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on Monetary Economics |
| By: | Alfred V Guender; Jacob Greig; Kuntal Das; Jakub Pesek |
| Abstract: | This paper assesses the global reach of US monetary policy over the 2007-2022 period in a sample of 78 countries and currency unions. Our findings show that the zero-lower-bound (ZLB) problem was restricted to advanced economies or those with currencies tied to the US dollar during the Global Financial Crisis (GFC) but became more widespread following the outbreak of COVID-19. The enormous and rapid expansion of the Fed’s balance sheet was not common elsewhere in the GFC period. Only three central banks expanded the size of their real balance sheet by more in relative terms than the Fed during the GFC and its aftermath. In contrast, six central banks did so after hitting the ZLB bound during the COVID-19 pandemic. The strongest support for a leading global role of Fed policy action comes from a pairwise assessment of central bank balance sheet changes during the two crises. Positive comovements, both contemporaneous and lagged, between US balance sheet changes and changes in other countries were common, with correlations being considerably more widespread and higher during the pandemic than the GFC. |
| Keywords: | unconventional monetary policy, zero lower bound, balance sheet management, international spillover effects, economic crises |
| JEL: | E5 E6 F4 F6 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-60 |
| By: | Ferrando, Annalisa; Lamboglia, Sara; Offner, Eric |
| Abstract: | We study how survey-based measures of funding needs and availability influence the transmission of euro area monetary policy to investment. We first provide evidence that funding needs are primarily driven by fundamentals, while perceived funding availability captures financial conditions. Using these two measures, we assess how the effectiveness of monetary policy varies with fundamentals and financial conditions. Our results indicate that monetary policy is most effective when firms’ fundamentals are strong. In contrast, firms with favorable financial conditions exhibit a more muted investment response to monetary policy. By combining these two survey-based measures, we construct an indicator of financial constraints and show that financially constrained firms are more sensitive to monetary policy. These findings offer new light on the transmission of monetary policy to corporate investment, emphasizing not only the role of financial conditions, but also the importance of fundamentals, which are beyond the direct influence of central banks JEL Classification: C83, E22, E52 |
| Keywords: | central banking, financial conditions, firm heterogeneity, investment opportunities, survey data |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253150 |
| By: | Masao Fukui (Boston University (E-mail: mfukui@bu.edu)); Niels Joachim Gormsen (University of Chicago, Booth School of Business (E-mail: niels.gormsen@chicagobooth.edu)); Kilian Huber (University of Chicago, Booth School of Business (E-mail: kilianhuber@uchicago.edu)) |
| Abstract: | We show that firms' nominal required returns (i.e., discount rates) are sticky with respect to expected inflation. Sticky discount rates generate distinct theoretical predictions that are broadly consistent with stylized empirical patterns: increases in expected inflation directly raise real investment; demand shocks generate investment-consumption comovement; and the sensitivity of investment to interest rates is low. Sticky discount rates imply monetary non- neutrality, even when all other prices are flexible, because of a direct link from expected inflation to investment. In the New Keynesian optimal monetary policy problem, the central bank steers long-run inflation expectations, even in response to temporary shocks. |
| Keywords: | investment, discount rate, required return, nominal rigidity, monetary non-neutrality, New Keynesian |
| JEL: | E0 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-16 |
| By: | Natalie Kessler |
| Abstract: | We develop a method to measure ambiguity—uncertainty about the distribution of out-comes—in asset markets, using the volatility of the empirical distribution of unpredictable components in transaction prices. For comparison, we measure risk as the volatility of the unpredictable price component itself, following the conventional practice of using the cross-sectional standard deviation. Applying this framework to 22 million secured lending transactions in the EU, we estimate ambiguity and risk perceived by major money market lenders. Unexpected monetary policy tightening raises both measures. Higher ambiguity reduces repo market liquidity by lowering loan volumes and increasing repo rates, thereby amplifying contractionary effects. Higher risk lowers loan volumes but also repo rates, partly dampening contractionary effects. Our results suggest that ambiguity plays a distinct and quantitatively important role in monetary policy transmission that is overlooked when fo-cusing on risk alone. |
| Keywords: | Ambiguity and Risk; Repurchase Agreements; Monetary Policy Transmission; Liquidity Provision |
| JEL: | E52 G24 D43 D86 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:847 |
| By: | Mrs. Jana Bricco; Mr. Mario Mansilla; Mrs. Delia Velculescu; Mr. Philippe Wingender |
| Abstract: | This paper explores the macroeconomic implications of lowering the inflation target in an Emerging Market such as South Africa using the IMF’s Global Integrated Monetary and Fiscal model (GIMF). Model-based simulations indicate that lowering the inflation target from 4.5 to 3 percent, as recently announced by South Africa’s central bank, may entail moderate near-term output costs (measured by the so-called “sacrifice ratio”), while leading to medium-term output gains and lower borrowing costs. The near-term costs critically depend on the credibility of the central bank, which determines the speed with which agents adjust their inflation expectations. Specifically, output costs are lower when inflation expectations adjust more rapidly following the announcement of the new target by the central bank. Similarly, higher sensitivity of risk premia to the announcement of a lower inflation target can further reduce these costs. Concurrent fiscal consolidation can help support the disinflation process and lower the marginal sacrifice ratio. |
