|
on Monetary Economics |
| By: | Dirk Niepelt |
| Abstract: | We review the macroeconomic literature on retail central bank digital currency (CBDC), organizing the discussion around a CBDC-irrelevance result. We identify both fundamental and policy-related sources of relevance, or departures from neutrality. Bank disintermediation - the crowding out of deposits - does not, by itself, constitute such a source. We argue that the literature has primarily focused on policy-related sources of non-neutrality, often without making this focus explicit. From a macroeconomic perspective, CBDC is, at its core, a matter of monetary architecture, and political economy considerations are central to understanding CBDC policy design. |
| Keywords: | Monetary architecture, central bank digital currency, public money, private money, neutrality, lender of last resort. |
| JEL: | E42 E51 G21 G28 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2509 |
| By: | Hanin Khawaja (Department of Economics, New School For Social Research, USA) |
| Abstract: | The international monetary system (IMS) has long been interpreted through the lens of singularity, where global stability hinges on a single dominant currency fulfilling all core monetary functions—store of value, medium of exchange, and unit of account. This paper challenges that paradigm by introducing the concept of functional fragmentation. The IMS is evolving toward different currencies increasingly specializing in specific roles, without any single issuer monopolizing the system. The transformation draws on wholesale central bank digital currencies (wCBDCs) and distributed ledger technologies (DLTs), but also reflects deliberate institutional choices shaped by geopolitical tensions and the erosion of trust in dollar-centric infrastructure. The U.S. dollar is likely to maintain its primacy in global reserves, but new platforms are enabling regional currencies to gain ground in payments and settlement. First, emerging markets are building wCBDC-based networks designed to bypass traditional correspondent banking. Second, the European Union is advancing interoperability and financial infrastructure resilience to safeguard the euro’s regional role. Third, the USA and the UK, slower to adopt CBDCs, are leveraging regulatory frameworks around stablecoins to reinforce dollar dominance through fintech intermediaries. The implications for global liquidity, reserve strategies, and financial stability are profound, requiring renewed attention to institutional coordination and systemic design in a modular, post-hegemonic IMS. |
| Keywords: | International Political Economy, international monetary system (IMS), singularity, world money, central bank digital currency (CBDC), functional fragmentation |
| JEL: | E42 F02 F53 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:new:wpaper:2514 |
| By: | Cleaver, Cynan; Guest, Oliver; Steenkamp, Daan |
| Abstract: | Inflation dispersion affects the extent to which inflation harms welfare. As a result, inflation dispersion bears on the optimal inflation target and assessment of the appropriate stance of policy at any particular point in time. In this policy brief, we propose a new measure of inflation dispersion for South Africa, drawing on hundreds of goods and services categories to summarise inflation pressure in South Africa. We show that inflation dispersion describes divergences in inflation from the inflation target. Our analysis suggests that a lower average inflation level may not automatically imply lower inflation dispersion in South Africa, making it harder to anchor inflation expectations at a lower inflation target. This means that reforms to address persistently high administered price inflation and monetary policy communication focused on what policy must do to address inertial price and wage settings are particularly important. |
| Keywords: | CPI dispersion, underlying inflation |
| JEL: | E31 E37 E58 |
| Date: | 2025–10–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126439 |
| By: | Gregorio Impavido |
| Abstract: | This paper assesses the relative contribution of domestic and external factors to headline inflation in Kazakhstan. We confirm earlier results that inflation is primarily imported, and we provide novel details on the sources of imported inflation and its transmission channels. We find that domestic factors like fiscal policy and more recently utility tariff increases are the key determinants of domestic inflationary pressures. We provide new information on the likely determinants of inflation expectations through which domestic and external factors affect inflation. We find that monetary policy has only been partially successful at containing domestic and external pressures with insufficient liquidity sterilization, likely contributing to weakening of the interest rate transmission channel. Finally, we find that shocks are highly persistent and bringing back inflation to its target is likely to be a difficult and long process for the Central Bank. |
| Keywords: | Inflation determinants; domestic factors; external factors; monetary policy; fiscal policy; inflation expectationsl SUR |
| Date: | 2025–10–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/210 |
| By: | Nina Biljanovska; Eduardo Espuny Diaz; Amir Kermani; Rui C. Mano |
| Abstract: | This paper examines how housing market overvaluation—measured by the price-to-rent ratio and its deviations from long-term trends—affects the transmission of monetary policy. Using U.S. metropolitan-level data and three measures of monetary policy shocks, we find that house prices respond more strongly to policy rate changes in overvalued markets. Examining buyer heterogeneity, we show that investor demand, proxied by non-owner-occupied purchases, declines more sharply after monetary tightening in these markets. These results are consistent with models of extrapolative beliefs and suggest that monetary policy can serve a stabilizing role during housing booms. |
| JEL: | D84 E52 R31 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34404 |
| By: | Patrick A. Imam; Mr. Tigran Poghosyan |
| Abstract: | This paper examines the effectiveness of inflation targeting (IT) frameworks during the global inflation surge of 2022, a shock primarily driven by large adverse supply side disruptions following the onset of the War in Ukraine. The empirical findings suggest that (de jure) IT frameworks did not systematically deliver better inflation outcomes during this episode. The decline in inflation back towards historical norms was broadly comparable across (de jure) IT and non-IT country groups. While (de jure) IT central banks hiked their policy rates by more than non-IT central banks on average, this did not help with achieving better inflation outcomes. Also, we find no evidence of a more flexible exchange rate after the shock in (de jure) IT central banks. These findings suggest that (de jure) IT does not necessarily imply an advantage for monetary policy, particularly in the face of large, global supply shocks. Further analysis is warranted on how monetary policy frameworks can adapt to an environment characterized by more frequent and persistent supply-side disruptions. While using a de facto classification of IT regimes would be preferable, the absence of a comprehensive database makes this infeasible. |
| Keywords: | Inflation Targeting; Central Bank Credibility; Supply Shocks |
| Date: | 2025–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/212 |
| By: | SHIRATSUKA, Shigenori |
