|
on Monetary Economics |
| By: | Angelos Athanasopoulos; Donato Masciandaro; Davide Romelli |
| Abstract: | This paper provides novel evidence of the long-run effects of central bank independence on inflation. We show that improvements in central bank independence have a much larger impact on inflation in the long run compared to the short run. Contrary to most of the previous literature, our results also show that the long-run effects of central bank independence on inflation are larger in developing countries. We find similar effects using linear and instrumental variable local projection methods. Finally, we show that central bank independence also reduces inflation persistence, reinforcing the effectiveness of monetary policy. |
| Keywords: | central bank design, central bank independence, inflation, persistence |
| JEL: | E5 E31 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp25237 |
| By: | Martin Feldkircher; Petr Korab; Viktoriya Teliha |
| Abstract: | This paper analyzes the evolution of central bank topics using a corpus of over 20, 000 speeches spanning nearly three decades and a range of topic models. We identify thirteen themes, including monetary policy, financial stability, digital payments, and climate-related finance. Examining their development over time, we classify these themes as "evergreens", "waning threads", or emergent "rising stars", and show that early adoption and topic leadership are nearly equally shared between emerging and advanced economies' central banks. In the aftermath of the Global Financial Crisis, topic focus converged worldwide, with a renewed emphasis on financial stability. Finally, static covariate regressions link topic prevalence to inflation regimes, central bank independence, and speech format, highlighting the impact of macroeconomic and institutional factors on communication priorities. |
| Keywords: | monetary policy, financial stability, digital payments, climate-related finance |
| JEL: | C55 C88 E52 E58 D83 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-35 |
| By: | Ozili, Peterson K |
| Abstract: | Little attention has been paid to the role of central bank interest rate and monetary aggregates in influencing financial stability in good times. This study examines the impact of monetary policy on financial stability in good years. It focuses on the impact of three monetary policy tools on financial stability. The study used the median quantile regression method to analyze 22 countries during the 2011 to 2018 period – a period which isolates the shock from the COVID-19 pandemic and the shock from the global financial crisis. The financial stability indicator is the country-level bank nonperforming loans ratio. The monetary policy indicators are broad money growth, broad money to GDP ratio and the central bank interest rate, while controlling for the inflation rate, total unemployment rate, efficiency ratio, institutional governance quality and economic growth rate. The findings reveal that high central bank interest rates impair financial stability by increasing the bank nonperforming loans ratio in African countries and developing countries. In contrast, high central bank interest rates improve financial stability in developed countries and emerging market countries. Furthermore, higher broad money growth improves financial stability in European banks while broad money growth, broad money to GDP ratio and central bank interest rate do not have a significant effect on the NPL ratio of Asian banks. |
| Keywords: | monetary policy, financial stability, nonperforming loans, interest rate, central bank, broad money, institutional quality, domestic private credit, economic growth, unemployment, inflation, efficiency, quantile regression |
| JEL: | E31 G21 G23 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125030 |
| By: | Ozili, Peterson K |
| Abstract: | The objective of this article is to present some of the current thinking and arguments about central bank digital currency (CBDC) from the perspective of those who have vested interests in central bank digital currency (CBDC) and from those who are opposed to CBDC. The article gives the reader an opportunity to reflect deeply about CBDC and to make their own opinion about CBDC based on the informed insights of others. From the collection of quotes, it was found that the concept of a central bank digital currency has come to stay, and many central banks want to issue a CBDC in the distant future. It was also found that, despite the efforts of central banks and pro-CBDC enthusiasts to publicise the benefits of a CBDC for citizens, many people continue to raise daunting questions about the potential for government overreach and surveillance, loss of competitive advantages for deposit-taking financial institutions, loss of privacy for citizens, and concerns that CBDC development is an unwholesome distraction for central banks, among other concerns. There is also a perceived negative sentiment about CBDC, and this sentiment is unlikely to change anytime soon. |
