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on Monetary Economics |
| By: | Dräger, Lena; Gründler, Klaus; Potrafke, Niklas |
| Abstract: | Social interactions affect individual behavior in a variety of ways, but their effects on expectation formation are less well understood. We design a large-scale global survey experiment among renowned experts working in 135 countries to study whether peer effects impact expectations about the macroeconomy. The global setting allows us to exploit rich cross-national variation in macroeconomic fundamentals. Our experiment uncovers sizable effects of peers and shows that peer information also shifts monetary policy recommendations of experts. The results have important implications for the design of policies and models of information acquisition. |
| Keywords: | Inflation expectations; belief formation; peer effects; survey experiment; economic experts |
| JEL: | E31 E71 D84 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:han:dpaper:dp-739 |
| By: | Breckenfelder, Johannes; Schepens, Glenn |
| Abstract: | Central banks increasingly act as market-makers-of-last-resort, yet the impact and exit of such interventions remain poorly understood. Using euro-area data, we analyze the cycle of market freeze, intervention, and exit in short-term debt markets. A run on money market funds (MMFs) triggered a collapse in these markets in March 2020. Firms replaced only 27% of lost funding through credit lines. The European Central Bank intervened, fully replacing MMFs for some firms and allowing them to issue more debt at lower rates and longer maturities. After the ECB’s exit, more-exposed firms faced higher yields (+20.2 bps), reduced MMF investments, and fewer new relationships. Credit line take-up did not materially change post-exit. JEL Classification: G11, G23, G32, E5 |
| Keywords: | central bank intervention, commercial paper, exit, market-maker-of-last resort, money market funds, short-term corporate debt |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253055 |
| By: | Pedro Henrique Alves Pereira |
| Abstract: | This paper examines optimal inflation targeting, determining the best inflation target and policy response using a DSGE model with adaptive price-setting firms, in the form of a hybrid Phillips Curve. The results indicate a zero inflation target maximizes household welfare, as higher inflation increases volatility and economic inefficiency. As inflation targets rise, monetary policy must respond more aggressively to shocks and deviations from the target. Notably, the optimal policy does not react to output gaps. These findings highlight the importance of credible and well-structured monetary policies in ensuring macroeconomic stability and the growing costs of inflation (in terms of households’ welfare). |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:623 |
| By: | van 't Klooster, Jens |
| Abstract: | The ECB's strategy is under review, and rightly so. Recent inflation shocks have exposed weaknesses in the ECB's current approach. It focuses too narrowly on medium-term inflation expectations and relies almost exclusively on interest rate adjustments. The strategy is blind to structural inflation risks. Supply-side disruptions, corporate pricing power, and climate-related shocks were key drivers of the 2022-23 inflation surge, yet these risks lie outside the ECB's analytical framework and time horizon. Rate hikes alone are a blunt and costly tool. The ECB's reactive approach left it with few options beyond raising rates, which did little to curb cost-push inflation at the source and risked undermining investment in long-term resilience, especially in clean energy. The ECB's framework can be updated. Though mindful of 1970s-style inflation and inspired by the Bundesbank's success in fighting it, the drafters of the ECB mandate recognised the uniqueness of these circumstances and deliberately gave the central bank the flexibility to adapt to new economic challenges. The 2025 review is a chance to do so. The ECB must equip itself to detect and address structural risks before they materialise - and coordinate more effectively with other EU policy tools to preserve price stability in turbulent times. This report makes three policy recommendations: 1. Broaden the time horizon of the ECB's strategy to include the long-term preconditions for price stability. 2. Create a third analytical pillar dedicated to long-term risks, including climate change, energy dependence, demographics, market power and geopolitical disruptions. 3. Embed monetary policy in a wider EU inflation governance framework that supports strategic coordination with fiscal, industrial and competition policies. |
| Keywords: | Monetarypolicy, Inflation, ECB |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:dzimps:317066 |
| By: | Uraku Yoshimoto; Kiyotaka Sato; Takatoshi Ito; Junko Shimizu; Yushi Yoshida; Taiyo Yoshimi |
| Abstract: | While Japanese exports are generally considered invoiced mainly in U.S. dollars (USD), this study presents contrary evidence that most Japanese firms choose yen-invoiced exports. Surprisingly, only the top one percent of firms in size tend to choose USD-invoiced exports, based on the Japan Customs export declaration data that was newly made available to researchers. By conducting fixed-effect panel estimation using the granular Japan Customs transaction data, combined with the most comprehensive firm-level data compiled by the Ministry of Economy, Trade and Industry (METI), we demonstrate that the firm size and the intra-firm export share significantly reduce yen-invoiced exports. Smaller firms with few overseas subsidiaries tend to choose yen-invoiced exports to avoid foreign exchange risk. In contrast, larger firms efficiently manage foreign exchange risk arising from USD-invoiced exports, since they tend to export to overseas subsidiaries and benefit from operational hedging that offsets USD-denominated import payments with export revenues within group companies. Smaller firms would continue to choose yen-invoice exports unless they can benefit from operational hedging. |
| JEL: | F30 F31 F37 F41 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33748 |
| By: | Vera Baye (University of Osnabrueck); Valeriya Dinger (University of Osnabrueck and Leeds University Business Schoo) |
| Abstract: | We empirically document deviations of residential real estate prices from fundamental values at the micro level and investigate their relationship with local bank lending growth during a period of unconventional monetary policy. Our findings indicate a positive relationship between credit growth and excessive price increases in real estate markets, with interest rate reductions further amplifying these credit-driven price distortions. Additionally, we provide evidence that banks' search-for-yield behavior explains the increase in lending, particularly among deposit-funded banks that experienced a squeeze of margins during the negative monetary policy rate period. This credit expansion, in turn, directly influences the real economy by fueling local housing markets. In our analysis, we exploit that the introduction of negative monetary policy rates affected banks differently depending on their ex-ante liquidity and relate micro-level real estate data to balance sheet information from locally operating banks and macroeconomic variables. |
