | 2025–03–21 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1123 |
| By: | Shi, Jiping (University of Warwick) |
| Abstract: | I investigate how news uncertainty influences the signaling effects of monetary policy, a key element for understanding how central bank communication impacts households and firms. Utilizing a monetary policy news uncertainty index from newspaper data, I apply a smooth transition local projection model to examine the effects of contractionary monetary shocks under varying levels of news uncertainty. I find that under high news uncertainty, inflation expectations, and output rise—contrary to the central bank’s goals—demonstrating the price and output puzzles. However, when news uncertainty is low, these variables decrease as expected following contractionary policy shocks. My findings illustrate that high news uncertainty amplifies signaling effects, leading to unintended economic outcomes, whereas minimizing news uncertainty reduces these effects and supports the efficacy of traditional policy mechanisms. I propose two mechanisms : (1) households pessimistically misjudge monetary shocks in the opposite direction when conflicting media reports distort the information they receive, and (2) households misinterpret monetary policy as a signal of rising inflation, while firms misinterpret it as a combination of a positive preference shock and a negative productivity shock. These insights underline the importance of reducing news uncertainty through clear and consistent central bank communication. |
| Keywords: | E43 ;E52 ; E71 ; D83 JEL classifications: News Uncertainty ; Dispersed Information ; Disanchoring of Inflation Expectations ; Monetary Policy Transmission ; Price and Output Puzzles |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:wrkesp:81 |
| By: | Alberto Americo; Douglas Kiarelly Godoy de Araujo; Johannes Damp; Sjur Nilsen; Daniel Rees; Rafael Schmidt; Christian Schmieder |
| Abstract: | We identify and document key stylised facts of inflation cycles for a large panel of advanced and emerging market economies. To this end, we propose three complementary inflation cycle concepts: (1) cycles in inflation levels, reflecting mostly the low- and medium-frequency components of inflation; (2) cycles in higher-frequency deviation of inflation from its trend; and (3) a categorisation of inflation into high and low inflation regimes. For each concept, we document key stylised facts within and across countries and examine how these have evolved over time. We also show that the relationship between inflation and business cycles matters: entry in a high-inflation regime is associated with a significantly higher chance of a recession in the following quarters. A cross-country dataset with the inflation cycles is made publicly available. |
| Keywords: | inflation cycles, business cycle, monetary policy |
| JEL: | E31 F44 C53 C55 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1264 |
| By: | Ṣebnem Kalemli-Özcan; Can Soylu; Muhammed A. Yildirim |
| Abstract: | We develop a novel framework to study the interaction between monetary policy and trade. Our New Keynesian open economy model incorporates international production networks, sectoral heterogeneity in price rigidities, and trade distortions. We decompose the general equilibrium response to trade shocks into distinct channels that account for demand shifts, policy effects, exchange rate adjustments, expectations, price stickiness, and input–output linkages. Tariffs act simultaneously as demand and supply shocks, leading to endogenous fragmentation through changes in trade and production network linkages. We show that the net impact of tariffs on domestic inflation, output, employment, and the dollar depends on the endogenous monetary policy response in both the tariff-imposing and tariff-exposed countries, within a global general equilibrium framework. Our quantitative exercise replicates the observed effects of the 2018 tariffs on the U.S. economy and predicts a 1.6 pp decline in U.S. output, a 0.8 pp rise in inflation, and a 4.8% appreciation of the dollar in response to a retaliatory trade war linked to tariffs announced on “Liberation Day.” Tariff threats, even in the absence of actual implementation, are self-defeating—leading to a 4.1% appreciation of the dollar, 0.6% deflation, and a 0.7 pp decline in output, as agents re-optimize in anticipation of future distortions. Dollar appreciates less or even can depreciate under retaliation, tariff threats, and increased global uncertainty. |
| JEL: | E0 F40 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33686 |
| By: | Carola Binder; Cody Couture; Abhiprerna Smit |