| Abstract: | An exit strategy from large-scale unconventional monetary policy requires central banks to adjust their policy interest rates and the size of their balance sheet. Adjustments of policy interest rates are carried out using neutral interest rates as a guidepost, even in the presence of measurement uncertainty. In contrast, adjustments of balance sheet size, or quantitative tightening (QT), are implemented through trial and error without any standardized guideposts. In this paper, I will develop a guidepost for the QT process in Japan. To that end, I will examine the long-term level of the balance sheet size of the Bank of Japan (BOJ), based on the estimation results for the nonlinear shape of the reserve demand curve. I will then carry out a simulation analysis of the transition path of the BOJ’s holdings of Japanese Government Bonds (JGBs). I will also address concerns over the boundary between fiscal financing and monetary policy by proposing the “extended banknote rules, ” both in the long term and in the transition. |
| Keywords: | Central bank balance sheet, New conventional monetary policy, Liquidity effects, Quantitative tightening, Extended banknote rule |
| JEL: | E44 E52 E58 G21 |
| Date: | 2025–09–09 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-146 |
| By: | HASUI, Kohei; TERANISHI, Yuki |
| Abstract: | This paper evaluates whether the Bank of Japan (BOJ)’s “Inflation-Overshooting Commitment” can work to raise inflation rates by over 2 percent to end the zero interest rate policy or whether cost-push shocks luckily give a chance of high inflation rates for the BOJ to escape a liquidity trap. We show that the Taylor-type rule can not replicate inflation overshooting, even though the zero interest rate policy continues as the BOJ’s monetary policy. However, the Taylor-type rule achieves about a 2 percent target in the end, and the cost-push shocks work as good luck to induce high inflation data and justify the escape from a liquidity trap. In the case of the price-level targeting policy, inflation rates increase by more than 2 percent, and the zero interest rate policy continues even after inflation rates sufficiently exceed 2 percent. Under the price-level targeting policy, the cost-push shocks give little good luck in terminating the zero interest rate policy earlier. Our simulation results imply that the BOJ successfully excludes the effect of positive cost-push shocks to implement the exit policy and conducts the history-dependent policy under inflation-overshooting commitment. Our results do not change for a variety of Japanese parameters for the anchored level of inflation rate, elasticity of demand to real interest rate, and inflation persistence. Moreover, the augmented Taylor-type rule with a strong history dependence can work as a price-level targeting policy. |
| Keywords: | monetary policy, commitment, liquidity trap |
| JEL: | E31 E52 E58 E61 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-149 |
| By: | Joseph Kopecky (Department of Economics, Trinity College Dublin); Giacomo Mangiante (Bank of Italy) |
| Abstract: | How does the population age structure affect monetary policy? With advanced economies experiencing increased inflation risk and sluggish growth, it is more important than ever to understand how the monetary toolbox transmits to the outcomes that policymakers wish to affect. Studying a long run panel of countries, we identify the impact of changing population age structures on the effectiveness of monetary policy transmission to the economy. These shocks are identified using a recently proposed trilemma instrument for quasi-exogenous change in policy rates. On the one hand, we provide strong empirical evidence for a relationship between age structure and the transmission of interest rate shocks to CPI inflation, with young populations reducing this transmission, middle-aged ones reinforcing it, and older retirees strongly reducing it again. We observe the same pattern for nominal wages and real house prices. On the other hand, population aging is found to have transitory effects on the responsiveness of real aggregate variables such as, output, consumption, and investment with older populations delaying the impact of monetary policy. We find no impact on transmission to unemployment. These results have potentially important implications for the conduct of policy, particularly in the current environment where central bankers must frequently choose between their inflation and full employment targets. |
| Keywords: | Monetary Policy Transmission; Demographic Change |
| JEL: | E50 E52 J11 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep1725 |
| By: | Tudor Schlanger (Yale School of Management); Lena Suchanek (Bank of Canada); Jonathan Swarbrick (University of St Andrews); Joel Wagner (Bank of Canada); Yang Zhang (Bank of Canada) |
| Abstract: | We study the role of unconventional monetary policies during a pandemic, focusing on the implementation sequencing of policies when there is a social containment period. Using the Bank of Canada's main projection model (ToTEM), we compare the efficacy of a suite of extended monetary policies (EMPs), finding that the immediate implementation of forward guidance and quantitative easing, followed by credit easing when containment measures are lifted delivers the best outcome. We also quantify the fiscal response needed to offset the gap in gross domestic product created by the effective lower bound, given operational limitations in scaling up EMPs. |
| Keywords: | COVID-19; pandemic; monetary policy; monetary policy sequencing; quantitative easing; credit easing |
| JEL: | E3 E4 E5 E52 E58 |
| Date: | 2025–06–19 |
| URL: | https://d.repec.org/n?u=RePEc:san:econdp:2501 |
| By: | L. Randall Wray |
| Abstract: | This working paper integrates the credit money approach (associated with Post Keynesian endogenous money theory) with the state money approach (associated with Modern Money Theory) by drawing on Wray's 1990 book (Money and Credit in Capitalist Economies: The Endogenous Money Approach, Edward Elgar), his 1998 book (Understanding Modern Money: the Key to Full Employment and Price Stability, Edward Elgar), and his 2004 edited book (Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar). New sources and interpretation of the history of money make it clear that there is no contradiction between state money and private credit money--each played a role in the creation of the modern monetary system. Indeed, today's system was created by bringing state money into the private money giro, thereby strengthening both. |
| Keywords: | credit money; state money; Modern Money Theory (MMT); Bank of England; fiat money; giro money; history of money; central bank; nominalism; origins of money |
| JEL: | B25 B52 E42 E58 E62 N11 N20 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1076 |
| By: | Stefano Fasani; Giuseppe Pagano Giorgianni; Valeria Patella; Lorenza Rossi |
| Abstract: | This paper studies the macroeconomic effects of a belief distortion shock—defined as the unexpected component of household inflation expectations after accounting for professional forecasts and observable fundamentals. Using survey data, U.S. macroeconomic variables, and machine-learning methods, we identify this shock and examine its effects both within and outside the zero lower bound (ZLB), conditioning on household inflation uncertainty. The shock raises inflation, uncertainty, and unemployment in normal times. At the ZLB, the shock reduces real interest rates and becomes expansionary; however, the accompanying rise in inflation uncertainty dampens or can even reverse these effects. A New Keynesian model with belief shocks replicates these dynamics and matches the empirical patterns of inflation uncertainty. |
| Keywords: | inflation, belief distortion shock, inflation uncertainty, households expectation, machine learning, local projections, New Keynesian model, monetary policy, ZLB |
| JEL: | E31 C22 D84 C32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12209 |
| By: | McLeay, Michael; Tenreyro, Silvana |
