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on Monetary Economics |
| By: | Greitens, Jan |
| Abstract: | This paper contributes to current debates surrounding the digital euro and US stablecoins by unpacking the present day relevance of two important episodes in monetary history: Prussia's effort in the 18th century to implement a uniform coinage standard across the Holy Roman Empire, and the 19th century Currency School Banking School debate. While the ECB presents the digital euro as a conservative measure designed to preserve the existing two tier system and the euro as a currency anchor, Prussia's failed reform efforts show that political will must be accompanied by political clout for a monetary standard to become widely accepted. Meanwhile, the US is promoting stablecoins backed by government debt in order to foster innovation and extend the dominance of the dollar. Based on a close reading of Hayek, this paper critiques currency competition as a justification for stablecoins. The risk of a fragmented monetary system no longer amenable to central bank control is also discussed with reference to the Currency School Banking School debate, which discloses the perennial importance of balancing stability with elasticity while alsoavoiding fragmentation. In this way Prussian and British historical experience with monetary system reform sheds valuable light on the parameters that policymakers should consider when devising or assessing proposals for digital money, as a failure could lead to uncertainty and the fragmentation of the monetary system or excessive rigidity in the money supply. |
| Keywords: | Digital Euro, Monetary Anchor, Gresham's Law, Currency Competition, Stablecoins |
| JEL: | E42 E58 N13 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ibfpps:340050 |
| By: | Hyeongwoo Kim; Shuwei Zhang |
| Abstract: | This paper characterizes optimal monetary policy responses to technology shocks in a two-country model with sticky prices, local currency pricing, and international technology diffusion. We show that technology shocks originating in the tradable sector, regardless of their country of origin, elicit symmetric and closely coordinated monetary policy responses across countries, providing a rationale for a fixed exchange rate regime. By contrast, technology shocks originating in the nontradable sector generate asymmetric policy responses and depreciate the source country's currency, supporting the case for exchange rate flexibility. We further show that the international transmission of technology shocks amplifies real sector dynamics through news effects, prompting central banks to adopt contractionary policies, a result that stands in sharp contrast to the prior literature. |
| Keywords: | Exchange Rate Regimes; Interest Rate Rules; Local Currency Pricing; Sticky Price; Technology Diffusion |
| JEL: | F31 F41 O0 E52 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2026-05 |
| By: | Giovanni Di Bartolomeo; Francesco Ferlaino; Carolina Serpieri |
| Abstract: | This paper studies why inflation inattention varies across households and over time, and how such variation shapes monetary transmission. We propose a behavioral mechanism, grounded in reference dependence and relative consumption, through which inflation inattention depends on the consumption gap between asset holders and non-asset holders. Consistent with this intuition, U.S. data suggest a negative reduced-form relationship between the consumption gap and inflation inattention. Motivated by this pattern, we develop a Two-Agent New Keynesian model with imperfect information in which asset holders endogenously reduce inattention when the consumption gap widens. The mechanism improves the accuracy of inflation expectations and inflation stabilization after cost-push shocks, but at the cost of a deeper contraction in real activity and lower welfare in inefficient steady states. |
| Keywords: | behavioral macroeconomics; inflation; inattention; expectations; consumption gap; monetary policy. |
| JEL: | E31 E52 E58 E71 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:sap:wpaper:wp280 |
| By: | Joseph Abadi; Jesús Fernández-Villaverde; Daniel R. Sanches |
| Abstract: | We present a micro-founded monetary model of the world economy to study international currency competition. Our model features both “unipolar” equilibria, with a single dominant international currency, and “multipolar” equilibria, in which multiple currencies circulate internationally. Long-run equilibria are highly history-dependent and tend towards the emergence of a dominant currency. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt, but large economies have a natural advantage in ensuring the dominance of their currencies. We calibrate the model to assess the quantitative importance of these mechanisms and study the dynamics of the international monetary system under counterfactual scenarios. |