| Keywords: | South Africa; Monetary Policy; Inflation Targeting; Sacrifice Ratio; Inflation Expectations; Central Bank Credibility |
| Date: | 2025–11–07 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/237 |
| By: | Bobasu, Alina; Ciccarelli, Matteo; Notarpietro, Alessandro; Ambrocio, Gene; Auer, Simone; Bonfim, Diana; Bottero, Margherita; Brázdik, František; Buss, Ginters; Byrne, David; Casalis, André; Conti, Antonio M.; Di Casola, Paola; Dobrew, Michael; Dupraz, Stéphane; Giammaria, Alessandro; Gomes, Sandra; Goodhead, Robert; Grimaud, Alex; Haavio, Markus; Martínez Hernández, Catalina; Imbierowicz, Björn; Jacquinot, Pascal; Kalantzis, Yannick; Kornprobst, Antoine; Kortelainen, Mika; Lozej, Matija; Mandler, Martin; McClung, Nigel; Mogliani, Matteo; Müller, Georg; Odendahl, Florens; Priftis, Romanos; Rannenberg, Ansgar; Reichenbachas, Tomas; Repele, Amalia; Theofilakou, Anastasia; Valderrama, María T.; Vestin, David; Vetlov, Igor; Wacks, Johannes; Zhutova, Anastasia; Zimic, Srečko; Zlobins, Andrejs; Berg, Tim Oliver; Delis, Panagiotis; Gonçalves, Nuno Vilarinho; Izquierdo, Matías Covarrubias; Le Gall, Claire; Nilavongse, Rachatar; Yakut, Dilan Aydın |
| Abstract: | This paper serves as a reference guide on the effects of “standard” monetary policy shocks on output and prices, based on harmonised simulation exercises conducted across models of the European System of Central Banks (ESCB), meta-analysis of existing empirical literature for the euro area, and selected works on heterogeneity and non-linearities in the monetary transmission mechanism as captured by empirical models. Our analysis starts by comparing the effects of monetary policy shocks as estimated by structural, semi-structural and dynamic stochastic general equilibrium (DSGE) models, and identifying the main sources of heterogeneity – most notably via the specification of monetary policy rules, the slope of the Phillips curve, the role of real rigidities and financial frictions, and the expectations formation mechanism. While DSGE models tend to produce sharper responses, semi-structural models often reveal more gradual and persistent effects, in line with backward-looking empirical models. The second chapter presents a meta-analysis of estimated effects based on the empirical literature, which are broadly consistent with the results obtained from the ESCB models, although differences might appear when correcting for publication bias, or accounting for different identification frameworks. The study is then complemented by selected works on heterogeneity and non-linearities in the monetary transmission mechanism as captured by empirical models. Our analysis in the final chapter shows that monetary policy transmission is heterogeneous across countries, sectors, demand components, and time. It also reveals important non-linear and state-dependent dynamics: in high-inflation periods, greater price and wage flexibility amplifies the response of inflation while dampening output effects, thereby lowering the sacrifice ratio. [...] JEL Classification: C22, C52, D58, E31, E52, E58, F45 |
| Keywords: | empirical models, heterogeneity, inflation, meta-analysis, monetary policy, output, semi-structural, structural models |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2025377 |
| By: | Matthew Elias; Christian Gillitzer; Greg Kaplan; Gianni La Cava; Nalini V. Prasad |
| Abstract: | We examine what is widely considered to be one of the strongest channels of monetary policy transmission into household spending – the effect of changes in mortgage payments when mortgage rates are linked to the short-term policy rate. Using bank transactions data from Australia, we analyze a cumulative 425 basis point increase in the central bank policy rate, which caused mortgage repayments for homeowners with adjustable-rate mortgages to increase by $13, 800. We find little change in the spending of adjustable-rate mortgagors relative to fixed rate mortgagors. This is because adjustable-rate mortgages come with redraw facilities that make mortgages liquid, and households had large excess buffers due to pandemic-era transfer programs and restrictions on spending. Our findings demonstrate that the direct effects of a monetary policy tightening on household spending need not be large. |
| JEL: | D0 E0 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34461 |
| By: | Boliang Lin; Ruixi Lin |
| Abstract: | A currency with stable purchasing power can always provide a psychological haven for people around the world. However, since the collapse of the Bretton Woods system, issuing more cheap currencies has become a common trend in the international community, and the legalization and over issuance of stablecoins will strengthen this trend. In this context, our study focused on a parallel monetary system based on a redeemable self-decay/devalued money(RSDM). Firstly, we point out the idea of redeeming gold at a fixed denomination with gold certificates is similar to an impossible perpetual motion machine. Only when the face value of a gold token self-decays or self-depreciates and the weight of the reduced value can compensate for the storage cost of physical gold, can it be convertible or redeemable. Secondly, we pointed out that as a modern "good money" under the Internet environment, it must have two basic functions: long-term value storage and zero logistics cost of money circulation. Thirdly, we found that a single type of money is difficult to shoulder the responsibility of modern "good money". Only a parallel monetary system, including RSDM, such as a triple-monetary system consisting of RSDM, domestic fiat and major international reserve currencies, can form the ultimate safe haven of wealth and safeguard the reverse Gresham law. Based on this analysis, we build an integer programming model for currency optimization selection in a multi-monetary pool. Fourthly, several potential application scenarios of RSDM in the real world were discussed, including a new approach to activate dormant gold assets in India based on RSDM, and the gold monetization scheme in the United States. Finally, the demand for RSDM with precious metals as collateral was analyzed, providing theoretical support for establishing a sound parallel monetary system based on RSDM. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.00365 |
