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on Monetary Economics |
| By: | Athanasopoulos, Angelos; Fraccaroli, Nicolo; Kern, Andreas; Romelli, Davide |
| Abstract: | This paper studies the impact of central bank independence on sovereign borrowing, using an index that captures institutional constraints on central bank lending to the government across 155 countries from 1972 to 2023. The findings show that tighter lending to the executive significantly reduces sovereign interest rates and raises the debt-to-gross domestic product ratio in developing countries. These effects reflect the executive’s improved ability to borrow at lower costs under greater central bank independence. The results are robust to multiple tests, but there are no significant effects in advanced economies. From a policy perspective, the results highlight the key role of independent central banks as catalysts for reducing governments’ borrowing costs and enhancing the government’s borrowing capacity. |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11179 |
| By: | Christoffel, Kai; Farkas, Mátyás |
| Abstract: | This paper investigates the implications of a potential loss of credibility in the central bank’s ability to bring inflation back to target in the medium-term (”de-anchoring”). We propose a monetary policy framework in which the central bank accounts for de-anchoring risks using a regime-switching model. First, we derive the optimal monetary policy strategy, which balances the trade-off between the welfare costs of a stronger response to inflation and the benefits of preserving the central bank’s credibility. Next, we apply this framework in a medium-scale regime-switching DSGE model and develop a method to assess de-anchoring risks in real time. Using the post-COVID inflation episode in the euro area as a case study, we find that an explicit ”looking-through” strategy would have only modestly increased de-anchoring risks. These findings highlight the importance of monitoring de-anchoring risks in monetary policy design. JEL Classification: D83, D84, E10 |
| Keywords: | DSGE estimation, inflation de-anchoring, regime switching |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253082 |
| By: | Carola Binder |
| Abstract: | In recent years, central bankers’ speeches and other forms of communication have become pedagogical in nature, aiming to shape public knowledge, beliefs, expectations, and attitudes. With the shift toward expectations management as a monetary policy tool, central banks’ educational role has become a central component of their monetary policymaking, and central bank communication with the public has become a rapidly-growing area of research. I argue that this research is closely related, both thematically and methodologically, to the field of educational psychology. I discuss insights from educational psychology research that could guide central bank communication research—including insights about the challenges and pitfalls that both fields share. |
| JEL: | D83 D84 E03 E30 E5 E58 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34002 |
| By: | Boris Hofmann; Xiaorui Tang; Feng Zhu |
| Abstract: | This paper examines the sentiments of central banks and the media regarding central bank digital currencies across 15 major global economies. Leveraging large language models, we develop jurisdiction-level central bank digital currency sentiment indices derived from central bank publications and news articles on a daily basis. Our findings reveal significant divergences between central bank and media sentiments, with notable variations over time and across jurisdictions. Analyzing the interplay between these sentiments, we observe that central bank sentiment tends to exert a stronger influence on media sentiment than the reverse. Additionally, we identify substantial cross-border sentiment spillovers, where sentiment in leading economies shapes sentiment in other regions. Through an event study approach, we demonstrate that cryptocurrency and equity markets primarily respond to shifts in central bank sentiments. Specifically, more positive central bank sentiments on central bank digital currency are associated with negative impacts on cryptocurrency market returns and the stock performance of banking and payment-related firms. |
| Keywords: | Central bank digital currency (CBDC), central bank communication, media sentiment, large language model (LLM), financial market |
| JEL: | E58 G12 G18 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1279 |
| By: | Rhys Bidder; Timothy Jackson; Matthias Rottner |
| Abstract: | We examine the impact of a retail central bank digital currency, combining survey evidence from German households with a macroeconomic model featuring endogenous systemic bank runs. The survey reveals non-trivial demand for retail CBDC as a substitute for bank deposits in normal times ("slow disintermediation") and increased withdrawal risks during financial distress ("fast disintermediation"). Informed by the survey, the model indicates that introducing a retail CBDC might reduce financial stability because CBDC offers storage-at-scale - making it attractive to run to. We estimate an optimal holding limit which chokes off fast disintermediation and enhances financial stability by shrinking a fragile banking system. |
| Keywords: | Central bank digital currencies, financial crises, disintermediation, bank runs, banking system, money |
| JEL: | E42 E44 E51 E52 G21 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1280 |
| By: | Karlis Vilerts (Latvijas Banka); Sofia Anyfantaki (European Central Bank); Konstantins Benkovskis (Latvijas Banka); Sebastian Bredl (Deutsche Bundesbank); Massimo Giovannini (Bank of Malta); Florian Matthias Horky (Narodna banka Slovenska); Vanessa Kunzmann (Deutsche Bundesbank); Tibor Lalinsky (Narodna banka Slovenska); Athanasios Lampousis (Bank of Greece); Elizaveta Lukmanova (Central Bank of Ireland); Filippos Petroulakis (Bank of Greece); Klavs Zutis (Latvijas Banka) |
| Abstract: | Does the maturity of the relevant risk-free rate influence the strength of monetary policy pass-through to interest rates on new loans? To address this question, we present novel empirical evidence on lending practices across all euro area countries, using AnaCredit data covering nearly seven million new loans issued to non-financial corporations in 2022-2023. We document substantial variation in (a) the prevalence of fixed- vs floating-rate loans, (b) rate fixation periods, and (c) reference rates. This variation results in lending rates being exposed to different segments of the risk-free rate yield curve which, in turn, influence their sensitivity to monetary policy changes. We show that loans linked to shorter-maturity risk-free rates experience more pronounced monetary pass-through. Importantly, this effect is not purely mechanical, as part of the effect is offset by adjustments in the premium, revealing previously less-explored heterogeneity in the pass-through to lending rates. |