| Keywords: | central bank, CBDC, central bank digital currency, wholesale CBDC, retail CBDC, financial stability, financial crisis, financial inclusion, payments. |
| JEL: | E52 E58 E59 O31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124263 |
| By: | Samuel Kaplan (UNC/UDESA); Efstathios Polyzos (Zayed University/CAMA Australia); David Tercero-Lucas (ICADE/ICAI/Universidad Pontificia Comillas) |
| Abstract: | The growing influence of cryptocurrencies in global financial markets has raise questions about the impact of central bank communications on their price dynamics.This paper investigates how central bank communication affects the behaviour of cryptocurrency markets. Using a dataset of over 6, 000 central bank speeches anda broad panel of crypto assets, we quantify sentiment, uncertainty, and fear tone through natural language processing and assess their impact using local projectionmethods. Our results show that positive tone initially depresses returns while raising volatility, whereas uncertainty and fear produce mixed return responses and amplifyprice fluctuations in the short run. Heterogeneity across asset types reveals stronger responses among emerging, high-performing, and non-stablecoin cryptocurrencies.The findings highlight the informational role of central bank narratives in shaping outcomes in speculative and decentralised markets, with important implications forcommunication policy and financial stability monitoring. |
| Keywords: | Cryptocurrency, Central Bank Communication, Text Analysis, Sentiment Analysis, Monetary Policy |
| JEL: | D53 E52 E58 G15 O33 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:365 |
| By: | Erwan Gautier; Frédérique Savignac; Olivier Coibion |
| Abstract: | Using a new survey of French firms’ inflation expectations that predates the inflation spike, we document i) evidence on the anchoring of inflation expectations during the inflation surge, and ii) the relevance of inflation expectations for firms’ decisions. First, we show that inflation expectations under-responded to the initial surge but then persistently overshot actual inflation dynamics. As inflation rose, firms initially perceived inflation to be less persistent than in previous years, an effect that dissipated over time. Second, we find that inflation expectations correlate with firms’ wage and price decisions. One-year expectations matter more than long-term expectations. During the inflation surge, wage and price decisions became increasingly disconnected from inflation expectations. This suggests that the scope for wage-price spirals is likely more limited than one might have expected from the surge in inflation and inflation expectations. |
| JEL: | E30 E4 E5 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33799 |
| By: | Weber, Michael |
| Abstract: | This paper assesses the European Central Bank (ECB)'s monetary policy stance as of June 2025, analysing its evolving interest rate path, balance sheet developments, and communication strategy. It highlights the transition toward a neutral policy rate, ongoing quantitative tightening, persistent inflation dispersion, and increasing macroeconomic uncertainty. The analysis concludes that while inflation is converging toward target, elevated uncertainty, and divergence between interest rate policy and balance sheet reduction demand cautious calibration and transparent communication. This document was provided/prepared by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee of the European Parliament. |
| Keywords: | ECB, Monetary Policy, Inflation, Neutral Policy Rate |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewh:319903 |
| 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: | 2025–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-46 |
| By: | Jonathan Adams; Symeon Taipliadis |
| Abstract: | Data suggest that monetary policy should ease to offset inflation over-pessimism among households. |
| Keywords: | monetary policy; inflation; household expectations |
| JEL: | E52 E30 D84 E70 |
| Date: | 2025–06–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:101182 |
| By: | Anna Cole; Julian Kozlowski; Joseph Martorana |
| Abstract: | This paper analyzes market-based probability distributions for long-run inflation expectations derived from inflation derivatives. We construct forward-looking distributions for five-year-ahead inflation to assess the likelihood that inflation will fall above, below, or near the Federal Reserve's 2 percent target. By examining the mean, volatility, and skewness of these distributions, we document how expectations have evolved since the onset of the COVID-19 pandemic. To assess the reliability of market-based measures, we compare our results with alternative data sources. We highlight the elevated probability of inflation exceeding the 2 percent target that persisted shortly after the COVID-19 pandemic. The findings underscore the importance of market-based tools in capturing nuanced inflation dynamics and informing policy and financial decisions. |
| Keywords: | inflation; Inflation expectations; market-based probabilities |