| By: | Takeki Sunakawa (Professor, Faculty of Economics, Hitotsubashi University (E-mail: takeki.sunakawa@gmail.com)) |
| Abstract: | We investigate the extent to which fiscal factors have contributed to inflation in Japan over the past four decades. Despite sustained fiscal expansion and rising debt since the 1990s, inflation remained low until recent years. Using the medium-scale DSGE model developed by Bianchi et al. (2023), we estimate the model with Japanese data and find that, in contrast to the U.S. case, unfunded fiscal shocks are not the main drivers of inflation in Japan. Instead, real demand and supply shocks, along with accommodative monetary policy, have played more significant roles in shaping inflation dynamics. |
| Keywords: | Inflation, Fiscal Theory of Price Level, Japan |
| JEL: | E31 E52 E62 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-14 |
| By: | Francisco Arizala; Santiago Bazdresch; Tomohide Mineyama; Shiqing Hua |
| Abstract: | This paper analyzes the impact of fiscal policy on inflation expectations across a large sample of advanced economies (AEs) and emerging market economies (EMs). We identify episodes of significant fiscal adjustment using both quantitative thresholds and a narrative approach and find that such episodes are associated with statistically significant changes in inflation expectations in EMs while the responses are muted in AEs. We also document that the relationship between fiscal policy and inflation expectations is more pronounced in high-inflation environments and under weak fiscal positions. Additionally, we explore how market perceptions of sovereign risk, as well as monetary and exchange rate frameworks, influence the transmission of fiscal policy to inflation expectations. Our empirical results suggest that it is especially important for EMs to implement prudent fiscal policy as it may help reduce inflationary pressures and inflation expectations. |
| Keywords: | Fiscal Policy; Fiscal Consolidations; Inflation Expectations; Narrative Approach |
| Date: | 2025–11–07 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/231 |
| By: | Assenza, Tiziana; Huber, Stefanie; Mogilevskaja, Anna; Schmidt, Tobias |
| Abstract: | We use a randomized experiment in the Bundesbank Online Panel-Households (n ≈ 3, 900) to show that the estimated link between inflation expectations and household consumption flips sign depending on survey wording. This finding reconciles prior contradictory results and has direct implications for central bank survey design. Our experiment systematically varies elicitation framing of consumption question along three dimensions: the reference unit (individual vs. household), the time horizon (past one, 3, or 12 months), and the question type (attitudinal, planned, qualitative and quantitative recall-based). We find that the time horizon and question type significantly influence the estimated relationship between inflation expectations and durable consumption. While the average effect is weak, its sign and magnitude vary strongly with question design. Planned spending and attitudinal questions, such as whether it is a good time to buy, produce very similar negative associations, suggesting that respondents interpret the former as a proxy for future intentions. In contrast, quantitative recall-based questions on past spending yield a modestly positive link, especially for shorter horizons. These results highlight the critical role of survey design in shaping behavioral measurements, offering a novel explanation for mixed findings in the literature and guidance for both research and policy. |
| Keywords: | Expectations; household decision making; survey methodology; framing effects; measurement; inflation (economic) |
| JEL: | C83 D12 D84 E31 |
| Date: | 2025–11–04 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:131083 |
| By: | Jon Frost; Jean-Charles Rochet; Hyun Song Shin; Marianne Verdier |
| Abstract: | We compare three competing digital payment instruments: bank deposits, digital platform tokens and central bank digital currencies (CBDCs). A simple theoretical model integrates the theory of two-sided markets and payment economics. We use the model to assess the impact of a public option such as a fast payment system that makes private payment instruments interoperable, or a CBDC that provides general access to public digital money. We show that both options are essentially equivalent for the industrial organisation of the payment system. We find that, even if they may lead to some degree of disintermediation, both options can contribute to increasing financial inclusion and improving social welfare. |
| Keywords: | payments, CBDC, fast payments, banks, big tech, platforms |
| JEL: | E42 E58 G21 L51 O31 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1301 |
| By: | Diego Comin (Dartmouth College, NBER, and CEPR (E-mail: diego.comin@dartmouth.edu)); Robert C. Johnson (University of Notre Dame, and NBER (E-mail: rjohns24@nd.edu)); Callum Jones (Federal Reserve Board (E-mail: callum.j.jones@frb.gov)) |