| Abstract: | This paper examines partisanship in public perceptions of the Federal Reserve. In all years from 2001 through 2023, trust in the Federal Reserve was highest for respondents of the same party as the President. The partisan effects were larger than other demographic differences in trust, but do not explain the large partisan gap in inflation expectations in those years. We conducted a new survey-based information experiment before and after the Presidential inauguration in 2025, and found a changed pattern: Republicans continued to have lower trust in the Fed than did Democrats, even after a Republican President was elected and took office. Yet, Republicans had much lower inflation expectations than Democrats. Responses to open-ended survey questions point to tariffs and President Trump himself as most salient to consumers when considering how inflation will evolve. |
| JEL: | E02 E03 E30 E5 E51 E58 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33684 |
| By: | Hashmat Khan (Department of Economics, Carleton University); Sergio Lago Alves (Department of Economics, Carleton University) |
| Abstract: | The equilibrium in the standard New Keynesian (NK) model with Calvo pricing becomes explosive at low levels of trend inflation (4 to 7 percent). Even halfway before this threshold, optimal prices, price dispersion, and costs rise rapidly to large values, while output plummets. We show that these well-known issues stem not from Calvo pricing itself but from its interaction with the widely used Dixit-Stiglitz demand structure in NK models. Using a framework with general firms’ demand functions and Calvo pricing, we demonstrate that for NK models to have a stable equilibrium at any level of trend inflation, the demand function must not increase unboundedly as relative prices decrease — a condition the Dixit-Stiglitz structure fails to meet. We propose a model with price wedges to modify existing demand structures to satisfy this condition. Applying this approach to models with Dixit-Stiglitz and Kimball-demand aggregators, we show that the generalized NK model with price wedges stabilizes price dispersion under rising trend inflation and prevents output from collapsing. Moreover, this model exhibits superior theoretical and empirical properties, aligning better with micro and macro evidence. It also introduces new implications for the slope of the Phillips curve and the effects of monetary shocks. |
| Keywords: | New Keynesian models, Calvo pricing, trend inflation, steady state problem, demand functions. |
| JEL: | E31 E32 E52 |
| Date: | 2025–02–07 |
| URL: | https://d.repec.org/n?u=RePEc:car:carecp:25-01 |
| By: | Lawrence Christiano; Martin S. Eichenbaum; Benjamin K. Johannsen |
| Abstract: | This paper compares inflation in true price indices to inflation in fixed-weight price indices. We construct model-based inflation measures in time-dependent pricing models that are analogous to measures of inflation in the data, e.g., the Consumer Price Index. In the standard new Keynesian model, when inflation rises rapidly, the differences between inflation in those indices and true price indices are increasing in the degree of price stickiness and the elasticity of substitution across goods. For commonly used parameter values, those differences are large and persistent for increases in inflation of the size seen after 2020 in the U.S. |
| JEL: | E0 E31 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33665 |
| By: | Philip Coyle (University of Wisconsin-Madison, Department of Economics (Email: pcoyle@wisc.edu)); Naoki Maezono (Graduate School of Public Policy, University of Tokyo (Email: m7046ranpo464@g.ecc.u-tokyo.ac.jp)); Taisuke Nakata (Faculty of Economics and Graduate School of Public Policy, University of Tokyo (Email: taisuke.nakata@e.u-tokyo.ac.jp)); Sebastian Schmidt (European Central Bank, Monetary Policy Research Division, (Email: sebas-tian.schmidt@ecb.int)) |
| Abstract: | We analyze the so-called deflationary equilibrium of the New Keynesian model with an interest rate lower bound when the future course of the economy is uncertain. In the deflationary equilibrium, we find that the rate of inflation is higher at the risky steady state-which takes uncertainty into account-than at the deterministic steady state- which abstracts away from uncertainty. The rate of inflation at the risky steady state can be positive if the target rate set by the central bank is positive. Our theory is consistent with the Japanese experience in the 2010s when the rate of inflation was on average positive while the interest rate lower bound was binding. |
| Keywords: | Effective Lower Bound, Deflationary Equilibrium, Liquidity Trap, Risky Steady State, Uncertainty |
| JEL: | E32 E52 E61 E62 E63 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-01 |
| By: | Borsos, András (Magyar Nemzeti Bank, Complexity Science Hub Vienna and Institute for New Economic Thinking at the Oxford Martin SchoolMagyar Nemzeti Bank, Complexity Science Hub Vienna and Institute for New Economic Thinking at the Oxford Martin School); Carro, Adrian (Banco de España and Institute for New Economic Thinking at the Oxford Martin School); Glielmo, Aldo (Banca d’Italia); Hinterschweiger, Marc (Bank of England); Kaszowska-Mojsa, Jagoda (Narodowy Bank Polski, Institute for New Economic Thinking at the Oxford Martin School and Institute of Economics, Polish Academy of Sciences); Uluc, Arzu (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 2007–09. 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; household analysis; financial institutions; central bank policies; monetary policy; prudential policies |