| JEL: | E31 |
| Date: | 2025–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:101179 |
| By: | Stefan Avdjiev; Linda S. Goldberg |
| Abstract: | Global risk conditions, along with monetary policy in major advanced economies, have historically been major drivers of cross-border capital flows and the global financial cycle. So what happens to these flows when risk sentiment changes? In this post, we examine how the sensitivity to risk of global financial flows changed following the global financial crisis (GFC). We find that while the risk sensitivity of cross-border bank loans (CBL) was lower following the GFC, that of international debt securities (IDS) remained the same as before the GFC. Moreover, the changes in risk sensitivities of these flows were related to balance sheet constraints of financial institutions that were intermediating these flows. |
| Keywords: | global liquidity; international bank lending; international bond flows; emerging markets; advanced economies |
| JEL: | G10 G21 F34 |
| Date: | 2025–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101162 |
| By: | Garabedian, Garo (Central Bank of Ireland) |
| Abstract: | We disentangle macroeconomic surprises in a structural Bayesian VAR, and show that common measures of the short-term neutral rate underreact to shocks that affect the near term productive capacity of the economy. In contrast, these measures overreact to transitory demand shocks, such as monetary policy shocks. Their impact is persistent, making short term shocks hard to distinguish from secular trends. Our findings are robust across a large array of r-star measures. Particularly when the economy is near the effective lower bound, expansionary monetary policy has a forceful downwards impact on r-star. Hence, the neutral rate is not exogenous as in the Neo-Wicksellian paradigm. For our main analysis, we extend the Holston-Labauch-Williams estimate back to the 1920s, thus revealing a non-monotonic time-series. We add to the debate on the use of r-star in the policy realm, and the effectiveness of monetary policy tools when rates are low. |
| Keywords: | Equilibrium real interest rate, R*, long-term rates, cyclical drivers, macroeconomic shocks, monetary policy, structural Bayesian VAR, sign restrictions. |
| JEL: | C11 E43 E52 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:wpaper:4/rt/25 |
| By: | Gara Afonso; Marco Cipriani; JC Martinez; Matthew Plosser |
| Abstract: | Banks use central bank reserves for a multitude of purposes including making payments, managing intraday liquidity outflows, and meeting regulatory and internal liquidity requirements. Data on aggregate reserves for the U.S. banking system are readily accessible, but information on the holdings of individual banks is confidential. This makes it difficult to investigate important questions like: “Which types of banks hold reserves?” “How concentrated are they?” and “Does the distribution change over time or in response to significant events?” In this post, we summarize how non-confidential data can be used to answer these questions by providing publicly available proxies for bank-level reserves. |
| Keywords: | reserves; Publicly Available Dataset |
| JEL: | E52 G21 |
| Date: | 2025–06–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101134 |
| By: | Patrick Honohan (Peterson Institute for International Economics) |
| Abstract: | Twenty or more of the world's most significant central banks have seen their equity position (or capital and reserves) go negative in the last few years. This novel situation does not fundamentally challenge the ability of these institutions to deliver on their mandate, but it does raise some interesting policy and communications issues. Central banks are incurring losses for two main reasons. The first is the impact of rising interest rates on their maturity mismatched portfolios. The second is losses on foreign exchange reserves accumulated in the attempt to avoid currency overvaluation. Comparing the experience of different central banks is not, however, straightforward. The lack of uniformity in their accounting practice makes it difficult to make comparisons. Indeed, if put on a common marked-to-market basis, Honohan finds that some central banks that report positive net equity are really under water, while (in sharp contrast) others report a negative equity figure that neglects sizable unrealized capital gains. |
| Keywords: | Central bank accounting, central bank capital, quantitative easing |
| JEL: | E58 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp25-15 |
| By: | Yao Amber Li; Lingfei Lu; Shang-Jin Wei; Jingbo Yao |
| Abstract: | We find that an unanticipated tightening of US monetary policy tends to raise US import prices. This empirical “spill-back” pattern differs from the predictions of typical open-economy macro models. We also document a new empirical "spillover" effect: import prices of other countries also rise following an unexpected US monetary tightening. To understand the mechanism, we examine Chinese exporters and identify a borrowing cost channel—their liquidity conditions generally deteriorate after a US monetary tightening. Indeed, the output price response is greater for those firms facing higher borrowing costs or tighter liquidity conditions. |