| Abstract: | We develop a New Keynesian framework to evaluate how potentially binding capacity constraints, and shocks to them, shape inflation. We show that binding constraints for domestic and foreign producers shift domestic and import price Phillips Curves up. Further, data on prices and quantities together identify whether constraints bind due to increased demand or reductions in capacity. Applying the model to interpret recent US data, we find that binding constraints in the goods sector explain half of the increase in inflation during 2021-2022. In particular, tight capacity served to amplify the impact of loose monetary policy in 2021, fueling the inflation takeoff. |
| Keywords: | inflation, supply chain, occasionally binding constraints |
| JEL: | E31 E52 E62 F63 D24 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-15 |
| By: | Alexopoulou, Ioana; Brancatelli, Calogero; Fudulache, Adina-Elena; Gomes, Diana; Gybas, Daniel; Sauer, Stephan |
| Abstract: | In this paper we explore the role of the temporary and country-specific Additional Credit Claims (ACC) frameworks as a monetary policy implementation tool. We discuss their evolution and provide a novel and detailed description of all ACC measures adopted by the different euro area NCBs since 2012. Reviewing the literature, we document the channels through which ACCs contributed to liquidity distribution during the euro area sovereign debt crisis, the negative interest rate period and the pandemic. Drawing on panel data on the use of collateral and securities holding statistics, we document novel stylised facts about ACC mobilisation patterns during these episodes. A number of conceptual contributions and empirical findings emerge. While ACCs started out as a crisis instrument, the historical review highlights that ACCs constitute a policy tool that is suitable for enhancing monetary policy implementation. Empirically we find that pledging ACCs was not systematically associated with more concentrated collateral pools. Banks pledging ACCs were mostly universal banks and diversified lenders of varying size and were associated with higher funding costs for their short-term secured debt instruments, though the causality is unclear. Finally, drawing on the implementation and risk management experience with ACC frameworks as well as our empirical findings, we establish five lessons to inform future policy discussions on collateral JEL Classification: E4, E5, E65 |
| Keywords: | Additional Credit Claims, collateral framework, monetary policy implementation |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2025378 |
| By: | Campos, Maria Manuel; Gomes, Sandra; Jacquinot, Pascal; Cardoso-Costa, José Miguel |
| Abstract: | This paper studies the effect of alternative monetary policy responses and the implementation of different fiscal policy measures to an inflationary shock in a monetary union, through the lens of a global DSGE model calibrated to the euro area. We find that a more aggressive monetary policy response mitigates the inflation surge, but has a detrimental impact on economic activity that imposes a stronger increase of public debt, reducing the fiscal policy space. We also find that some fiscal policy measures may alleviate the negative impact of the shock on households and firms, but do not significantly alter the inflation dynamics: a reduction of consumption taxes reduces inflation only temporarily, while an increase of transfers or of public investment slightly increase inflation initially, even if the latter may have a protracted negative impact. Overall, an appropriate mix of monetary and fiscal policies may be needed to ensure a swift return of inflation to target, while mitigating the impact on consumption. Targeting transfers to support constrained households has a mild impact on inflation, but may be a way to mitigate the impact on the most vulnerable with a less detrimental effect on public debt. JEL Classification: E52, E62, E63, F45 |
| Keywords: | cost-push shock, fiscal policy, inflation, monetary policy, public debt |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253145 |
| By: | Mr. Yan Carriere-Swallow; Gene Kindberg-Hanlon; Danila Smirnov |
| Abstract: | We provide empirical evidence on the impact of the Bank of Japan’s unconventional monetary policies on domestic economic variables and their spillovers to international sovereign yields. Using high-frequency asset price surprises to Bank of Japan (BOJ) policy announcements, we identify shocks to forward guidance (FG) and large-scale asset purchase (LSAP) policies. We show that expansionary LSAP and FG shocks increase Japanese activity and stock prices, lower unemployment, and depreciate the yen. We find that FG and LSAP shocks produce spillovers to sovereign bond yields in other countries. Spillovers from BOJ LSAP shocks seem to transmit through term premia, and the strength of spillovers is strongest to those markets where Japanese investors have a larger participation. |
| Keywords: | monetary policy transmission; quantitative easing; spillovers; Japan |
| Date: | 2025–11–07 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/227 |
| By: | Andreas Dibiasi; Heiner Mikosch; Samad Sarferaz; Armin Steinbach |
| Abstract: | In a novel survey, we study how German senior government officials systematically adjust fiscal policy in response to economic shocks, focusing on their fiscal responses to a contractionary monetary policy shock. Using randomized vignette treatments, we examine how officials update GDP and inflation expectations under fiscal and monetary policy shock scenarios and assess their preferred fiscal adjustments. Our findings show that officials predominantly respond by increasing debt and reducing spending, with tax increases playing a minor role, often combining multiple fiscal instruments. Counterfactual analysis reveals that officials’ reasoning aligns with key insights from the Heterogeneous Agent New Keynesian literature. |
| Keywords: | fiscal policy, monetary policy, fiscal-monetary interaction, expectation formation, survey experiment |