| JEL: | C63 E37 E58 |
| Date: | 2025–02–28 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1122 |
| By: | Leonardo Ciambezi (Université Côte d'Azur, CNRS, GREDEG, France); Alessandro Pietropaoli (Université Côte d'Azur, CNRS, GREDEG, France) |
| Abstract: | Is inflation equal for all? Combining Italian Household Budget Survey (HBS), Survey on Household Income and Wealth (SHIW) and Harmonised Index of Consumer Prices (HICP) data, we investigate the heterogeneity of Italian households’ inflation experiences over the period 2015-2023, conditional on their income and other observable characteristics. Following several years of distributional inflation neutrality, we find that the price surge that began in mid-2021 especially increased the cost of living of poorer households and more fragile socio-demographic groups, contributing therefore to increase overall inequality. After peaking in the second half of 2022, the aggregate inflation rate sharply declined in 2023 and so did the differential exposure of Italian households. In addition, by mapping each of the 480 HBS items into 90 ECOICOP 3- and 4-digit level categories, we show that between 2021 and 2022 more than 20% of the measured differential inflation between the top and the bottom income deciles comes from more granular information and would remain hidden by merely relying on 2-digit product-price data. Finally, the comparison over time between Laspeyres and Paasche average inflation rates reveals that while the two indices have generally coincided during normal times, the Paasche index-based inflation rate has consistently been higher than the Laspeyres measure since inflation began to rise. This puzzling result highlights the exceptional nature of the recent inflationary context - mostly driven by energy price shocks - where income effects rather than substitution effects seem to have prevailed across Italian households. |
| Keywords: | Household-specific inflation rates, Energy price shocks, Inflation inequality, Italy |
| JEL: | D31 E31 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2025-18 |
| By: | Dimitrios Kanelis; Pierre L. Siklos |
| Abstract: | We combine modern methods from Speech Emotion Recognition and Natural Language Processing with high-frequency financial data to precisely analyze how the vocal emotions and language of ECB President Mario Draghi affect the yields and yield spreads of major euro area economies. This novel approach to central bank communication reveals that vocal and verbal emotions significantly impact the yield curve, with effects varying in magnitude and direction. Our results reveal an important asymmetry in yield changes with positive signals raising German, French, and Spanish yields, while negative cues increase Italian yields. Our analysis of bond spreads and equity markets indicates that positive communication influences the risk-free yield component, whereas negative communication affects the risk premium. Additionally, our study contributes by constructing a synchronized dataset for voice and language analysis. |
| Keywords: | artificial intelligence, asset prices, communication, ECB, high-frequency data, speech emotion recognition |
| JEL: | E50 E58 G12 G14 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-25 |
| By: | Paweł Kopiec (Narodowy Bank Polski) |
| Abstract: | This paper examines the non-linear impact of unemployment levels on the effectiveness of monetary policy. Using a standard heterogeneous-agent model with uninsured income risk, integrated with a canonical frictional labor market framework, I compare two versions of the model calibrated to reflect high- and low-unemployment regimes in the Polish economy. The findings reveal that the output response to a policy rate change is 60% larger in the high-unemployment scenario than in the low-unemployment one, while price reactions are more pronounced when unemployment is low. Additionally, I investigate the role of incomplete insurance markets in the transmission of monetary policy and assess the welfare implications of policy changes, both at the aggregate level and across different household subgroups. |
| Keywords: | Monetary Policy, Heterogeneous Agents, Frictional Markets, Unemployment |
| JEL: | D30 D31 D52 E21 E24 E43 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:nbp:nbpmis:375 |
| By: | Michael B. Devereux; Rui Lu; Kang Shi; Juanyi (Jenny) Xu |