| Keywords: | dominant currency; international monetary system; strategic complementarities; history dependence |
| JEL: | E42 E58 G21 |
| Date: | 2026–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:103040 |
| By: | Bo Li; Mr. Tommaso Mancini-Griffoli; Mr. Marcello Miccoli; Brandon Joel Tan; Ms. Longmei Zhang |
| Abstract: | Payment stablecoins are privately issued digital money with the potential to enhance payment efficiency, foster innovation, and improve financial inclusion. At the same time, they are vulnerable to runs and associated welfare losses. One way to lower run risk is to require stablecoin issuers to hold safe assets. But doing so may lower issuers’ profitability and thus their incentive to provide stablecoins, hampering payment innovation and product variety. This paper offers a theoretical framework to navigate the tradeoff between maintaining stability and incentivizing issuance. Based on the Diamond and Dybvig (1983) model of bank runs, the paper shows that an unregulated private equilibrium is suboptimal. Stablecoin issuers hold risky assets to maximize profits, increasing run risk. A social planner can improve the equilibrium by requiring the backing of stablecoins with a safe asset (such as central bank reserves in a narrow bank setting), and creating conditions for other sources of revenue for issuers (such as central bank reserves remuneration or policies for payment data utilization). The model offers a baseline for the ongoing policy discussion while identifying considerations for further study. |
| Keywords: | Stablecoins; reserve backing; digital money |
| Date: | 2026–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/074 |
| By: | Christopher D. Cotton; Vaishali Garga |
| Abstract: | The real effects of monetary policy depend on price stickiness. Existing studies that measure aggregate stickiness using US consumer price index microdata hold the consumption basket fixed. This yields a lower level of stickiness in 2024 compared with 1978. We show instead that stickiness is unchanged. Although individual products now change prices more frequently, the effect is largely offset by shifts in consumer spending, notably toward services with stickier prices. These consumption-basket shifts reduce the estimated decline in monetary non neutrality by 25 percentage points, suggesting that monetary policy remains far more effective than methods used in existing studies imply. |
| Keywords: | Frequency of price changes; size of price changes; price stickiness; price distribution; monetary non-neutrality; consumer price index; expenditure weights |
| JEL: | E31 E52 E58 |
| Date: | 2026–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:103045 |
| By: | Piero Garcia (Banco Central de Reserva del Perú.); Jorge Pozo (Banco Central de Reserva del Perú.); Rafael Velarde (Banco Central de Reserva del Perú.) |
| Abstract: | This article analyzes the influence of monetary policy rate expectations on the daily reserve accumulation behavior of financial institutions in the Peruvian interbank money market. Using daily data from 39 institutions between January 2017 and September 2024, we show that expectations of policy rate hikes are associated with a faster pace of reserve build-up, while expectations of rate cuts are followed by a slower accumulation pattern. These findings suggest that reserve accumulation dynamics reflect not only liquidity needs driven by legal reserve requirements but also strategic responses to anticipated changes in the policy interest rate. Our empirical analysis, based on fixed-effects panel regressions, provides evidence on the existence of a significant effect of rate expectations on reserve build-up, providing valuable insights for commercial bank’s liquidity management strategies and the design of central bank open market operations. |
| Keywords: | reserve requirements, interbank market, monetary policy expectations |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbp:wpaper:2025-019 |
| By: | Dudley Cooke; Tatiana Damjanovic |
| Abstract: | This paper studies macroprudential policy in a small open economy with financial intermediation and nominal rigidity. Fluctuations in bank deposit rates - which depend on the focus of monetary policy - create liability-side volatility, destabilize net interest margins, and reduce output. A macroprudential policy which shifts bank funding away from deposits towards equity enhances domestic risk-sharing and mitigates volatility. Optimal macroprudential policy generates bank capital ratios that differ by up to 5 percentage points depending on whether monetary policy stabilizes domestic prices or the exchange rate. Relative to an unregulated economy, macroprudential policy raises welfare by between 0.4 percent and 0.9 percent of steady-stateconsumption. |