| JEL: | D83 E62 E63 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12247 |
| By: | James Morley; Jieying Zhang |
| Abstract: | We examine whether inflation is driven by aggregate or sectoral output gaps. The aggregate output gap may not fully capture inflationary pressures because it can obscure sectoral shocks and heterogeneity in propagation to prices. We find that aggregating sectoral output gaps by weights estimated from real-time regressions produces a better fit of the Phillips curve than using the aggregate output gap. We confirm the sectorally-aggregated output gap based on these weights has significant explanatory power for inflation beyond the aggregate output gap and find it performs better in forecasting inflation, although the aggregate output gap retains its own distinct information. |
| Keywords: | sectoral shocks, inflation dynamics, Phillips curve, real-time analysis |
| JEL: | C22 E31 E32 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-58 |
| By: | Leonardo N. Ferreira; Caio Garzeri; Diogo Guillen; Antônio Lima; Victor Monteiro |
| Abstract: | This paper quantifies the “prediction value” of different forms of central bank communication. Combining traditional econometrics and natural language processing, we test how much forecast-improving information can be extracted from the different layers of the Federal Reserve communication. We find that committee-wise communication (statements and minutes) and speeches by the Chair and the Vice Chair improve interest rate forecasts, suggesting that they provide additional information to understand the policy reaction function. However, individual communication beyond the Vice Chair, such as speeches by board members, other FOMC members, and Federal Reserve Bank presidents not sitting in FOMC, is not forecast improving and sometimes even worsens interest-rate forecasts. Based on our theoretical model, we interpret these results as suggesting that the Fed may have overcommunicated, providing excessive noise-inducing communication for forecasting purposes. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:635 |
| By: | Dimitris Georgarakos (European Central Bank (E-mail: Dimitris.Georgarakos@ecb.europa.eu)); Yuriy Gorodnichenko (University of California, Berkeley (E-mail: ygorodni@econ.berkeley.edu)); Olivier Coibion (University of Texas at Austin (E-mail: ocoibion@austin.utexas.edu)); Geoff Kenny (European Central Bank (E-mail: geoff.kenny@ecb.europa.eu)) |
| Abstract: | We implement a survey-based randomized information treatment that generates independent variation in the inflation expectations and the uncertainty about future inflation of European households. This variation allows us to assess how both first and second moments of inflation expectations separately affect subsequent household decisions. We document several key findings. First, higher inflation uncertainty leads households to reduce their subsequent durable goods purchases for several months, while a higher expected level of inflation increases them. Second, an increase in uncertainty about inflation induces households to tilt their portfolios towards safe and away from riskier asset holdings. Third, higher inflation uncertainty encourages household job search consistent with a strong precautionary motive for labor supply, leading to higher subsequent employment among the unemployed and less part-time employment among the alreadyemployed. Finally, we document that the level of inflation expectations has a different effect from uncertainty in inflation expectations and thus it is crucial to take into account both to measure their separate effects on decisions and in policy communication. |
| Keywords: | inflation uncertainty, consumption, household finance, labor supply, Consumer Expectations Survey |
| JEL: | E31 C83 D84 G51 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-12 |
| By: | Ayoki, Milton |
| Abstract: | By July 2025 the Federal Reserve confronted the most treacherous phase of post-pandemic disinflation—“the final mile” in which the last half-percentage-point of inflation proves harder to expunge than the first four. Headline PCE had fallen from 7 % in mid-2022 to 2.5 %, yet core services inflation, amplified by tariff-driven cost-push shocks and still-elevated wage growth, refused to converge to the 2% target. Meanwhile, payroll gains had slowed to a crawl (73 k in July), the unemployment rate had drifted up to 4.1%, and financial markets were pricing two 25 bp cuts before year-end. This paper reconstructs the FOMC’s July 29-30 deliberations—held against a backdrop of White House pressure, a flattening yield curve and an ongoing framework review—to show how the Committee balanced the competing risks of under-tightening (un-anchoring expectations) and over-tightening (precipitating a recession). Using the newly released minutes, high-frequency market data and a calibrated New-Keynesian model, we argue that the decision to hold the federal-funds target at 4.25-4.50 % can be interpreted as a state-contingent “flexible anchoring” strategy: keep policy moderately restrictive today while signalling that even a modest deterioration in labor-market momentum would justify insurance cuts as early as September. Counterfactual simulations indicate that the chosen path shaved 15 bp off the term premium, reduced the probability of a 2026 recession by one-third relative to a hawkish baseline, and kept 5y5y inflation expectations anchored at 2.05%. The episode illustrates how a transparently data-dependent reaction function can substitute for explicit forward guidance when the economy is buffeted by supply-side shocks whose persistence is unknown. |
| Keywords: | Federal Reserve, inflation expectations, monetary-policy rules, fiscal dominance, supply shocks |
| JEL: | E31 E52 E58 |
| Date: | 2025–08–20 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126548 |
