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on Monetary Economics |
| By: | Ahmed, Mhammad Ashfaq; Nawaz, Nasreen |
| Abstract: | Objective: Contemporary research on monetary policy does not account for the loss/gain in efficiency during the adjustment of the market and the after-policy vis-a-vis pre-policy equilibrium in the money market. After a central bank exercises a monetary policy, the central bank's cost as a supplier of money rises to pre-policy cost plus the per unit money cost incurred due to monetary policy, which affects money supply and pushes the money market out of equilibrium. Demand and supply of money along with the interest rate follow certain adjustment mechanism until the final equilibrium arrives. The basis of adjustment is lack of coordination regarding decisions of consumers and suppliers of money at the prevailing interest rate. For the design of an optimal monetary policy, efficiency considerations both during the adjustment of the market as well as in final equilibrium are important to be taken care of. This research designs a dynamic money market model and derives an optimal monetary policy. Methods: A perfectly competitive money market with five agents has been modeled. The equations maximizing their objectives have been derived and solved simultaneously to solve the model. An optimal monetary policy has been derived by minimizing the objective function of efficiency loss, i.e., supply or consumption of money lost in post-policy equilibrium vis-a-vis the pre-policy one, and the loss during the time market is adjusting subject to central bank's cost constraint. Results: Derived mathematical expressions outline the optimal expansionary and contractionary monetary policies considering the adjustments in demand and supply over time. Conclusion: The expressions are functions of demand, supply, and inventory curves' slopes as well as initial pre-policy equilibrium quantity of funds. (JEL E41, E42, E43, E51, E52, E58) |
| Keywords: | Money Market, Monetary Policy, Dynamic Efficiency, Interest Adjustment Path |
| JEL: | E41 E42 E43 E51 E52 E58 |
| Date: | 2024–04–28 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128663 |
| By: | Jørgensen, Kasper; Bocola, Luigi; Dovis, Alessandro; Kirpalani, Rishabh |
| Abstract: | Policymakers often cite the risk that inflation expectations might “de-anchor” as a key reason for responding forcefully to inflationary shocks. We develop a model to analyze this trade-off and to quantify the benefits of stable long-run inflation expectations. In our framework, households and firms are imperfectly informed about the central bank’s objective and learn from its policy choices. Recognizing this interaction, the central bank raises interest rates more aggressively after adverse supply shocks and accepts short-run output costs to secure more stable inflation expectations. The strength of this reputation channel depends on how sensitive long-run inflation expectations are to surprises in interest rates. Using high-frequency identification, we estimate these elasticities for emerging and advanced economies and find large negative values for Brazil. We fit our model to these findings and use it to quantify how reputation building motives affect monetary policy decisions, and the role of central bank’s credibility in promoting macroeconomic stability. JEL Classification: E52, E58 |
| Keywords: | de-anchoring of inflation expectations, optimal policy, reputation |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263218 |
| By: | Cory Baird; Jonathan Benchimol; Wook Sohn; Vira Vyshnevska; Iegor Vyshnevskyi |
| Abstract: | This study introduces the Monetary Policy Statement Database (MPSD), comprising 6, 693 statements from 51 central banks worldwide (1990-2024). We develop a reproducible pipeline combining standard natural language preprocessing with large language model (LLM) tools for cross-country analysis. Four key findings emerge. First, statements lengthened substantially after the Global Financial Crisis while readability improved modestly. Second, inflation references comove across countries during global inflation episodes. Third, LLM-based question answering and aspect-based sentiment reveal that central banks attribute global financial conditions primarily to broad U.S. macroeconomic developments rather than to Federal Reserve policy actions specifically. Fourth, using a benchmark dictionary-based sentiment index and LLM-derived aspect-based sentiment indicators, Granger causality tests suggest that statement sentiment predicts the Global Financial Cycle rather than merely responding to it. The MPSD and accompanying codebase support reproducible research on monetary policy communication and international transmission. |
| Keywords: | central bank communication, large language models, text analysis, generative database, machine learning |
| JEL: | C55 C63 E52 E58 G15 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-25 |
| By: | Nicolás Bonino-Gayoso (Universidad Complutense de Madrid); Mónica Correa-López (Banco de España) |
| Abstract: | This paper empirically explores the pass-through channel of inflation expectations to inflation by looking at a real-time macroeconomic forecasting exercise conducted by an exogenous observer. Models that are informed either by households’ updated beliefs about future inflation or, especially, by services firms’ expected changes in their own prices can systematically predict core inflation more accurately – and do so in a stable way – than a class of commonly used models that do not use this information. Qualitative updates in households and firms price surveys emerge as relevant signals of consumer and firm behavior, since they influence aggregate inflation dynamics. These results point to an economically meaningful pass-through channel of short-term inflation expectations to inflation. |