| Abstract: | Has the dominance of the dollar in global trade rendered monetary policy ineffective? An emerging view contends that if a country invoices its exports in dollars, exchange rates cannot stabilize economic activity, as the classical expenditure-switching channel is muted. This view rests on the premise that export prices are sticky in dollars, breaking the link between export demand and depreciations. But this assumption is not borne out by the data: goods priced in dollars tend to have more flexible prices, along with higher elasticities of substitution. We propose a model with more realistic assumptions and show that even with dollar pricing, depreciating the currency by loosening monetary policy can still boost exports and activity materially. The limit to any expansion is not demand, but supply capacity. We also show that low exchange-rate pass-through to dollar prices is not informative about price stickiness. The price response to exchange rates is small when demand elasticities are high, even with flexible prices: low pass-through is an equilibrium result, not evidence of a nominal friction. |
| JEL: | E31 E52 F41 Q30 |
| Date: | 2025–10–17 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128085 |
| By: | Okan Akarsu; Emrehan Aktuğ; Huzeyfe Torun |
| Abstract: | We conducted a survey of Turkish firms, using randomized treatments to provide varied information about inflation in a high-inflation environment. By matching the survey data with administrative firm-level data on employment, sales, credit, and foreign exchange transactions, we explore the impact of exogenous variations in inflation expectations on firms' behavior, borrowing decisions, and expectations. Our findings are summarized in seven facts: (i) information treatments are effective at generating exogenous variation in inflation expectations, even when inflation is high; (ii) the pass-through to firms' own price, wage, and cost expectations is strong, reaching up to 60%; (iii) firms adopt a supply-side interpretation of inflation—lower inflation expectations make them more optimistic; (iv) firms with lower inflation expectations decrease credit demand by approximately 3% for a 1 percentage point decline in expected inflation, shifting from long-term to short-term loans to avoid higher perceived costs; (v) they dollarize their liabilities by increasing their share of FX-denominated debt; (vi) they de-dollarize their assets by decreasing their net foreign currency holdings; and (vii) they increase their real activity, leading to higher employment and sales, and lower inventory. |
| Keywords: | expectations, firms, RCT, high inflation, macroeconomics |
| JEL: | E12 E24 E31 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12210 |
| By: | Bredl, Sebastian |
| Abstract: | The present paper utilizes AnaCredit loan-level data to examine the impact of regional loan market structure on lending rates. The analysis focuses on newly issued loans to small non-financial corporations in the euro area during the monetary policy tightening phase of 2022 and 2023. The findings suggest that banks tend to charge higher lending rates when they possess larger regional market shares. This outcome is driven by differences between banks rather than by individual banks adjusting their lending rates to regional market conditions. Overall, there is no strong evidence that market power conveyed by higher regional market concentration impeded the transmission of the monetary policy tightening to lending rates. If anything, there are indications that this type of market power may hinder the short-term pass-through of the unexpected component of monetary policy. |
| Keywords: | Lending rates, pass-through, loan market concentration |
| JEL: | D40 E43 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:330309 |
| By: | SUI, Qing-yuan |
| Abstract: | We empirically investigate the impact of the Bank of Japan’s (BOJ) monetary policy on the lending behaviors of regional banks during the period of quantitative easing (QE). We focus particularly on the credit supply from banks to different industries or sectors, with an emphasis on manufacturing and real estate-related industries. Our results indicate that the BOJ’s QE policy promoted bank lending to the estate-related industries or sectors but not to the manufacturing industry. Our findings align with recent studies on the limitations of overall credit supply in influencing the business cycle and economic growth. Furthermore, Our results suggest that the BOJ has limited ability to halt the recession through lending channels under the QE policy. |
| Keywords: | quantitative easing, bank lending, regional banks, excess reserve, dynamic panel model |
| JEL: | E44 E52 E58 G21 |
| Date: | 2025–08–24 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-144 |
| By: | Çekin, Semih Emre; Polattimur, Hamza |
| Abstract: | This paper introduces a novel TV news index specifically designed to track coverage of rising inflation across major US TV channels: ABC, CBS, CNN, and Fox News. The index is generated daily and aggregated into a monthly measure. Using this index, we analyze the impact of TV news on inflation expectations based on both aggregated monthly and micro-level daily data. We find that only CNN and Fox coverage have significant effects on inflation expectations, and that responses are stronger among women, younger, poorer, and less-educated households. Moreover, the effects are larger when inflation is rising and the inflationary episode is prolonged. The micro data confirm these findings and reveal a partisan bias: Republicans respond more strongly to TV news than Democrats and the effects are larger for Fox than for CNN. |
| Keywords: | Inflation Expectations, Expectation Formation, TV News, Text Analysis |
| JEL: | E31 D84 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:330315 |
| By: | Gert Peersman; (-) |
| Abstract: | This paper employs a joint SVAR-IV model for the United States and the euro area to estimate the pass-through of energy and food commodity cost shocks to inflation. Exogenous commodity cost shocks—such as those triggered by the Russian invasion of Ukraine—had only a modest impact on inflation during the post-pandemic period. However, counterfactual analyses based on the pass-through estimates indicate that overall commodity cost fluctuations—including their endogenous responses to macroeconomic conditions—can almost fully account for the rise and subsequent decline of energy, food, and core CPI inflation over this period. These findings highlight that commodity costs constitute a key transmission channel through which macroeconomic developments affect inflation. Estimates of a standard Phillips Curve specification, including its slope, are shown to be severely biased when this channel is ignored. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:25/1123 |
| By: | Emilio Barucci; Andrea Gurgone; Giulia Iori; Michele Azzone |
| Abstract: | We analyse financial stability and welfare impacts associated with the introduction of a Central Bank Digital Currency (CBDC) in a macroeconomic agent-based model. The model considers firms, banks, and households interacting on labour, goods, credit, and interbank markets. Households move their liquidity from deposits to CBDC based on the perceived riskiness of their banks. We find that the introduction of CBDC exacerbates bank-runs and may lead to financial instability phenomena. The effect can be changed by introducing a limit on CBDC holdings. The adoption of CBDC has little effect on macroeconomic variables but the interest rate on loans to firms goes up and credit goes down in a limited way. CBDC leads to a redistribution of wealth from firms and banks to households with a higher bank default rate. CBDC may have negative welfare effects, but a bound on holding enables a welfare improvement. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.21071 |
| By: | Diana Barro (Ca’ Foscari University of Venice); Antonella Basso (Ca’ Foscari University of Venice); Marco Corazza (Ca’ Foscari University of Venice); Guglielmo Alessandro Visentin (Henley Business School, University of Reading) |
