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on Monetary Economics |
| By: | Hoffmann, Mathias; Mönch, Emanuel; Pavlova, Lora; Schultefrankenfeld, Guido |
| Abstract: | During the post-pandemic inflation surge, many central banks actively used communication about the inflation outlook as a policy tool to limit spillovers from realized to expected inflation. We present novel survey evidence showing that the ECB's guidance about the projected inflation path substantially lowers households' inflation expectations in times of unusually high inflation. A reassuring, positively framed non-quantitative communication style has the largest treatment effects on short-term expected inflation. Providing simple visualizations of the ECB's projected inflation path also significantly lowered inflation ex- pectations across horizons. We document substantial heterogeneity of these effects along key socio-demographic characteristics. Our findings suggest that, regarding their communication, central banks should 'keep it sophisticatedly simple (KISS)'. |
| Keywords: | Inflation projections, Central Bank Communication, Inflation Expectations, Randomized Control Trial, Survey Data |
| JEL: | E31 E52 E32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:319626 |
| By: | Ginters Buss; Guido Traficante |
| Abstract: | This paper studies monetary policy in a New Keynesian model with incomplete information regarding the persistence of cost-push shocks. The central bank and the private sector gradually learn about the persistence of the shock as it propagates through the economy. The central bank adopts a look-through policy in response to temporary cost-push shocks; otherwise, it follows a Taylor rule. If agents initially believe the cost-push shock to be temporary, while the true shock is persistent, it takes some time for the central bank, acting initially under an incorrect assumption, to realise its mistake and switch to monetary tightening. As a result, the actual inflation is higher than in a complete information case. Data-dependent discretionary early liftoff strategies can partially mitigate the effects of the initial policy misjudgment. Contrary to the full-information conditions, the findings cast doubt on the effectiveness of look-through policies in environments of incomplete information, irrespective of the actual persistence of the cost-push shock. |
| Keywords: | monetary policy, imperfect information, cost-push shock, high inflation |
| JEL: | D83 E17 E31 E47 E52 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-40 |
| By: | Francesca Caselli; Allan Dizioli |
| Abstract: | This paper sheds new light on an overlooked channel of monetary transmission: the relationship between central bank interest rate policy and the economy’s trade position. It examines the impact of monetary policy on import dynamics through its effect on domestic demand composition. In 2023, the euro area faced a significant contraction in imports, despite resilient GDP growth, challenging traditional import elasticity models. While an import intensity-adjusted demand framework explains the Great Financial Crisis (GFC) trade-GDP disconnect, it fails to account for the euro area’s 2023 import shortfall, indicating that additional factors are at play. Incorporating lending rates into the regression significantly improves the model’s explanatory power for this recent period, underscoring the role of monetary policy in the recent decline in imports. Using local projection methods with high-frequency monetary policy shocks, we confirm that monetary tightening negatively impacts imports by suppressing demand components with higher import intensity. Furthermore, this effect is amplified when accounting for the cross-border synchronization of monetary policy. |
| Keywords: | Monetary policy; Demand Composition; Monetary policy synchronization; International trade; Euro Area |
| Date: | 2025–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/140 |
| By: | Schepens, Glenn; Core, Fabrizio; De Marco, Filippo; Eisert, Tim |
| Abstract: | We provide novel evidence on the supply-side transmission of monetary policy through a floating-rate channel. After a rate hike, firms with floating-rate loans keep prices elevated to offset higher borrowing costs, thereby reducing the effectiveness of monetary policy. Using monthly data on product-level prices, industry-level inflation rates and the euro-area credit register from 2021 to 2023, we find that the short-run impact of monetary tightening on inflation is 50% smaller when firms rely on floating-rate loans. This effect is stronger for firms that rely more on working capital to finance production and when they can easily pass on higher prices to their sticky customerbase (customer capital). Since firms with floating-rate loans face an increase in their financial burden, their loan terms are more frequently renegotiated, often resulting in reduced spreads and a shift from floating to fixed rates. Overall, if firms across the euro area had a lower reliance on floating-rate loans, inflation would have been 0.8 percentage points lower in 2022-2023. JEL Classification: E31, E52, G21 |
| Keywords: | floating-rate loans, inflation, market power, monetary policy transmission, product prices |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253064 |
| By: | Ozili, Peterson K |
| Abstract: | The motivations and benefits of issuing a central bank digital currency (CBDC) are well known but the challenges faced by central banks in developing and issuing a CBDC have received less attention. To fill this gap, this article provides a succinct understanding of how politics hinder CBDC development. It presents the common arguments used by politicians to stifle CBDC development. It also suggests some ways to reduce political resistance towards CBDC development. |
| Keywords: | CBDC, politics, central bank digital currency, resistance. |
| JEL: | E50 E51 E52 E58 E59 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125034 |
| By: | Kristian S. Blickle; Jian Li; Xu Lu; Yiming Ma |
| Abstract: | Deposits are often perceived as a stable funding source for banks. However, the risk of deposits rapidly leaving banks—known as deposit flightiness—has come under increased scrutiny following the failures of Silicon Valley Bank and other regional banks in March 2023. In a new paper, we show that deposit flightiness is not constant over time. In particular, flightiness reached historic highs after expansions in bank reserves associated with rounds of quantitative easing (QE). We argue that this elevated deposit flightiness may amplify the banking sector’s response to subsequent monetary policy rate hikes, highlighting a link between the Federal Reserve’s balance sheet and conventional monetary policy. |
| Keywords: | banking; deposits |
| JEL: | G20 G21 E00 |
| Date: | 2025–07–10 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101247 |
| By: | Karadi, Peter; Nakov, Anton; Nuño, Galo; Pasten, Ernesto; Thaler, Dominik |
| Abstract: | We characterize optimal monetary policy under state-dependent pricing. The framework gives rise to nonlinear inflation dynamics: The flexibility of the price level increases after large shocks due to an endogenous rise in the frequency of price changes. In response to large cost-push shocks, optimal policy leverages the lower sacrifice ratio to curb inflation. When faced with total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability. The optimal long-run inflation rate is just above zero. JEL Classification: E31, E32, E52 |