| JEL: | E52 F41 G11 G15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202601 |
| By: | Stefan Tanevski |
| Abstract: | This paper asks how institutional stock-market integration reshapes the transmission of monetary policy through asset prices in small open economies. Motivated by the persistent segmentation of Western Balkan capital markets, we develop a two-stage counterfactual transmission framework to identify how stock-exchange consolidation would alter the elasticity of market valuations to monetary shocks. First, a synthetic-control simulation constructs a counterfactual integrated Western Balkan stock exchange comprising Bosnia and Herzegovina, North Macedonia, and Serbia, benchmarked to the Baltic OMX merger, thereby quantifying the structural valuation gains of institutional integration. Second, we identify exogenous monetary-policy innovations using a Taylor-rule framework augmented with inflation and output forecasts and reserve adjustments. These shocks are then embedded within a Local-Projections estimator \`a la Jord\`a (2005) to trace the dynamic responses of market capitalisation under fragmented and integrated market regimes. The results point to a systematic amplification of monetary-policy transmission through the asset-price channel once markets are unified. Following a policy tightening of about 100 basis points, equity valuations fall roughly twice as strongly under integration than under fragmented markets. Additionally, we find that integration alters the sensitivity of monetary transmission itself: the initial pass-through intensifies, but its marginal responsiveness to further integration declines over time, signalling the consolidation of a new steady-state regime. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.18330 |
| By: | Ms. Mitali Das; Jonathan Hambur; Klaus-Peter Hellwig; John A Spray |
| Abstract: | Macroeconomic models largely preclude a labor supply response to monetary policy shocks, and this view of monetary policy is reflected in explicit statements by major central banks. Our paper contributes to an emerging literature that challenges this view by providing evidence of a labor supply channel in monetary transmission. We study how Australian workers adjust labor supply in response to the Reserve Bank of Australia’s 2022–23 monetary policy tightening, exploiting administrative data covering the universe of employed workers. Because most Australian mortgages are floating-rate, higher policy rates quickly translate into higher mortgage repayments, allowing us to measure household exposure to the tightening using pre-tightening debt service ratios. We find that highly exposed individuals respond to higher interest payments by increasing labor supply, with sizable effects on employment probabilities, the number of jobs held, and labor earnings. The effects are strongest among those without children, consistent with childcare constraints limiting labor supply responses, but the discrepancy diminishes following a policy reform that increased the generosity of childcare subsidies, highlighting an interaction between fiscal policy and monetary transmission. Together, these findings provide causal evidence that liquidity pressures from higher mortgage repayments can transmit monetary policy to the labor market through house-hold labor supply decisions. |
| Keywords: | Monetary Policy; Labor Supply; Monetary Transmission; Fiscal-Monetary Interactions; Childcare Subsidy; Employment; Mortgage Markets |
| Date: | 2026–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/071 |
| By: | Simone Lenzu |
| Abstract: | I develop a framework analyzing how artificial intelligence (AI) reshapes monetary policy through three interrelated channels: cyclical transmission, structural transition, and financial stability. In the short run, AI can alter inflation dynamics by changing how supply and demand disturbances map into prices—through shifts in production technologies, pricing behavior, cost pass-through, and expectations—even when conventional measures of economic slack are unchanged. Over longer horizons, AI may shift the natural benchmarks around which policy is calibrated, including potential output and the natural rate of interest. For financial stability, AI may improve credit allocation and risk assessment, but can also heighten systemic vulnerabilities through inflated expectation-driven asset valuations and model monocultures. A particular risk arises at the intersection of these channels: if AI initially depresses realized efficiency through adoption frictions while simultaneously fueling elevated asset valuations, the economy may face cost-push inflation and financial fragility at once—an AI-specific stagflation risk that the interest rate instrument alone is ill-suited to address. I argue that AI does not call for a redefinition of central banks’ objectives, but it does require a recalibration of existing frameworks: its diffusion blurs the distinction between cyclical fluctuations and structural shifts, raising the value of cost-side diagnostics and robust policy strategies over exclusive reliance on reduced-form inflation-gap relationships. |