| Keywords: | Lending Rates, Interest Rate Pass-Through, Fixed-Rate Loans, Floating-Rate Loans |
| JEL: | E52 E43 G21 E58 |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202504 |
| By: | Volha Audzei; Jan Bruha; Ivan Sutoris |
| Abstract: | In this paper, we study domestic and foreign monetary policy transmission in a small open economy in which firms can decide to hold foreign currency loans (FCLs). In a workhorse two-country DSGE model, firms borrow in advance to cover production costs and choose the share of FCLs based on interest rate differentials and expected exchange rate movements. In this framework, we further examine how FCL holdings affect the transmission of exogenous shocks and monetary policy. The results indicate that FCLs impact the effectiveness of domestic policy depending on the shock type: they strengthen monetary policy transmission in response to domestic shocks, while weakening it in response to asymmetric foreign and exchange rate shocks. Symmetric global supply shocks reduce domestic policy efficacy, requiring higher rates to curb inflation but causing larger output losses. In contrast, global demand shocks allow for less aggressive domestic policy responses under large FCL holdings. |
| Keywords: | Cost channel of monetary policy, dynamic stochastic general equilibrium models, foreign currency loans, small open economy |
| JEL: | E32 E44 E52 F41 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2025/10 |
| By: | Bigoni, M.; Camera, G.; Gallo, E. |
| Abstract: | Globalization offers unparalleled opportunities to expand welfare through cooperation across large networks of unrelated individuals. Social exclusion – permanent or temporary – and monetary exchange are institutions that in theory can incentivize cooperation. In an experiment, we evaluate their relative performance and interaction in anonymous networks of different sizes. Permanent social exclusion (ostracism) reduces long-run economic potential by leading to sparse networks. Monetary exchange and temporary social exclusion perform similarly well in small networks. In large networks, however, monetary exchange is the only institution that promotes full cooperation by crowding out ostracism and keeping the network complete. An insight is that monetary systems outperform social exclusion mechanisms in promoting cooperation in globalized social and economic networks. |
| Keywords: | Cooperation, Experiment, Money, Network, Social Exclusion |
| JEL: | C92 E40 D85 C73 |
| Date: | 2025–07–23 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2519 |
| By: | Stéphane Auray (ESC [Rennes] - ESC Rennes School of Business); Michael B Devereux (Vancouver school of economics, University of British Columbia - UBC - University of British Columbia [Canada]); Aurélien Eyquem (UNIL - Université de Lausanne = University of Lausanne) |
| Abstract: | This paper shows that the outcome of trade wars for tariffs and welfare will be affected by the monetary policy regime. The key message is that trade policy interacts with monetary policy in a way that magnifies the welfare costs of discretionary monetary policy in an international setting. If countries follow monetary policies of flexible inflation targeting, trade wars are relatively mild, with low equilibrium tariffs and small welfare costs. Discretionary monetary policies imply much higher tariffs, high inflation rates, and substantially larger welfare costs. We quantify the effects of a global trade war among major economies using estimates of trade elasticities, economic size, net foreign assets, and trade openness. We find large welfare benefits of an inflation targeting monetary policy for all countries. |
| Keywords: | Protectionism, Trade wars, Inflation targeting, Discretionary monetary policy, Trade imbalances F30, F40, F41 |
| Date: | 2025–07–08 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05151249 |
| By: | Quineche, Ricardo; Zapata, Juan |
| Abstract: | This paper develops a pressure decomposition of inflation as the net outcome of two competing forces: inflationary pressure, defined by the frequency and magnitude of price increases, and deflationary pressure, determined by corresponding price decreases. Using 245 PCE sub-indices spanning 1959-2024, we construct an exact bottom-up inflation measure that transparently maps sectoral pricing decisions into macroeconomic aggregates. Our decomposition reveals fundamental asymmetries in inflation formation: inflationary pressure exhibits dramatic variation (2.35%-12.68%) while deflationary pressure remains remarkably stable (0.72%-5.18%), indicating inflation episodes are primarily driven by surges in upward pricing momentum rather than retreats of downward movements. Historical analysis shows distinct pressure regimes across major macroeconomic episodes: the Great Inflation featured extreme inflationary pressure volatility, the Great Moderation achieved balanced dynamics, the 2008-2009 crisis uniquely witnessed deflationary pressure dominance creating deflation risk, while COVID-19 saw dramatic inflationary pressure resurgence. We reassess the price puzzle using Bayesian local projections with alternative monetary policy shock identifications. Conventional narrative shocks generate sustained inflationary pressure increases with minimal deflationary response, while informationally robust shocks resolve the puzzle completely through both increased deflationary pressure and reduced inflationary pressure, with the deflationary channel providing the dominant contribution consistent with demand-channel transmission. Extensive robustness checks across specifications and estimation methods confirm these findings while revealing the diagnostic value of pressure decomposition for evaluating shock quality. Results demonstrate that the price puzzle reflects informational frictions rather than genuine economic phenomena, and suggest successful monetary policy operates through managing pressure balance with important implications for real-time policy diagnosis and central bank communication. |
| Keywords: | Inflation decomposition, price puzzle, monetary policy transmission, pressure dynamics |
| JEL: | E31 E52 E58 C43 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:322269 |
| By: | Sangyup Choi (Yonsei University); Kimoon Jeong (University of Virginia); Jiseob Kim (Yonsei University) |