| Keywords: | large shocks, nonlinear Phillips curve, optimal monetary policy, state-dependent pricing |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253068 |
| By: | Kanelis, Dimitrios; Kranzmann, Lars H.; Siklos, Pierre L. |
| Abstract: | We analyze how financial stability concerns discussed during Federal Open Market Committee (FOMC) meetings influence the Federal Reserve's monetary policy imple- mentation and communication. Utilizing large language models (LLMs) to analyze FOMC minutes from 1993 to 2022, we measure both mandate-related and financial stability-related sentiment within a unified framework, enabling a nuanced examina- tion of potential links between these two objectives. Our results indicate an increase in financial stability concerns following the Great Financial Crisis, particularly dur- ing periods of monetary tightening and the COVID-19 pandemic. Outside the zero lower bound (ZLB), heightened financial stability concerns are associated with a reduc- tion in the federal funds rate, while within the ZLB, they correlate with a tightening of unconventional measures. Methodologically, we introduce a novel labeled dataset that supports a contextualized LLM interpretation of FOMC documents and apply explainable AI techniques to elucidate the model's reasoning. |
| Keywords: | Explainable Artificial Intelligence, Financial Stability, FOMC Deliberations, Monetary Policy Communication, Natural Language Processing |
| JEL: | E44 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:319627 |
| By: | Aaron Hedlund; Kieran Larkin; Kurt Mitman; Serdar Ozkan |
| Abstract: | This paper examines the impact of mortgage market structures on shaping economic responses to the unprecedented interest rate and inflation dynamics of 2021-2024. We first empirically document that economies with a larger share of variable-rate mortgages exhibit stronger responses in house prices to monetary policy shocks. We then develop and calibrate a structural model of the housing market to demonstrate that these mortgage structures can account for a substantial portion of the divergent house price paths observed across the U.S., Canada, Sweden, and the U.K. during the Great Inflation. Our analysis reveals that early pandemic mortgage rate cuts drove 45% of the U.S. house price boom. Economies dominated by adjustable-rate mortgages (ARMs) show greater price sensitivity to monetary tightening, while fixed-rate mortgage (FRM) regimes exhibit more pronounced path dependence due to a lock-in effect. These dynamics have significant distributional consequences, with low-income homeowners benefiting most from the initial low-rate environment, especially in FRM regimes. Finally, we show that the preferred monetary tightening path is regime-dependent, as a policy counterfactual reveals that FRM-dominant economies benefit more from a shorter and sharper tightening schedule. |
| Keywords: | housing; mortgages; monetary policy; heterogeneous agents; inflation |
| JEL: | D31 E21 E52 |
| Date: | 2025–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:101282 |
| By: | Jonathan Benchimol; Sophia Kazinnik; Yossi Saadon |
| Abstract: | In this study, we examine the Federal Reserve’s communication strategies during the COVID-19 pandemic, comparing them with communication during previous periods of economic stress. Using specialized dictionaries tailored to COVID-19, unconventional monetary policy (UMP), and financial stability, combined with sentiment analysis and topic modeling techniques, we identify a distinct focus in Fed communication during the pandemic on financial stability, market volatility, social welfare, and UMP, characterized by notable contextual uncertainty. Through comparative analysis, we juxtapose the Fed’s communication during the COVID-19 crisis with its responses during the dot-com and global financial crises, examining content, sentiment, and timing dimensions. Our findings reveal that Fed communication and policy actions were more reactive to the COVID-19 crisis than to previous crises. Additionally, declining sentiment related to financial stability in interest rate announcements and minutes anticipated subsequent accommodative monetary policy decisions. We further document that communicating about UMP has become the “new normal†for the Fed’s Federal Open Market Committee meeting minutes and Chairman’s speeches since the Global Financial Crisis, reflecting an institutional adaptation in communication strategy following periods of economic distress. These findings contribute to our understanding of how central bank communication evolves during crises and how communication strategies adapt to exceptional economic circumstances. |
| Keywords: | central bank communication, unconventional monetary policy, financial stability, text mining, COVID-19 |
| JEL: | C55 E44 E58 E63 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-38 |
| By: | J. Atsu Amegashie |
| Abstract: | Inflation is the percentage change in the CPI over a given period of time. It is usually calculated over a year (year-on-year inflation) and over a month (month-to-month inflation). Even if prices are not currently rising from month to month, the year-to-year inflation rate could still be positive and high. As shown in this article, it is possible that, during a certain period, the cost of living in a given month is the highest but the year-on-year inflation in that month is the lowest. The cost of living and the inflation rate may move in opposite directions. This accounts for the well-known difference between measured (official) inflation and consumers’ perceived inflation. Using the CPI, I propose a simple solution that unambiguously ensures that a fall (a rise) in the inflation rate indicates that we are getting closer to (farther from) a ‘target’ cost of living. |
| Keywords: | annual inflation, consumer price index, cost of living, monthly inflation, perceived inflation |
| JEL: | E31 H25 J31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11973 |
| By: | Hermes, Felix; Schmeling, Maik; Schrimpf, Andreas |
| Abstract: | We analyze the international dimension of repo markets using novel euro area regulatory microdata. Our findings highlight the deep integration of funding markets across the Atlantic and the US dollar’s outsized role. Our paper documents five key facts: (1) US dollar repos by euro area entities account for approximately 40% of total volumes and are comparable in size to euro repos; (2) term repos (with maturities beyond one day) are quantitatively more relevant than commonly thought, especially non-centrally cleared ones; (3) repo markets have become more collateral-driven, involving diverse nonbank financial players and trading motives; (4) banks’ intragroup transactions form a large share of non-centrally cleared volumes; and (5) haircuts, even for riskier collateral, are often zero or negative, especially in euro trades. We show in two empirical applications that US monetary policy shocks spill over to euro repo rates and that negative haircuts arise from market power and collateral demand dynamics. JEL Classification: G12, G14 |
| Keywords: | bank intermediation, haircuts, repo market, US dollar funding |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253065 |
| By: | Karim Badr |