| Keywords: | artificial intelligence; monetary policy; inflation; financial stability |
| JEL: | O33 E52 E58 E31 E32 E44 |
| Date: | 2026–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103050 |
| By: | Dalibor Stevanovic (University of Quebec in Montreal) |
| 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 supplyshock 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. |
| Keywords: | Inflation forecasting, regime change, historical analogy, experience-based learning, expectations anchoring, large language models |
| JEL: | C22 C53 D84 E31 E37 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:bbh:wpaper:26-02 |
| By: | Filippin, Maria Elena (Central Bank of Ireland and Uppsala University) |
| Abstract: | This paper examines how household-targeted government policies influence financial market participation conditional on financial literacy, focusing on potential Central Bank Digital Currency (CBDC) adoption. Due to the lack of empirical CBDC data, I use the 2012 introduction of retail Treasury bonds in Italy as a proxy to study how financial literacy affects households’ likelihood to engage with a new government-backed retail instrument. Using the Bank of Italy’s Survey on Household Income and Wealth, I show that households with some but low financial literacy are more likely to participate in the Treasury bond market than other groups following the introduction of the new instrument. Based on these findings, I develop a theoretical model to study how financial literacy affects CBDC demand through portfolio choice - low-financially literate households with limited access to risky assets allocate more resources to CBDC, while high-financially literate households use risky assets to safeguard against income risk. |
| Keywords: | Central Bank Digital Currency, Financial literacy, Government policies, Market participation, Treasury bonds. |
| JEL: | E42 E58 G11 G18 G53 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:wpaper:05/rt/26 |
| By: | Julia Schmidt; Maéva Silvestrini; Urszula Szczerbowicz |
| Abstract: | This paper challenges the conventional wisdom that US monetary policy tightening attracts foreign capital through purchases of US Treasuries. Using bilateral data on US foreign assets and liabilities, we show that much of the observed capital inflows into the US is actually due to US investors repatriating funds from foreign equities. This highlights important heterogeneity between domestic and foreign investors. Extending the analysis to Central Bank Information shocks—monetary surprises conveying additional economic information—we document a distinct global portfolio rebalancing characterized by risk-on behavior, with US investors increasing foreign equity holdings and foreign investors shifting into US equities. |
| Keywords: | Monetary Policy, Spillovers, Capital Flows |
| JEL: | F44 E52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1040 |
| By: | Carola Binder; Dimitris Georgarakos; Pei Kuang; Li Tang |
| Abstract: | We study how consumer expectations respond to monetary policy announcements using a two-wave survey experiment around the September 2025 FOMC meeting. We compare three commonly used approaches to identifying causal effects on expectations: hypothetical ("vignette’’) scenarios, randomized control trials, and event studies. All three identification strategies yield qualitatively similar results: a rate cut reduces short- and long-run inflation expectations, raises expectations of economic activity, and lowers unemployment expectations. The estimated magnitudes are similar across the randomized controlled trial and event-study approaches, but relatively larger for vignette-based measures. Within-respondent comparisons further show that individuals who revise their expectations more in response to vignette scenarios also exhibit larger revisions following actual policy announcements and experimental information treatments. |
| JEL: | D83 D84 E31 E52 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35090 |
| By: | Enisse Kharroubi; Marius Koechlin |