| Abstract: | We propose a hybrid approach that combines Neural Networks with a Vector Autoregression (VAR) model to generate long-term forecasts of time series. We apply this methodology to forecast the impact of shifts in monetary policies within the Euro area on a comprehensive set of macroeconomic variables. Our analysis begins with a standard (linear) VAR model, which is then enhanced by incorporating Neural Networks to generate long-term forecasts for key variables such as the interest rate, inflation, real output, narrow money, exchange rate, and corporate bond spread. The results suggest that a Neural Network-VAR model offers improvements over the traditional linear VAR for forecasting certain macroeconomic variables in the long run. However, due to the limited sample size, the nonlinear model does not consistently outperform the linear VAR. |
| Keywords: | Forecasting; VAR; Neural Networks; Monetary policies; Euro area |
| JEL: | C32 C45 C53 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ven:wpaper:2025:24 |
| By: | UGAI, Hiroshi; OSADA, Takeshi |
| Abstract: | This study empirically examines liquidity dependence in the Japanese banking system. Acharya and Rajan (2024) and Acharya et al. (2024) pointed out the phenomenon of liquidity dependence, which was observed during the U.S. quantitative easing and tightening policies and is regarded as a possible factor in liquidity crises in September 2019 and March 2023 crises in the U.S. Since quantitative easing was introduced in March 2001, the Japanese economy has experienced a more than 20-year period of quantitative easing, longer than that encountered in the U.S. Our macro and micro analysis employs more than 20 years of macroeconomic and bank-level accounting data and reveals that the same liquidity dependence phenomenon is observed in the Japanese economy. The Japanese broad deposit insurance system is superior to that in the United States, so an incident like the Silicon Valley Bank bankruptcy is unlikely to occur in Japan. However, partly with the rise of digital banking, we suggest that the Japanese economy needs to prepare for the impending major quantitative tightening—the so-called exit from the long-term quantitative easing policy. |
| Keywords: | Bank of Japan, quantitative easing, quantitative tightening, deposits, financial fragility, monetary policy |
| JEL: | G01 G2 E5 |
| Date: | 2025–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-147 |
| By: | Mishel Ghassibe; Anton Nakov |
| Abstract: | Business cycles with pronounced inflation can have sectoral origins and often feature a growing share of price-adjusting firms. Rationalizing such phenomena re- quires enhancing our modeling toolkit. We do that by building a non-linear equilibrium multi-sector framework featuring a general input-output network and optimal decisions on the timing and size of price adjustments. The interaction of our ingredients creates equilibrium cascades: large movements in aggregates trigger price adjustment decisions on the extensive margin. Following demand shocks, such as monetary interventions, networks dampen cascades, thus slowing down price adjustment decisions and giving central banks substantial power to stimulate the real economy with limited inflationary consequences. In contrast, under supply shocks, networks amplify cascades, leading to fast increases in the frequency of repricing and large inflationary swings. Applied to Euro Area data, the interaction of networks with cascades allows to quantitatively match the surges in inflation and repricing frequency in the post-Covid era. |
| Keywords: | large shocks, menu costs, networks, non-linear business cycles |
| JEL: | E31 E32 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1525 |
| By: | Neil Mehrotra; Hyunseung Oh; Julio L. Ortiz |
| Abstract: | Using industry-level panel data and plausibly exogenous variation in supply conditions, we estimate the elasticity of retail price margins with respect to inventories along the retailer's optimal pricing curve. We find that this elasticity is negative and statistically significant, implying that lower finished-good inventories lead to higher price margins. We assess the implications of this channel for inflation dynamics within a New Keynesian Phillips curve (NKPC) framework that links inventories to retailers' markup behavior. Incorporating the inventory-sales ratio into the NKPC markedly improves the model's empirical fit and helps account for two notable recent inflation episodes: the missing disinflation of 2009â 2011 and the COVID-era surge. |
| Keywords: | Inflation; Inventories; Supply disruptions; Phillips curve |
| JEL: | E31 E32 E22 |
| Date: | 2025–10–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1424 |
| By: | Thomas Kohler; Jean-Paul L’Huillier; Gregory Phelan; Maximilian Weiß |
| Abstract: | Firms tend to justify price increases as necessary to cover rising costs. However, standard models imply that firms not only adjust prices to cost increases, but also to changes in spending. We present a model where, instead, there is differential adjustment depending on the type of shock. The model is disciplined using a firm survey, which shows that, towards the end of the pandemic, price increases were primarily a response to higher costs. In contrast, firms report not reacting to higher demand to avoid upsetting customers. Supply shocks are responsible for most of the upward adjustment of prices. |
| Keywords: | inflation bursts, optimal strategies, price gouging, monetary policy tradeoffs |
| JEL: | D82 E31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12212 |
| By: | SEKINE, Toshitaka; WADA, Tetsuro |
| Abstract: | During the chronic deflation era starting in the 1990s, Japanese inflation expectations were said to be firmly anchored at a very low level, say, around zero. These expectations seemed to have become something like the social norm. Households were quite against any price hikes, and as a consequence, firms hesitated to raise their prices — when they raised prices, they apologized for their misbehavior. People not only expected that prices would not increase, but also believed that prices should not increase. That social norm may have changed in response to inflationary shocks after COVID-19 and the Ukraine war. We applied a natural language processing technique to tweets that commented on price hikes and found an increase in posts after 2021 that accepted price hikes for various goods. Some of these posts indicated even positive feelings and mentioned salary hikes. |
| Keywords: | tweet, natural language processing, sentiment analysis, inflation expectation, monetary policy, Japan |
| JEL: | C0 E31 |
| Date: | 2025–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-150 |
| By: | Daniel Ofori-Sasu (Accra, Ghana); Elikplimi Komla Agbloyor (Accra, Ghana); Dennis Nsafoah (New York, USA); Simplice A. Asongu (Johannesburg, South Africa) |
| Abstract: | This study examines the effect of regulatory independence of the central bank in shaping the impact of electoral cycles on bank lending behaviour in Africa. It employs the dynamic system Generalized Method of Moments (SGMM) Two-Step estimator for a panel dataset of 54 African countries over the period, 2004-2022. The study found that banks lend substantially higher during election years, and reduce lending patterns thereafter. The study shows that countries that enforce monetary policy autonomy of the central bank induce a negative impact on bank lending behaviour while those that apply strong macro-prudential independent action and central bank independence reduce lending in the long term. The study provides evidence to support that regulatory independence of the central bank dampens the positive effect of elections on bank lending around election years while they amplify the reductive effects on bank lending after election periods. There is a wake-up call for countries with weak independent central bank regulatory policy to strengthen their independent regulatory policy frameworks and political institutions. This will enable them better strategize to yield a desirable outcome of bank lending to the real economy during election years. |