| Abstract: | Over the past two decades, Afghanistan experienced three main periods of deflation, with the lastest being the longest. This paper investigates the macroeconomic factors influencing inflation dynamics in the short and long run, considering both domestic and external factors. Utilizing quarterly data and employing Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM) methodologies, the paper finds that the exchange rate is the primary long-term price driver due to Afghanistan's reliance on imports and foreign aid, followed by money supply and international commodity prices. In the short run, inflation is persisent, and broad money have a significant impact on inflation compared to external factors. |
| Keywords: | Afghanistan; Inflation; Deflation; Money Supply; Exchange Rate; Fragile and Conflict States; Commodity Prices |
| Date: | 2025–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/137 |
| By: | Busato, Francesco; Cisco, Gianluigi; De Simone, Marco; Marzano, Elisabetta |
| Abstract: | Climate change has led to an increase in extreme weather events, causing significant challenges for macroeconomic stability and monetary policy, particularly in small open economies (SOEs). This paper investigates the optimal monetary policy response to weather shocks in an SOE framework, using a Dynamic Stochastic General Equilibrium (DSGE) model calibrated for Turkey. The model includes sectoral price rigidities, trade openness, and climate-related productivity shocks affecting agricultural output. We evaluate alternative monetary policy rules, including those that target aggregate inflation, sector-specific inflation, and output stabilization. Our findings suggest that an aggressive monetary policy response to agricultural inflation mitigates short-term economic disruptions and accelerates recovery, albeit at the cost of a deeper initial contraction. The Ramsey-optimal policy prioritizes inflation stability while minimizing the long-term persistence of weather-induced output losses. Our results offer insights into the role of monetary policy in addressing climate-induced economic fluctuations in SOEs, highlighting the importance of tailored monetary policies that account for sectoral heterogeneities. |
| Keywords: | Agricultural output, Weather shocks, Dynamic Stochastic General Equilibrium Model |
| JEL: | E32 Q51 Q54 |
| Date: | 2025–03–17 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125175 |
| By: | Pascal Paul; Mauricio Ulate; Jing Cynthia Wu |
| Abstract: | We develop a quantitative New Keynesian DSGE model with monopolistic banks to study the macroeconomic effects of introducing a central bank digital currency (CBDC). Households benefit from an expansion of liquidity services and higher deposit rates as bank deposit market power is curtailed, while bank profitability and lending decline. We assess this trade-off for a wide range of economies that differ in their level of interest rates. We find substantial welfare gains from introducing a CBDC with an optimal rate that can be approximated by a simple rule of thumb: the maximum between 0% and the policy rate minus 1%. |
| JEL: | E3 E4 E5 G21 G51 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33968 |
| By: | Jonathan Alexander Muñoz-Martínez |
| Abstract: | This study introduces a methodology for evaluating the de-anchoring of inflation expectations by proposing indicators to measure deviations in short- and long-term inflation expectations from the Central Bank's target, analyzing their dependency over time using traditional and hierarchical statistical copulas, the latter incorporating the effect of the monetary policy stance. Using data from the Colombian financial market, the findings reveal that during inflationary episodes (2008–2009, 2015–2016, and 2022–2023), the dependency between short- and long-term expectations increased, indicating de-anchoring. This pattern was also observed during periods when inflation was below the target (2013 and 2020). Conversely, in years such as 2006, 2010, 2014, 2017, and 2021, and towards the end of 2023, the decrease in this dependency suggests that expectations were anchoring. Additionally, when the monetary policy stance was considered, there was a strong negative dependency during contractionary episodes, while progressive interest rate reductions were associated with a positive dependency. *****RESUMEN: Este estudio introduce una metodología para evaluar el desanclaje de las expectativas de inflación proponiendo indicadores que miden desviaciones en las expectativas de inflación a corto y largo plazo respecto al objetivo del Banco Central, posteriormente, se analiza su dependencia a lo largo del tiempo utilizando cópulas estadísticas tradicionales y jerárquicas, estas últimas incorporando el efecto de la postura de la política monetaria. Utilizando datos del mercado financiero colombiano, los hallazgos revelan que durante episodios inflacionarios (2008–2009, 2015–2016 y 2022–2023), la dependencia entre las expectativas a corto y largo plazo aumentó, indicando desanclaje. Este patrón también se observó durante períodos en los que la inflación estuvo por debajo del objetivo (2013 y 2020). Por el contrario, en años como 2006, 2010, 2014, 2017 y 2021, y hacia finales de 2023, la disminución en esta dependencia sugiere que las expectativas estaban ancladas. Además, cuando se consideró la postura de la política monetaria, hubo una fuerte dependencia negativa durante episodios contractivos, mientras que las reducciones progresivas de la tasa de interés se asociaron con una dependencia positiva. |
| Keywords: | De-anchoring, Expectations, Credibility, Monetary Policy, Desanclaje, Expectativas, Credibilidad, Política Monetaria. |
| JEL: | E31 E52 E58 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1322 |
| By: | Basten, Christoph; Juelsrud, Ragnar |
| Abstract: | We show theoretically how the anticipated cross-selling of loans incentivizes banks to offer lower deposit spreads to attract and retain depositors, more when policy rates are lower and future cross-selling is more valuable. Utilizing comprehensive data on every Norwegian bank household relationship, we then establish empirically how banks facing identical loan demand respond to policy rate cuts with greater deposit spread reductions for clients with higher cross-selling potential, thereby raising both deposit and loan growth. Cross-selling constitutes a complementary, novel channel for monetary policy transmission through banks, elucidates loss-making deposit pricing in low-rate periods, and connects banks’ deposit and loan franchises. JEL Classification: D14, D43, E52, G21, G51 |
| Keywords: | bank franchise, cross-selling, deposits channel of monetary policy, monetary policy transmission, multi-product banking |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253072 |
| By: | Shantanu Banerjee; Paul Cordova; Michiel De Pooter; Olesya V. Grishchenko |
| Abstract: | We apply natural language processing tools to news articles in the financial press to construct a sentiment index—an index of the perceived semantic orientation of monetary policy communications around scheduled Federal Open Market Committee (FOMC) meetings. To that end, we develop several dictionaries that capture various monetary policy tools: conventional monetary policy, asset purchases, and forward guidance. The surprises in the sentiment index around FOMC meetings announcements explain variation in major asset prices classes between May 1999 and November 2022. Sentiment index surprises are important for explaining the variation in asset prices beyond monetary policy surprises. |