| By: | Mai C. 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. Exchange rate depreciations in response to negative shifts in currency demand are followed by small persistent appreciations that generate predictable expected 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. |
| JEL: | E4 F3 G12 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34443 |
| By: | Efrem Castelnuovo; Giovanni Pellegrino; Laust L. Særkjær |
| Abstract: | Imposing restrictions on policy rule coefficients in vector autoregressive (VAR) models enhances the identification of monetary policy shocks obtained with sign and narrative restrictions. Monte Carlo simulations and empirical analyses for the United States and the Euro area support this result. For the U.S., adding policy coefficient restrictions yields a larger and more precise short-run output response and more stable Phillips multiplier estimates. Heterogeneity in output responses reflects variation in systematic policy reactions to output. In the Euro area, policy coefficient restrictions sharpen the identification of corporate bond spread responses to monetary policy shocks. |
| Keywords: | monetary policy shocks, narrative restrictions, policy coefficient restrictions, vector autoregressive models, Monte Carlo simulations, DSGE models |
| JEL: | C32 E32 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12246 |
| By: | Stephen Murchison |
| Abstract: | The post-pandemic rise in global inflation has renewed interest in the relative roles played by demand and supply factors in determining prices. Many central banks have stressed the joint role that persistent increases in input costs and excess demand played in boosting inflation in 2021 and 2022. Yet the latter influence plays no independent role in the workhorse New Keynesian models used by many central banks. Under the typical assumption of constant elasticity of substitution (CES) preferences, variations in consumption shift the firm’s profit function up and down, but do not influence its curvature. As a result, the optimal markup is not a function of demand. This assumption is contradicted by both evidence about household shopping behaviour and survey evidence about how firms set prices. This paper proposes an alternative structure based on non-homothetic household preferences over varieties of consumption goods. Specifically, the elasticity of substitution between goods is state dependent, declining during periods of strong per-capita consumption and vice versa. This captures the stylized fact that individual consumers are less price sensitive during economic booms and more price sensitive during downturns. These substitution effects in turn give the firm an incentive to adjust its markup in response to consumption demand. In aggregate, this generates desired markups that increase nonlinearly in consumption demand. When strategic complementarities in pricing are present, these preferences also give rise to state-dependent pass-through of cost shocks. A New Keynesian sticky price model featuring non-homothetic preferences is estimated on Canadian data, and strong evidence favouring a direct role for per-capita consumption demand is presented. This model is better able to capture the increase in core inflation that occurred in 2021–22, particularly when simulated in its nonlinear form. |
| Keywords: | Economic models; Market structure and pricing; Inflation and prices |
| JEL: | E27 E52 Q43 Q58 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-30 |
| By: | Lampe, Max; Adalid, Ramón |
| Abstract: | Monetary aggregates provide valuable information about the monetary policy transmission and the business cycle. This paper applies machine learning methods, namely Learning Vector Quantisation (LVQ) and its distinction-sensitive extension (DSLVQ), to identify turning points in euro area M1 and M3. We benchmark performance against the Bry–Boschan algorithm and standard classifiers. Our results show that LVQ detects M1 turning points with only a three-month delay, halving the six-month confirmation lag of Bry–Boschan dating. DSLVQ delivers comparable accuracy while offering interpretability: it assigns weights to the sources of broad money growth, showing that lending to households and firms, as well as Eurosystem asset purchases when present, are the main drivers of turning points in M3. The findings are robust across parameter choices, bootstrap designs, alternative performance metrics, and comparator models. These results demonstrate that machine learning can yield more timely and interpretable signals from monetary aggregates. For policymakers, this approach enhances the information set available for assessing near-term economic dynamics and understanding the transmission of monetary policy. JEL Classification: E32, E51, C63 |
| Keywords: | machine learning, monetary aggregates, turning points |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253148 |
| By: | Junming Chen |
| Abstract: | This paper studies the issue of “should monetary policy lean against rational asset price bubbles†by establishing an analytically tractable New Keynesian model with endogenous capital accumulation. Rational bubbles may exist in equilibrium because of the extra liquidity they generate for financially constrained firms when a lumpy investment opportunity arrives. Under certain conditions, bounded bubble-driven fluctuations (in output) may emerge via both supply-side and demand-side mechanisms. The monetary policy analyses of the model do not strongly favor a leaning-against-the-bubble strategy and emphasize a special overreaction risk that it may suffer from relative to its conventional counterpart. |
| Keywords: | rational asset price bubbles, monetary policy, financing constraints, New Keynesian model |
| JEL: | E12 E22 E32 E44 E52 E63 G12 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:yor:yorken:25/04 |
| By: | Juselius, Mikael |