| Abstract: | This paper proposes a concept of a global currency and introduces a “global currency pricing” specification into a standard N-country open economy macroeconomic model. A global currency is defined as a virtual unit of account that is exclusively used for international trade invoicing and is formed as a basket of individual currencies, similar to the existing SDR. We show there is a unique optimal composition of a global currency that weights currencies according to their importance in international trade. A striking implication is that under this global currency design, the monetary policy of each country should be concerned solely with domestic shocks. No country should have more than a 50 percent weight in an optimal global currency, and a situation where a large country has the sole weighting in the global currency is likely to be worst outcome from a perspective of global welfare. We derive the conditions under which global currency pricing (GCP) dominates all other outcomes, and is an optimal choice of invoicing currency for individual firms. |
| JEL: | F30 F40 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33540 |
| By: | Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang |
| Abstract: | Stablecoins are crypto assets whose value is pegged to that of a fiat currency, usually the U.S. dollar. In our first Liberty Street Economics post, we described the rapid growth of stablecoins, the different types of stablecoin arrangements, and the May 2022 run on TerraUSD, the fourth largest stablecoin at the time. In a subsequent post, we estimated the impact of large declines in the price of bitcoin on cumulative net flows into stablecoins and showed the existence of flight-to-safety dynamics similar to those observed in money market mutual funds during periods of stress. In this post, we document the growth of stablecoins since 2019, including the evolution of the reported collateral backing major stablecoins. Then, we estimate the impact on the stablecoin industry of large bitcoin price increases that occurred between 2021 and 2025. |
| Keywords: | stablecoins; crypto assets |
| JEL: | G23 |
| Date: | 2025–04–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99893 |
| By: | Bill Dupor; Marie Hogan |
| Abstract: | A new method of tracking the prices and quantities of U.S. consumer expenditures provides insights into the 2021-22 surge in prices. |
| Keywords: | COVID-19; inflation |
| Date: | 2025–04–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:99922 |
| By: | Jiang, Zhengyang (Northwestern U); Krishnamurthy, Arvind (Stanford U); Lustig, Hanno (Stanford U); Richmond, Robert (New York U); Xu, Chenzi (U of California, Berkeley) |
| Abstract: | What can we learn from the high-frequency responses in bond and currency markets to the recent tariff announcement about the status of the U.S. dollar as the global reserve currency? The dollar depreciated by 3.4% after April 4 in spite of rising U.S. interest rates and market volatility, which is highly unusual. The willingness of foreign investors to pay extra for the safety of dollar safe assets, including but not limited to U.S. Treasury, has declined. These asset market responses suggest that investors started to question the role of the dollar as the reserve currency. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4241 |
| By: | Piccolo, Jessica (University of Padova); Gorodnichenko, Yuriy (University of California, Berkeley) |
| Abstract: | This paper examines how homeownership status shapes attention to inflation and its impact on durable consumption. Using randomized controlled trials on U.S. households (2021–2023), we document systematic heterogeneity in responses to inflation-related information. Homeowners exhibit greater baseline awareness and update their expectations less than renters. Exploiting exogenous variation in inflation expectations induced by the treatments, we find that homeowners adjust durable spending significantly, whereas renters do not. These results highlight homeownership as a key factor in the formation of inflation expectations and their influence on economic behavior. |
| Keywords: | homeownership, mortgages, inflation expectations, durable consumption |
| JEL: | D12 D84 E21 E31 R21 C93 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17770 |
| 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 non-bank) 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. |
| JEL: | F30 F34 F42 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33674 |
| By: | Pablo Andrés Neumeyer; Juan Pablo Nicolini |
| Abstract: | We discuss the extent to which the Taylor principle can solve the indeterminacy of equilibria in economies in which the monetary authority follows an interest rate feedback rule. We first show that only the limiting behavior of the feedback rule matters, so identifying in the data if the Taylor principle holds cannot be achieved, above and beyond the arguments specified in Cochrane (2008). Second, we show that the competitive equilibrium under interest rate feedback rules is nominally determined if the Taylor principle holds and, in addition, two ad-hoc restrictions on equilibrium are satisfied. These require equilibrium inflation to be bounded and equilibria to be locally unique. Finally, we show that the Taylor principle is strongly time inconsistent, in a sense we make very precise. |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:udt:wpecon:2025_07 |
| By: | Bobeica, Elena; Holton, Sarah; Huber, Florian; Martínez Hernández, Catalina |