| Keywords: | Textual analysis; Semantic orientation; Sentiment index; Federal Reserve; FOMC; Hawkish; Dovish; Asset prices; Policy expectations; Conventional monetary policy; Asset purchases; Forward guidance; Zero-lower-bound; COVID |
| JEL: | E00 E40 E58 G12 |
| Date: | 2025–07–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-48 |
| By: | Jonathan J. Adams; Mr. Philip Barrett |
| Abstract: | Empirical monetary policy shocks (EMPS) contain information about monetary policy both today and in the future. We define the term structure of monetary policy news as the marginal impact of an EMPS on the policy residual at each horizon. Policy news at different horizons has different effects, so knowing the term structure is necessary in order to use an EMPS to evaluate theory. We develop an IV method to estimate this term structure. We find that EMPS in the literature do not represent textbook policy surprises. Instead, they represent a mix of information about policy at many horizons, and this mix varies depending on how the EMPS is identified. We use the estimated term structures to construct synthetic forward guidance and surprise shocks, and estimate their macroeconomic effects. Surprise interest rate hikes are contractionary with little effect on prices, while long-term forward guidance is deflationary. |
| Keywords: | Monetary Policy Shocks; Forward Guidance; Term Structure |
| Date: | 2025–06–27 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/128 |
| By: | Kothe, Rafael |
| Abstract: | This paper investigates how social network and conformity dynamics shape the stability of inflation expectations and the dissemination of economic narratives. Using an agent-based macroeconomic simulation, I integrate a heuristic switching framework with an opinion dynamics mechanism to examine the impact of targeted narrative dissemination by highly central agents on expectation dispersion. The computational experiments reveal that when influential network actors transmit the central bank's inflation narrative, both inflation rate dispersion and the dispersion of expectations are substantially reduced. Conversely, when distorting narratives spread through these key nodes, it requires very high persuasion levels to significantly amplify instability. Moreover, impulse response analyses show that stronger social influence accelerates convergence toward rational expectations following shocks, thereby mitigating both the magnitude and persistence of deviations. However, heightened persuasion can also weaken the link between expectations and underlying fundamentals, as agents increasingly align with dominant narratives rather than economic signals. Overall, these findings underscore the dual role of social networks in monetary policy communication, capable of both anchoring expectations and amplifying destabilising narratives. |
| Keywords: | Expectations, Economic Narratives, Network Effects, Behavioral Macroeconomics, Agent-Based Modeling, Monetary Policy Communication |
| JEL: | D84 D83 E52 E71 D85 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bamber:319882 |
| By: | John Aguirre; Alan Ledesma; Fernando Perez; Youel Rojas |
| Abstract: | This paper studies how El Niño Costero, a large climatic event, generates physical risks disrupting business cycles and hindering the effectiveness of monetary policy. Using Peruvian data, we find consistent empirical evidence that El Niño shocks leave a footprint on the economy akin to a supply-side shock: it exerts inflationary pressures while simultaneously contracting GDP. The effects are very persistent and reflect the differentiated effects across sectors in the economy. Primary sectors response is more immediate and larger but persistent. Conversely, non-primary sectors experience lagged effects that become considerably more persistent and important later on. We integrate these empirical findings into a semi-structural model that incorporates five non-linear transmission channels through which El Niño affects the economy. These non-linearities present a challenge for monetary policy design, as the economic uncertainty and the cost in stabilizing the economy depends on the frequency of El Niño events. Faced with such large-scale shocks, hawkish conventional monetary policy remains a relevant, though limited, tool for stabilizing inflation dynamics. |
| Keywords: | climate, extreme weather events, growth, inflation, financial and macroeconomic stability |
| JEL: | E31 E52 O44 Q54 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1276 |
| By: | Kanelis, Dimitrios; Siklos, Pierre L. |
| Abstract: | We combine modern methods from Speech Emotion Recognition and Natural Language Processing with high-frequency financial data to precisely analyze how the vocal emo- tions and language of ECB President Mario Draghi affect the yields and yield spreads of major euro area economies. This novel approach to central bank communication reveals that vocal and verbal emotions significantly impact the yield curve, with effects varying in magnitude and direction. Our results reveal an important asymmetry in yield changes with positive signals raising German, French, and Spanish yields, while negative cues increase Italian yields. Our analysis of bond spreads and equity mar- kets indicates that positive communication influences the risk-free yield component, whereas negative communication affects the risk premium. Additionally, our study contributes by constructing a synchronized dataset for voice and language analysis. |
| Keywords: | Artificial Intelligence, Asset Prices, Communication, ECB, High-Frequency Data, Speech Emotion Recognition |
| JEL: | E50 E58 G12 G14 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:320429 |
| By: | Aydin Yakut, Dilan (Central Bank of Ireland) |
| Abstract: | This study investigates the dynamics of trend inflation for both the euro area (EA) countries and the aggregate rates of the EA. To this aim, trend inflation rates are estimated using various forms of a flexible unobserved components model, allowing for outliers and stochastic volatility. Using granular sector-level data for country-level applications provides a finer comparison between the member countries. Both models exploiting the sector and country levels are considered for the euro area to understand the underlying dynamics more thoroughly. In addition, alternative estimates for the euro area are obtained by combining country-level results. The results show that the use of multivariate models improves precision and outperforms the univariate models at longer horizons. A horse race between these estimates and the other popular measures from the literature, such as PCCI, supercore, etc., shows that no single metric outperforms the others. Therefore, it remains crucial to have various measures in the toolbox of policymakers as they complement each other. |
| Keywords: | Trend inflation, persistence, unobserved components, the euro area. |
| JEL: | E52 C32 C11 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:wpaper:3/rt/25 |
| By: | Felipe Benguria; Dennis Novy |
| 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: | E58 F14 F31 F33 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11964 |
| By: | Schulz-Gebhard, Jan; Ipsen, Leonhard |