| Abstract: | Recent inflationary trends have reignited debates about the natural real interest rate (r∗). This paper reviews the literature on estimating r∗ and its drivers, highlighting significant uncertainty and variability in estimates. The challenges in achieving consensus on r∗ is mostly due to differing methodologies and model assumptions. Understanding these sources of uncertainty is essential for shaping future monetary policy, especially in a low interest rate environment where conventional policy tools may be limited. |
| Keywords: | natural real interest rate, monetary policy |
| JEL: | E43 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofecr:331241 |
| By: | J. Scott Davis; Kevin X. D. Huang; Zheng Liu; Mark M. Spiegel |
| Abstract: | We document evidence of a U-shaped relationship between financial development and the adjustments of foreign exchange (FX) reserve holdings in response to a U.S. interest rate increase. Countries with intermediate levels of financial development sell reserves aggressively, while those with low or high development adjust little. Domestic interest rate responses are not systematically related to financial development. A model with borrowing constraints and foreign-currency debt rationalizes these findings: the associated pecuniary externality is maximized at intermediate levels of financial development. Calibrated to match the observed leverage and currency composition, the model reproduces the empirical U-shaped relationship under optimal FX reserve policy, and this relation is robust under a range of conventional interest-rate policy regimes. |
| Keywords: | foreign reserves; financial development; capital flows; optimal policy |
| JEL: | F32 F38 E52 |
| Date: | 2025–11–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:102072 |
| By: | Janine Aron; Greg Farrell; John Muellbauer |
| Abstract: | South Africa’s experience developing a macroprudential role for its central bank could yield lessons for emerging market central banks. An explicit mandate to maintain and enhance financial stability accompanied a re-defined prudential and conduct regulatory (‘Twin Peaks’) framework in the Financial Sector Regulation Act of 2017. Using a macroprudential lens and international comparative analysis, this paper goes further than previous analyses (largely by legal scholars) and reveals weaknesses in the governance design for macroprudential policy. We suggest changes in the design of institutions, processes, transparency and accountability, to improve and future-proof SA macroprudential policymaking. These include: formalising the role of the central bank’s Financial Stability Committee - the de facto executive body for policy but not mentioned in the Act - preferably as a smaller statutory committee with external members and improved reportage; strengthening macroprudential policy in ‘ordinary’ times’ by adopting ‘comply or explain’ recommendations to reduce the Act’s crisis focus and better manage credit cycles; improved data collection to extend the macroprudential instrument toolbox for Borrower Based Measures and create early warning indicators for vulnerable households; and, for the Financial Stability Review, to address gaps in tracking and reporting risk indicators, and policy decisions, to better meet its new role as vehicle for transparency and accountability under the Act. We also consider political economic trade-offs between protecting the SA banking system and wider social and economic goals. |
| Keywords: | macroprudential governance, central banking institutions, central bank transparency, financial regulation, credit cycles, financial crisis, systemic risk, financial stability, loan-to-value, debt-to-income |
| JEL: | E58 G01 G18 G21 G23 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:csa:wpaper:2025-12 |
| By: | Hodula, Martin; Mimun, Anisa Tiza |
| Abstract: | Is there an undesired side-effect of banking regulation on the non-bank sector? How effective is the non-bank transmission channel of monetary policy in the presence of macroprudential policy? Using a state-dependent local projection approach and a rich dataset capturing macroprudential tightening across euro area countries, we present strong cross-country heterogeneity. In financially conservative markets (Germany, France, the Netherlands), tight monetary policy combined with stricter macroprudential measures significantly contracts investment fund assets. Conversely, financial hubs (Luxembourg, Ireland, Italy) experience counterintuitive expansions under the same policy mix. We introduce a simple balance-sheet framework that shows how interacting funding-cost and collateral-constraint channels generate these opposing responses. Further disaggregation shows that equity funds are more vulnerable to joint tightening in conservative systems, while bond funds partly offset contractionary forces in hubs through higher yields. JEL Classification: E58, G21, G28, G51 |
| Keywords: | macroprudential policy, monetary policy, non-bank financial intermediaries, state-dependent local projections |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253151 |
| By: | De Jonghe, Olivier; Benkovskis, Konstantins; Bielskis, Karolis; Bonfim, Diana; Bottero, Margherita; Briglevics, Tamás; Cesnak, Martin; Dirma, Mantas; Emiris, Marina; Filep-Mosberger, Pálma; Jouvanceau, Valentin; Kaiser, Nicholas; Khametshin, Dmitry; Lalinsky, Tibor; Grolmusz, Viola M.; Moretti, Laura; Nikitins, Artūrs Jānis; Nunnari, Angelo; Rodriguez-Moreno, Maria; Stefanova, Elitsa; Szabó, Lajos Tamás; Vilerts, Kārlis; Zhao, Sujiao Emma |