| Abstract: | We propose a novel empirical structural inflation model that captures non-linear shock transmission using a Bayesian machine learning framework that combines VARs with non-linear structural factor models. Unlike traditional linear models, our approach allows for non-linear effects at all impulse response horizons. Identification is achieved via sign, zero, and magnitude restrictions within the factor model. Applying our method to euro area energy shocks, we find that inflation reacts disproportionately to large shocks, while small shocks trigger no significant response. These non-linearities are present along the pricing chain, more pronounced upstream and gradually attenuating downstream. JEL Classification: E31, C32, C38, Q43 |
| Keywords: | energy, euro area, inflation, machine learning, non-linear model |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253052 |
| By: | Palligkinis, Spyros |
| Abstract: | I assess the impact of the recent hike in bank lending rates on euro area retail borrowers using a novel microsimulation framework that updates household-level data of a recent representative survey with up-to-date macro-financial information. The key novelty is that existing mortgages are gradually repaid, and new ones are extended, a feature necessary for medium-term simulations in a period of sizable credit growth. Since lending rates have increased, debt servicing has become more demanding, and the simulated share of distressed loans has increased. Effects are stronger for adjustable-rate mortgages, and especially for the most recent among them, but are present in all portfolios. JEL Classification: C1, G2, G51, E52 |
| Keywords: | financial stability, household finance, microsimulations, monetary policy |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253053 |
| By: | Chen, Yehning; Hasan, Iftekhar; Takalo, Tuomas |
| Abstract: | We study the effects of bank transparency on both banks' asset and liquidity risks, and ultimately, on banking sector stability and welfare. We show how enhanced bank transparency increases banks' vulnerability to excessive deposit outflows, but this threat of a liquidity crisis incentivizes banks to choose safer assets. We find that bank stability and welfare are a nonmonotonic function of transparency, and that they are maximized at an intermediate level of transparency, which is larger than the one preferred by banks but lower than what would result in excessive deposit outflows. Our model also suggests that bank transparency and deposit insurance are complementary policy tools, and that bank regulators should adjust disclosure requirements for banks procyclically |
| Keywords: | bank transparency, bank runs, asset risk taking, banking stability, deposit insurance |
| JEL: | G21 G28 D83 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:316423 |
| By: | Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Vasileios Pappas (University of Surrey - Surrey Business School); Athina Petropoulou (University of Sussex Business School) |
| Abstract: | In 2012 the U.S. Federal Deposit Insurance Corporation defined community banks and recognized their distinct role. In 2020 this definition was reaffirmed. But what makes community banks special? To answer this question, we measure the efficiency of community banks versus comparable other banks using a stochastic frontier model. We decompose cost efficiency into long-and short-run components. We find that community banks are almost 20% more efficient on average, with structural factors-not managerial performance-driving this "efficiency premium". Especially smaller community banks outperform larger competitors. Efficiency gains also stem from micropolitan presence and agricultural lending, while income diversification weakens efficiency. A one standard deviation increase in core deposits raises long-run efficiency by almost 5%. Despite overall efficiency improvements during COVID-19, community banks' efficiency has remained stable. These findings highlight the need for regulators to support innovation while preserving locally focused financial institutions. |
| Keywords: | Community bank, relationship banking, cost frontier, bank capability, local economy, Federal Deposit Insurance Corporation (FDIC) |
| JEL: | G14 G21 G38 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2529 |
| By: | James Morley; Benjamin Wong |
| Abstract: | We study the relevance of global shocks in determining r-star for a set of typically studied advanced open economies (Australia, Canada, Euro Area, New Zealand, Norway, Sweden, and the United Kingdom). To do so, we build on the multivariate Beveridge-Nelson decomposition to account for open economy features by developing an empirical two-block open economy model and also embedding restrictions used in the open economy literature to identify the role of foreign shocks. We document three key findings: (i) shocks driving r-star for the United States are almost entirely sufficient to understand the role of the global r-star for these open economies; (ii) local shocks are also important in determining domestic r-stars, leaving open the potential that domestic economic policies can complement or offset the global forces determining r-star; and (iii) even though local shocks are important, global forces played the leading role in the long-term decline in r-stars for all seven open economies since the global financial crisis. |