| Keywords: | inflation, inflation expectations, Phillips curve, real-time forecasting |
| JEL: | E31 E37 E52 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2613 |
| By: | Issing, Otmar |
| Abstract: | Under the overwhelming evidence of numerous empirical studies that found a negative correlation between the degree of independence and the level of inflation, many governments granted their national central banks independent status around 1990. With low inflation rates in the subsequent period - with the notable exception of the sharp price increases after 2020 - monetary policy largely confirmed the empirical findings. Consequently, one might expect that independence is now considered an undisputed element of sound central bank governance. However, this is by no means the case. |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:340021 |
| By: | Swayamshree Barik (Indian Institute of Technology Roorkee); Manish K. Singh (Indian Institute of Technology Roorkee); Harsh Vardhan (xKDR Forum) |
| Abstract: | Central banks aim to achieve price stability by adjusting interest rates to meet their inflation target. However, when a central bank also manages the government debt, tightening policy rates raises borrowing costs, thereby increasing the probability of debt distress. To understand the nature of this trade-off, we examine how policy rate changes by the Reserve Bank of India affect the Government of India's actual borrowing costs. Using monthly data from 2004 to 2025 and an ARDL error-correction framework, we estimate the differential impact of policy rate on both primary and secondary markets and find a clear divergence. In secondary markets, pass-through is gradual and declines with maturity, whereas in the primary markets, transmission is immediate and near-complete, and it remains durably anchored to the policy rate in the long run. We interpret this as a distinctive feature of India's institutional arrangement, where captive investors and the RBI's discretionary authority over auctions keep sovereign borrowing costs closely tied to monetary policy. |
| JEL: | E43 E52 E58 G12 H63 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:anf:wpaper:48 |
| By: | Bjarni G. Einarsson;Thórarinn G. Pétursson |
| Abstract: | We use Bayesian methods to estimate a model of trend inflation in Iceland, allowing for stochastic volatility in both the trend and cyclical components of inflation and a time-varying persistence of deviation of inflation from its trend. Our results show that although trend inflation has fallen and become more stable since the mid-1980s, most of the improvements in overall inflation performance in Iceland reflects a decline in the volatility and persistence of the cyclical component of inflation. At the same time, our results suggest that the share of overall inflation dynamics accounted for by the trend component has significantly risen in recent years. We also find that the trend continues to be more volatile than in other advanced economies, largely reflecting less firmly anchored inflation expectations and, more recently, the interaction of weakly anchored inflation expectations and large global supply shocks. |
| JEL: | C11 C32 E31 E52 E58 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ice:wpaper:wp100 |
| By: | Jonathan Swarbrick (University of St Andrews) |
| Abstract: | This paper studies monetary policy in a New Keynesian economy with frictional bank lending, rationalising evidence that lending conditions can remain tight despite liquidity injections. The model features a policy trade-off in which increases in banking sector liquidity can incentivise more lending by lowering the overnight rate and the marginal cost of funds, but can also incentivise less lending by compressing bank margins as interest rates approach the policy floor, worsening adverse selection and credit rationing. As a result, quantitative easing can exert a contractionary effect when the economy is away from the effective lower bound, with outcomes depending on borrower risk and the size of the programme. However, both channels raise inflation expectations, and so liquidity policies are always expansionary at the lower bound. Optimal policy features a deflation bias under credit rationing, while commitment to future accommodation eases current credit conditions and implies gradualism in quantitative tightening. |
| Keywords: | Monetary policy; quantitative easing; small business lending; credit rationing; bank liquidity |
| JEL: | E5 E44 G21 |
| Date: | 2026–03–25 |
| URL: | https://d.repec.org/n?u=RePEc:san:econdp:2601 |
| By: | Kenta Kinehara (Bank of Japan); Tatsuyoshi Okimoto (Bank of Japan and Keio University); Hiroki Yamamoto (Bank of Japan) |
| Abstract: | This paper investigates the reasons behind the resilience of the U.S. economy despite the rapid and significant monetary policy tightening since 2022, focusing on two perspectives: heterogeneity among GDP demand components, and the time-varying nature of the credit channel. Methodologically, we employ a Factor-Augmented VAR model to examine the heterogeneity in the effects of monetary policy across demand components. Subsequently, we estimate a smooth-transition Local Projection model with the excess bond premium as a transition variable to quantify the time-varying effects of monetary policy depending on financial market conditions. The analysis reveals that demand components with higher reliance on borrowing are dampened by rate hikes, while components with lower reliance exhibit muted responses. Furthermore, the results show that the effects of monetary policy intensify for demand components with higher borrowing dependence only when the credit channel is strongly operative. Conversely, components with lower borrowing dependence demonstrate weak reactions irrespective of the prevailing regime. These findings suggest that the limited downward impact of the monetary policy tightening since 2022 on the real economy can be explained by the heterogeneity in responses among demand components, the "composition effect" linked to the growing recent dominance of service consumption in the U.S. economy, and the "regime effect" characterized by the subdued amplification role of the credit channel during this period. This paper contributes to the literature by providing a unified framework to analyze both composition and regime effects. |