| Abstract: | We present empirical evidence from the United States demonstrating that labour market flows provide valuable insights into subsequent wage and price inflation. Specifically, we introduce a novel measure of the unemployment gap, defined as the difference between the unemployment rate implied by current labour market transitions -referred to as "flow-based unemployment"- and the observed, or stock-based unemployment, rate. Our findings reveal that inflationary pressures tend to subside when the unemployment gap becomes positive, i.e., when flow-based unemployment exceeds stock-based unemployment. To further investigate this relationship, we develop a search-and-matching model incorporating nominal wage rigidities and persistent (non-i.i.d.) shocks. In this framework, while firms face wage rigidities, they retain the ability to negotiate wages with new hires, making firms' bargaining power endogenous and dependent on both stock- and flow-based unemployment. Consistent with our empirical results, the model demonstrates that a larger unemployment gap-whether driven by higher flow-based unemployment or lower stock-based unemployment-typically leads to lower wages, provided that shocks to transition probabilities exhibit sufficient persistence. |
| Keywords: | labour market flows, unemployment gap, search-and-matching, nominal rigidities, inflation, Phillips curve |
| JEL: | E23 E24 E31 E32 E52 J64 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1341 |
| By: | Akgunduz, Yusuf Emre (Central Bank of the Republic of Turkiye); Cilasun, Seyit Mumin (TED University); Deryol, Ahmet (Central Bank of the Republic of Turkiye); Tumen, Semih (Amazon) |
| Abstract: | This paper studies how lifetime inflation exposure shapes individuals’ inflation expectations, perceptions, and financial behavior. Using a large individual-level dataset from Türkiye spanning 2014 to 2024, combined with detailed measures of past inflation experiences, we show that individuals who have lived through higher inflation consistently report higher expected and perceived inflation. They also respond more strongly to current inflation conditions. The effects are larger for less educated and lower income individuals. In additional analysis, we find that greater lifetime inflation exposure is associated with higher use of retail loans, especially fixed rate loans. These results highlight the persistent influence of past economic conditions on expectation formation and household decisions in an emerging economy with a history of volatile inflation. |
| Keywords: | inflation expectations, lifetime exposure, households |
| JEL: | D12 D84 D91 E03 E31 H31 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18543 |
| By: | Subash Bhandari; Hyeongwoo Kim |
| Abstract: | This paper investigates the transmission of structural global oil market shocks to U.S. inflation using an IV-SVAR approach applied to highly disaggregated CPI components. We specifically utilize oil supply news shocks-market expectations of future OPEC production changes-and find that a news-driven 10% oil price increase triggers a significant 5% surge in headline inflation. Analyzing over 55 sectoral indexes reveals that these effects are heavily concentrated in energy-related goods, while other components remain muted or respond negatively. We identify consumer budget reallocation as a primary mitigating mechanism: households facing rising energy costs shift demand toward more affordable alternatives, such as used vehicles and food at home. By employing weak-instrument robust inference, this study demonstrates that headline inflation dynamics are driven by specific energy sub-components and adaptive consumer behavior rather than broad-based sectoral increases. |
| Keywords: | OPEC News Shock; Oil Supply Shock; Disaggregated CPI Components; Instrumental Variable Structural Vector Autoregression |
| JEL: | E3 F4 Q4 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2026-06 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | Do banks fail because of runs or because they become insolvent? Answering this question is central to understanding financial crises and designing effective financial stability policies. Long-run historical evidence reveals that the root cause of bank failures is usually insolvency. The importance of bank runs is somewhat overstated. Runs matter, but in most cases they trigger or accelerate failure at already weak banks, rather than cause otherwise sound banks to fail. |
| Keywords: | bank runs; bank failures; deposit insurance; bank regulation; bank supervision |
| JEL: | H0 |
| Date: | 2026–04–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103048 |
| By: | Filippin, Maria Elena (Central Bank of Ireland); Pelli, Michele (Central Bank of Ireland) |
| Abstract: | Trust is a central element of monetary and payment systems, and it plays a particularly important role when assessing the prospects for the digital euro. Ireland’s digitally advanced payment landscape provides useful context for understanding how households view the potential for digital euro adoption. Across the euro area, Irish respondents are the fourth most likely to report being willing to use the digital euro, with trust in the euro and institutions strongly associated with adoption intentions. While 90% of Irish respondents view the traditional form of physical euro positively, digital euro awareness remains below the euro area average (at 49%), highlighting the need for enhanced public communication as the project progresses. Digital euro awareness and adoption intentions within Ireland vary modestly across demographic groups, with men, older respondents, and the financially literate showing consistently higher awareness, willingness to adopt, and emphasis on key features such as security and business acceptance. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:stafin:2/si/26 |