| Abstract: | Despite extensive research, there is little consensus on whether common monetary policy generates systematically asymmetric effects within the euro area. We argue that this ambiguity arises from failing to account for heterogeneity in local cyclical conditions at the time of policy changes, which leads state-dependent responses to obscure underlying cross-country differences. To address this, we construct a measure of country-specific monetary policy that internalizes local cyclical conditions. This adjustment reveals systematic asymmetries in policy transmission between core and periphery euro area countries that conventional methods overlook. We find that macroeconomic and financial variables respond more strongly in periphery countries. In contrast, credit and housing booms are largely absent in core countries. This differential response is consistent with the bank lending channel of monetary policy: banks in periphery countries ease mortgage lending standards following an expansionary shock, while those in core countries tighten them. Cross-border banking flow patterns further corroborate the importance of credit supply in explaining regional heterogeneity. |
| Keywords: | Monetary Union; Country-specific monetary policy gap; Mortgage credit; Bank lending survey; Cross-border banking flows. |
| JEL: | E21 E32 E44 F52 G21 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2025rwp-256 |
| By: | Karan, Mehmet Baha; Westerman, Wim (University of Groningen) |
| Abstract: | Probably, the Knights Templar as bankers of the Crusaders and softeners of the Churchs view on taking interest, impressed early Italian bankers. In particular, the Medici family from Florence established good relations with the Church and wisely benefited from the economic conditions during the Renaissance.The Netherlands differed from prior leading areas in that banking developed here in tandem with economic growth in an open environment. Moreover, the skilful Dutch had access to financial markets and controlled them. The bank money of the Amsterdam Bank of Exchange ensured financial stabilityand fuelled economic activity. English banking started with the Goldsmiths, who deposited money from the public. The public trusted the Goldsmiths, who could therefore circulate money deposited with them.In this way, a fractional reserve system emerged. While the financial sector grew under open conditions, the Bank of England started as the first modern central bank. France experimented with paper money, but the experiment under the flamboyant Scot John Law became a failure. During the Napoleonic era, the Rothschilds appeared on the stage. Their banking empire was based on the network of five brothers in major European cities. The Rothschilds, with their strong family ties and circulating money across borders, were virtually untouchable. J. P. Morgan, with his strong relations, was the most notable banker in America's Gilded Age. Beyond this, he was successful also in heavy industries, being an outstanding businessman and a true leader. He even saved the U.S. economy from a crisis twice and co-moulded its central banking system. The Ottoman Bank was one of the oldest modern banks operating in adeveloping country. Being established with much foreign capital, it served as an independent central bank in Turkey after the Ottoman Empire. Throughout the 20th century, banking was largely organized country-wise. ‘National Champions’ such as Citibank dominated the scene, often benefiting fromrelationships in (semi-) colonies. Following the breakdown of the post World War II monetary system, thin lines between creative deal making and clear unethical tactics were crossed by unscrupulous bankers at times. In hindsight, economic freedom and liberal democracy were a critical factor in the developmentof banks as economic cornerstones. It is therefore essential that their entrepreneurial conditions are kept intact, whereas the Global Financial Crisis has shown that controls, internal norm setting and sector innovations may be helpful. Banks and their current partial replacers serve a public task. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024012-eef |
| By: | Martin Feldkircher; Christos A. Makridis |
| Abstract: | This paper studies how the linguistic features of central bank communication affect household economic sentiment. Linking central bank speeches from 29 countries to individual-level data from the Gallup World Poll (2006-2023), we examine whether speech complexity--captured through sentiment, tone, length, and readability--is associated with public perceptions of the economy and labor market. We find that longer and more syntactically complex speeches are consistently linked to lower economic confidence and less favorable views of the job climate. Positive sentiment in modal (i.e., policy-relevant) sentences is associated with more optimistic household outlooks. These effects are stronger among younger and college-educated respondents, suggesting differential processing of complex information. These findings underscore the importance of clarity and tone in central bank messaging and support the view that communication is a key behavioral channel of monetary policy transmission. |
| Keywords: | central bank communication, household expectations, sentiment analysis, monetary policy, public trust, global survey data |
| JEL: | E52 E58 D84 H63 C23 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-43 |
| By: | Pedersen, Michael |
| Abstract: | Climate change poses significant challenges to economic stability, particularly in vulnerable regions such as Latin America and the Caribbean (LAC). This paper examines the macroeconomic and monetary policy implications of climate risks in the region, focusing on both physical and transition risks. Physical risks, including extreme weather events and long-term climate shifts, disrupt productivity, infrastructure, and supply chains, intensifying inflationary pressures and hindering economic growth. Transition risks, driven by the shift to a low-carbon economy, impact key industries and labor markets, while also creating opportunities for green investments and innovation. The study explores how climate change disrupts the traditional monetary policy transmission mechanism, requiring central banks to adapt their frameworks and tools. It emphasizes the crucial role of central banks in integrating climate risks into monetary policy, promoting sustainable finance, and collaborating with fiscal authorities to enhance climate resilience. The findings highlight the importance of robust data collection, policy coordination, and regional cooperation to address these challenges effectively. By tailoring monetary policies to the LAC region’s distinct socio-economic and environmental context, central banks can play a key role in mitigating climate-related disruptions and fostering sustainable growth. |