| Keywords: | Political Economy; Political Credit Cycles, Electoral Cycle; Central Bank Regulatory Independence; Bank lending Behaviour |
| JEL: | D7 D72 G2 G3 E3 E5 E61 G21 L10 L51 M21 P16 P26 |
| Date: | 2024–01 |
| URL: | https://d.repec.org/n?u=RePEc:dbm:wpaper:24/020 |
| By: | Kaldorf, Matthias |
| Abstract: | We propose a quantitative DSGE model with environmental and financial frictions to asses how high emission taxes affect optimal central bank collateral policy. Central banks specify which assets banks can pledge as collateral to obtain short-term central bank funding. This is referred to as central bank collateral policy and involves a trade-off between supplying sufficient liquidity to banks and exposing itself to losses from accepting risky assets as collat- eral. Emission taxes affect this trade-off by reducing productivity in the non-financial sector, such that the corporate default rate increases and the quality of collateral deteriorates. High emission taxes also reduce investment, debt issuance and, hence, the amount of collateral available to banks. This decline in the quantity of collateral is more pronounced if emission tax shocks are very persistent or permanent. It is therefore optimal to relax collateral policy in the longer run, where the collateral quantity channel dominates, and to tighten collateral policy after a transitory emission tax shock, in order to offset the short run reduction in collateral quality. |
| Keywords: | Central Bank Collateral Policy, Climate Policy, Collateral Premia, Corporate Default Risk |
| JEL: | E44 E58 E63 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:330307 |
| By: | James K. Galbraith; Pavlina R. Tcherneva |
| Abstract: | The Central Bank of the United States, the Federal Reserve, has a dual mandate to maintain both full employment and price stability. However, inflation-fighting had always eclipsed the full employment objective without much accountability. Today, the Federal Reserve provides regular testimony before Congress on how well it is achieving its dual mandate. Professor Galbraith wrote that section into law (among others), which requires the Federal Reserve to report to Congress on its work. According to Professor Galbraith, the law intentionally kept the scope of Federal Reserve policy wide. The purpose was not to impose some economic theory on the policymaker, but to promote an open dialogue between the Federal Reserve and Congress over what monetary policy is and does. And yet, the legacy of monetarism continues to influence monetary policy today: the belief that there is a trade-off between inflation and unemployment firmly guides contemporary Federal Reserve policy. Even as the Federal Reserve's own research finds that labor markets are not the driver of inflation, economists, including at the Fed, continue to insist that unemployment and labor market slack are the way to fight price increases. In this keynote, Professor Galbraith highlights other, more effective and enlightened ways of dealing with inflation. Originally issued as EDI Working Paper No. 14, May 2023. |
| Keywords: | Economic Insecurity; Money and Finance |
| JEL: | F30 N10 N14 P16 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1071 |
| By: | Samuel Ligonnière (Université Paris-Saclay, Univ Evry, EPEE-CEPS, 91025, Evry-Courcouronnes); Salima Ouerk (National Bank of Belgium) |
| Abstract: | We analyze the dynamic effects of ECB monetary policy surprises on newly originated mortgage credit across the household income distribution using loan-level data from the French national credit registry. We find a distinct U-shaped pattern in mortgage borrowing across income groups, with loans for primary residences taken by middle-income households showing the strongest reaction. These households, while creditworthy, have liquidity constraints which make them more sensitive to changes in financing conditions and macroeconomic signals than other groups. Our analysis of transmission channels confirms these findings. Credit demand reacts positively to expansionary pure monetary policy and forward guidance surprises, underscoring the central role of the expectations channel. In quantitative terms, we estimate that a one-standard deviation expansionary surprise over two years leads to a 10% increase in new mortgage lending for primary residences among middle-income households. In addition, credit demand increases in response to positive macroeconomic signals, pointing to the role of the information channel. |
| Keywords: | monetary policy, credit distribution, inequality. |
| JEL: | D31 E4 E52 G21 G5 G51 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202510-484 |
| By: | Philip Schnattinger; Prachi Srivastava |
| Abstract: | This paper investigates how subjective household inflation uncertainty around future prices shapes employed individuals’ expectations of nominal wage growth. Utilizing detailed microdata from the Federal Reserve Bank of New York’s Survey of Consumer Expectations (SCE), we document two key empirical findings: (i) individual-level inflation uncertainty is positively associated with wage growth expectations, and (ii) this relationship is marginally higher for low-income households. To address potential endogeneity arising from wage-price dynamics, we propose a novel instrumental variable strategy that exploits variations in forecast imprecision for highly salient consumer goods (gasoline and food). Our identification leverages the cognitive heuristic that individuals use ”round numbers to represent uncertain forecasts, ” generating quasi-exogenous variation in inflation uncertainty. To interpret these empirical findings, we develop a search-and-matching model of the labor market with heterogeneous worker wealth, extending the framework of Krusell et al. (2010) to incorporate wage bargaining under uncertainty. We propose wage bargaining under uncertainty, combining the alternative offer bargaining wage bargain proposed Hall and Milgrom (2008) with the solution for bargaining under uncertainty developed in White (2008). In our model, nominal wages are negotiated before the realization of inflation. Risk-averse workers, facing uncertainty about their future real purchasing power, demand higher nominal wages as compensation for bearing inflation risk. This compensating risk premium mechanism plays a pivotal role, explaining why increased inflation uncertainty leads workers to form higher nominal wage growth expectations and negotiate higher wage increases. |
| Keywords: | inflation uncertainty, expectations, wage bargaining |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12216 |
| By: | Denis Nikitin; Johan Schmalholz; Carolina Bloch |
| Abstract: | This paper explores how retail central bank digital currencies (CBDCs) could enhance the delivery of social safety nets (SSNs). It assesses CBDC design features and their implications for payment administration and delivery. Findings suggest that using CBDCs solely as payment delivery solutions offers limited advantages over existing systems such as faster payment systems. However, leveraging CBDCs as payment administration platforms—with peer-to-peer transfers, decentralized ledger access, and advanced programmability—could transform SSN delivery by enabling agencies to automate transfers, operate independently from private financial intermediaries, and monitor transactions directly. These benefits come with significant challenges, including privacy concerns, compliance risks, and infrastructure requirements. The paper emphasizes that realizing CBDCs’ full potential for SSNs will depend on thoughtful integration with existing systems and a clear understanding of their comparative advantages. Aimed at social protection policymakers and finance specialists, it highlights the need for collaboration between CBDC developers and SSN administrators to ensure that digital currencies effectively support inclusive and efficient benefit delivery. |