| By: | Sophia Cho; John C. Williams |
| Abstract: | Over the past quarter century, the U.S. economy has experienced significant declines in both the labor share of income and the natural rate of interest, referred to as R*. Existing research has largely analyzed these two developments in isolation. In this post, we provide a simple model that captures the joint evolution of the labor share and R*, which we call the R*–labor share nexus. Our key finding is that structural changes affecting R* also influence the evolution of the labor share, and thereby wages and prices. This highlights a potentially important channel, absent from many macroeconomic models, through which the factors that determine R* also affect the labor share and, in turn, broader macroeconomic developments, with implications for monetary policy. |
| Keywords: | R-star; natural rate of interest; labor share; monetary policy |
| JEL: | C32 E25 E43 E52 |
| Date: | 2026–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103044 |
| By: | Joseph Kopecky (Department of Economics, Trinity College Dublin) |
| Abstract: | As major powers deploy trade policy as coercion, what fiscal capacity does a currency union need to sustain a credible collective response? I embed the multi‐sector trade model of Caliendo and Parro (2015) into a monetary union with heterogeneous members, calibrated to the world input‐output database (WIOD) for 20 individual Eurozone members. A US tariff escalation of 20% plus EU retaliation requires 0.69% of Eurozone GDP (€97 billion); a Chinese critical minerals restriction requires 0.44% (€62 billion); both simultaneously require 1.12% (€157 billion). A substantial share of the fiscal need arises from the asymmetric costs of collective action itself: the costs that EU counter‐tariffs impose on members with concentrated trade exposures. This reframes the fiscal requirement as the price of strategic credibility. Single market deepening generates welfare gains, but barely reduces the fiscal requirement, showing that integration and fiscal capacity are complements. Joint borrowing is needed, as budget‐balanced redistribution cannot sustain collective action. However, the headline fiscal requirement is an upper bound. Embedding the model in existing EU institutions (cross‐conditionality of EU fiscal flows and qualified majority voting rules) reduces the practical requirement to 0.33% of Eurozone GDP (€46 billion) in the combined scenario, since the EU need only compensate a handful of pivotal large members to prevent a blocking minority. |
| Keywords: | Fiscal unions, currency unions, trade policy, economic coercion, Eurozone, strategic autonomy |
| JEL: | F13 F15 F42 F45 E62 H77 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep0426new |
| By: | Stéphane Auray; Michael B. Devereux; Anthony M. Diercks; Aurélien Eyquem; Joon Kim |
| Abstract: | Inflation expectations derived from financial markets exhibited unprecedented dynamics in 2025: the correlation between one-year inflation swaps and one-year-ahead one-year forward rates turned significantly negative for the first time on record. We show that this decoupling occurred primarily on days when tariff news dominated market pricing, using a two-stage event classification validated by Bloomberg news trends. Standard small open-economy New Keynesian models in which tariffs generate a one-time price-level increase imply positive comovement across horizons and cannot explain this pattern. We explain these occurrences through the lens of an amended small open-economy New Keynesian model. Three ingredients prove critical for reproducing the observed negative conditional correlation between spot and forward inflation after tariff shocks: targeting year-on-year inflation, substantial interest-rate inertia, and persistent tariffs. Under empirically plausible calibrations, the model generates a negative correlation conditional on tariff shocks while preserving a positive unconditional correlation, suggesting that the 2025 twist in the term structure reflects expectations of a persistent policy response to trade shocks. |
| JEL: | C50 E10 G1 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35076 |
| By: | Guido Ascari; Andrea Colciago; Marco Membretti |