| Keywords: | residential real estate prices, housing bubbles, bank lending, search-for-yield, micro data, negative interest rates |
| JEL: | E44 E52 G21 R21 R31 |
| Date: | 2025–05–08 |
| URL: | https://d.repec.org/n?u=RePEc:iee:wpaper:wp0126 |
| By: | Piyali Das; Chetan Ghate; Subhadeep Halder |
| Abstract: | We develop a dynamic model of monetary-fiscal interactions and government debt. We introduce a novel channel of fiscal dominance through the maturity structure. Faced with an expansionary fiscal policy shock, extending debt-maturity under fiscal dominance becomes a strategic tool for maintaining debt sustainability without immediate price-level adjustments by the monetary authority. We show that extending the maturity of debt raises the interest burden of debt. To validate the results empirically, we assemble a novel central government security level dataset between 1999-2022 for India. We find that the probability of issuing a long-term security is approximately 7 percentage points higher in a fiscal dominant regime compared to a monetary dominant regime. Using the approach in Hall and Sargent (2011) for debt-decomposition, we show that the nominal return on marketable and non-marketable debt is the largest component driving public debt increases in periods of fiscal dominance between 1999-2022. Our paper highlights the ’maturity-structure’ channel of fiscal dominance, and provides a framework to quantify the impact of fiscal dominance on the interest-rate burden of sovereign debt in a large emerging market economy. |
| Keywords: | debt decomposition, fiscal dominance, monetary-fiscal interactions, macroeconomic stabilization |
| JEL: | E43 E61 E63 E65 H63 O23 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-29 |
| By: | Efrem Castelnuovo; Giovanni Pellegrino; Laust L. Særkjær |
| Abstract: | We study how uncertainty shocks affect the macroeconomy across the inflation cycle using a nonlinear stochastic volatility-in-mean VAR. When inflation is high, uncertainty shocks raise inflation and depress real activity more sharply. A non-linear New Keynesian model with second-moment shocks and trend inflation explains this via an 'inflation-uncertainty amplifier': the interaction between high trend inflation and firms' upward price bias magnifies the effects of uncertainty by increasing price dispersion. An aggressive policy response can replicate the allocation achieved under standard policy when trend inflation is low. |
| Keywords: | uncertainty, trend inflation, nonlinear VAR model, new Keynesian model, monetary policy. |
| JEL: | C32 E32 E44 G01 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11853 |
| By: | Flores Zendejas, Juan; Nodari, Gianandrea |
| Abstract: | This paper adopts a historical perspective to examine the geopolitical dimensions of monetary policy, focusing on the 1930s. During this period, Stabilization Funds were established to promote exchange rate stability as nations abandoned the gold exchange standard. These entities intervened in foreign exchange markets and extended stabilization loans to other countries. This article analyzes the experience of the U.S. Exchange Stabilization Fund (ESF), situating it within the broader context of global economic fragmentation and the formation of currency blocs. The analysis reveals that rivalries with foreign powers significantly influenced the outcomes of these loans, and the political conditions attached to them delineated the boundaries of the expanding "dollar bloc." The U.S. ESF emerged as a pivotal instrument, enabling the United States to secure trade markets while bolstering the war efforts of allied nations. |
| Keywords: | Economic fragmentation, Great depression, Geopolitical competition, Currency crises, Dollar diplomacy |
| JEL: | N16 N22 N26 F15 F34 F36 F53 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:gnv:wpaper:unige:185041 |
| By: | Mitsuru Katagiri (Associate Professor, Faculty of Business Administration, Hosei University (E-mail:mitsuru.katagiri@hosei.ac.jp)); Yusuke Oh (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuusuke.ou@boj.or.jp)); Yasutaka Ogawa (Director, Financial System and Bank Examination Department, Bank of Japan (E-mail: yasutaka.ogawa@boj.or.jp)); Nao Sudo (Associate Director-General, Financial System and Bank Examination Department, Bank of Japan (E-mail: nao.sudo@boj.or.jp)); Takeki Sunakawa (Associate Professor, Faculty of Economics, Hitotsubashi University (E-mail: t.sunakawa@r.hit-u.ac.jp)) |
| Abstract: | In macroeconomics, fiscal and monetary policies are both viewed as important macro policy tools for stabilizing aggregate demand, and their transmission channels and effects are considered to interact with each other. By adjusting interest rates, monetary policy can affect the extent to which the intertemporal substitution of aggregate demand occurs and thus alter the size of fiscal multipliers. These adjustments can also impact government debt accumulation through changes in interest payments. Conversely, fiscal policy and resulting government debt levels, just like other economic and social environments, can influence the transmission and impact of monetary policy by affecting the decision- making of households and firms. In addition, some theories posit that primary fiscal balance dynamics themselves impact the determination of the aggregate price level. Academic interest in the interaction of the two policies has intensified, sparked by debates on how stimulative policies should be executed in response to the global financial crisis and inflation surges after the COVID-19 pandemic. This paper overviews recent macroeconomic studies on monetary and fiscal policy interactions mainly from three perspectives: the Taylor rule and fiscal multipliers, interest rates and government debt, and the fiscal theory of the price level. |
| Keywords: | Taylor rule, fiscal multipliers, interest rates and government debt, fiscal theory of the price level |
| JEL: | E12 E21 E31 E52 E62 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:24-e-12 |
| By: | C. LABROUSSE (Insee, Paris School of Economics); Y. PERDEREAU (Paris School of Economics) |
| Abstract: | What are the effects of central bank balance sheet expansion, and should we worry about central bank losses? Using a Heterogeneous Agent New Keynesian model incorporating money in utility and an endogenous zero lower bound (ZLB), we study the fiscal-monetary interaction of central bank balance sheet policies. We find that the overall efficiency of asset purchase programmes depends on the combination of the expected future size of the balance sheet and the fiscal transmission of central bank losses. First, permanent balance sheet expansions stimulate the economy in the long-run and, by anticipation, increase inflation and output during the ZLB episode, as they interact with distortionary taxes and imperfect capital markets. Second, at the end of the ZLB, the central bank incurs losses: issuing securities to offset these losses is more welfare-enhancing than raising taxes. |
| Keywords: | monetary policy heterogeneous agents, balance sheet, Quantitative Easing, Quantitative Tightening, Central Bank losses, fiscal and monetary policy mix |
| JEL: | E21 E41 E51 E52 E58 E63 E65 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:nse:doctra:2025-10 |