| Abstract: | We argue that most of the existing literature on inflation inequality misses an essential source of disparity by focusing on differences in expenditures while ignoring the effect of a price change on the purchasing power of households' incomes. As a remedy, we propose weighting price changes by income rather than by expenditure, as is commonly done. We theoretically derive why, under incomeweighting, lower-income households are disproportionately affected by any change in prices. This proposition is validated empirically for 21 EU countries using current sector-level input-output data. Our approach allows to reconcile the conflicting evidence in the literature on inflation inequality regarding structurally higher inflation perceptions and expectations of lower-income households. Ultimately, these findings call for a broad reassessment of current approaches to measuring inflation and income inequality. |
| Keywords: | Inflation, Inequality, Input-output Analysis, Europe |
| JEL: | E31 D31 C15 C67 D90 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bamber:319883 |
| By: | Laurence M. Ball; Daniel Leigh; Prachi Mishra |
| Abstract: | Why did US inflation rise over 2021-22 and why has it retreated since then? Ball, Leigh, and Mishra (2022), writing near the inflation peak, explained the rise with a framework in which inflation depends on three factors: long-term expectations; the tightness of the labor market as measured by the vacancy-to-unemployment (V/U) ratio; and large changes in relative prices in particular industries such as energy and autos. This paper finds that the same framework explains the retreat in inflation since our earlier work. |
| JEL: | E31 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33806 |
| By: | Ricardo J. Caballero; Tomás E. Caravello; Alp Simsek |
| Abstract: | Monetary policy transmits through broad financial conditions—interest rates, asset prices, credit spreads and exchange rates—rather than through the policy rate alone. Yet current frameworks remain anchored around r*, the neutral interest rate. We introduce FCI*, the neutral level of financial conditions that closes expected output gaps, within a framework where financial conditions and macroeconomic shocks drive economic activity with inertia. Conceptually, FCI* reflects macroeconomic developments rather than financial market valuations, making it more stable than r*, which responds to both macroeconomic and financial factors. We estimate FCI* using a two-equation model along the lines of Laubach and Williams (2003) with 1990-2024 data. Our empirical estimates reveal three findings. First, estimated FCI* remained stable after the 2008 crisis while r* declined persistently due to asset price declines. Second, since the observed FCI reflects financial market shocks, large FCI gaps emerge especially during recessions. Third, at times of rapid monetary policy changes, FCI gaps more accurately reflect the effective policy stance because FCI is driven by forward-looking markets; for example, FCI gaps correctly identified the 2022 tightening when interest rate measures still suggested accommodation. |
| JEL: | C32 E43 E44 E52 E58 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33952 |
| By: | Robert C. M. Beyer; Mr. Luis Brandão-Marques |
| Abstract: | Updated estimates of real equilibrium interest rates in the euro area, derived from eight prominent methodologies proposed in the academic literature, deliver a wide range of estimates, partly because they vary in time horizon and economic complexity. By the end of 2024, shorter-term equilibrium rates mostly exceeded longer-term rates, with foreign spillovers contributing positively to euro area equilibrium rates. Given the wide range of estimates and their high uncertainty, a judgment-based assessment should be based on three criteria and consider their conceptual fit, robustness, and alignment with other economic indicators. Even then, the uncertainty surrounding the estimates represents a specific form of model uncertainty that necessitates the formulation of robust conclusions and policy recommendations. Our results show that ECB policy rates are broadly aligned with short-run efficient rates and suggest that monetary policy remained restrictive at the end of 2024. |
| Keywords: | Equilibrium Interest Rates; Euro Area; Monetary Stance; Foreign Spillovers |
| Date: | 2025–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/123 |
| By: | José Vicente Romero; Sara Naranjo-Saldarriaga; Jonathan Alexander Muñoz-Martínez |
| Abstract: | This paper examines the macroeconomic impacts of adverse weather shocks on the Colombian economy, with a specific focus on agricultural output, food prices, and headline inflation. Drawing on empirical evidence from events such as the 2015–2016 El Niño, we document that these shocks tend to reduce agricultural output and increase inflation while having a limited effect on aggregate GDP growth. Motivated by these stylized facts, we develop a small open economy New Keynesian model for Colombia that introduces a mechanism in which weather shocks alter the relative prices of agricultural and non-agricultural goods. This framework allows us to capture the inflationary pressures induced by adverse climate events in a structural setting. Under our proposed calibration, food inflation, headline inflation, and inflation expectations rise in response to the shock, prompting the monetary authority to raise the interest rate to anchor inflation expectations. *****RESUMEN: Este documento examina los impactos macroeconómicos de choques climáticos adversos sobre la economía colombiana, con un enfoque específico en la producción agrícola, los precios de los alimentos y la inflación total. A partir de la evidencia empírica, documentamos que estos choques tienden a reducir la producción agrícola y aumentar la inflación, aunque con un efecto limitado sobre el crecimiento del PIB total. Motivados por estos hechos estilizados, se desarrolla un modelo neokeynesiano para una economía pequeña y abierta que introduce un mecanismo mediante el cual los choques climáticos afectan los precios relativos de bienes agrícolas y no agrícolas. Este marco permite capturar las presiones inflacionarias inducidas por eventos climáticos adversos de manera estructural. Bajo la calibración propuesta para Colombia, la inflación de alimentos, la inflación total y las expectativas de inflación aumentan en respuesta al choque, lo que lleva a la autoridad monetaria a incrementar parcialmente la tasa de interés con el fin de anclar las expectativas de inflación. |
| Keywords: | Extreme Weather events, El Niño Southern Oscillation (ENSO), Inflation, Small Open Economy New Keynesian Models, Eventos climáticos extremos, Fenómeno de El Niño (ENSO), Inflación, Economía pequeña y abierta, Modelos neokeynesianos. |
| JEL: | Q54 E52 E31 E32 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1319 |
| By: | Gardner, Leigh A. |
| Abstract: | A long-standing debate in Africa’s economic history is the speed with which the introduction of colonial currency changed the monetary systems in use on the continent. On the one hand, this introduction saw the gradual decline of indigenous currencies such as cowries and manilas. On the other, the persistence of such currencies suggests that a system of multiple currencies was maintained for some time after the beginning of colonial rule. This article uses new data on seasonal fluctuations in the circulation of official currencies in West Africa to argue that they were largely used for the purchase of cash crops and imports. Demand for these currencies was thus driven by their use as the medium of exchange in international trade. Such limited adoption of colonial currencies reflected both the motivations behind their introduction as well as Africans’ limited access to financial services. |