| Date: | 2025–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:ecr:col037:81906 |
| By: | Takuya Sakaguchi (Graduate School of Economics, Kobe University, JAPAN); Masahiko Shibamoto (Research Institute for Economics and Business Administration and Center for Computational Social Science, Kobe University, JAPAN) |
| Abstract: | Monitoring inflation is an important aspect of policymaking, but understanding the factors that drive inflation remains challenging. In this paper, we construct a cyclically sensitive inflation (CSI) index for Japan and examine its usefulness from several perspectives. Specifically, we investigate (1) the dynamic relationship from financial markets and the real economy to cyclical inflation, (2) how well cyclical inflation can predict future inflation trends, and (3) the effectiveness of the CSI as a real-time indicator of economic slack. Our empirical results show that the CSI can complement headline and core inflation measures and, when used together, help distinguish whether price changes are due to temporary factors or persistent pressures associated with the business cycle. |
| Keywords: | Cyclical inflation; Business cycle; Financial market; Inflation forecast; Japanese economy |
| JEL: | C32 E31 E32 E52 E58 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-22 |
| By: | Thibaut Duprey; Yaz Terajima; Jing Yang |
| Abstract: | We draw on the Canadian experience to examine how monetary and macroprudential policies interact and possibly complement each other in achieving their respective price and financial stability objectives. |
| Keywords: | Financial stability; Monetary policy |
| JEL: | E3 E37 E5 E52 E58 E6 E61 G0 G01 G2 G21 G28 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-18 |
| By: | van der Kwaak, Christiaan (University of Groningen) |
| Abstract: | In this paper, we investigate the long-run effects from central bank bond purchases onfinancial stability within a New Keynesian DSGE model with financial frictions. Banks havea portfolio choice between safe government bonds and risky corporate securities, and aresubject to limited liability. Bond purchases by the central bank induce banks to shift fromsafe bonds to risky securities, thereby increasing the probability of insolvency, everythingelse equal. However, bond purchases also lead to capital gains on banks’ existing assets, which reduces banks’ reliance on deposits. Moreover, a lower return on banks’ assets (asa result of the bond purchases by the central bank) decrease banks’ profitability, therebydecreasing depositors’ willingness to let banks operate with high leverage ratios. Our keyconclusion is that bond purchases also enhance financial stability in the long-run. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024013-eef |
| By: | Michael D. Bordo; John V. Duca; Barry E. Jones |
| Abstract: | The rise of U.S. inflation in 2021 and 2022 and its partial subsiding have sparked debates about the relative role of supply and demand factors. The initial surge surprised many macroeconomists despite the unprecedented jump in money growth in 2020-21. We find that the relationship between consumption and the theoretically based Divisia M3 measure of money (velocity) can be well modeled both in the short- and long-runs. We use the estimated long-run relationship to calculate the deviation of actual velocity from its long-run equilibrium and incorporate it into a P-Star framework. Our model of velocity significantly improves the performance of the P-Star model relative to using a one-sided HP filter to calculate trend velocity as, for example, used by Belongia and Ireland (2015, 2017). We also include a global supply pressures index in the model and find that recent movements in U.S. inflation largely owed to aggregate demand driven macroeconomic factors that are tracked by Divisia money with a smaller role played by supply factors. |
| JEL: | E41 E51 E52 E58 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34017 |
| By: | Gluschenko, Konstantin; Voronov, Yuri |
| Abstract: | The international monetary system based on the US dollar as the world’s dominant reserve currency has become in recent years risky and unreliable tool of international financial relations. In addition, confidence in the dollar is falling worldwide. These reasons lead to a transformation of the international currency system, primarily aimed at getting rid of the dominance of the US dollar. This transformation is still at the very beginning and it is unclear where it will come. The purpose of this paper is to consider possible directions of the transformation. This is not an attempt at forecasting, but an analysis of potential scenarios with assessments of the feasibility of their implementation. We are discussing a range of possible paths for transforming the international monetary system. One end of the range is the creation of a single supranational currency based on the reformation of Special Drawing Rights (SDR). The other end is the disintegration of the single currency system, which is partly already underway. In between is a return to the gold standard and the displacement of the US dollar by renminbi. However, an unpredictable option due the digitalization of currencies is also possible. |
| Keywords: | international monetary system supranational currency gold standard renminbi digital currencies |
| JEL: | F02 F33 |
| Date: | 2025–07–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125275 |
| By: | Anyfantaki, Sofia; Benkovskis, Konstantins; Kunzmann, Vanessa; Lalinsky, Tibor; Petroulakis, Filippos; Zutis, Klavs; Vilerts, Kārlis; Bredl, Sebastian; Giovannini, Massimo; Horky, Florian Matthias; Lampousis, Athanasios; Lukmanova, Elizaveta |
| Abstract: | Does the maturity of the relevant risk-free rate influence the strength of monetary policy pass-through to interest rates on new loans? To address this question, we present novel empirical evidence on lending practices across all euro area countries, using AnaCredit data covering nearly seven million new loans issued to non-financial corporations in 2022–2023. We document substantial variation in (a) the prevalence of fixed- vs floating-rate loans, (b) rate fixation periods, and (c) reference rates. This variation results in lending rates being exposed to different segments of the risk-free rate yield curve which, in turn, influence their sensitivity to monetary policy changes. We show that loans linked to shorter-maturity risk-free rates experience more pronounced monetary pass-through. Importantly, this effect is not purely mechanical, as part of the effect is offset by adjustments in the premium, revealing previously less-explored heterogeneity in the pass-through to lending rates. JEL Classification: E52, E43, G21, E58 |