| By: | Sumit Agarwal (NUS); Sergio Mayordomo (BANCO DE ESPAÑA); María Rodríguez-Moreno (BANCO DE ESPAÑA); Emanuele Tarantino (LUISS, EIEF, CEPR, AND EUROPEAN COMMISSION) |
| Abstract: | This paper examines how monetary policy affects corporate lending through its impact on household balance sheets, bridging the gap between the cash flow and bank lending channels. When policy rates rise, households with variable-rate debt face higher monthly payments, prompting early mortgage repayments, particularly among high-income borrowers. Exploiting the monetary tightening between July 2022 and September 2023 as a policy experiment, we show that banks that are more exposed to variable-rate mortgages granted to higher-income households increase their supply of corporate credit, especially to micro and small firms. However, no variation is observed in the balance of household credit or in other investment items on the banks’ balance sheets. Indeed, banks facing higher liquidity constraints tend to extend more corporate credit as their exposure to early redemptions increases. Our findings provide new evidence on how household financial constraints shape monetary policy transmission, offering novel insights into the interplay between household debt dynamics and corporate credit allocation. |
| Keywords: | floating-rate mortgages, early redemption, monetary policy tightening, monetary policy transmission, corporate lending, bank liquidity |
| JEL: | D14 E43 E52 G21 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2524 |
| By: | Aurélien Goutsmedt (F.R.S.-FNRS, UCLouvain, ISPOLE, ICHEC - Brussels Management School [Bruxelles]); Francesco Sergi (LIPHA - Laboratoire Interdisciplinaire d'étude du Politique Hannah Arendt Paris-Est - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel, UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12); François Claveau (UdeS - Université de Sherbrooke, CIRST - Centre interuniversitaire de recherche sur la science et la technologie - UdeM - Université de Montréal - UQAM - Université du Québec à Montréal = University of Québec in Montréal); Clément Fontan (UCLouvain, ISPOLE) |
| Abstract: | This article investigates the scientization process in central banks, using the Bank of England (BoE) as a case study. Its main goal is to clarify the interactions and tensions among three dimensions of scientization: contributory, policymaking and legitimizing. To do so, we outline an ideal type of contributory scientization in central banks, whereby they become active contributors to science. The article derives empirically observable characteristics for this ideal type, regarding leadership and staff profiles, use of internal resources, composition of external networks, and publication and discursive outputs. The BoE is then contrasted to this ideal type of a central bank thoroughly involved in contributory scientization. The empirical material includes archives and interviews as well as three databases providing quantitative information from the 1970s to 2019. We find that the development of contributory scientization is strategically motivated, often generating tensions with policymaking and legitimizing dimensions. Our findings suggest that scientization in central banks is best understood as a three-dimensional, non-linear process, rather than a steamroller. |
| Abstract: | Cet article étudie le processus de scientificisation dans les banques centrales, en utilisant la Banque d'Angleterre (BoE) comme étude de cas. Il propose un idéal-type de banque centrale scientifique, qui est lié à l'idée centrale selon laquelle la scientificité d'une organisation augmente avec sa volonté de contribuer à la science pertinente. Nous dérivons de cet idéal-type des caractéristiques empiriquement observables concernant les profils des dirigeants et du personnel, l'utilisation des ressources internes, la composition des réseaux externes et les résultats des publications et des discours. La BoE est ensuite comparée à cet idéal-type d'une banque centrale entièrement scientifique. Le matériel empirique comprend des archives et des entretiens ainsi que trois bases de données fournissant des informations quantitatives de 1980 à 2019. Nous constatons que le chemin vers la scientificisation est stratégiquement motivé et varié, influencé par des facteurs tels que l'équilibre entre les impératifs de crédibilité des experts et l'information des décideurs politiques. Sur la base de cette analyse empirique, nous soulignons les multiples facettes de la dynamique du processus de scientifisation et appelons à des représentations plus nuancées dans la littérature académique. |
| Keywords: | Central bank, Scientisation, Expertise, Depoliticisation, Word embedding |
| Date: | 2025–04–22 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04267004 |
| By: | Kristin Forbes; Jongrim Ha; M. Ayhan Kose |
| Abstract: | Central banks often face tradeoffs in how their monetary policy decisions impact economic activity (including employment), inflation and the price level. This paper assesses how these tradeoffs have evolved over time and varied across countries, with a focus on understanding the post-pandemic adjustment. To make these comparisons, we compile a cross-country, historical database of “rate cycles†(i.e., easing and tightening phases for monetary policy) for 24 advanced economies from 1970 through 2024. This allows us to quantify the characteristics of interest rate adjustments and corresponding macroeconomic outcomes and tradeoffs. We also calculate Sacrifice Ratios (output losses per inflation reduction) and document a historically low “sacrifice†during the post-pandemic tightening. This popular measure, however, ignores adjustments in the price level—which increased by more after the pandemic than over the past four decades. A series of regressions and simulations suggest monetary policy (and particularly the timing and aggressiveness of rate hikes) play a meaningful role in explaining these tradeoffs and how adjustments occur during tightening phases. Central bank credibility is the one measure we assess that corresponds to only positive outcomes and no difficult tradeoffs. |
| Keywords: | monetary policy, interest rates, central bank, Sacrifice Ratio, business fluctuations, prices, employment |
| JEL: | E31 E32 E43 E52 E58 F33 F44 N10 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-30 |
| By: | Ozili, Peterson K |
| Abstract: | This study investigates the determinants of financial inclusion in Nigeria. The study extends the empirical debate on the determinants of financial inclusion by focusing on the monetary policy and banking sector factors that influence the level of financial inclusion in Nigeria. The study employs the two-stage least squares regression method to estimate the determinants of financial inclusion in Nigeria during the 2007–2021 period. The results show that the central bank monetary policy rate, the savings deposit rate, and the loan to deposit ratio of banks are significant determinants of financial inclusion in Nigeria. Specifically, increase in the central bank interest rate decreases the level of financial inclusion, increase in the savings deposit rate increases the level of financial inclusion, and increase in the loan-to-deposit ratio decreases the level of financial inclusion. These determinants are robust to alternative estimation using the quantile regression method. There is further evidence that the interbank lending rate, inflation rate and the nominal interest rate are also determinants of financial inclusion in Nigeria based on the two-stage least squares estimation. |