| Keywords: | Monetary Policy; Credit Channel; FAVAR; Smooth-transition Local Projection |
| JEL: | E21 E22 E44 E52 |
| Date: | 2026–04–16 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp26e06 |
| By: | Corrado, L.; Grassi, S.; Paolillo, A.; Ravazzolo, F. |
| Abstract: | We study how the COVID-19 pandemic and Russia’s invasion of Ukraine reshaped energy prices and macroeconomic conditions in the Euro area. We develop and estimate a two-sector model in which oil, coal, and gas are combined to produce refined energy used by households and firms. The model allows for complementarities between energy and non-energy inputs, so shocks to individual energy markets propagate broadly through production, consumption, and inflation. Focusing on shocks specific to oil, coal, and gas from the onset of the pandemic to 2022:Q3, we find that they raised energy inflation by about 36 percentage points and headline inflation by 1.8 percentage points. Complementarities, wage indexation, and monetary policy amplify these effects, while subsidies offset them only partially. |
| Keywords: | Fossil Energy, Supply Shocks, Inflation, Complementarities, Monetary Policy, Fiscal Policy |
| JEL: | E31 E32 E52 E62 Q43 |
| Date: | 2026–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2629 |
| By: | Fecht, Falko; Kellers, Moritz |
| Abstract: | We study how monetary policy is transmitted through the open-end investment fund (OEIF) sector and how this transmission depends on fund fragility. Using high-frequency identified ECB monetary policy surprises and daily share-class data on German-domiciled OEIFs from 2010 to 2023, we show that an unexpected 10 basis point monetary tightening reduces cumulative fund net inflows by more than 0.2 percentage points within two weeks (about 0.7 standard deviations of monthly sector flows). This effect is highly uneven: fragile funds-identified by an excessive flow response to past under-performance-experience an additional outflow of about 0.2 percentage points compared to their peers, implying a total response roughly three times as large as for non-fragile funds. Intuitively, the pattern is present only for unexpected tightening, not easing. Fragile bond funds reduce corporate bond holdings more strongly, and fragile funds meet redemptions by running down bank deposits. While the average fund increases deposits after tightening, fragile funds reduce deposits and shrink liquidity buffers amplifying the deposit channel. At the bank level, investor reallocations into overnight deposits induce a reallocation of deposits across banks. Overall, fund fragility emerges as a key state variable for monetary policy transmission and financial stability. |
| Keywords: | monetary policy, investment funds, financial fragility |
| JEL: | E52 G1 G23 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:339998 |
| By: | Timmer, Yannick; Van der Ghote, Alejandro; Perez-Orive, Ander |
| Abstract: | We revisit the credit channel of monetary policy when firms face multiple financing constraints, a common feature of corporate financing we document empirically. Our theory shows that the multiplicity of constraints dampens the transmission of expansionary policy to firm borrowing and investment notably but amplifies the transmission of policy tightening. This asymmetry arises because, when policy tightens (eases), the most (least) responsive constraint binds. Using U.S. firm-level data and exploiting a quasi-natural experiment, we find strong support for these predictions and for our proposed channel. Embedding the mechanism into a New Keynesian framework, we find that the drop in investment after contractionary shocks is twice as large as its increase following equally-sized expansionary shocks, thus providing an explanation for why monetary policy tightenings have stronger effects than easings, a longstanding puzzle in monetary economics. Moreover, our analysis implies that the effectiveness of monetary policy is strongly determined by the distribution of financial constraints across firms and that similar asymmetries likely characterize the transmission of other macroeconomic shocks. JEL Classification: D22, D25, E22, E44, E52 |
| Keywords: | asymmetry, financial frictions, firm heterogeneity, investment, monetary policy |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263217 |
| By: | Maxime L. D. Nicolas; Fran\c{c}ois Sicard; Marion Laboure; Zixin Sun; Anah\'i Rodr\'iguez-Mart\'inez |
| Abstract: | This study investigates the transmission of monetary policy narratives to Bitcoin prices, distinguishing the impact of ex-ante expectations from ex-post interest rate implementation. We introduce a high-frequency Monetary Policy Expectations (MPE) index, using a Large Language Model (LLM)-based classification of 118, 000+ market messages to achieve a precise hawkish/dovish decomposition. Results from a framework combining Long Short-Term Memory (LSTM) networks with SHapley Additive exPlanations (SHAP) indicate that Bitcoin functions as a sensitive barometer of central bank signaling; specifically, hawkish narratives consistently trigger negative price responses independently of actual Federal Funds Rate adjustments. We demonstrate that the MPE index Granger-causes Bitcoin returns at short-to-medium horizons, establishing linear predictive causality, while the LSTM-SHAP framework reveals pronounced non-linear, macroeconomic regime-dependent interactions. These findings highlight Bitcoin's structural sensitivity to global monetary discourse, establishing LLM-derived sentiment as a potent leading macroeconomic indicator for the digital asset landscape. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.08825 |