| Keywords: | fixed-rate loans, floating-rate loans, interest rate pass-through, lending rates |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253078 |
| By: | Gabriel Rodriguez (Departamento de Economía de la Pontificia Universidad Católica del Perú); Mauricio Alvarado (Departamento de Economía de la Pontificia Universidad Católica del Perú) |
| Abstract: | This paper examines the evolution of the inflation uncertainty-inflation relationship in seven Latin American countries and the G7 from Q1 1948 to Q4 2023, using the time-varying parameter stochastic volatility in mean (TVP-SVM) model of Chan (2017) and its extension incorporating time-varying mixture innovations (TVP-SVM-TVMI) from Hou (2020). The key findings are as follows: (i) the TVP-SVM model is preferred in 8 out of 14 countries; (ii) inflation uncertainty has been higher in Latin America than in the G7, particularly during the 1980s "lost decade"; (iii) log-inflation uncertainty is more persistent in Latin America; (iv) there is no evidence supporting the hypothesis of Friedman (1977) in any of the countries analyzed; (v) the Cukierman-Meltzer hypothesis (1986) holds, as the uncertainty-inflation relationship is positive and time-varying in all countries; (vi) this relationship is stronger and statistically significant during periods of high inflation uncertainty; and(vii) there is evidence of more structural breaks in this relationship in Latin America than in the G7. Palabras claves: Inflation Uncertainty, Inflation, Latin America, G7, Bayesian Estimation and Comparison, Stochastic Volatility in Mean, Time-Varying Parameters, Structural Breaks. JEL Classification-JE: C11, C15, C58, E31, N16. |
| Keywords: | Inflation Uncertainty, Inflation, Latin America, G7, Bayesian Estimation and Comparison, Stochastic Volatility in Mean, Time-Varying Parameters, Structural Breaks. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pcp:pucwps:wp00544 |
| By: | Delis, Manthos; Iosifidi, Maria |
| Abstract: | We develop a model of green lending to study its implications for monetary policy and environmental regulation. Banks finance firms’ brown and/or green projects. The costs of brown projects increase with rising regulatory stringency or when endogenous monetary policy affects the cost of funds. Both policies can elevate the equilibrium share of green lending, resulting in greener output. Our findings remain consistent when we introduce central banks with an explicit green objective (e.g., differential interest rates based on project type), forward-looking bank behavior, and adjustment costs. Additionally, we demonstrate the relative impacts of regulatory and monetary persistent regime changes. |
| Keywords: | Green lending; Green monetary policy; Environmental regulation |
| JEL: | E44 E52 G21 Q50 |
| Date: | 2025–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125118 |
| By: | Benoit Mojon; Phurichai Rungcharoenkitkul; Dora Xia |
| Abstract: | This paper introduces a new Monetary Policy Condition Index (MCI) that integrates conventional and unconventional monetary policy tools into a unified measure. The MCI is a weighted average of short-term interest rate and central bank balance sheet size, improving upon the shadow rate by capturing balance sheet policy effects away from the effective lower bound. We estimate the MCI's weight and its dynamic relationships with output, inflation and financial conditions using a Bayesian Vector Autoregression (BVAR) framework. Results suggest that large balance sheet policies have exerted a significant accommodative influence on monetary policy conditions, including away from the effective lower bound. Through historical decomposition and counterfactual exercises, the MCI provides new insights into unconventional policy's effectiveness and unintended consequences. The framework can flexibly accommodate numerous extensions, including possibly higher neutral balance sheet under ample reserve system. |
| Keywords: | monetary policy, monetary policy conditions, financial conditions, unconventional monetary policy, central bank balance sheet, ample reserves system |
| JEL: | E51 E52 E58 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1281 |
| By: | Elfsbacka-Schmöller, Michaela; Goldfayn-Frank, Olga; Schmidt, Tobias |
| Abstract: | This paper provides novel empirical evidence on the impact of monetary policy on innovation investment using unique firm-level data. First, we document the effect of a large, systematic monetary tightening (ECB rate increases from 0% to 4.5% during 2022-23), with average firm-level innovation cuts of 20%. These cuts persist over the medium term, indicating a sustained innovation slowdown. Second, we use the survey to identify elasticities of innovation expenditure to exogenous policy rate changes. Responses to hikes and cuts are significant and largely symmetric at the baseline rate (4.5%), though we detect potential state-dependent asymmetry due to the extensive margin. The financing channel emerges as one of the transmission channels, with more pronounced effects in firms with higher shares of bank loans and variable-rate loans. Crucially, we show that monetary policy transmits via aggregate demand, with stronger responses in firms with pessimistic demand expectations. Forward guidance provides substantial additional stimulus by reducing uncertainty about future rates, suggesting long-term, supply-side effects of announcements. These results challenge monetary long-run neutrality and are suggestive of policy endogeneity of R∗ operating through innovation-driven technology growth. JEL Classification: E52, E22, E24, D22 |
| Keywords: | endogenous growth, forward guidance, monetary policy transmission, R&D, R∗ |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253080 |
| By: | Okan Akarsu; Emrehan Aktug; Kubra Yildiz Ozertas; Huzeyfe Torun |