| Keywords: | Financial inclusion, determinants, monetary policy, index, inflation, central bank, Nigeria, interest rate, savings, interbank lending |
| JEL: | G20 G21 G23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124265 |
| By: | Takemasa Oda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Japan Center for Economic Research, E-mail: takemasa.oda@jcer.or.jp)) |
| Abstract: | This paper quantitatively evaluates the long-run effects of changes in inflation on the real economy, with a focus on deflation and population aging in Japan. It develops an overlapping generations model that incorporates household demand for safe assets. The model features two channels through which a decline in inflation affects the real economy in the long run, that is, the Mundell-Tobin effect and the redistribution effect. Calibrated to the Japanese economy, the model shows that a decline in inflation does more damage to young households and impairs capital accumulation, thus reducing output and social welfare, and moreover, that the damage can be magnified by population aging. This result could provide a certain rationale for central banks to pursue and maintain a positive rate of inflation in an aging economy. |
| Keywords: | Demographics, life cycle, deflation, Mundell-Tobin effect, redistribution, overlapping generations model |
| JEL: | E21 E31 J11 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:24-e-14 |
| By: | Hiroshi Inokuma (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: hiroshi.inokuma@boj.or.jp)); Mitsuru Katagiri (Associate Professor, Faculty of Business Administration, Hosei University (E-mail: mitsuru.katagiri@hosei.ac.jp)); Nao Sudo (Deputy Director-General, Financial System and Bank Examination Department (E-mail: nao.sudou@boj.or.jp)) |
| Abstract: | This study revisits the old and ongoing challenge of identifying the optimal trend inflation rate, using a novel model that incorporates a firm's innovation choices, product life cycles, and the interplay of the two factors. We construct an endogenous growth model with sticky prices, where firms have two options: to be an innovator or to be a follower. An innovator causes creative destruction, forcing all the incumbents to exit, and becomes a monopolist in its sector. A follower enters an existing sector by offering a product that is slightly different from the incumbent's products, inducing a product life cycle within the sector. Trend inflation impacts the firm's decision regarding which of the two options to choose by changing expected markups and profits. We show that the optimal trend inflation rate could exceed zero as it mitigates potential innovator losses upon the entry of followers, which in turn depresses the incentives for firms to be followers, promoting creative destruction and faster economic growth. |
| Keywords: | Sticky prices, Optimal inflation, Product life cycle, Innovation, Productivity growth, Markups |
| JEL: | E31 O31 O41 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:24-e-17 |
| By: | Rodolfo E. Manuelli |
| Abstract: | In their celebrated 1981 paper "Some Unpleasant Monetarist Arithmetic, " Sargent and Wallace show that when a central bank is required to transfer resources to the fiscal authority, it faces a trade-off: if it chooses to keep inflation low in the short run, then it must be willing to accept higher inflation in the long run. In this paper I characterize the optimal interest rate (and inflation) policy by a central bank faced with a version of the Sargent-Wallace scenario. I explore this question in a setting in which a certain amount has to be transferred for an uncertain period of time. I find that uncertainty makes the optimal policy to deviate from a Barro-like martingale behavior of taxes or a Lucas-Stokey type of solution where the tax (or distortion) inherits the properties of the stochastic process for transfers. The optimal nominal interest rate (and inflation) is such that the central bank chooses to issue debt (e.g., reverse repos) instead of raising the required amount of seigniorage. Initially inflation is lower than what would be required to raise enough resources to pay for the transfer plus the interest on existing debt. The intuition for this result is that the monetary authority is taking advantage of an option: if the transfer period is short, then (relatively) low inflation today can spread the losses over time. Over time, as the debt increases, more revenue has to be raised. Interest rates increase. The time path of inflation depends on whether the monetary authority can “inflate away” part of the debt. If this default is costly, the end of the transfer period is associated with permanently lower inflation. If a sudden increase in the price level (default) is an option (and if it chooses to be exercised), the end of the transfer period is associated with high (and brief) inflation and then stabilization. |
| Keywords: | optimal monetary policy; inflation; fiscal dominance |
| JEL: | E5 E6 |
| Date: | 2025–04–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:99980 |
| By: | António Afonso; Jorge Braga Ferreira |
| Abstract: | We assess how countries’ fiscal policies during COVID-19 pandemic influenced the effects of the Pandemic Emergency Purchase Programme (PEPP) on sovereign bond Option-Adjusted Spreads. Using a cross-sectional regression model with country and time-fixed effects, we analyse a sample of 1, 368 euro-denominated sovereign bonds issued between Q1:2018 and Q1:2022 in 19 Eurozone countries. We consider the PEPP net purchases by country, and the fiscal policy is measured through changes in debt-to-GDP ratio and net lending/borrowing as a percentage of GDP. The results indicate that PEPP’s effectiveness in reducing spreads was strongly conditional on fiscal conditions, and then fiscal fundamentals condition the effectiveness of ECB interventions. In high-debt countries, PEPP did not lower spreads, which suggests that fiscal concerns remained dominant. PEPP was more effective in low-debt countries, but its effects diminished as the level of debt increased, which suggest rising fiscal risks. Furthermore, eligibility status was more important in economies with low debt levels, where eligible bonds were seen as riskier assets. Finally, the results suggests that PEPP’s effectiveness was stronger for higher-rated bonds, longer-maturity bonds, and central government bonds, in fiscally sound countries. |
| Keywords: | ECB, PEPP, unconventional monetary policy, fiscal policy, sovereign bond yields, COVID-19 pandemic. |
| JEL: | C23 E52 E58 E62 G12 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03782025 |
| By: | Kevin Lee; Viet Nguyen; Kalvinder Shields |
| Abstract: | Alternative models of actual and expected inflation are estimated to investigate how, in real time and as information arrives, different types of consumer learn about inflation. The models distinguish various views about learning including those based on Bayesian updating or on learning-rigidity heuristics. Using a detailed Australian survey, we find that learning is best characterised by periodic shifts in beliefs rather than incremental Bayesian adjustments, that different consumer groups learn at different times and from different experiences and that the inflation expectations of different groups are anchored on a range of reference inflation rates which do not move in sync. |