| JEL: | E3 E5 F14 F40 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33811 |
| By: | Emmanuel Caiazzo (Department of Economics and Statistics, University of Naples Federico II, CSEF, and MoFiR); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR) |
| Abstract: | This paper presents a model in which the policy rate set by the central bank affects decisions about bank rescue policies when liquidity crises hit the banking system. We highlight a trade-off: maintaining an interest rate ensuring effective control over inflation escalates the costs of rescue interventions. We delve into this trade-off and determine the circumstances under which deviating from the target interest rate, thereby reducing intervention costs, enhances overall welfare. From a normative standpoint, our analysis indicates where liquidity risk is either low or high, the central bank should prioritize achieving the inflation target. |
| Keywords: | Central Banking, Financial stability, Rescue Policies |
| JEL: | G01 G21 G28 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:anc:wmofir:191 |
| By: | Christophe Blot; Paul Hubert; Fabien Labondance |
| Abstract: | We investigate whether dissent in monetary policy committees affect asset prices. We exploit a feature of the ECB communication for identification: the revelation of dissent during press conferences is separated from policy decision announcements. Following a narrative approach, we compute a novel granular index of ECB dissent for each instrument and identify the dissent direction. Using tick data, we isolate asset price changes exactly when dissent is revealed. Dissent has a strong negative effect on stock prices, that operates specifically around status quo decisions. Dissent is a key driver of stock prices on these days, explaining one-third of their variation. |
| Keywords: | Asset prices, Monetary Policy Committee, European Central Bank, Disagreement, Bad news. |
| JEL: | G14 E43 E52 D70 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-31 |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | We estimate transitory and permanent import tariff shocks in the United States over the postwar period. We find that transitory tariff increases are neither inflationary nor contractionary, and are not associated with monetary tightening. In contrast, permanent tariff increases trigger a temporary rise in inflation (a one-off increase in the price level) and a brief tightening of monetary policy. Consistent with the intertemporal approach to the balance of payments, transitory tariff increases reduce imports and improve the trade balance, whereas permanent increases leave both largely unchanged. Transitory shocks account for approximately 80 percent of tariff movements. Overall, tariff shocks are estimated to be a minor driver of U.S. business cycle fluctuations on average and even during episodes of substantial tariff hikes, such as Nixon 1971, Ford 1975, and Trump 2018. |
| JEL: | E31 E52 F13 F41 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33997 |
| By: | Joseph Abadi; Jesús Fernández-Villaverde; Daniel R. Sanches |
| Abstract: | We present a micro-founded monetary model of the world economy to study international currency competition. Our model features both “unipolar” equilibria, with a single dominant international currency, and “multipolar” equilibria, in which multiple currencies circulate internationally. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt. A large economy has a natural advantage in ensuring its currency becomes dominant, but if it lacks the fiscal capacity to absorb the global demand for liquid assets, the multipolar equilibrium emerges. |
| Keywords: | Dominant Currency; International Monetary System; Interest-Rate Policy; Fiscal Capacity |
| JEL: | E42 E58 G21 |
| Date: | 2025–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:101163 |
| By: | Jonathan Chiu; Cyril Monnet |
| Abstract: | Central bankers argue that programmable digital currencies may compromise the uniformity of money. We explore this in a stylized model where programmable money arises endogenously, and differently programmed monies have varying liquidity. Programmability provides private value by easing commitment frictions but imposes social costs under informational frictions. Preserving uniformity is not necessarily socially beneficial. Banning programmable money lowers welfare when informational frictions are mild but improves it when commitment frictions are low. These insights suggest programmable money could be more beneficial on permissionless blockchains. |
| Keywords: | Digital currencies and fintech; Payment clearing and settlement systems |
| JEL: | E50 E58 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-18 |
| By: | Li, Mengheng; Mendieta-Munoz, Ivan |