| Abstract: | Under monetary tightenings, employment at small, high-churn firms con-tracts more than at large incumbents, raising the employment share of large firms. A mixed-frequency BVAR on U.S. data (1983–2018) shows that tight-enings reduce firm entry and new-entrant hiring, severing inflows into small firms, while higher exit destroys small-firm employment. Large incumbents are comparatively insulated, rarely exiting and exhibiting weak sensitivity to entry conditions. This mechanism raises employment concentration, defining an em-ployment concentration channel of monetary policy. An estimated structural model with heterogeneous firms, endogenous entry and exit, and equilibrium unemployment matches this effect, showing that the concentration channel is quantitatively important in accounting for the empirical output-inflation trade-off. |
| Keywords: | Monetary policy; employment concentration; unemployment; heterogeneous firms; BVAR. |
| JEL: | E52 E32 C13 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:859 |
| By: | Daniel Aronoff; F. Christopher Calabia; Anders Brownworth; Ashwanth Samuel; Neha Narula |
| Abstract: | U.S. dollar stablecoins are increasingly used as payment and settlement instruments beyond cryptocurrency markets. With the enactment of the GENIUS Act in 2025, the United States established the first comprehensive federal framework governing their issuance, backing, and supervision. This paper evaluates the financial, technological, and regulatory risks that may arise as GENIUS-compliant stablecoins scale into mainstream use. We show that maintaining par-value redemption may depend not only on backing-asset quality, but also on the functioning of Treasury and repo markets, the balance-sheet capacity of broker-dealers, and the operational reliability of blockchain-based transaction rails. Even conservatively backed stablecoins can face stress from redemption surges, market-intermediation bottlenecks, or technological disruptions. We argue that durable stability will likely require an integrated approach spanning financial-market infrastructure, prudential regulation, and software governance. While grounded in U.S.\ law, the analysis identifies principles that are relevant for regulators in other jurisdictions developing stablecoin regimes. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.17167 |
| By: | Jorge Pozo (Banco Central de Reserva del Perú.) |
| Abstract: | This article studies the impact of deposit dollarization on credit dollarization through the natural hedging and the excessive risk-taking hannels. We develop a theoretical model that helps us to describe both channels and how these determine the direction in which deposit dollarization might affect credit dollarization. The model shows that through the natural hedging channel, deposit dollarization positively affects credit dollarization, while through the excessive bank risk-taking channel, deposit dollarization negatively affects credit dollarization. Using regional data of credits and deposits in Peru, we find evidence of these two channels, with the natural hedging channel being the dominant one. In addition, we reveal that les credit market competition and high FX uncertainty amplify the role of the excessive bank risk-taking channel. |
| Keywords: | Bank risk-taking, dollarization, foreign exchange rate risk, limited liability, deposit insurance, bank competition |
| JEL: | D41 D42 E44 G11 G21 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbp:wpaper:2025-013 |
| By: | Sneha Agrawal |
| Abstract: | Uncertainty in the foreign value of the US dollar affects the US banking sector and therefore, the US real economy. In this paper, I propose a novel ‘Exchange Rate (ER) Uncertainty Channel’ and show the effects of increased volatility in the trade-weighted US dollar index on the US banking sector. Higher volatility in the exchange rate leads to retrenchment by foreign banks from the US syndicated loans market (SLM). This entails a loanable funds supply bottleneck for US banks trying to finance their loans through syndicates. US banks respond with tighter credit standards in an attempt to re-allocate scarce funds. In response to a 1 standard deviation increase in ER volatility, US banks’ net interest margin increase by 10 bps annualized, whereas balance sheet contract by 2-3 pp annualized. This is consistent with banks exerting market power in the loan market while simultaneously shrinking their balance sheet. Both the price and volume effects are stronger for US banks with greater exposure to the SLM as measured by their loans-to-interest-earning-assets ratio. Thus, volatility in the US dollar is a ‘global risk indicator’ that significantly affects US banking lending activity. |
| Keywords: | Exchange Rate Uncertainty; US Dollar; Syndicated Loans Market; Foreign Banks; Loanable Funds Supply Bottleneck; US Bank Lending Margin; Global Risk Indicator; Market Power |
| Date: | 2026–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/081 |