| Keywords: | learning, updating, expectations, surveys, demographic groups, inflation anchor |
| JEL: | C32 D84 E31 E32 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-28 |
| By: | Nicolas de Roux; Laurent Ferrara |
| Abstract: | Officially, the U.S. Federal Reserve has a statutory dual domestic mandate of price stability and full employment, but, in this paper, we question the role of the international environment in shaping Fed monetary policy decisions. In this respect, we use minutes of the Federal Open Market Committee (FOMC) and construct indexes of the attention paid by U.S. monetary policymakers to the international economic and financial situation. These indexes are built by applying natural language processing (NLP) techniques ranging from word count to built-from-scratch machine learning models, to OpenAI's GPT models. By integrating those text-based indicators into a Taylor rule, we derive various quantitative measures of the external influences on Fed decisions. Our results show that when there is a focus on international topics within the FOMC, the Fed’s monetary policy generally tends to be more accommodative than expected by a standard Taylor rule. This result is robust to various alternatives that includes a time-varying neutral interest rate or a shadow central bank interest rate. |
| Keywords: | Monetary policy, Federal Reserve, FOMC minutes, International environment, Natural Language Processing, Machine Learning |
| JEL: | E52 F42 C54 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-23 |
| By: | Pablo Hernandez de Cos (Peterson Institute for International Economics) |
| Abstract: | Since mid-2021, the euro area economy has gone through several shocks, leading to the highest inflation since the creation of the European Monetary Union. A forceful and persistent response from the European Central Bank, grounded in the monetary policy framework it agreed in 2021 ahead of the inflationary episode, has succeeded in bringing inflation down and delivering on the central bank's price stability mandate. The framework will be reviewed in 2025, and it might conclude that there is no need for a drastic change. Nevertheless, this assessment should be compatible with identifying some areas for improvement. In particular, the 2021 review was primarily focused on the effective lower bound. The recent inflationary episode, together with high ongoing uncertainty, indicate that the articulation of monetary policy strategy frameworks should be robust to very different scenarios. Likely persistence of high levels of uncertainty over the next few years will also require an emphasis on flexibility to adapt to the magnitude, origin, and persistence of shocks. Unconditional forward guidance should be avoided. In addition, there might be a need to more clearly distinguish in the future, when possible, between quantitative easing for market functioning versus monetary stimulus, which could incentivize a careful assessment of the amount, duration, and structure of any asset purchase program. Communication also needs to be improved in relation to the level of uncertainty and its consequences for monetary policymaking with, for instance, greater use of scenarios and sensitivity analyses as appropriate. Improving forecasting/modeling tools, in particular when dealing with large supply shocks, and understanding the roles of different measures of inflation expectations should also be priorities. |
| Keywords: | Inflation, European Central Bank, Monetary Policy |
| JEL: | E02 E17 E31 E52 E58 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp25-10 |
| By: | Ralf R. Meisenzahl; Friederike Niepmann; Tim Schmidt-Eisenlohr |
| Abstract: | This paper documents a new dollar channel that transmits monetary policy across borders. Exploiting unique features of the syndicated loan market for identification, we show that changes in the euro-dollar exchange rate around ECB monetary policy announcements that are orthogonal to simultaneous changes in euro-area interest rates and stock prices affect U.S. leveraged loan spreads. Specifically, in response to dollar appreciation, investors require higher compensation for risk, and borrowing costs for U.S. firms increase. These findings imply a causal link between the U.S. dollar and investors’ risk appetite. |
| Keywords: | loan pricing; Monetary policy spillovers; Dollar; Institutional investors; risk taking |
| JEL: | F15 G15 G21 G23 |
| Date: | 2025–03–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:99939 |
| By: | Gr\'egory Bournassenko |
| Abstract: | In recent years, cryptocurrencies have attracted growing attention from both private investors and institutions. Among them, Bitcoin stands out for its impressive volatility and widespread influence. This paper explores the predictability of Bitcoin's price movements, drawing a parallel with traditional financial markets. We examine whether the cryptocurrency market operates under the efficient market hypothesis (EMH) or if inefficiencies still allow opportunities for arbitrage. Our methodology combines theoretical reviews, empirical analyses, machine learning approaches, and time series modeling to assess the extent to which Bitcoin's price can be predicted. We find that while, in general, the Bitcoin market tends toward efficiency, specific conditions, including information asymmetries and behavioral anomalies, occasionally create exploitable inefficiencies. However, these opportunities remain difficult to systematically identify and leverage. Our findings have implications for both investors and policymakers, particularly regarding the regulation of cryptocurrency brokers and derivatives markets. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.18982 |
| By: | Huixin Bi; Andrew Foerster; Nora Traum |
| Abstract: | Using a two-country monetary union framework with financial frictions, we quantify the efficacy of targeted asset purchases, as well as expectations of such programs, in the presence of sovereign default and financial liquidity risks. The risk of default increases with the level of government debt and shifts in investors’ perception of fiscal solvency. Liquidity risks increase when the probability of default affects the tightness of credit markets. We calibrate the model to Italy during the 2012 European debt crisis and compare it to key features of the data. We find that changes in investors’ perception played a more significant role than increases in government debt in affecting the macroeconomy. When a debt crisis occurs, asset purchases help stabilize both financial markets and the economy. This stabilization effect can occur even if asset purchases are expected but never implemented. Moreover, expectations of potential asset purchases during a crisis alter the level of economic activity in periods when there are no crises. |
| Keywords: | fiscal policy; monetary policy; unconventional monetary policy; Monetary Union; financial frictions; Regime-Switching Models |
| JEL: | E58 E63 F45 |
| Date: | 2025–05–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99977 |
| By: | Soares, Carla |