| Abstract: | We propose a factor correlated unobserved components (FCUC) model to analyze the sticky and flexible components of U.S. inflation. The proposed FCUC framework estimates trend inflation and component cycles in a flexible stochastic environment with time-varying volatility, factor loadings, and cross-frequency (trend-cycle) correlations, thus capturing how structural heterogeneity in price adjustment shapes the evolution of aggregate trend inflation over time. Using Bayesian estimation methods, we show that the FCUC model substantially reduces the uncertainty surrounding estimates of trend inflation and improves both point and density forecast accuracy. Our findings reveal that, particularly following the Global Financial Crisis and more markedly since the COVID-19 recession, transitory price shocks originating from flexible inflation have become a major driver of trend inflation, whereas sticky inflation explains only part of the variation. These results indicate that temporary price movements can have persistent effects, highlighting important policy implications regarding the cyclical dynamics of disaggregated inflation components amid evolving macroeconomic conditions. |
| Keywords: | trend inflation, sticky inflation, flexible inflation, stochastic volatility, dynamic factor model |
| JEL: | C32 C53 E37 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:320299 |
| By: | Karsten Chipeniuk (Reserve Bank of New Zealand); Gulnara Nolan (Reserve Bank of Australia); Matt Nolan (e61 Institute) |
| Abstract: | In this paper we study the propagation of demand and supply shocks in a heterogeneous agent New Keynesian model. Calibrating the model to Australia, we explore how inequality in the model affects shock transition, as well as how shocks impact individuals differently across the distribution. Contrary to much of the literature, with a single asset in the model we find a dampening in the response of the real economy to a monetary policy shock, driven by falling consumption in the extremes of the distribution. This dampening is likely due to the high holdings of liquid assets by many households in the model, which allows these households to effectively smooth their consumption, emphasising the need to include further asset classes. In the case of supply shocks, we likewise find a dampened response of the real economy to both a labour disutility shock and a mark-up shock. These results highlight the need to explore models with more realistic asset classes in the Australian context. |
| Keywords: | heterogeneous agents; supply; inflation |
| JEL: | E21 E31 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2025-04 |
| By: | Monia Magnani; Massimo Guidolin |
| Abstract: | We study the complex, non-linear linkages between short-term policy rates and the size and expected durations of equity bubbles. We extend empirical models of periodically collapsing, rational bubbles to test whether and to what extent the long cycle of rates at the zero lower bound and of quantitative easing policies may have increased the probability of bubbles inflating and persisting, with emphasis on the US stock market. We find that the linkages between S&P returns, and ratebased indicators of monetary policies contain evidence of recurring regimes that can be characterized as one of a persisting vs. one of a collapsing bubble. Moreover, the probabilities of financial markets transitioning from a bubble to a state of (partial) collapse turns out to depend on both the initial, relative size of the bubble and on monetary policy indicators. This implies that an easier (tighter) monetary policy will inflate (deflate) a bubble through a simple, regression-style effect, but also yield a non-linear, “concave” effect by which, starting from low rates, rate hikes may at first inflate bubbles before contributing to their bursting, when rates are pushed above a critical threshold. Besides fitting the data, the resulting, parsimonious, regime switching models provide accurate and economically valuable recursive out-of-sample predictive performance, even when transaction costs are taken into account. |
| Keywords: | Rational bubbles, monetary policy, stock returns, regime switching, forecasting. |
| JEL: | G12 E52 C58 G17 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp25252 |
| By: | Paweł Kopiec (Narodowy Bank Polski); Małgorzata Walerych (Narodowy Bank Polski) |
| Abstract: | We investigate whether the transmission of monetary shocks in Poland depends on the level of economic slack. To this end, we estimate smooth transition panel local projections using Poland’s regional data and analyze how monetary shocks affect unemployment and prices in regimes of high and low unemployment. Our key finding aligns with economic intuition: the response of unemployment to monetary policy shocks is stronger when economic slack is high, compared to when it is low. Conversely, the adjustment of prices to monetary innovations is more pronounced when idle resources in the economy are scarce, compared to when they are abundant. Our main conclusion is further supported by evidence showing that the difference in the strength of the employment response to monetary shocks, depending on the unemployment level, is more pronounced in sectors producing non-tradable goods than in those manufacturing tradable goods. Moreover, comparing our model with its linear counterpart confirms that monetary transmission in Poland indeed exhibits state-dependence, while the analysis of monetary shock distributions under low and high unemployment shows that our results are not driven by the presence of a regime-dependent pattern in monetary disturbances. |