| By: | Pia Hüttl; Gökhan Ider; Matthias Kaldorf |
| Abstract: | Central bank collateral policy specifies which assets banks can pledge as collateral to obtain central bank funding and is an important determinant of liquidity in the banking system. We propose a high-frequency identification approach to study the systematic effects of central bank collateral policy on banks, financial markets, and asset prices. We identify collateral policy surprises using intraday bank stock price changes around Eurosystem collateral policy announcements. Expansionary collateral policy surprises lead to excess returns of bank stocks, a decline in common volatility measures, and a reduction in bank default risk, in particular for riskier banks. They also compress core-periphery government bond spreads, even for policy changes that are unrelated to the collateral treatment of government bonds. The uneven transmission of collateral policy through banks to sovereign bond markets is distinct from both central bank asset purchases and conventional monetary policy. |
| Keywords: | Central Bank Collateral Framework, Bank Stocks, Government Bond Market, High Frequency Identification, Intermediary Asset Pricing |
| JEL: | E44 E58 G12 G21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2162 |
| By: | Donato Masciandaro |
| Abstract: | A key tool has characterized monetary policy analysis over the past thirty years: the use of reaction functions. This paper aims to review the evolution of the economics of the monetary policy reaction function from Taylor’s (1993) seminal contribution to present day. The review is based on two assumptions: (1) the peculiar property of the Taylor rule as a flexible tool explains its pathbreaking nature given its capacity to test multiple economic and institutional cases; and (2) this property can be described using a theoretical four-pillar approach. In this approach, the reaction function is the fourth pillar, which represents the final outcome of three intertwined drivers – business-cycle dynamics, central bank governance and central bankers’ preferences – and is itself a feedback instrument rule. Then, given the macroeconomic conditions and the infrequent changes of the monetary regime, it is highlighted the role that the central bankers’ preferences has played at various points, describing how, after the founding conservative central banker was born, new members of the Taylor rule family progressively emerged: visionary, prudent, holistic and creative central bankers, respectively with their forward-looking, inertial, augmented, and shadow reaction functions. Finally the literature stresses that so far the true central bankers show a mixed attitude to adopt the flexible instrument rule perspective, particularly when they are confronted with the Odysseus versus Delphi dilemma. |
| Keywords: | monetary policy, Taylor rule, reaction function, central bank independence, central banker conservatism, hawks versus doves, Odysseus versus Delphi |
| JEL: | E52 E58 E61 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp26270 |
| By: | Adam Copeland; Owen Engbretson |
| Abstract: | The Federal Reserve’s 2022-23 tightening cycle involved the use of two monetary policy tools: changes in administrative rates and changes in the size of its balance sheet. This post highlights the results of a recent Staff Report that explores how these tools affect money market conditions. Using confidential trade-level data, we find that both tools have significant effects on the pricing of funds sourced through repo. These results suggest that the Fed can manage how financing conditions are affected even as it influences economic conditions. For example, the Fed can lower its administrative rates to loosen economic conditions, while shrinking its balance sheet to maintain financing conditions in the money markets. |
| Keywords: | repo; liquidity risk premium; rate pass-through; short-term funding |
| JEL: | G23 E58 |
| Date: | 2026–04–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103002 |
| By: | José Aguilar (Banco Central de Reserva del Perú y Pontificia Universidad Católica del Perú.); Ricardo Quineche (Banco Central de Reserva del Perú y Universidad del Pacífico.) |
| Abstract: | Despite being an emerging economy, Peru has achieved superior post-pandemic disinflation compared to major developed economies, making its regional inflation dynamics globally instructive for monetary policy design. This study investigates Lima’s suitability as Peru’s inflation-targeting anchor by analyzing regional spillovers across nine economic regions using monthly CPI data (2002-2024). Employing both Diebold-Yilmaz time-domain and Baruník-Kˇrehlík frequency-domain frameworks, we quantify the direction, magnitude, and persistence of inflation transmission. Results reveal strong regional interdependence (73.60% total spillover index) with Lima as the dominant net transmitter (23.94 percentage points). However, frequency decomposition uncovers striking cyclical heterogeneity: Lima receives short-run shocks from food-producing regions but dominates long-run transmission (44.70% vs. 28.99% frequency spillover index). Rolling-window analysis during COVID-19 shows temporary spillover disruption (connectivity declining from 75% to 68%) followed by recovery during 2022’s inflationary surge. Robustness checks across specifications, granular city-level data, and three-band frequency segmentation confirm Lima’s structural centrality at lower frequencies. These findings validate the Central Reserve Bank’s Lima-centered approach for long-run targeting while revealing asymmetric frequency-dependent spillovers. The presence of short-run regional shocks suggests integrating upstream agricultural signals could enhance near-term forecasting and policy responsiveness. |