| Abstract: | [EN] In this study, using a randomized controlled trial (RCT), we generate exogenous variation in firms’expectations in Türkiye through providing them with publicly available information regardinginflation forecasts of several parties and official inflation target. Next, we examine how the reminderof already available information influences their inflation expectations and how exogenously shapedinflation expectations affect firm outcomes. Our findings reveal that information regarding theforecasts of professionals, central bank short- and long-term forecasts, and the official inflationtarget of the CBRT reduces the inflation expectations of firms compared to non-treated ones.Findings also suggest that firms with lower inflation expectations exhibit greater optimism aboutboth the broader economy and their own prospects, while higher expectations are associated withweaker anticipated outcomes. This highlights how inflation expectations influence firms' economicsentiment, with higher expectations linked to concerns about weaker activity. Although the effects ofthe treatments diminish over time, these results underscore the potential of targeted informationdissemination in shaping expectations and improving economic sentiment. [TR] Bu calisma, firmalara kamuya acik bilgiler saglamanin yuksek enflasyon ortaminda enflasyon beklentilerini ve ekonomik gorunumlerini nasil etkiledigini incelemektedir. Turkiye'de gerceklestirilen bir randomize kontrollu deney (RCT) ile firmalarin beklentilerinde dissal bir degisim yaratilmistir. Bulgularimiz, bilgi mudahalelerinin enflasyon beklentilerini onemli olcude azalttigini ve gecmis enflasyon, merkez bankasinin kisa ve uzun vadeli tahminleri ile resmi enflasyon hedefinin guclu sabitleyici etkiler gosterdigini ortaya koymaktadir. Bulgular ayrica, daha dusuk enflasyon beklentisine sahip firmalarin hem genel ekonomi hem de kendi gelecekleri konusunda daha iyimser oldugunu, daha yuksek beklentilere sahip firmalarin ise daha zayif sonuclar ongordugunu gostermektedir. Bu durum, enflasyon beklentilerinin firmalarin ekonomik algilarini nasil etkiledigini, yuksek beklentilerin daha zayif ekonomik aktiviteye dair endiselerle baglantili oldugunu ortaya koymaktadir. Bilgi paylasiminin etkileri zamanla azalmakla birlikte, bu sonuclar, hedefe yonelik bilgi yayiliminin beklentilerin sekillendirilmesinde ve ekonomik guvenin iyilestirilmesinde onemli bir potansiyel tasidigini vurgulamaktadir. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:econot:2514 |
| By: | Ezzedine Ghlamallah (CERGAM - Centre d'Études et de Recherche en Gestion d'Aix-Marseille - AMU - Aix Marseille Université - UTLN - Université de Toulon); Ahmed Danyal Arif |
| Abstract: | This article explores the universal condemnation of interest and delves into the metaphysical aspects of monetary systems. It critically examines the historical and philosophical viewpoints against interest from various cultures and religions, including ancient Greek and Roman societies, Judaism, Christianity, and Islam. The paper highlights the ethical, economic, and metaphysical reasons behind the condemnation of interest, associating it with injustices like exploitation and social inequality. Additionally, it discusses the concept of free money advocated by Silvio Gesell and its similarities to the Islamic practice of zakāt, emphasizing the negative economic impacts of hoarding wealth and advocating for a monetary system that discourages such practices. The metaphysical analysis draws on Aristotelian principles, suggesting that just like physical entities, monetary systems should adhere to natural laws of entropy and equilibrium, thus challenging the current financial practices that encourage perpetual growth and destabilize economic systems. The paper concludes by proposing a redefinition of money that aligns with these metaphysical principles, advocating for the abolition of interest to achieve a more equitable and stable economic system. |
| Keywords: | Islamic economics, monetary metaphysics, debt, currency, ribā, zakāt |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05160176 |
| By: | Aguilar, José; Quineche, Ricardo |
| Abstract: | Despite being an emerging economy, Peru has achieved superior post-pandemic disinflation compared to major developed economies, making its regional inflation dynamics globally instructive for monetary policy design. This study investigates Lima's suitability as Peru's inflation-targeting anchor by analyzing regional spillovers across nine economic regions using monthly CPI data (2002-2024). Employing both Diebold-Yilmaz time-domain and Baruník-Křehlík frequency-domain frameworks, we quantify the direction, magnitude, and persistence of inflation transmission. Results reveal strong regional interdependence (73.60% total spillover index) with Lima as the dominant net transmitter (23.94 percentage points). However, frequency decomposition uncovers striking cyclical heterogeneity: Lima receives short-run shocks from food-producing regions but dominates long-run transmission (44.70% vs. 28.99% frequency spillover index). Rolling-window analysis during COVID-19 shows temporary spillover disruption (connectivity declining from 75% to 68%) followed by recovery during 2022's inflationary surge. Robustness checks across specifications, granular city-level data, and three-band frequency segmentation confirm Lima's structural centrality at lower frequencies. These findings validate the Central Reserve Bank's Lima-centered approach for long-run targeting while revealing asymmetric frequency-dependent spillovers. The presence of short-run regional shocks suggests integrating upstream agricultural signals could enhance near-term forecasting and policy responsiveness. |
| Keywords: | Inflation spillovers, Regional inflation dynamics, Baruník-Křehlík framework, Diebold-Yilmaz methodology, Frequency-domain analysis |
| JEL: | E31 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:322270 |
| By: | Sikiru, AbdulSalam Adeyemi; Salisu, Afees A. |
| Abstract: | In this study, we examine the drivers of persistent exchange rate depreciation in Nigeria and suggest remedial monetary policy actions based on inference from the results. Using time series data from January 2008 to June 2023, the following potential drivers were examined: price level differential, interest rate differential, terms of trade, stock market performance, oil price and central bank forex supply to the FX market. While the Naira/USD exchange rate is a daily observation data, potential drivers are majorly available on a monthly basis. On this note, we employ the GARCH variant of the Mixed Data Sampling (GARCH-MIDAS) technique. For robustness purposes, we employ conduct modelling with fixed window and rolling window data sampling techniques. Notable model selection criteria such as the Akaike Information Criterion (AIC), Bayesian Information Criterion (BIC) and Logarithmic Likelihood (LogL) are utilized to determine the optimal model. Our results reveal that foreign exchange market inefficiency, high inflation, low interest rate, dwindling oil price, adverse stock market performance, and low CBN FX supply to the forex market are major drivers of exchange rate variability in Nigeria. The results are robust to alternative data sampling techniques. Additional results of this study suggest that improvement in macroeconomic performance and adverse financial market performance can reduce the long-term volatility persistence of the exchange rate in Nigeria. Based on intuition from these findings, remedial monetary policy actions proposed by this study include improvement in forex market efficiency, promotion of productivity and export of tradeable goods and services, reduction in macroeconomic uncertainties, and policy consistency in exchange rate and macroeconomic management. In addition, we conclude that monetary authorities need not introduce hostile financial market policies to reduce exchange rate variability; rather, they should embark on policies to enhance macroeconomic performance. |