| Keywords: | Central Bank Digital Currencies; Social Safety Nets; Payment Systems; Government Transfers; Fintech; Financial Inclusion |
| Date: | 2025–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/211 |
| By: | Eva, Kenneth; Lamla, Michael; Pfajfar, Damjan |
| Abstract: | We document novel stylized facts regarding updating of households' inflation expectations. Using two randomized controlled trials fielded in the US and Germany where signals in the form of professionals' inflation forecasts have different perceived levels of precision, we show that households react more to information with higher levels of precision, in line with Bayesian updating. However, in contrast to Bayesian updating, they mostly respond differently to these signals in the decision to update expectations (extensive margin) and not in the size of the adjustment (intensive margin). The extensive margin also displays a pronounced asymmetry: Households more frequently update their expectations when the signal is above the prior compared to when the signal is below the prior. We propose a model where households' inflation expectations exhibit state-dependent inattentiveness to inflation signals. In times of high uncertainty, elevated inflation expectations may persist due to the increased information processing costs of uncertain inflation signals and the relatively smaller welfare losses of not adjusting expectations when signals are below priors (disinflations) compared to when signals are above priors (accelerating inflation). Our model provides microfoundations for the asymmetric loss function that is commonly assumed to explain biases in inflation expectations. |
| Abstract: | Wir untersuchen und zeigen neue Erkenntnisse hinsichtlich der Anpassung von Inflationserwartungen privater Haushalte. Unter der Nutzung von zwei Experimenten, in den USA und Deutschland, in denen wir Haushalte Inflationsprognosen von Fachleuten mit unterschiedlicher Präzision bereitstellen, zeigen wir, dass präzisere Informationen stärkere Anpassungen der Erwartungen bewirken - im Einklang mit einer bayesschen Aktualisierung. Von der Bayes-Regel weichen die Haushalte jedoch ab, wenn es um die Entscheidung geht, ob Erwartungen überhaupt angepasst werden (extensive Marge). Für die extensive Marge beobachten wir zudem eine ausgeprägte Asymmetrie: Erwartungen werden deutlich häufiger angepasst, wenn das Informationssignal oberhalb der bestehenden Erwartungen liegt, als wenn es darunter liegt. Um diese Beobachtungen theoretisch zu fundieren, schlagen wir ein Modell vor, in dem Inflationserwartungen eine zustandsabhängige Unaufmerksamkeit gegenüber Inflationssignalen aufweisen. In Phasen hoher Unsicherheit können erhöhte Inflationserwartungen fortbestehen, da unsichere Signale höhere Informationsverarbeitungskosten verursachen und die Wohlfahrtsverluste gleichzeitig aber relativ gering sind, wenn bei Signalen sinkender Inflation keine Anpassung erfolgt, im Vergleich zu Situationen mit Signalen, die auf eine beschleunigte Inflation hindeuten. Das Modell liefert damit eine mikroökonomische Grundlage für die asymmetrische Verlustfunktion, die in der Literatur häufig herangezogen wird, um systematische Verzerrungen in Inflationserwartungen zu erklären. |
| Keywords: | Inflation expectations, rational inattention, signal uncertainty, randomized controlled trial, survey experiment |
| JEL: | E31 E52 E58 D84 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:rwirep:330184 |
| By: | Tanweer Akram; Khawaja Mamun |
| Abstract: | This paper analyzes the dynamics of Canadian dollar-denominated (CAD) interest rate swap yields. It applies autoregressive distributive lag (ARDL) models, using monthly time series data, to estimate the effects of the current short-term interest rate and other relevant macro-financial variables on interest rate swap yields. It shows that the current short-term interest rate is a crucial driver of the swap yields of different maturity tenors. Similar patterns of interest rate swaps denominated in other hard currencies, such as the US dollar, euro, British pound sterling, and Japanese yen, have been discerned in previous empirical research testing the Keynesian hypothesis, which maintains that the current short-term interest rate has a decisive influence on the long-term interest rate. Thus, the findings of this paper lend additional support to the Keynesian hypothesis by showing that the same pattern holds for CAD interest rate swap yields. The results obtained in the paper can be useful for portfolio managers, corporate leaders, and policymakers. |
| Keywords: | Canadian Dollar Swaps; Interest Rate Swap Yields; Short-Term Interest Rate; Monetary Policy; Bank of Canada |
| JEL: | E43 E50 E60 G10 G12 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1072 |
| By: | Weimin Wang |
| Abstract: | This article examines whether the high inflation in 2022 in Canada was demand–pull or supply–push. It finds that at the aggregate level, Canada’s household final consumption expenditure grew at a much higher rate than gross domestic product from early 2021 to mid 2022 and that headline inflation accelerated during this period. These findings suggest that the aggregate excess demand for consumption and high inflation in 2022 were highly related. This article also decomposes inflation in the price of household final consumption into the contributions by detailed products consumed. It finds that both demand and supply shocks are important contributors, with increasing contributions from the supply side until the fourth quarter of 2022. This is consistent with findings by Chen and Tombe (2023) and Wang (2023). From 2021 to 2022, quarterly inflation in household final consumption expenditure averaged 5.99%, of which 54.0%, 23.7% and 22.3% are attributed to the product-specific supply shock, the product-specific demand shock and the aggregate demand shock, respectively. In terms of contributions by product, food and fuels and lubricants had much larger contributions than all other products. Also, pent-up demand following the easing of public health restrictions in early 2022 led to a growing demand and higher prices for travel and recreation-related services. In addition, paid rental fees for housing contributed significantly to the high inflation in all four quarters of 2022. These top contributors are mostly essential goods and services, implying that many households could not afford to keep up their consumption of essential goods and services during the high inflation period. |
| Keywords: | inflation, demand-pull, supply-pull, consumption expenditure |
| JEL: | J23 M21 |
| Date: | 2024–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:stc:stcp8e:202400500005e |
| By: | FUJIKI, Hiroshi |
| Abstract: | This paper examines the future evolution of cash demand in Japan, amid rapid demographic aging and the increasing adoption of cashless payments. Despite a decline in cash use for daily transactions, aggregate cash demand has remained stable, likely due to cash hoarding by older generations. Using survey data from 2021 that separates cash held for daily use and hoarding purposes by age group, we project cash demand through 2070. Our baseline scenario assumes constant cash-holding behavior by cohort, while an alternative scenario incorporates reductions reflecting the spread of cashless payments. Adjustments for the underrepresentation of high-cash-holding households are made using methodologies from the distributional national wealth literature, which employs Pareto distributions to align microdata with aggregate statistics. Results suggest that cash on hand (COH) will decline by 1.5%–2.4% annually, and cash at home (CAH) by about 1% annually. The rate of decrease in cash demand is faster than the population decrease of 0.7%, as we assume that future older individuals will hoard less cash than current older individuals, and future younger individuals will use less cash for day-to-day payment due to the spread of cashless payments. We find that a 1% rise in deposit rates would cause a 20% decrease in CAH demand, a much stronger effect than demographic aging. Finally, we discuss the implications for the Bank of Japan’s balance sheet, as declining cash demand could increase the Bank’s cost burden during monetary tightening. |