| Keywords: | Inflation spillovers, Regional inflation dynamics, Frequency-domain analysis, Diebold-Yilmaz methodology, Baruník-Krehlík framework |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbp:wpaper:2025-016 |
| By: | Murat Duran; Mustafa Erdem; Ismail Anil Talasli |
| Abstract: | [EN]In this study, two proxy indicators are constructed to reflect the monetary stance of the Central Bank of the Republic of Türkiye (CBRT), using market-based data. These indicators also consider the effects of macroprudential regulations and unconventional tools that influence the transmission of policy rates into market interest rates. The study uses a dataset of 24 financial indicators comprising bond returns, money market and deposit rates, interest rate spreads and data related to the loan market. With the help of these indicators, the factors that summarize the monetary and financial conditions are obtained. These factors are mapped to the Weighted Average Funding Cost (WAFC), which reflects the cost of liquidity provided by the CBRT. As a result, two alternative indicators that reflect the monetary policy stance are developed. The first indicator utilizes all the dataset and presents a broader perspective by incorporating market expectations. The second indicator relies only on short-term variables. Therefore, it mostly reflects the current monetary policy and market conditions. Both indicators are more aligned with the WAFC between the forecast period of 2005- 2017. However, in the following years, some divergences were observed between these indicators and the WAFC. These divergences provide valuable information for understanding the effects of market expectations, regulatory measures and changing financial conditions on monetary policy. This method provides a powerful and flexible tool for analyzing the real impact of monetary policy during periods when the headline policy rate is insufficient to reflect the monetary stance. [TR] Bu calismada, Turkiye Cumhuriyet Merkez Bankasi’nin para politikasinin durusunu yansitmak uzere piyasa verileri kullanilarak iki faiz gostergesi (proxy) olusturulmustur. Bu gostergeler, politika faizinin piyasa faizlerine aktarimini etkileyen makro ihtiyati duzenlemeler ve geleneksel olmayan araclarin etkisini de dikkate almaktadir. Calismada, tahvil getirileri, para piyasasi ve mevduat faizleri, faiz farklari ve kredi piyasasina iliskin verilerden olusan 24 finansal gosterge kullanilmistir. Bu gostergeler yardimiyla, parasal ve finansal kosullari ozetleyen faktorler elde edilmistir. Bu faktorler, TCMB'nin sagladigi likiditenin ortalama maliyetini yansitan Agirlikli Ortalama Fonlama Maliyeti (AOFM) ile iliskilendirilmistir. Boylece, para politikasi durusunu yansitan alternatif iki gosterge gelistirilmistir. Gostergelerden ilki, tum verileri kullanmakta ve piyasa beklentilerini kapsayan daha genis bir bakis acisi sunmaktadir. Ikinci gosterge ise sadece kisa vadeli verilere dayanmaktadir. Bu nedenle, mevcut para politikasi uygulamalarini ve piyasa kosullarini yansitmaktadir. Her iki gosterge de tahmin donemi olan 2005–2017 yillari arasinda AOFM ile daha yuksek uyum gostermektedir. Ancak sonraki yillarda bu gostergeler ile AOFM arasinda bazi ayrismalar gozlenmektedir. Bu ayrismalar, piyasa beklentilerinin, duzenleyici tedbirlerin ve degisen finansal kosullarin para politikasina olan etkilerini anlamak acisindan degerli bilgiler sunmaktadir. Bu yontem, manset politika faizinin parasal durusu yansitmakta yetersiz kaldigi donemlerde para politikasinin gercek etkisini analiz etmek icin guclu ve esnek bir arac saglamaktadir. |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:econot:2602 |
| By: | Kaaresvirta, Juuso; Kerola, Eeva; Nuutilainen, Riikka |
| Abstract: | This paper examines recent developments in the internationalisation of the Chinese yuan, focusing on trade and portfolio flows, foreign exchange markets, cross-border payments, and official reserve holdings. The promotion of the yuan's global role has been a deliberate policy objective for Chinese authorities over the past two decades. The use of the yuan in China's own cross-border trade and portfolio flows has increased in recent years. Still, broader international adoption of the yuan remains very small compared to the US dollar and the euro and has not increased markedly in recent years. Under the current Chinese economic and financial framework-characterized by constrained capital account openness and an emphasis on market and exchange rate stability- the scope for a substantial increase in global yuan use remains limited. |
| Keywords: | China, yuan, currency, internationalisation |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitb:340029 |
| By: | Tatsushi Okuda; Tomohiro Tsuruga; Francesco Zanetti |
| Abstract: | We study why inflation responds differently to economic activity over time. Using survey data covering the universe of Japanese firms, we show that firms are unable to perfectly distinguish aggregate from sector-specific demand changes, leading to positively correlated expectations about these two components. We develop a model with imperfect information that reproduces this pattern and predicts that higher relative volatility of sector-specific demand reduces the sensitivity of inflation to changes in aggregate demand, thus flattening the Phillips curve. Testing this prediction with Japanese data from 1976 to 2022, we find that increases in the volatility of sectoral demand shocks explain significant changes in the Phillips curve slope over the sample period. Our results provide a novel explanation for the flattening of the Phillips curve: the composition of shocks -- not just their magnitude -- critically affects the sensitivity of inflation to aggregate demand. |