| Keywords: | colonialism; international trade; money; seasonality; West Africa |
| JEL: | F10 N17 |
| Date: | 2025–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128610 |
| By: | Irigoin, Alejandra |
| Abstract: | By specifying the specie on which returns were to be repaid respondentia was a ubiquitous financial instrument to carry international trade in which silver was “essential” for its continuation. Where multiple currencies existed and silver was the preferred money, imported silver species performed as foreign currency. Thus, the import of foreign coins created issues for prices, profits and exchange rates. Eighteenth century Europeans alternatively used respondentia or bills depending on the monetary context, casting a shade of doubt on the inherent efficiency of a cashless means of payment. Until the 1820s, private bills of exchange did not circulate where cash had a premium. Europeans developed means to regulate the price of foreign coins and exchange rates. Elsewhere respondentia allowed to hedge against exchange risk and propitiated arbitrage profits, giving an advantage over bills. The article documents the global scope of the instrument; it explains the exchange nature of the contract and explores the issues that respondentia came to solve. It highlights the role of monies of account Europeans used in pricing foreign currencies in international trade. |
| Keywords: | private maritime trade finance; early modern global commerce; exchange risk; monies of account |
| JEL: | N20 F31 G23 G14 |
| Date: | 2025–04–29 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128607 |
| By: | Laron Alleyne; Patrick Blagrave |
| Abstract: | We examine the vulnerability of inflation in Small Island Developing States (SIDS) to global food and fuel inflation changes, drawing on a large panel of 168 countries, including 31 SIDS. Estimates using the local projections methodology of Jordà (2005) reveal that inflation in SIDS is nearly twice as responsive to international food commodity inflation shocks as in non-SIDS counterparts. There is also evidence of asymmetry in food inflation pass-through, with food-inflation increases having larger pass-through than equivalently sized food-inflation decreases. Results hold even in the presence of country-specific fixed-effects and other control variables, most notably the weight of food and oil in a country’s CPI basket, further strengthening the finding that there is something SIDS-specific leading to higher food inflation pass-through. In the case of shocks to international crude oil inflation, the disparity between SIDS and non-SIDS is less apparent. Our results can be interpreted as indicating that market structures, dependence on imports, and the health of supply chains impact food-inflation passthrough, and should thus be priority areas for policymakers in SIDS. |
| Keywords: | Small Island Developing States; Inflation; Pass-through; Local Projections; Global Supply-Chain |
| Date: | 2025–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/138 |
| By: | d'Avernas, Adrien; Vandeweyer, Quentin; Petersen, Damon |
| Abstract: | This paper studies how Treasury market dynamics depend on adjustments to the central bank balance sheet. We introduce a dynamic model of Treasury bonds with traditional and shadow banks. In the model, both Treasury and repo market disruptions arise as a joint consequence of three frictions: (i) balance sheet costs, (ii) intraday reserves requirements, and (iii) imperfect substitutability between repo and bank deposits. Our model highlights the critical role of both sides of the central bank’s balance sheet as well as agents’ anticipation of shocks and policy interventions in matching observed market dynamics. JEL Classification: E43, E44, E52, G12 |
| Keywords: | basis trade, hedge funds, liquidity risk, repo, reserves, shadow banks |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253066 |
| By: | Savon Zakaria (Faculté des sciences juridiques, économiques et sociale-Souissi, Université Mohamed V) |
| Abstract: | The rise of Islamic banks in different countries worldwide can potentially complicate the implementation of monetary policy and affect its effectiveness. The purpose of our work is to address the question of the nature of the response of Islamic banking financing to the interest rate of monetary policy. Beyond this question, we are also interested in the factors that can shape the response of Islamic banking financing to conventional monetary policy. For the period between 2013 and 2022, across a panel of 12 countries, the results of the GMM approach first revealed the absence of an Islamic banking financing channel. They also showed that conventional monetary policy loses its effect on Islamic banks in dual banking systems where these banks have systemic importance. The development of Islamic finance, in turn, contributes to shielding Islamic financing from the effects of monetary policy. |
| Abstract: | L'essor des banques islamiques dans différents pays du monde peut potentiellement compliquer la mise en oeuvre de la politique monétaire et affecter son efficacité.L'objet de notre travail est de répondre à la question de la nature de la réponse des financements bancaires islamiques au taux d'intérêt de la politique monétaire. Au-delà de cette question, on s'intéresse également aux facteurs qui peuvent façonner la réponse du financement bancaire islamique à la politique monétaire conventionnelle. Pour la période entre 2013 et 2022, sur un panel de 12 pays, les résultats de l'approche GMM ont révélé d'abord l'absence d'un canal de financement bancaire islamique. Ils ont montré également que la politique monétaire conventionnelle perd d'effet sur les banques islamiques dans les systèmes bancaires duales où celles-ci ont une importance systémique. Le développement de la finance islamique concourt, à son tour, dans la prémunition des financements islamiques des effets de la politique monétaire. |
| Keywords: | Islamic banks, Transmission, Panel, GMM, Banques islamiques, politique monétaire, transmission, panel, Monetary policy, Banques islamiques politique monétaire transmission panel GMM Islamic banks monetary policy transmission panel GMM, GMM Islamic banks, monetary policy |
| Date: | 2025–06–15 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05124702 |
| By: | Iñaki Aldasoro; Matteo Aquilina; Ulf Lewrick; Sang Hyuk Lim |
| Abstract: | Stablecoins' linkages with the traditional financial system are growing, which raises policy challenges ranging from preserving financial integrity to mitigating financial stability risks. Broader use of foreign currency-denominated stablecoins could raise concerns about monetary sovereignty and, in some jurisdictions, erode the effectiveness of existing foreign exchange regulations. The principle of "same risks, same regulation" faces limitations in the context of stablecoins, highlighting the need for tailored regulatory approaches that address the nature and specific features of stablecoins. |