| Keywords: | monetary policy transmission, unemployment, local projections, state dependence |
| JEL: | E24 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:nbp:nbpmis:377 |
| 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: | Similar to the more traditional money market funds (MMFs), stablecoins aim to provide investors with safe, money-like assets. We investigate similarities and differences between these two investment products. Our key finding is that, like MMFs, stablecoins also suffer from “flight-to-safety” dynamics. This is manifested in net flows from riskier to safer stablecoins on days of crypto-market stress. The same flight-to-safety dynamics also characterized flows during stablecoin runs, as exemplified by the two most severe episodes in 2022 and 2023. Furthermore, as flight-to-safety flows occur within MMF families, stablecoin flows tend to occur within blockchains. |
| Keywords: | money market mutual funds; financial stability; runs; liquidity transformation; crypto assets; stablecoins |
| JEL: | G10 G20 G23 |
| Date: | 2025–06–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbqu:101131 |
| By: | Sophia Cho; Thomas M. Mertens; John C. Williams |
| Abstract: | Interest rates have fluctuated significantly over time. After a period of high inflation in the late 1970s and early 1980s, interest rates entered a decline that lasted for nearly four decades. The federal funds rate—the primary tool for monetary policy in the United States—followed this trend, while also varying with cycles of economic recessions and expansions. |
| Keywords: | zero lower bound (ZLB); ZLB; risk; Financial derivatives |
| JEL: | E52 |
| Date: | 2025–07–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101205 |
| By: | Andrea Boitani (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Catalin Dragomirescu-Gaina (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Andrea Monticini (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore) |
| Abstract: | We delve into Venezuela’s 2018-2019 hyperinflation episode to examine the policy constraints autocratic governments face during extreme economic distress. We develop a simple model that reflects dynamics in a segmented foreign exchange (FX) market and allows us to understand how media coverage may influence discretionary policy controls. Leveraging a special dataset of daily consumer prices collected by volunteers, we show that official FX manipulation allowed the government to mitigate hyperinflationary pressures by maintaining overvalued levels relative to the black-market that in turn helped anchor expectations. Crucially, our empirical results indicate that media coverage significantly constrained the government’s ability to manipulate official FX rates, despite ample reserves and a de facto control over hard currency supply. The findings offer new evidence that, even in low-accountability regimes, policy discretion is limited by media-driven scrutiny. |
| Keywords: | hyperinflation; media coverage; exchange rate; policy discretion; autocratic regime. |
| JEL: | D80 E31 E50 H50 P20 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:ctc:serie1:def142 |
| By: | Andrew B. Martinez; Alexander D. Schibuola; David Beckworth |
| Abstract: | Arguments for nominal income targeting are often dismissed because it is an unreliable measure. To assess these concerns, we compare the real-time performance of several nominal and real measures of economic slack. We find that the nominal GDP expectations gap - the difference between nominal GDP and average projections thereof from surveys of professional forecasters - performs well as a measure of economic slack: its historical revisions are 2-3 times smaller than other measures, it significantly improves real-time forecasts of inflation since the pandemic, and it makes monetary policy rules up to 40 percent less volatile. Overall, concerns about nominal income targets are misplaced. |
| Keywords: | Business cycles; Forecast accuracy; Phillips curve; Taylor rule |
| JEL: | C53 E32 E37 E47 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:gwc:wpaper:2025-004 |
| By: | Xie, Danyang |