| Abstract: | This study investigates to what extent the significant liquidity injections by the ECB over the past 15 years may have created a dependency by banks on central bank liquidity itself. Following Acharya et al. (2024), I examine whether the ECB's liquidity provision changed banks' incentives to increase liquid deposits, potentially heightening their susceptibility to liquidity shocks. Using both aggregate and bank-level data, I find that euro area banks tend to increase demand deposits and decrease time deposits with their holdings of excess reserves over the liquidity expansion phase and do not revert when aggregate liquidity starts to shrink. However, this is contained to specific periods, when interest rates were low and stable. The differences relative to the US could be related to distinct sources of liquidity and regulatory frameworks governing liquidity. JEL Classification: E5, G21 |
| Keywords: | central bank liquidity, deposits, euro area, monetary policy |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253056 |
| By: | Osoro, Jared; Talam, Camilla |
| Abstract: | This paper seeks to establish whether the monetary policy stance of Central bank of Kenya (CBK) at the turn of financial markets is pre-emptive or a cleanup. The feedback loop between monetary policy reaction and the markets' response presupposes a sequencing that runs from the former to the latter. That hardly rule out the possibility of monetary policy responding to financial markets' actions, not necessarily preempting them. Deploying a structural vector autoregressive (SVAR) model on Kenyan data for the period December 2013 to June 2024, we establish that there is a dynamic interaction among key financial market prices that is not necessarily at the prompting of monetary policy. This points to how financial markets are pre-emptive, and the monetary authority playing catchup. Such sequencing comes with the possibility of monetary policy reacting to market movements more than markets responding to monetary policy signal, underlying the tension between monetary policy and fiscal policy. The direct connection between the CBK's policy signal and the inter-bank rate justifies the CBK's interest rate corridor around the former. We however consider that as a necessary but not sufficient framework for efficient policy signalling and transmission unless it is accompanied by measures to address inter-bank market segmentation as well as those that can injects vibrancy in the horizontal repo market. We further contend that the positioning of the foreign exchange policy in support of monetary policy objectives is encumbered by the small-open-economy attributes that limits the assumption that full flexibility is sufficient for full effectiveness. |
| Keywords: | Monetary policy, Monetary policy transmission, Financial market, Kenya |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kbawps:316415 |
| By: | Jessica Leutert; Rolf Scheufele; Selina Schön |
| Abstract: | We analyse the historical relationship between consumer prices and wages in Switzerland. Our results show that, between 1980 and 2019, the pass-through from prices to wages was substantial. At the same time, nominal wage increases only had a modest effect on prices. Other factors – such as imported inflation, inflation expectations and economic slack – clearly dominate wages in explaining price movements in Switzerland. Second-round effects of inflation, in turn, are mainly explained by inflation expectations. Our results suggest that the pass-through from wages to prices could be higher in an environment of elevated inflation. However, even in the 1980s and 1990s, the pass-through was only modest. It follows that periods of simultaneously high inflation and high wage growth were not the result of a wage-price spiral. Instead, the long-term comovement of the two variables can mostly be explained by common drivers (e.g., inflation expectations, economic slack) and by the gradual adjustment of wages to price. |
| Keywords: | Inflation, Labour costs, Pass-through, Switzerland, SVECM, Granger causality |
| JEL: | E24 E31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2025-06 |
| By: | Ndwiga, David; Makunda, Geraldine |
| Abstract: | The study investigates the effects of macro imbalances on the banking sector performance in Kenya from the financial intermediation cost perspective for 2020q4 - 2024q1 period. Employing dynamic panel GMM model, the study finds that inflation pressures above the upper bound target, external debt unsustainability, monetary policy tightening and current account deficit to GDP ratio lead to increase in the intermediation cost. The findings call for need to anchor the inflation rate below the upper bound target, exercise prudence fiscal measures, effective application of the monetary policy instruments and development of a matrix of interlinkages between the macro imbalances. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kbawps:316419 |
| By: | Martin Chorzempa (Peterson Institute for International Economics); Lukas Spielberger (Centre for Security, Diplomacy and Strategy-VUB) |
| Abstract: | Despite worldwide concerns about the US dollar, the Chinese renminbi is not yet ready to be a serious contender for leading international currency status. This Policy Brief examines three of the most important Chinese approaches to increasing the renminbi's role as an international settlement currency: promote bilateral swap agreements between the People's Bank of China and other central banks; create international payment systems that do not involve the dollar, most notably the Cross-Border Interbank Payment System; and develop a central bank digital currency for alternative payment infrastructures. The authors find that Beijing's efforts fall short of posing a systemic challenge to the dollar or to infrastructures like SWIFT. Nevertheless, these approaches have enabled China to use its currency for bilateral foreign policy. US and European policymakers should consider countering or attenuating these efforts, even though they have had limited success in increasing renminbi usage. This Policy Brief has been copublished with the Centre for Security, Diplomacy and Strategy-VUB. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:iie:pbrief:pb25-4 |
| By: | GEORGAKAS, IOANNIS |
| Abstract: | We examine the relationship between expansionary monetary and fiscal policy and inflation in two different periods: the 2008 global financial crisis and the COVID-19 pandemic period from 2020 to 2022. In the first case, we analyze the response of central banks through interest rate cuts and quantitative easing in an environment of negative inflation and low demand. In the second, the much more intense monetary and fiscal intervention is examined, accompanied by direct transfers to households and firms, leading to widespread inflationary pressures from 2021 onwards. We attempt to compare the features and effects of the two policies, highlighting the effects of excessive liquidity, deficit financing, and delayed tightening. We conclude that treating inflation as a "transitory phenomenon" was a critical miscalculation. The need for macroeconomic stability, timely interest rate adjustment, and restoration of monetary credibility is stressed |
| Keywords: | monetary policy, inflation, Federal Reserve, European Central Bank, interest rates, quantitative easing, 2008 crisis, COVID-19 pandemic, monetary policy, inflation |
| JEL: | E31 E52 E62 |