| Keywords: | cash demand, population aging, demographic changes, cashless payment methods, cash hoarding |
| Date: | 2025–08–26 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-145 |
| By: | Sirio Aramonte |
| Abstract: | After the Global Financial Crisis, the liquidity-supply ecosystem that underpins nonbank intermediation shifted away from traditional dealers. Instead, it started to rely more on intermediaries with fragile funding structures and opportunistic investment strategies. Over the years, stress episodes saw the sudden retrenchment of these intermediaries, which amplified liquidity imbalances and market malfunction. Efforts to reduce the risk and magnitude of liquidity imbalances have mostly focused on reducing liquidity transformation and on constraining liquidity demand. This paper highlights the importance of strengthening liquidity supply in certain non-bank segments, particularly those that allow households to conduct long-term consumption smoothing. The main argument is that the rise of non-bank intermediation, and the ensuing risk of spikes in liquidity demand, partly reflects structural changes in how households can meet fundamental financial needs. In addition, the risk-taking channel of monetary policy can affect liquidity-demand dynamics, including for some intermediaries that facilitate household consumption smoothing. |
| Keywords: | Drivers of liquidity demand; Liquidity supply; NBFIs |
| JEL: | G14 G28 G38 |
| Date: | 2025–10–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1425 |
| By: | Kozo Ueda; Yoshio Kamijo; Hideaki Minami |
| Abstract: | This study investigates why inflation converges only slowly to its target by combining laboratory experiments with structural estimation. We create a laboratory environment in which subjects act as ï¬ rms and set prices under Calvo-type stickiness, where profits are determined as a weighted average of competitors’ prices and an exogenously given aggregate price. The experimental results show that both higher aggregate inflation and stronger strategic complementarity hinder convergence to the theoretical equilibrium under rational expectations. Using Bayesian MCMC estimation, we systematically compare subjects' behavior with rational-expectations predictions, allowing for small deviations motivated by bounded rationality. The results reveal that subjects overestimate strategic complementarity, which contributes to delayed inflation convergence. |
| Keywords: | strategic complements, sticky prices, bounded rationality |
| JEL: | C92 E32 E52 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-57 |
| By: | Ranger, Nicola A.; Adam, Christopher; Arndt, Channing; Martín, Roberto Spacey |
| Abstract: | Climate change is driving three transformations in the landscape of global finance, with implications for central banks in Sub-Saharan Africa (SSA). First, pressures on financial institutions related to climate-related physical risks are mounting, with potential to threaten price and financial stability. Second, global and domestic responses to climate change are creating risks and opportunities for SSA economies. Third, the ongoing shift in the global financial architecture toward sustainability could either crowd-out or crowd-in international investment flows to SSA. Uncertainties in each increase the challenges for central banks and supervisors. We find that, without action, the risks outweigh the opportunities. To fulfil their mandates, SSA's central banks are obliged to react; however, the paucity of peer-reviewed evidence hinders the development and execution of appropriate responses. Preparedness is crucial if actions by SSA central banks are to play their part in shifting the balance towards managing risks and grasping opportunities. |
| Keywords: | climate change; central banking; Sub-Saharan Africa; financial markets; financial risk |
| JEL: | E58 O13 Q54 |
| Date: | 2025–10–06 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129898 |
| By: | Joseph Kopecky (Department of Economics, Trinity College Dublin) |
| Abstract: | Has the euro improved trade evenly across member states? This paper revisits the impact of the euro on trade, focusing on systematic heterogeneity between core and peripheral members. I develop a stylized conceptual framework showing that while the elimination of exchange-rate volatility should raise trade for all European Monetary Union (EMU) members, other forms of price convergence may generate asymmetric effects. Using bilateral trade data from 1960–2018, I estimate a gravity model with Poisson pseudo maximum likelihood (PPML) and apply a doubly robust inverse-propensity score weighting estimator. The results show that the average EMU effect masks substantial heterogeneity across member states. On average, euro membership increases trade by about 6%, with stronger gains, around 12%-for core country exports (to both core and periphery destinations) and within periphery exports. However, trade flows from the periphery to core members decline by an estimated 7%. |
| Keywords: | Euro; Currency unions; Trade; Gravity |
| JEL: | F10 F13 F45 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep1625 |
| By: | Pol Campos-Mercade; Armando N. Meier; Florian H. Schneider; Roberto A. Weber |
| Abstract: | We study attitudes toward offering monetary payments for vaccination. We develop the Policy Lab, an experimental paradigm to characterize policy preferences in which participants decide whether to implement actual interventions to influence others’ real-world behavior. In two studies with representative samples of the Swedish population (N=2, 010) and one with Swedish policymakers (N=2, 008), participants decide whether to provide others (N=1, 529) with monetary incentives for vaccination. A majority of participants oppose using monetary incentives. Despite the widespread perception that such incentives are an effective policy instrument, which is supported in our data, opposition to their use is driven by perceptions that they are coercive and unethical. Policymakers exhibit, if anything, greater opposition to the use of monetary incentives. We also document that opposition to incentives extends beyond vaccination to other health domains. Our study provides evidence that the public opposes policies that they correctly perceive as effective, potentially creating barriers to their adoption. We further introduce a novel method to elicit policy preferences, widely applicable whenever researchers conduct randomized trials. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:zur:econwp:478 |
| By: | Pattravadee de Favereau de Jeneret; Ioannis Diamantis |