| Abstract: | The United States and China exhibit markedly different development paths in digital assets and blockchain technology. The US relies on market-driven approaches, with the private sector promoting stablecoin innovation to strengthen the dollar’s global position, while China adopts a government-led approach, implementing centralized systems such as consortium chains and the digital yuan (e-CNY), emphasizing financial security and regulation. These divergent paths reflect fundamental institutional differences: American distrust of centralized institutions has fostered distributed ledger development, while China mitigates risks through government leadership. Currently, the digital yuan faces adoption challenges due to insufficient enthusiasm from commercial banks. We propose implementing a “dynamic reserve mechanism” to incentivize circulation and enhance privacy protection to address user concerns. The private sector should participate more actively in innovation, and we recommend establishing AI-supported “dynamic regulatory sandboxes” or “smart regulatory gateways” based on smart contracts to better balance innovation and regulatory needs. To address inflation and depegging risks of stablecoins, we recommend moving beyond fiat currency pegging to explore new models anchored to consumer goods, such as a “BigMac Coin.” |
| Keywords: | Central Bank Digital Currency; Stablecoins; Blockchain; Financial Regulation; Financial Innovation; Regulatory Sandbox |
| JEL: | E42 E58 F33 G28 |
| Date: | 2025–05–27 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124989 |
| By: | Benguria, Felipe (Gatton College of Business and Economics, University of Kentucky); Novy, Dennis (University of Warwick, CAGE, CEP/LSE, CEPR, CESifo) |
| Abstract: | How can a currency achieve more widespread international use? We study the internationalization of the Chinese renminbi (RMB) through the lens of a unique policy experiment in Argentina. In 2023, amid a severe dollar shortage, Argentina expanded a currency swap line with the People's Bank of China. Within the next few months, the share of imports from China invoiced in RMB surged rapidly to nearly 50% - displacing the US dollar, which had previously accounted for virtually all invoicing. Following the presidential election of late 2023, as macroeconomic policies changed and the dollar shortage eased, invoicing in RMB declined. We explore the mechanisms behind this aggregate pattern, using rich firm-level data on imports, bank-firm loan relationships, and bank balance sheets. Our results indicate that banks played a key role, in line with the dollar shortage narrative. First, firms with pre-existing relationships to banks with limited US dollar loans were more likely to switch to RMB. Second, firms borrowing from a Chinese state-owned bank were significantly more likely to use RMB. We also document firm-level spillovers, with RMB use for imports from China increasing the likelihood of RMB use for imports from other countries. Finally, we observe an effect on trade volumes. Firms switching to RMB saw increased total imports. |
| Keywords: | Banking, Central Bank, China, Geoeconomics, Invoicing, Lending, Renminbi, Swap, Trade, US Dollar JEL Classification: E58, F14, F31, F33, G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:cge:wacage:758 |
| By: | Hugo De Vere; Srini Ramaswamy; Sam Schulhofer-Wohl |
| Abstract: | The Federal Reserve’s liabilities include a mix of floating-rate instruments, such as reserves, and long-duration, non-interest-bearing instruments, such as currency. We investigate the implications of an asset-liability management approach to choosing assets to back these liabilities, with a focus on matching the duration of assets and liabilities. We study the net income volatility and mark-to-market volatility of several different asset maturity ladders using a Monte Carlo simulation of future interest rate paths. Short-duration ladders minimize net income volatility when paired with floating-rate liabilities but maximize it when paired with currency. Long-duration ladders minimize income volatility when combined with currency and also minimize the volatility of the economic value of assets net of liabilities in that case, but at the expense of higher mark-to-market asset volatility. We discuss why barbells that combine long- and short-duration strategies produce much lower income volatility than ladders of similar average duration, when liabilities have a mix of long and short durations. However, a barbell could be challenging to implement at scale. We find that an ”across-the-curve” strategy of buying securities in proportion to outstanding amounts generates somewhat less income volatility than a laddered portfolio, though still more than the barbell portfolio. |
| Keywords: | Central Bank; Monetary Policy; Federal Reserve Balance Sheet; Asset and Liability Management |
| JEL: | E52 E58 |
| Date: | 2025–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:101201 |
| By: | Brignone , Davide (Bank of England); Mazzali, Marco (University of Bologna) |