| Date: | 2025–04–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124405 |
| By: | Bill Dupor |
| Abstract: | I estimate the effect of labor market tightness on wage inflation from 2004-2019 using aggregate data and a hybrid New Keynesian Phillips curve. The Phillips curve slope, i.e., the effect of a unit increase in the vacancy-unemployment ratio on inflation, is about 3.4 percentage points. Then, I estimate the model using the corresponding panel-level data with a time-fixed-effect regression: The resulting regional (i.e., relative) Phillips curve slope is about 0.7. This large difference between the two slopes is robust to controlling for various measures of inflation expectations and for supply shocks. The gap arises because variation used in one regression is—by construction—orthogonal that used in the other. I explain how cross-region spillovers might explain the large gap between the aggregate and relative slopes. |
| Keywords: | Phillips curve; fixed effects; spillovers |
| JEL: | E31 |
| Date: | 2025–05–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:99981 |
| By: | Irigoin, Alejandra; Kobayashi, Atsushi; Chilosi, David |
| Abstract: | This paper analyses a new, large dataset of silver prices, as well as silver and merchandise trade flows in and out of China in the crucial decades of the mid-19th century when the Empire was opened to world trade. Silver flows were associated with the interaction between heterogenous monetary preferences and availability of specific coins. Before the 1850s, money markets became increasingly efficient, as reliance on bills of exchange allowed exports to grow in times when sound money was in short supply. When a new standard for silver eventually emerged, there was a new peak in China’s silver imports. |
| Keywords: | China silver flows; triangular trade settlement mechanism; exchange operations; arbitrage; ‘opening of China’ |
| JEL: | E42 F33 N10 |
| Date: | 2023–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:119759 |
| By: | Boddin , Dominik (Deutsche Bundesbank); te Kaat, Daniel Marcel (University of Groningen); Roszbach , Kasper (Norges Bank) |
| Abstract: | This paper provides novel microlevel evidence that cross-border bank flows are an important means for households to access credit, not only in emerging markets but also in advanced economies. Using supervisory bank-level data alongside household credit and consumption data from Germany, we study how lending to households was impacted by the influx of cross-border bank funding following the European Central Bank’s implementation of nonconventional monetary policy in 2014 and 2015. Regional banks that were highly exposed to fluctuations in foreign capital inflows increased consumer lending to riskier, lower-income households by 50% more than other banks. Rising deposit inflows from non-euro area banks induced less-capitalized banks to expand their lending on the extensive margin. The analysis concludes that Improved access to credit enables lower-income customers of exposed banks to increase nondurable consumer spending. Data from a larger group of euro area countries confirm that conclusion. |
| Keywords: | cross-border bank flows; households; bank lending; risk-taking; credit booms; funding shocks |
| JEL: | F30 G20 G50 |
| Date: | 2025–05–09 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0779 |
| By: | Zakaria Savon (Ph.D., Faculty of Legal, Economic and Social Sciences - Souissi, Mohammed V University, Rabat) |
| Abstract: | Islamic banking plays a critical role in mobilizing funds for the economy. The financing mechanisms used by Islamic banks are largely influenced by macroeconomic conditions due to their asset-backed nature. A substantial portion of the assets held by these banks originates from debt financing methods, including Murabahah and Ijarah. However, Islamic financial institutions are exposed to various risks, particularly financing or credit risks. This type of risk pertains to the potential financial losses that banks may encounter when a borrower fails to meet their obligations. The non-performing financing (NPF) rate serves as a key indicator for assessing this risk. Our study investigates the impact of key macroeconomic variables and monetary policy on the nonperforming financing rate of Islamic banks in Jordan. The analysis employs an autoregressive distributed lag (ARDL) model, utilizing data from the fourth quarter of 2013 through the first quarter of 2022. The results indicate that both monetary policy and economic growth significantly influence the non-performing financing rates of Islamic banks in Jordan. |
| Keywords: | Islamic banks, Credit-risk, Macroeconomics, Monetary policy, ARDL, JORDAN |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05011821 |
| By: | Ozili, Peterson |
| Abstract: | There are calls for monetary and fiscal authorities to use policy tools to support ongoing efforts to achieve the net zero emissions goal. However, limited attention has been paid to the regional differences in the relationship between monetary-fiscal policy and CO2 emissions. This study examines the impact of monetary and fiscal policy on carbon dioxide (CO2) emissions from fossil fuel energy consumption. The study extends the literature by linking monetary and fiscal policy to climate action for achieving the net zero emissions goal. In the empirical analysis, the monetary policy indicator is the lending interest rate, the fiscal policy indicator is the tax revenue to GDP ratio while CO2 emissions from fossil fuel energy consumption is the CO2 emissions indicator. The findings reveal that contractionary monetary and fiscal policy jointly reduce CO2 emissions in the regions of the Americas and Africa. Contractionary monetary and fiscal policy combined with higher renewable energy consumption jointly reduce CO2 emissions in the regions of the Americas, Asia and Europe. Also, contractionary monetary and fiscal policy combined with higher institutional quality jointly reduce CO2 emissions in African countries. Higher renewable energy consumption reduces CO2 emissions in Africa, Asia, Europe and Americas regions while strong institutional quality consistently reduce CO2 emissions in Europe and the Americas. The implication of the findings is that monetary and fiscal authorities should strengthen existing institutions, increase renewable energy consumption, and increase interest rate and taxes on the fossil fuel economy in a coordinated manner to reduce CO2 emissions from fossil fuel energy consumption. |
| Keywords: | CO2 emissions, monetary policy, fiscal policy, institutional policy, population, interest rate, tax revenue to GDP ratio, net zero, sustainable development, renewable energy, economic growth, Africa, Asia, Europe, Americas. |
| JEL: | E31 E52 Q52 Q54 Q56 Q57 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124261 |
| By: | Satoshi Kobayashi (Director and Senior Economist, Institute for Monetary and Economic Studies (IMES), Bank of Japan (BOJ) (E-mail: satoshi.kobayashi@boj.or.jp)); Takeshi Shinohara (Deputy Director and Economist, International Department, BOJ (takeshi.shinohara@boj.or.jp)); Shigenori Shiratsuka (Professor, Faculty of Economics, Keio University (E-mail: shigenori.shiratsuka@keio.jp)); Nao Sudo (Deputy Director-General, Financial System and Bank Examination Department, BOJ (E-mail: nao.sudou@boj.or.jp)); Itofumi Takeuchi (Economist, IMES, BOJ (E-mail: itofumi.takeuchi@boj.or.jp)) |