| Abstract: | This study investigates whether Topological Data Analysis (TDA) can provide additional insights beyond traditional statistical methods in clustering currency behaviours. We focus on the foreign exchange (FX) market, which is a complex system often exhibiting non-linear and high-dimensional dynamics that classical techniques may not fully capture. We compare clustering results based on TDA-derived features versus classical statistical features using monthly logarithmic returns of 13 major currency exchange rates (all against the euro). Two widely-used clustering algorithms, \(k\)-means and Hierarchical clustering, are applied on both types of features, and cluster quality is evaluated via the Silhouette score and the Calinski-Harabasz index. Our findings show that TDA-based feature clustering produces more compact and well-separated clusters than clustering on traditional statistical features, particularly achieving substantially higher Calinski-Harabasz scores. However, all clustering approaches yield modest Silhouette scores, underscoring the inherent difficulty of grouping FX time series. The differing cluster compositions under TDA vs. classical features suggest that TDA captures structural patterns in currency co-movements that conventional methods might overlook. These results highlight TDA as a valuable complementary tool for analysing financial time series, with potential applications in risk management where understanding structural co-movements is crucial. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.19306 |
| By: | Daniel Jaar; Joao Ritto |
| Abstract: | We develop a dynamic general equilibrium model with heterogeneous households and a cash-intensive informal sector that replicates two empirical patterns: the negative relationship between informality and firm productivity, and the declining share of informal consumption with household wealth. The non-homotheticity of informal consumption implies that tax incidence is heterogenous: poor households pay less consumption taxes but are more exposed to inflation. We use the model to study the distributional effects of financing government revenue through seigniorage versus consumption taxes. Calibrated to Peru – where informality accounts for around half of economic activity – the model shows that informal purchases provide significant savings through lower prices, particularly for poor households, who save up to 11% compared to purchasing the same bundle formally. The model also uncovers substantial variation in preferences over revenue-neutral combinations of inflation and consumption taxes: households in the top expenditure decile would like inflation to be as high as 12%, while those in the bottom favor inflation below 5%. This disagreement grows with the size of the informal sector. |
| Keywords: | Informality; Inflation; Public Finance; Inequality |
| JEL: | E62 H22 O17 |
| Date: | 2025–10–27 |
| URL: | https://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-805 |
| By: | Mr. Alexander Culiuc; Hyunmin Park |
| Abstract: | We introduce a novel dataset of large depreciations worldwide since 1971. First, we use a multi-step approach to accurately pinpoint large depreciation events on monthly data. We then construct large depreciation episodes that cover 24 months after the initial depreciation event. The month-level data allows for a granular characterization of the dynamics of large depreciations across multiple metrics, including maximum and equilibrium depreciations, overshooting, and number of depreciation events within a single episode. We then present stylized facts on episodes across various characteristics and groups (income, REER trajectory, number of events, exchange rate flexibility, and IMF-supported program status). Among these: (i) a few months into an episode, REER tends to appreciate unless there is an “aftershock” depreciation, (ii) attempts to peg following the initial depreciation are associated with a higher likelihood of “aftershocks”, and (iii) equilibrium REER depreciations are largest when an IMF-supported program is put in place after the initial depreciation takes place. |
| Keywords: | exchange rate; crisis; inflation; real exchange rate; overshoooting; equilibrium depreciation |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/221 |
| By: | Arturo Huerta G. |
| Abstract: | The article analyzes why exchange rate stability has been prioritized in Mexico and why the national currency has appreciated; which policies and factors have made this possible, the costs and consequences of the strong peso, and its sustainability and temporality are also examined. Mexico's economy does not have the endogenous conditions necessary to maintain such a strong currency--which has relied on the inflow of capital, thus exposing the economy to high vulnerability vis-a-vis the behavior of capital flows. The exchange rate stability has been very costly, due to the fact that there is no longer an economic policy in favor of growth; furthermore, the entry of capital leads to continuous productive imbalances which are behind the external deficit. In essence, Mexico has fallen into the Ponzi effect, whereby debt covers the deficit and pays off debt. This article posits that an effective, flexible exchange rate should be used to lower the interest rate and increase public spending in favor of growth and employment, and that economic policy should aim to encourage import substitution and increase the domestic value added of exports in order to reduce the external deficit and capital inflow requirements. This should be accompanied by regulating the movement of goods and capital to avoid speculation and protect domestic production from imports, in turn allowing for a more flexible economic policy in favor of the productive sector and employment. Lastly, the article proposes that the economy should be financed with its own currency to boost growth potential and reduce the foreign trade deficit in order to avoid relying on external financing. |
| Keywords: | Government and the Monetary System; Financial Markets and the Macroeconomy; Fiscal and Monetary Policy in Development; Policy Designs and Consistency; Financial Markets and the Macroeconomy; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Foreign Exchange Policy; Factor Movement Policy |
| JEL: | E42 E43 E44 E63 O23 O24 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1075 |
| By: | Matias Iaryczower; Gabriel Lopez-Moctezuma; Paola Moscariello |
| Abstract: | In this paper, we quantify the distortions induced by career concerns within the Federal Open Market Committee (FOMC). We combine a structural approach with an unanticipated change in the information available to the public about internal committee deliberations. We show that—given the policy preferences of Fed Presidents and Board Governors serving in the FOMC—agents' incentives to appear competent and unbiased outweigh the distortions induced by anti-pandering and conformity. Relative to a counterfactual with no reputational considerations, career concerns improve the welfare of an unbiased principal. Given our estimates of career concerns, Transparency improves welfare relative to an Opaque regime in which internal deliberations are not made public. In a counterfactual exercise, we show that greater heterogeneity in regional shocks reduces conformity but increases policy errors under Transparency. |
| JEL: | C57 D78 E58 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34394 |
| By: | Hélène Rey; Vania Stavrakeva |
| Abstract: | We study the anatomy of the international portfolio finance network. As global financial linkages have become denser over time, cross-border portfolio equity positions have grown in importance relative to debt for Emerging markets and Advanced economies. Using the framework developed by Stavrakeva and Rey (2024), we construct a novel proxy of daily foreign investor holdings in both equity and long-term sovereign debt markets across 32 currency areas. Leveraging an instrumental variable strategy, we identify an effect of foreign equity ETF inflows on exchange rates and local stock market prices. Our high-frequency proxy enables us to interpret episodes of turbulence in international finance. It should prove useful to assess how persistent the current shocks to the international financial system are likely to be. |
| JEL: | F3 F32 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34409 |