| Abstract: | What drives business cycle fluctuations in the euro area (EA)? To answer this question, we build a rich, high-dimensional dataset of quarterly time series covering both EA aggregates and its major member countries. We find that just two shocks account for the bulk of the EA’s cyclical dynamics, and that they map cleanly onto standard demand and supply disturbances, consistent with textbook macroeconomic theory. Beyond this aggregate result, we uncover a high degree of synchronization in how member states respond to these shocks, highlighting the presence of a shared underlying cycle across the region. We also provide a historical decomposition of key EA macro variables based on the identified demand and supply components, with a particular focus on the recent inflation surge. Our findings show that supply-side factors dominated the initial phase of inflation through mid-2022, while demand-side pressures intensified and became increasingly important from mid-2022 onward. |
| Keywords: | Business cycle; identification; frequency domain; euro area economy; dynamic factors; inflation. |
| JEL: | C38 E32 |
| Date: | 2025–04–25 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1124 |
| By: | Maria Elena Filippin |
| Abstract: | This paper examines how household-targeted government policies influence financial market participation conditional on financial literacy, focusing on potential Central Bank Digital Currency (CBDC) adoption. Due to the lack of empirical CBDC data, I use the introduction of retail Treasury bonds in Italy as a proxy to investigate how financial literacy affects households' likelihood to engage with the new instrument. Using the Bank of Italy's Survey on Household Income and Wealth, I explore how financial literacy influenced households' participation in the Treasury bond market following the 2012 introduction of retail Treasury bonds, showing that households with some but low financial literacy are more likely to participate than other household groups. Based on these findings, I develop a theoretical model to explore the potential implications of financial literacy for CBDC adoption, showing that low-literate households with limited access to risky assets allocate more wealth to CBDC, while high-literate households use risky assets to safeguard against income risk. These results highlight the role of financial literacy in shaping portfolio choices and CBDC adoption. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.12575 |
| By: | Matteo Barigozzi; Claudio Lissona; Matteo Luciani |
| Abstract: | We measure the Euro Area (EA) output gap and potential output using a non-stationary dynamic factor model estimated on a large dataset of macroeconomic and financial variables. From 2012 to 2024, we estimate that the EA economy was tighter than policy institutions estimate, suggesting that the slow EA growth results from a potential output issue, not a business cycle issue. Moreover, we find that a decline in trend inflation, not slack in the economy, kept core inflation below 2% before the pandemic and that demand forces account for at least 30% of the post-pandemic increase in core inflation. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.05536 |
| By: | Elona Dushku (Bank of Albania) |
| Abstract: | Small and medium-sized enterprises (SMEs) are vital to Albania’s economy but face significant financing challenges amid monetary tightening. Utilizing firm-level data from 2022–2023, this study documents that the abrupt interest rate increases in 2022 prompted a rise in alternative financing use, particularly among younger and smaller firms, alongside greater reliance on internal funds as an immediate coping mechanism. In contrast, the more gradual tightening in 2023 led to a broad-based decline in both alternative and internal financing, indicative of constrained liquidity and persistent financial pressures across firms. Notably, heterogeneity in internal financing adjustments was limited, with younger firms showing no statistically significant difference from older firms, except for those experiencing tighter bank credit conditions, who further curtailed internal funding. These findings underscore the varied responses of SMEs to phased monetary tightening and emphasize the need for targeted policy measures to support firm resilience over time. |
| Keywords: | SMEs; Access to Finance; Monetary Tightening; Firm Characteristics |
| JEL: | E52 G21 G32 L25 |
| Date: | 2025–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp09-2025 |
| By: | Dominic Zaun Eu Jones |
| Abstract: | I develop Ornithologist, a weakly-supervised textual classification system and measure the hawkishness and dovishness of central bank text. Ornithologist uses ``taxonomy-guided reasoning'', guiding a large language model with human-authored decision trees. This increases the transparency and explainability of the system and makes it accessible to non-experts. It also reduces hallucination risk. Since it requires less supervision than traditional classification systems, it can more easily be applied to other problems or sources of text (e.g. news) without much modification. Ornithologist measurements of hawkishness and dovishness of RBA communication carry information about the future of the cash rate path and of market expectations. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.09083 |