| Keywords: | Exchange rate, Monetary Policy, Central Bank, Macroeconomic |
| JEL: | E52 E58 F0 F31 |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123526 |
| By: | Bindseil, Ulrich; Mäkeler, Hendrik; Pihl, Christopher |
| Abstract: | Central bank collateral frameworks and the liquidity transformation they allow for play important roles for financing long term economic projects (and thereby economic growth) while preserving financial stability. To shed light on early central bank collateral frameworks, this note analyses a document of the Riksens ständers lånebank of 1682 which pledges real estate to serve as collateral for a loan of the Riksbank to the farmer Olof Olofsson. A transcription and translation are provided and the document is analyzed in the context of the 17th century operations, balance sheet, and mandate of the Riksens ständers lånebank and the related literature. We recall the role of central bank credit to private debtors in early central banking, and that, contrary to some prominent views, government financing was more the exception than the rule as key reason to establish and operate central banks before 1700. We also derive lessons for today's central bank collateral frameworks and their role in liquidity transformation. |
| Keywords: | Central bank collateral, early central banking, central bank operations |
| JEL: | E32 E5 N23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ibfpps:323592 |
| By: | Mai Dao; Pierre-Olivier Gourinchas; Oleg Itskhoki |
| Abstract: | We offer a unifying empirical model of covered and uncovered currency premia, interest rates and spot and forward exchange rates, both in the cross section and time series of currencies. We find that the rich empirical patterns are in line with a partial equilibrium model of the currency market, where hedged and unhedged currency is supplied by intermediary banks subject to value-at-risk balance-sheet constraints, emphasizing the frictional nature of equilibrium currency premia and exchange rate dynamics. In the cross section, the excess supply of local-currency savings is the key determinant of low relative interest rates, negative covered and uncovered currency premia, cheap forward dollars; and vice versa. In the time series, covered currency premia change infrequently and in concert across currencies, driven by aggregate financial market conditions. In contrast, uncovered currency premia move frequently in response to currency-specific demand shocks, which we capture with the dynamics of net currency futures positions of dealer banks. Sharp exchange rate depreciations in response to negative shifts in currency demand are followed by small persistent predictable appreciations that generate future positive expected currency returns necessary to ensure intermediation of currency demand shocks, irrespective of their financial or macroeconomic origin. Changes in net futures positions of dealer banks account for most of the variation in the spot exchange rate for every currency. |
| Keywords: | exchange rates; uncovered interest parity; covered interest parity; currency markets; futures market; intermediation frictions |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/153 |
| By: | Francisco Rivadeneyra; Scott Hendry; Alejandro García |
| Abstract: | A well-functioning monetary system is characterized by public and private forms of money that exchange at par as value flows freely between them. A relevant retail public money—whether in the form of cash, a central bank digital currency or both—is a necessary component of such a monetary system. |
| Keywords: | Central bank research; Digital currencies and fintech; Payment clearing and settlement systems |
| JEL: | E4 E42 E5 E50 E58 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-11 |
| By: | Roberto Casarin (Ca' Foscari University of Venice); Antonio Peruzzi (Ca' Foscari University of Venice); Davide Raggi (Ca' Foscari University of Venice) |
| Abstract: | We study a New Keynesian Phillips curve in which agents deviate from the rational expectation paradigm and forecast inflation using a simple, potentially misspecified autoregressive rule. Consistency criteria à la Hommes and Zhu (2014) between perceived and actual laws of motion of inflation might allow for multiple expectational equilibria. Unfortunately, multiple equilibria models pose challenges for empirical validation. This paper proposes a latent Markov chain process to dynamically separate such equilibria. Moreover, an original Bayesian inference approach based on hierarchical priors is introduced, which naturally offers the possibility of incorporating equilibrium-identifying constraints with various degrees of prior beliefs. Finally, an inference procedure is proposed to assess a posteriori the probability that the theoretical constraints are satisfied and to estimate the equilibrium changes over time. We show that common prior assumptions regarding structural parameters favor the separation of equilibria, thereby making the Bayesian inference a natural framework for Markov–switching Phillips curve models. Empirical evidence obtained from observed inflation, output gap, and the consensus expectations from the Survey of Professional Forecasters supports multiple equilibria, and we find evidence of temporal variation in over- and under-reaction patterns, which, to the best of our knowledge, have not been previously documented. Specifically, we observe that agents tend to underreact to shocks when inflation is high and persistent, whereas they behave substantially as fully informed forecasters when the inflation level is low and stable, i.e., after the mid–nineties. We also find that the model does not suffer from the missing disinflation puzzle during the Great Recession. |
| Keywords: | Bounded rationality; Markov Switching; Multiple equilibria; Under-reaction; Bayesian methods; Horseshoe hierarchical priors; Survey of Professional Forecasters |
| JEL: | C11 C24 E31 D84 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ven:wpaper:2025:10 |
| By: | Eleonora Granziera; Vegard H. Larsen; Greta Meggiorini; Leonardo Melosi |