| Date: | 2025–07–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:108 |
| By: | Marco Reuter |
| Abstract: | This paper presents a novel methodology—leveraging a combination of AI and machine learning to estimate the geographic distribution of international stablecoin flows, overcoming the “anonymity” of crypto assets. Analyzing 2024 stablecoin transactions totaling $2 trillion, our findings show: (i) stablecoin flows are highest in North America ($633bn) and in Asia and Pacific ($519bn). (ii) Relative to GDP, they are most significant in Latin America and the Caribbean (7.7%), and in Africa and the Middle East (6.7%). (iii) North America exhibits net outflows of stablecoins, with evidence suggesting these flows meet global dollar demand, increasing during periods of dollar appreciation against other currencies. Further, we show that the 2023 banking crisis significantly impeded stablecoin flows originating from North America; and finally, offer a comprehensive comparison of our data to the Chainalysis dataset. |
| Keywords: | stablecoins; capital flows; capital flight; capital flow management measures (CFMs); crypto assets; currency substitution; dollar demand |
| Date: | 2025–07–11 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/141 |
| By: | Abdelkader Aguir (ESPI - Ecole Supérieure des Professions Immobilières, MOFID-Université de Sousse) |
| Abstract: | This article aims to identify the determinants of inflation trends in the ASS (Alliance of Sahel States) zone using the ARDL model, over the period 2019M1-2023M12. The main results of our analyses show that: (1) there is a shortterm relationship between the explanatory variable and the explained variables. In fact, reading the adjustment coefficient of this information means that, when inflation is far from its short-term equilibrium and to reach long-term equilibrium, its annual speed of adjustment is 14.7%; (2). The results of the bounds cointegration test confirm the existence of a cointegrating relationship between the model's explanatory variables, thereby, confirming the long-term relationship between the series of study variables; (3) the long-term relationship between inflation and the money supply shows that a 1% increase in money supply generates a 0.60% increase in inflation. Therefore, the Covid-19 has a significant impact on inflation and economic activity in the long term in the ASS zone. |
| Date: | 2025–03–30 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05050170 |
| By: | Sophia Kazinnik; Erik Brynjolfsson |
| Abstract: | This paper examines how central banks can strategically integrate artificial intelligence (AI) to enhance their operations. Using a dual-framework approach, we demonstrate how AI can transform both strategic decision-making and daily operations within central banks, taking the Federal Reserve System (FRS) as a representative example. We first consider a top-down view, showing how AI can modernize key central banking functions. We then adopt a bottom-up approach focusing on the impact of generative AI on specific tasks and occupations within the Federal Reserve and find a significant potential for workforce augmentation and efficiency gains. We also address critical challenges associated with AI adoption, such as the need to upgrade data infrastructure and manage workforce transitions. |
| JEL: | C8 C9 G4 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33998 |
| By: | Luis Fernando Melo-Velandia; José Vicente Romero; Diego Niño-Garavito |
| Abstract: | The Global Financial Cycle (GFC), defined as the fluctuations in international capital flows, asset prices, and risk appetite, has garnered significant attention from the recent international finance literature, market practitioners, and policymakers. This study employs a Dynamic Conditional Correlation (DCC) Copula model to examine the interaction between exchange rates for a group of seven developed economies and seventeen emerging market economies. Using these results and employing quantile panel data methods, we assess how the time-varying correlations of exchange rates behave in relation to variables associated with the GFC, specifically the VIX. The findings contribute to understanding the interconnectedness between time-varying international financial conditions and currency markets over time and during stress episodes, offering relevant implications for policymakers and market participants. *****RESUMEN: El Ciclo Financiero Global (GFC), definido como las fluctuaciones en los flujos internacionales de capital, los precios de los activos y el apetito por el riesgo, ha captado una atención significativa por parte de la literatura reciente en finanzas internacionales, los analistas de mercado y los responsables de política económica. En este estudio emplean modelos de Cópulas con Correlaciones Condicionales Dinámicas (DCC, por sus siglas en inglés) para examinar las correlaciones entre las tasas de cambio de un grupo de siete economías desarrolladas y diecisiete economías emergentes. A partir de estos resultados y utilizando métodos de datos de panel cuantílicos, se evalúa cómo se comportan las correlaciones dinámicas de las tasas de cambio frente a variables asociadas al GFC, en particular el índice VIX. Los hallazgos contribuyen a una mejor comprensión de la interconexión entre las condiciones financieras internacionales y los mercados cambiarios, tanto a lo largo del tiempo como durante episodios de estrés, ofreciendo implicaciones relevantes tanto para los responsables de política como para los participantes del mercado cambiario. |
| Keywords: | Dynamic conditional correlations, Elliptical copulas, Exchange rates, Global Financial Cycle, correlaciones condicionales dinámicas, cópulas elípticas, Tasas de cambio, Ciclo Financiero Global. |
| JEL: | C22 C46 F31 G15 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1320 |
| By: | Bettendorf, Timo |
| Abstract: | This paper investigates the effects of uncertainty shocks on selected U.S. financial asset prices by decomposing a traditional uncertainty shock into its supply-side and demand-side components. Following the approach by Piffer and Podstawski (2018), we identify uncertainty shocks using the price of gold and enhance this strategy by introducing the price of oil as a second variable. By examining daily price changes during significant events that trigger uncertainty, we provide evidence suggesting that despite an increase in gold prices, supply-side uncertainty shocks (e.g. armed conflicts or natural disasters) tend to result in higher oil prices, while demand-side uncertainty shocks (e.g. political and economic events) lead to declining oil prices. By exploiting this information with help of sign restrictions, we create two proxy variables and estimate Bayesian Vector Autoregression (BVAR) models to identify supply-side and demand-side uncertainty shocks. Our findings indicate that while gold prices alone can identify uncertainty shocks for most variables, the inclusion of oil prices reveals an additional dimension. The effects of these shocks differ in their impact on inflation expectations and may thus be a potential source of price puzzles if only the price of gold is considered. |
| Keywords: | uncertainty, proxy VAR, sign restrictions |
| JEL: | E43 E47 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:319620 |
| By: | Abdelkader Aguir (ESPI - Ecole Supérieure des Professions Immobilières) |