| Keywords: | Imperfect information, Shock heterogeneity, Inflation dynamics, Survey of expectations of Japanese firms |
| JEL: | E31 D82 C72 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12607 |
| By: | Ding, Qiushuo; Luo, Yulei; Wang, Gaowang |
| Abstract: | We develop a model of optimal monetary policy in an economy where firms' price-setting decisions are distorted by a signal-extraction problem: they cannot perfectly distinguish aggregate from idiosyncratic shocks based on noisy local information. This systematic misattribution of aggregate nominal disturbances to firm-specific factors generates an additional indirect price response, implying that strict price stability is no longer optimal. Instead, the optimal policy fully stabilizes the output gap, which necessarily requires accommodating fluctuations in the price level. The cyclicality of the optimal price level depends critically on the source of firms' incomplete information: learning from local demand signals implies a procyclical price level, whereas learning from local productivity signals yields a countercyclical one. We show that these results are robust to extensions featuring elastic attention and sentiment shocks. |
| Keywords: | Optimal monetary policy, Idiosyncratic shock, Confounding information, Price stability |
| JEL: | D8 E5 |
| Date: | 2026–02–23 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128146 |
| By: | Mehmet Selman Colak; Mehmet Emre Samci |
| Abstract: | Households in many emerging economies hold substantial alternative assets such as gold and cryptocurrencies, yet macro effects from these assets are difficult to explore due to measurement challenges. Exploiting Türkiye’s cross-provincial heterogeneity in gold saving and the exogenous 2023-2025 global gold rally, we study how gold wealth transmits to the housing market. Using a province-level administrative dataset within a novel approach to proxy the formal and informal gold tendency and a difference-in-differences (DID) design, we show that house prices rise significantly more in high-gold provinces, with an average 10% cumulative additional price increase due to the wealth effects from gold. Mechanism tests indicate a liquidity channel: the cash-purchase share increases, while credit-financed transactions do not. At the same time, secondary market sales fall, consistent with strengthened homeowner balance sheets tightening resale supply. A Bartik-style instrumental variable (IV) strategy based on passive gains supports causality. The findings highlight that alternative saving instruments can fuel real asset inflation through cash, suggesting that monetary and macroprudential policy frameworks focused solely on credit flows may miss important pressures in inflationary environments. |
| Keywords: | Gold, Cryptocurrencies, DID, Wealth effects, House prices, IV strategy |
| JEL: | C36 D12 E21 E26 E31 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2606 |
| By: | Patrik Kupkovic (National Bank of Slovakia) |
| Abstract: | The global financial and sovereign debt crises prompted policymakers to prioritise systemic risk and financial stability. Since then, the use of borrower-based measures in macroprudential policy has become central to managing credit booms and housing market imbalances. However, evidence on the formal and rule-based implementation of this policy remains limited, particularly in small open economies that are prone to financial imbalances. Using a vector error correction model (VECM), this paper estimates Slovakia’s long-run macroprudential rule and its short-run asymmetric adjustment. The results indicate a transition from a passive, procyclical stance to an active, countercyclical framework between 2009 and 2014. In the short run, most of the tightening occurs when conditions are excessively loose, consistent with a strong initial move towards a tighter borrower-based framework. These findings contribute to the empirical evidence on both the long-run macroprudential rule and the asymmetric short-run responses that influence policy transmission. |
| JEL: | C32 C51 E61 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1140 |
| By: | Itamar Drechsler; Alexi Savov; Philipp Schnabl |
| Abstract: | We argue that severe credit crunches in the banking system contributed to the Great Stagflation of the 1970s. The credit crunches were due to Regulation Q, a banking law that capped deposit rates. Under Reg Q, Fed tightening triggered large deposit outflows that led banks to contract lending. The credit crunches line up closely with stagflation in the time series. To explain this, we add Reg Q to a standard model where firms use bank loans to finance working capital. When Reg Q binds and credit contracts, working capital becomes more expensive, leading firms to raise prices and shrink output. The model implies an augmented Phillips curve where monetary tightening reduces aggregate supply in addition to demand. The impact on supply is increasing in the severity of the credit crunches, firms' external finance dependence, and their working capital intensity. We test all three predictions in the cross section of manufacturing industries. In each case, we find that more exposed industries raise prices and cut output relative to others. Our results imply that under severe financial frictions monetary policy affects aggregate supply and not just demand. |
| JEL: | E52 E58 G21 G28 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35057 |
| By: | Zamora-Pérez, Alejandro |