| Abstract: | We study heterogeneity in households’ credit across nine European countries (Belgium, Spain, Hungary, Ireland, Italy, Latvia, Lithuania, Portugal, and Slovakia) during 2022-2024 using granular credit register data. We first document substantial between- and within-country variation in mortgage and consumer lending by borrower age, loan maturity, and interest rate fixation. We then quantify the passthrough of the ECB’s recent tightening cycle to household borrowing costs, and assess its heterogeneous impact across households. Pass-through is nearly complete for mortgages (around 0.9) but considerably weaker for consumer credit (around 0.4). While mortgage pass-through is relatively homogeneous across countries, consumer credit shows pronounced cross-country differences that cannot be explained by borrower or loan characteristics. Younger households face stronger mortgage pass-through but weaker consumer credit pass-through relative to older borrowers, and longer maturities are associated with stronger pass-through in both credit markets. JEL Classification: E52, G21, D14 |
| Keywords: | credit registers, cross-country heterogeneity, household borrowing, interest rate pass-through, monetary policy transmission |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253146 |
| By: | Karen Davtyan (Departament of Applied Economics, Universitat Autònoma de Barcelona, Spain); Adel R. Kalozdi (Departament of Applied Economics, Universitat Autònoma de Barcelona, Spain) |
| Abstract: | This paper investigates the effect of climate- and energy-related (green) communication by the European Central Bank (ECB) on the performance of renewable and fossil-based energy sectors. Using a sentence-embedding natural language processing method, we identify 247 ECB speeches from 2015 to 2024 that explicitly reference both climate and energy themes, categorize them, and compute a green score for each. The analysis reveals prominent topics of climate and financial risk, and monetary policy and economic conditions, along with consistently positive and trust-related emotional cues. We then use high-frequency identification to estimate the effect of ECB green speeches on the return differential between the green and the brown energy sectors. The results show that such ECB communication positively and significantly affects sectoral relative returns, highlighting the communicative role of the ECB in influencing the relative performance of green and brown energy sectors. The results remain robust across a series of sensitivity analyses. The effect does not change significantly with respect to the outbreak of the Russian–Ukrainian war or the ECB communication topics. |
| Keywords: | central bank communication, ECB green speeches, text analysis, high-frequency identification, energy sectors |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:uab:wprdea:wpdea2515 |
| By: | Kornher, L.,; Balezentis, T.; Santeramo, F.G. |
| Abstract: | Global food markets are in turmoil with agricultural input and energy prices doubling between 2020 and 2022, and driving food price inflation with immediate consequences on food accessibility. We examine the causes of the recent EU food inflation patterns, focusing on domestic vis-à-vis international components, and on the role of transaction costs. Using cross country and cross sectoral panel regressions, we show that the EU food price inflation has been mainly driven by changes in the costs of agricultural production and, to a lesser extent, by global food price dynamics. Furthermore, trade openness has not excarbated the inflating dynamics. |
| Keywords: | Food Consumption/Nutrition/Food Safety, Food Security and Poverty, International Relations/Trade |
| URL: | https://d.repec.org/n?u=RePEc:ags:aes024:355336 |
| By: | Flôres Junior, Renato Galvão |
| Abstract: | An outline for a new International Monetary System (IMS) is proposed, fit for the changing realities of nowadays’ turbulent world. Framed on the view of an IMS as a multi-layered graph, it emphasises flexibility and modularity, together with a lesser role for the International Monetary Fund. The proposal seeks to depart from the Bretton Woods’ framework, still the object of “new improvements”, actually marginal or merely technical ones, to save the status quo. The much talked about question of the reference currency is set under the perspective of negotiated currencies. Liquidity imbalances and hidden leverages are addressed, as well risk and control aspects of the designed structure. It must be taken as a transitional scheme, a way to operate a more or less chaotic and less efficient system, during a spell. A path, robust to unavoidable retreats, leading to a stable structure in the new and yet unknown order to come. |
| Date: | 2025–11–04 |
| URL: | https://d.repec.org/n?u=RePEc:fgv:epgewp:849 |
| By: | Abango, Mohammed A; Yusif, Hadrat M.; Asiama, Johnson Pandit; Mawuli, Francis Abude |
| Abstract: | The shock-absorbing capacity of Ghana’s inflation targeting (IT) policy has been under scrutiny, especially following COVID-induced inflationary pressures that drove real interest rates to a negative territory with implications for saving. This study examines IT policy’s role in moderating the real interest rate-saving nexus through the lens of the McKinnon-Shaw Hypothesis (MSH), from the perspective of private savings’ adaptation to real interest rate fluctuations. The study applies linear autoregressive distributed lag (ARDL) model to time series data spanning 1986-2023, augmented by non-linear ARDL analysis. We uncover no stable long-run relationship between real deposit interest rate and private financial saving as there prevails only a short run nexus. This finding suggests that the MSH might be delayed than implied by theory, which is likely due to asymmetric responses in the saving-interest rate nexus with positive and negative interest rates affecting saving differently. Results indicate a short run positive nexus between financial saving and negative real interest rate, while the relationship between positive real interest rate and saving is insignificant. IT policy, however, strengthens the relationship between saving and real interest rate over the long run, indicating that further strengthening of the policy could address asymmetric responses in the saving-interest rate nexus and help realize the MSH. |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:k25qz_v1 |