| Keywords: | global r-star, Beveridge-Nelson decomposition, block exogeneity, foreign shocks |
| JEL: | C32 E52 F41 F43 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-24 |
| By: | Fabien Rondeau (Crem - Centre de Recherche sur les Médiations - UL - Université de Lorraine); Yushi Yoshida (University of Shiga Prefecture) |
| Abstract: | With internationally fragmented processes of production via global value chains, value-added components of a country's export include the importer's contributions as well as that of exporters. The exchange rate sensitivity of export price reflects these value-added components. We examine the effect of value-added contributions of exporters and importers on the degree of exchange rate pass-through by focusing on the Japanese import prices by industries. Our results show that exchange rate pass-through increases for industries with a higher contribution of exporting countries' value added and for industries with a lower contribution of the importing country's value added. The differentials in value added among industries help explain the dynamics of exchange rate pass-through at the industry level. |
| Keywords: | Exchange rate pass-through, Global value chains, Value added in trade |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05035175 |
| By: | Aliaksandr Zaretski |
| Abstract: | I study the optimal regulation of a financial sector where individual banks face self-enforcing constraints countering their default incentives. The constrained-efficient social planner can improve over the unregulated equilibrium in two dimensions. First, by internalizing the impact of banks' portfolio decisions on the prices of assets and liabilities that affect the enforcement constraints. Second, by redistributing future net worth from new entrants to surviving banks, which increases the current forward-looking value of all banks, relaxing their enforcement constraints and decreasing the probability of banking crises. The latter can be accomplished with systemic preemptive bailouts that are time consistent and unambiguously welfare improving. Unregulated banks can be both overleveraged and underleveraged depending on the state of the economy, thus macroprudential policy requires both taxes and subsidies, while minimum bank capital requirements are generally ineffective. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.04636 |
| By: | Carlo Altavilla (European Central Bank (ECB)); Cecilia Melo Fernandes (International Monetary Fund (IMF)); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Alessandro Scopelliti (KU Leuven, Department Accounting, Finance and Insurance; University of Zurich - Department Finance) |
| Abstract: | We assess how regulatory changes in bail-inable liability requirements, aimed at ensuring orderly resolution processes and minimizing taxpayer-funded bailouts, affect bank bond holdings. Using confidential data on banks' securities portfolios, we find that the introduction of the Minimum Requirements for Eligible Liabilities prompts banks to increase their holdings of eligible bank bonds issued by other banks, compared to non-eligible bonds. Similarly, the Total Loss-Absorbency Capacity requirements encourage banks to invest in eligible subordinated debt issued by global systemically important banks. Our findings also reveal a within-country concentration of bank bond holdings, which may pose challenges to effective bail-in implementation. |
| Keywords: | bank bonds, regulatory changes, bail-inable debt, MREL, TLAC |
| JEL: | G01 G21 G28 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2538 |
| By: | Fetzer, Thiemo (University of Warwick, University of Bonn and Centre for Economic Policy Research); Guin, Benjamin (Bank of England); Netto, Felipe (Bank of England); Saidi, Farzad (University of Bonn and Centre for Economic Policy Research) |
| Abstract: | This paper examines how insurance companies monitor and react to cash‑flow shocks in commercial mortgage‑backed securities (CMBS). Using detailed micro data around the onset of the Covid pandemic, we show that lease expiration predicts commercial real estate mortgage delinquency, particularly for offices due to lower demand. Insurers monitor these risks and sell more exposed CMBS – mirrored by a surge in small banks holding CMBS. This monitoring effort also affects insurers’ trading in other assets, indicating limited risk assessment capacity. Our findings reveal that institutional investors actively monitor underlying asset risk and can even gain informational advantages over some banks. |
| Keywords: | Insurance sector; risk management; mortgage default; commercial real estate; CMBS; work from home |
| JEL: | G20 G21 G22 G23 |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1119 |