| Abstract: | Using a survey of 39, 507 adults in 17 euro-area countries, I find that crypto-asset owners and the niche subgroup of payers have distinct profiles. Owners – typically younger, male, and financially active – exhibit mixed preferences, valuing both cash-like privacy and card-like speed. Crypto payers display a cash-centric profile, seeking to replicate physical cash’s privacy and ease of use in digital form. While standard specifications show that holding cash reserves is positively associated with owning crypto – challenging the view that early adopters reject cash –, a multiple-instrument IV strategy exploiting pandemic-related payment shocks reveals a causal sign reversal: for compliers, building precautionary cash buffers reduces the probability of crypto ownership under uncertainty. These findings (1) explain the ownership-payment wedge as driven by user profiles beyond merchant-acceptance frictions, (2) show crypto and cash act as portfolio complements but substitutes under stress, and (3) may inform crypto regulation and CBDC design. JEL Classification: E41, E42, E58, G11, O33 |
| Keywords: | digital assets, household finance, money demand, payment choice, store of value |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263215 |
| By: | Chlo Allison; Theuns de Wet |
| Abstract: | This paper examines how inflation targeting influences the inflation risk premium embedded in South Africas nominal government bond yields. |
| Date: | 2026–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11102 |
| By: | Delia Ruiz (Banco Central de Reserva del Perú.); Diego Franco (Banco Central de Reserva del Perú.); Walter Cuba (Banco Central de Reserva del Perú.) |
| Abstract: | This paper examines the existence and magnitude of an LCR premium in Peru’s interbank market by exploiting the July 2019 reform that eliminated the punitive outflow weights on repo colateral under the Liquidity Coverage Ratio (LCR). Using daily transactions from January 2019 to February 2020, a ifference-in-Differences (DiD) design reveals repo rates declined by an additional 3–4 basis points (bp) relative to unsecured loans. We then embed this supply-shock in a structural IV-2SLS framework, finding that a 1 percentage point (pp) decrease in the rate increases repo volumes by 2, 495.5 mm PEN. Robustness checks —including alternative ±3/4/6-month windows, dynamic DiD and placebo DiD— confirm instrument validity and parallel trends. Post-reform, average monthly repo activity jumped from ~5, 800 mm to ~22, 400 mm PEN, demonstrating that even modest liquidity-rule adjustments can quickly eliminate the pre-reform penalty on secured funding and reorient banks toward collateralized trades. |
| Keywords: | Liquidity coverage ratio, Liquidity coverage ratio premium, interbank funding, repo markets |
| JEL: | G21 G28 E43 C32 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbp:wpaper:2025-014 |
| By: | Dalibor Stevanovic |
| Abstract: | This paper studies the 2021 U.S. inflation forecasting failure. I show that the failure was primarily driven by sample composition rather than functional-form misspecification: estimation samples dominated by the Great Moderation underweight supply-shock regimes, and expectations anchored to that regime were slow to recognize the shift. Three historically informed adjustments, an intercept correction, a similarity re-estimation on 1970s data, and a kernel-weighted estimator, substantially close the forecast gap, and the gains extend to eight additional U.S. price indices. Household survey respondents over 60, whose lifetime includes the 1970s, reported higher inflation expectations from early 2021, consistent with experience-based learning; younger cohorts remained anchored to the prevailing regime. A controlled experiment with large language models conditioned on ``experienced'' and ``young'' professional personas confirms that experiential priors generate significant forecast differences under a common training leakage assumption. Across all three exercises, the source of the prior mattered more than the sophistication of the model. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.14467 |
| By: | Ricardo Lagos; Gaston Navarro |
| Abstract: | We propose a new reserve-demand estimation strategy—a middle ground between atheoretical reduced-form econometric approaches and fully structural quantitative-theoretic approaches. The strategy consists of an econometric specification that satisfies core restrictions implied by theory and controls for changes in administered-rate spreads that induce rotations and shifts in reserve demand. The resulting approach is as user-friendly as existing reduced-form econometric methods but improves upon them by incorporating a minimal set of theoretical restrictions that any reserve demand must satisfy. We apply this approach to U.S. data and obtain reserve-demand estimates that are broadly consistent with the structural estimates in Lagos and Navarro (2023). |
| Keywords: | econometrics; monetary policy; minimal reserve demand |
| Date: | 2026–03–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:102968 |
| By: | Gabor, Daniela; Huth, Emil |
| Abstract: | Industrial policy is back, but its twin, credit policy, remains confined to academic debates. We theorise credit policy as the coercive steering of credit flows for transformative purposes, that is, developmentalist credit policy. Coercion, we argue, has two pillars: control over and through credit. We introduce the concept of credit financing to capture the critical but not dominant role of central banks in supporting coercive steering. We then elaborate the institutional set-up and instruments of credit regimes where the state is in close control of credit flows by drawing on the developmentalist credit policy experience of South Korea and Japan, in comparison with the ’coercive-less’ credit inclusion policy of India’s developmental state and contemporary experiments in China. This conceptualization is, we argue, fundamental for exploring the institutional politics behind transformative state ambitions. |