| Abstract: | We examine how speeches by Federal Open Market Committee (FOMC) members, including regional Fed presidents, shape private sector expectations. Speeches that signal rising inflationary pressures prompt both households and professional forecasters to raise their inflation expectations, consistent with Delphic effects. Only professional forecasters respond to Odyssean communications—statements about the Fed’s intended policy response—leaving Delphic effects as the dominant channel for households. These household responses are driven by speeches from regional presidents, likely due to greater visibility in regional media coverage. A general equilibrium model, featuring agents who differ in their ability to interpret Odyssean signals, explains this heterogeneity. |
| Keywords: | central bank communication, Delphic, Odyssean, inflation expectations, textual analysis, expectation formation |
| JEL: | E31 E58 D83 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11992 |
| By: | Bušs, Ginters; Traficante, Guido |
| 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:cpm:dynare:085 |
| By: | Tian, Xin (University of Groningen) |
| Abstract: | This paper examines whether a flexible exchange rate regime, capital controls, and foreign reserves are effective tools to reduce BRICS countries’ exposure toglobal financial cycle (GFCy) shocks. Based on local projections in which we allow the response of national financial cycles (NFCys) to the GFCy to vary, we observe that flexible exchange rate regime absorbs GFCy shocks in BRICS countries, as do tighter capital controls and larger international reserves. We also find thatthe responses of NFCys to GFCy shocks are heterogeneous across countries, withstronger effects observed in countries with higher inflation and GDP growth. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024007-gem |
| By: | Ozili, Peterson K |
| Abstract: | Little attention has been paid to the role of inflation and financial inclusion in influencing financial stability. These factors have become all the more important in light of the recent banking crisis in the United States. The lessons learnt from the recent banking crisis have heightened the need for financial regulators and bank supervisors to undertake continuous search for the non-traditional determinants of financial stability to identify risks early and mitigate risks to financial system stability. In this article, we examine some non-traditional determinants of financial stability using data from sixty-one countries from 2009 to 2021. The first-difference panel GMM regression method was used to estimate the model, and we find that greater financial stability in the previous period is followed by greater financial stability in the subsequent period in all regions, signalling the persistence of financial stability. The loan-to-deposit ratio improves financial stability in European and Americas countries while countries that have a high level of financial inclusion, and whose banking sector have a high loan-to-deposit ratio, are more financially stable. Financial inclusion improves financial stability in high inflation environments particularly in African and Americas countries. High levels of financial inclusion impair financial stability during a recession particularly in Asian countries. African banks with a high loan-to-deposit ratio are more financially stable during a recession. Also, Americas and African countries that have a combined high financial inclusion and inflation rates and whose banking sector have a high loan-to-deposit ratio are less financially stable, indicating that high inflation hinders financial inclusion and loan-to-deposit ratio from improving financial stability. |
| Keywords: | financial stability, determinants, financial inclusion, inflation, bank efficiency, loan-to-deposit ratio, economic growth, unemployment rate. |
| JEL: | G01 G20 G21 G23 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125565 |
| By: | Bartels, Bernhard; Eichengreen, Barry; Schumacher, Julian; Weder di Mauro, Beatrice |
| Abstract: | Unprecedented balance sheet expansion in recent years has resulted in heightened financial risk for central banks, reflected initially in higher profits and subsequently in significant losses. Combining data on central bank balance sheets with market data on asset prices, we provide evidence on the evolution and determinants of financial risk-taking by 18 advanced economy central banks. Based on the estimated Value at Risk (VaR), we document that average central bank balance sheet risk increased to about 3 percent of GDP. Central banks took more risk in periods of low policy rates, less expansionary fiscal policies, and more favorable growth prospects. Less independent central banks were more risk averse than their more independent peers, contrary to the fiscal dominance view. JEL Classification: E52, E58, E63, G32 |
| Keywords: | central bank independence, central bank profitability, monetary-fiscal interactions, monetary policy |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253079 |
| By: | Jorge Braga Ferreira |
| Abstract: | This study evaluates the impact of the ECB’s Corporate Sector Purchase Programme (CSPP) on corporate bond spreads at issuance, as measured by Option-Adjusted Spreads (OAS), and on subsequent changes in firms' capital structures, as proxied by year-on-year changes in the debt ratio. Using a sample of 1, 275 Eurozone corporate bonds issued between 2015:Q1 and 2018:Q4, we estimate a two-stage empirical model to evaluate. In the first stage, we find that the initial association between CSPP eligibility and lower spreads disappears once firm- and bond-level characteristics are controlled for, suggesting that observed differences reflect issuer and instrument features rather than programme eligibility. While the CSPP’s effect does not vary systematically by firm or bond characteristics, the results indicate broader market effects, likely driven by the programme’s signaling power and perceived credibility, which extended beyond the impact of direct bond purchases. In the second stage, we assess changes in leverage following the issuance of bonds. CSPP eligibility did not seem to affect the debt ratio in the issuance year. However, longer-maturity eligible bonds are associated with delayed increases in leverage, as firms expanded their debt ratios in the year following issuance. This pattern suggests that improved financing conditions under the programme may have encouraged firms to raise additional debt at a later stage. |
| Keywords: | ECB, CSPP, unconventional monetary policy, bond yields, corporate capital structure, corporate financing. |
| JEL: | C23 E52 E58 G12 G32 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03902025 |