| Abstract: | The global COVID-19 crisis led to a major recession, following a supply and demand shock severely affecting both developed and emerging economies. Containment measures reduced demand and production, while financial market volatility impacted emerging economies. Countries' stimulus policies had mixed effects on these economies. The pandemic also disrupted global supply chains, leading to volatility in the prices of raw materials such as oil, metals and agricultural products. These fluctuations had an impact on production costs and, consequently, on the prices of final goods and services. In the wake of rising inflation, some are questioning the effectiveness of inflation-targeting policies. Our study evaluates the performance of this monetary regime in the face of crisis, estimating the efficiency frontier: inflation variability - output variability, which allows us to deduce measures of economic performance and measures of the efficiency of monetary policy in the face of an economic crisis. |
| Abstract: | La crise mondiale de la COVID-19 a entraîné une récession majeure, à la suite d'un double choc d'offre et de demande ayant gravement affecté aussi bien les économies développées qu'émergentes. Les mesures de confinement ont réduit la demande et la production, tandis que la volatilité des marchés financiers a eu un impact significatif sur les économies émergentes. Les politiques de relance mises en œuvre par les différents pays ont eu des effets contrastés sur ces économies. La pandémie a également perturbé les chaînes d'approvisionnement mondiales, provoquant une forte volatilité des prix des matières premières telles que le pétrole, les métaux et les produits agricoles. Ces fluctuations ont influé sur les coûts de production et, par conséquent, sur les prix des biens et services finaux. Dans un contexte de remontée de l'inflation, l'efficacité des politiques de ciblage de l'inflation est remise en question. Notre étude évalue les performances de ce régime monétaire en période de crise, en estimant la frontière d'efficacité, variabilité de l'inflation / variabilité de la production , ce qui nous permet de déduire à la fois des mesures de performance économique et des indicateurs d'efficacité de la politique monétaire face à une crise économique |
| Keywords: | Monetary Policy, Covid Crisis, Inflation Targeting Policy, Efficiency Frontier |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05136089 |
| By: | Mark A. Carlson; Zack Saravay; Mary Tian |
| Abstract: | We examine how primary dealers utilized repo operations conducted by the Federal Reserve from September 2019 until May 2020 and how usage affected dealer borrowing and lending. Using daily dealer-level supervisory data, we find that during normal market conditions, dealers primarily used Fed repo to expand their total repo borrowing and on-lent much of this funding to a broad variety of counterparties. However, during market stress in March 2020, dealers used Fed repo as a substitute for funding from other counterparties and focused their on-lending to affiliated counterparties. Moreover, dealers with more headroom under the Supplementary Leverage Ratio requirement used more of their Fed repo borrowing to provide intermediation in funding markets. Our results underscore the critical role that the Fed's repo operations played, especially in March 2020, by reducing dealer funding stress and enabling dealers to pass on liquidity. |
| Keywords: | Federal Reserve; Dealer intermediation; Funding markets; Repo operation; Standing Repo Facility; Leverage ratio |
| JEL: | E58 G23 G28 |
| Date: | 2025–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-52 |
| By: | Winder, Philipp (University of St.Gallen); Hildebrand, Christian (University of St. Gallen) |
| Abstract: | The rise of cryptocurrencies is transforming how consumers trade, purchase, and pay for products. The current work explores how cryptocurrencies used as a payment method shape consumer-firm interactions. Through one large-scale pilot study, four experiments, and one field experiment, we demonstrate that consumers perceive cryptocurrencies as a riskier payment method compared to traditional payment methods. We introduce the Payment Method Technology Risk Transfer and demonstrate how this heightened risk perception, induced by a payment option, subsequently increases consumers’ perceived interaction risk when engaging with the same firm. These risk dynamics negatively impact and ultimately erode consumers’ evaluation of the firm offering the payment method. We further demonstrate two essential boundary conditions: When firms actively communicate the privacy benefits of cryptocurrencies as a payment method or when the firm has a higher baseline trust with consumers, the adverse effects of cryptocurrencies as a payment method are reduced. Our findings highlight the unintended risks associated with crypto payments and the importance of effectively managing consumer risk perceptions of digital currencies when used as a means of payment for products and services. This research offers novel insights into how digital currencies and innovative payment technologies influence the psychology of consumer-firm relationships, as well as strategies that firms can employ to manage consumer expectations and mitigate risk effectively. |
| Date: | 2025–06–18 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:up6k3_v1 |
| By: | Mai Dao; Brandon Tan; Jing Zhou |
| Abstract: | Recurring debt ceiling standoffs cause political disruptions and economic costs. We quantify one type of cost which is receiving growing attention: the spillover to short-term funding markets. Using high-frequency aggregate as well as granular money market fund specific data, we find that flows in and out of the Treasury General Account triggered by the debt ceiling mechanism can create large swings in the repo spread and distort the supply of repo funding for the Treasury market. Applying our estimates to the expected debt ceiling lift-off in summer 2025 implies that the repo spread could fluctuate by 20-30 basis points around the lift-off date. A higher level of aggregate bank reserves and overnight reverse repo balance at the Fed can dampen the impact on funding spreads appreciably. |
| Keywords: | Repo; Reserves; Treasury General Account; Debt Ceiling |
| Date: | 2025–06–27 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/127 |
| By: | Ricardo Duque Gabriel; Julianna Sterling |
| Abstract: | This paper examines the shifting dynamics in bank funding of nonbank financial institutions (NBFIs) from 1980 to 2024. We document three key facts. First, bank funding to NBFIs has been relatively stable, accounting for, on average, 3.5% of total NBFIs liabilities. Second, since 2012, on-balance-sheet funding by banks has declined sharply, falling from 4.7% to 2.5% of total NBFIs liabilities. Third, using Y-14 data, we find that credit lines extended to NBFIs have increased from 0.7% to 1.0% of total NBFIs liabilities, highlighting a structural shift in how banks engage with NBFIs. While reducing on-balance-sheet exposure to NBFIs might enhance financial stability, the growing reliance on credit lines, now accounting for approximately 3% of GDP, has increasingly introduced systemic vulnerabilities that can be amplified during periods of financial stress. |
| Date: | 2025–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-07-14 |