| Date: | 2026–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:qwrb2_v1 |
| By: | Bryan Hardy; Felipe Saffie; Ina Simonovska |
| Abstract: | We study how U.S. dollar fluctuations transmit through domestic supply chains in emerging markets. Large firms borrow in foreign currency and extend trade credit to domestic partners, exposing the supply chain to exchange rate risk. We develop a model where financially constrained suppliers pass through shocks to buyers, while unconstrained firms absorb them. Using quarterly firm-level data from 19 emerging markets, we provide empirical evidence consistent with the model's predictions. We find that even highly exposed firms reduce trade credit only modestly following a depreciation, while accepting large profit losses, suggesting that firm-to-firm credit relationships partially shield downstream firms from financial shocks. |
| Keywords: | trade credit, financial constraints, supply chains, financial linkages, dollar |
| JEL: | F31 F34 G21 G32 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12598 |
| By: | Mark L. Egan; Gregor Matvos; Amit Seru; Lulu Wang; Vincent Yao |
| Abstract: | We use novel data on the composition and cost of payments across U.S. merchants to quantify consumer redistribution in the payment system. Cards charge interchange fees to merchants to fund consumer rewards. When merchants raise prices for all consumers in response to these costs, users of low-cost payment methods (e.g., cash and debit) cross-subsidize high-reward credit card users who shop at the same merchant. This standard mechanism implicitly assumes that consumers using different payment methods shop at the same merchants and that merchants face similar fees. We show instead that incidence depends on the joint distribution of payment choices across merchants. We document two key forces that shape redistribution. First, consumer sorting—where consumers who use different payment methods shop at different merchants—limits the exposure of cash and debit users to the effects of high interchange fees. Second, interchange fees vary across merchants; where users of different payment methods overlap, such as at large grocery stores, fees are lower due to sector discounts and private negotiations. We embed these forces in a sufficient-statistics framework that maps observed heterogeneity directly into redistribution. We estimate that interchange fees transfer approximately $30 billion every year from cash and debit users to credit card users. Consumer sorting and merchant fee heterogeneity reduce the magnitude of this regressive transfer by 25%, but do not eliminate it. Finally, we show that both the Durbin Amendment and the rise of premium credit cards have been regressive, highlighting how policy and innovation can reshape the incidence of platform fees. |
| JEL: | D14 E42 G0 G2 G5 L11 L81 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35067 |
| By: | Bindseil, Ulrich |
| Abstract: | The retail payment industry is significant, affects every citizen and is a very precondition for a modern society based on the division of labor. It is characterized by two-sidedness, strong network effects, high fixed costs, high concentration and high profitability of successful firms, layering, path dependencies and stability of inferior equilibria. Alternative retail payment architectures may have potentially relatively similar social welfare performances, but vastly different implications on different industry stakeholders. The specificities of the retail payment industry accentuate the incentives to influence public opinion and lawmakers, including through "alternative" narratives. The public discourse on retail payment architecture will be confusing for several reasons: (i) technical complexity of retail payment architectures for non-experts; (ii) expertise concentrated with those having vested interests and who will thus always provide biased explanations and opinion; (iii) significant financial fire power of successful incumbent firms to promote their narratives; (iv) incentives to promote projects "out of the money" with exaggerated arguments, while truly promising projects may be kept secret for long; (v) long deployment times and uncertainty on ultimate implementation and use. We discuss the various perspectives of key retail payment industry stakeholders. For each, we identify their main interest, key preferred and feared narratives. We discuss in more depth specific issues relating to the current discourse around retail CBDC. We draw lessons from a public policy perspective. |
| Keywords: | Monetary architecture, means of payment, network industries, public discourse, vested interests, central bank money |
| JEL: | E42 E58 G21 G23 G28 L11 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewp:339999 |
| By: | Bippus, B.; Lloyd, S.; Ostry, D. |
| Abstract: | Using data on the external positions of global banks in the world's largest banking hub, the UK, and a granular international-banking model, we show that large banks' idiosyncratic net flows into USD debt influence exchange-rate dynamics. UK-resident banks' USD demand is, on average, price-elastic, whereas their counterparties' USD supply is price-inelastic. We document a structural shift—from banks' being price-inelastic before the Global Financial Crisis to price-elastic afterwards—linked to a marked rise in banks' hedging on-balance-sheet USD net exposures via FX derivatives. This change may help explain the tighter link between exchange rates and macroeconomic fundamentals since the crisis. |
| Keywords: | Capital Flows, Exchange Rates, FX Derivatives, International Banking |
| JEL: | F31 F32 F41 G15 G21 |
| Date: | 2026–03–10 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2359 |