| Abstract: | The consumer price index (CPI) is widely used by major central banks in the definition of a numerical target for price stability. In this context, the measurement errors, which became a significant concern following the U.S. Boskin Report in 1996, are still occasionally cited as one of the justifications for setting a positive inflation rate target. This paper presents a review of the current status of discussions and studies on measurement errors in major economies, including Japan, with a particular focus on those published since the Boskin Report. In light of the accumulated research to date, the implementation of solutions to enhance index accuracy in each country, and changes in economic structure, the magnitude of measurement errors that were pointed out in the report appears to have decreased overall, although there are differences across countries and types of errors. Nevertheless, certain areas, particularly those pertaining to service prices, continue to present challenges, and in consideration of the potential impact of changing economic structures, such as e-commerce, measurement errors may fluctuate significantly and remain unresolved in the transition towards a future increase in service consumption, a more digitalized economy, and an aging population. Given these issues, measurement errors could remain a valid basis for setting numerical targets for the CPI. |
| Keywords: | Consumer Price Index, CPI, Measurement errors, Upper Bias, Quality Adjustment, Service Price |
| JEL: | C43 E31 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:24-e-16 |
| By: | Nuwat Nookhwun; Jettawat Pattararangrong; Phurichai Rungcharoenkitkul |
| Abstract: | Under dominant currency pricing, exchange rate swings affect firms' profits in domestic currency rather than price competitiveness. We quantify these valuation effects by constructing firm-specific exchange rates that reflect invoicing currencies and capture cash-flow exposures. These net-invoice-currency-weighted exchange rates (NICER) outperform trade-weighted exchange rates in explaining firm profitability, particularly for smaller exporters. Higher trade dependency amplifies NICER sensitivities, while financial hedging only partially mitigates them. NICER fluctuations also impact firm liquidity and credit conditions, with large exporters offsetting liquidity shocks through external financing. These cash-flow effects, in turn, drive exporters' investment and employment decisions. |
| Keywords: | exchange rates, valuation effects, dominant currency paradigm, firm-level data, firm profitability, invoicing currency, exports, financial hedging |
| JEL: | E44 F31 F41 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1266 |
| By: | Kakuho Furukawa (Deputy Director, Research and Statistics Department (currently, Financial System and Bank Examination Department), Bank of Japan (E-mail: kakuho.furukawa@boj.or.jp)); Yoshihiko Hogen (Director, Research and Statistics Department, Bank of Japan (E-mail: yoshihiko.hougen@boj.or.jp)); Kazuki Otaka (Director, Research and Statistics Department, Bank of Japan (E-mail: kazuki.ootaka@boj.or.jp)); Nao Sudo (Deputy Director-General, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan (E-mail: nao.sudou@boj.or.jp)) |
| Abstract: | From the mid-1990s, when Japan's inflation rate plummeted to a low level, until recently, an increasing portion of firms in the service sector ceased to change their prices. This paper studies the causes of this phenomenon, often referred to as the "zero-inflation norm, " and argues that the norm was generated by a fall in the inflation rate and a rise in menu costs. First, using the source data of Japan's official consumer price index (CPI), we document that the emergence of the norm went hand-in-hand with the decline in the inflation rate. Next, we extend the menu cost model of Nakamura and Steinsson [2008] and show that it is able to explain a part of the emergence and disappearance of the norm by changes in the inflation rate, but we emphasize the importance of menu costs for bringing the model close to the data. More precisely, with large and asymmetric menu costs for upward and downward price changes, as implied by the Japanese price data, the model explains about half of the norm. With modest menu costs as implied by the U.S. data, however, the model barely generates the norm at all. Lastly, we study the possibility that model parameters might have changed during the time of the norm. We find that in order for the model to explain the remaining portion of the norm as well as the observed developments in the size of price changes, menu costs and the curvature of the demand curve should have risen, with the former playing a quantitatively important role. Increases in implied menu costs occurred very noticeably in the service sector and less so in the goods sector, lagged the inflation rate decline, and were pronounced for items that saw low inflation rates during the mid-1990s, suggesting the possibility that prevailing low inflation rates and low frequencies of price changes made firms change prices even less frequently than what the standard menu cost model would imply. |
| Keywords: | micro price dynamics, menu costs, kinked demand, strategic complementarity |
| JEL: | E3 E31 E5 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:24-e-15 |
| By: | Cameron Haas (Department of Economics, UMass Amherst); Mateo Hoyos (Department of Economics, CIDE); Emiliano Libman (Conicet, Argentina); Guilherme K. Martins (Department of Economics, University of Leeds); Arslan Razmi (Department of Economics, UMass Amherst) |
| Abstract: | After decades of low and stable inflation, recent global events —such as the COVID-19 pandemic and the Russian invasion of Ukraine—triggered a resurgence in inflationary pressures, prompting central banks worldwide to tighten monetary policy. This paper examines whether monetary policy effectively curbs inflation by employing a trilemma-based identification strategy on a panel dataset of 36 developing and 8 developed economies from 1990 to 2017. Using higher-frequency monthly data, we improve on traditional quarterly or annual approaches by more precisely capturing central bank responses. By applying our theory-driven, trilemma-based identification strategy to a sample of developing countries, we bring novel insights to existing literature. Our findings indicate that monetary policy shocks have significant but impermanent effects on inflation. A 100 basis point interest rate hike lowers the price level by 3.7% at its peak after six months, with effects fading within 18 months. Crucially, our results do not exhibit the “price puzzle, ” reinforcing the credibility of our identification strategy. Additionally, we find that monetary policy effects are state-dependent, with stronger disinflationary impacts during high-inflation periods and in economies with lower GDP per capita or higher commodity export dependence. These findings highlight the heterogeneity in monetary policy transmission, underscoring the need for tailored policy responses across different economic contexts. |
| Keywords: | interest rates, monetary experiments, trilemma, instrumental variables, local projections |
| JEL: | E01 E30 E32 E44 E47 E51 F33 F42 F44 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:emc:wpaper:dte650 |