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on Monetary Economics |
| By: | De Grauwe, Paul; Ji, Yuemei |
| Abstract: | The major central banks now operate in a regime of abundant bank reserves. As a result, they can only raise the money market rate by increasing the rate of remuneration of bank reserves. This, in turn, leads to large transfers of central banks’ profits to commercial banks that will become unsustainable and renders the transmission of monetary policies less effective. We propose a two-tier system of reserve requirements that would only remunerate the reserves in excess of the minimum required. This would drastically reduce the giveaways to banks, allow the central banks to maintain their current operating procedures and make monetary policies more effective in fighting inflation. |
| Keywords: | bank reserves; central banks; inflation; remuneration |
| JEL: | E42 E52 E58 |
| Date: | 2024–12–23 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:138004 |
| By: | Thomas Wangi |
| Abstract: | The central bank uses sterilization policy to mitigate the monetary effects of foreign capital inflows in PNG. The effectiveness of the policy depends not only on the conduct of open market operations, but also on the raising of cash reserve requirement. Thus, this paper estimates the sterilization and non-sterilization coefficients by using the monetary policy reaction and money supply functions. The empirical analysis uses quarterly data from March 1998 to December 2020 under the 2SLS framework. The estimated coefficients indicate that the central bank highly sterilizes the monetary effects of foreign capital inflows. However, the intensity of sterilization is not perfect through the implementation of both monetary policy instruments. Hence, the unsterilized reserves positively influence the monetary base and money supply in the domestic economy. Furthermore, the findings establish that the open market operations are more effective than cash reserve requirement regarding the success of monetary sterilization in PNG. The study suggests that in order to effectively manage the monetary effects of capital inflows, the central bank may consider other policy option such as fiscal tightening and capital controls. |
| Keywords: | capital inflows, monetary sterilization, monetary base, sterilization coefficient, non-sterilization coefficient, 2SLS method |
| JEL: | C39 E52 F21 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-35 |
| By: | Martin, Reiner; Nagy Mohácsi, Piroska |
| Abstract: | The post-pandemic inflation surge tested monetary policy frameworks around the world. It was a particular test for the four Visegrad countries (V4) in Central-Eastern Europe, which provided a “natural experiment” to examine monetary policy outcomes under two different monetary regimes. With broadly similar economic characteristics, Slovakia was already in the Economic and Monetary Union (EMU) before the post-pandemic inflation hit, whereas the other three countries (Czechia, Hungary and Poland) were not. What was the inflation performance of the V4 countries under the two different regimes? What does this imply for the cost/benefit analysis of euro adoption for countries which are still outside the euro area? We find that EMU membership was beneficial both during “normal times” as the benefits of monetary sovereignty for small, open, integrated economies faded away, and particularly helpful during crisis times. |
| Keywords: | Central-Eastern Europe; ECB; EMU; Euro area; inflation; monetary policy |
| JEL: | E31 E42 E52 E58 F02 F31 |
| Date: | 2024–12–23 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137978 |
| By: | Spencer Krane; Leonardo Melosi; Matthias Rottner |
| Abstract: | We examine how private sector agents might learn a new monetary strategy introduced while policy rates are at their effective lower bound (ELB) in an environment with large inflationary and deflationary shocks. We consider the adoption of a new asymmetric average inflation targeting rule aimed at countering the disinflationary bias imparted by the ELB. The most crucial time for learning runs from when rates would be near liftoff under the old strategy through early liftoff under the new rule. Recessionary shocks during this time could delay learning while large inflationary shocks could outright stop it, inhibiting the ability of the new strategy to address the costs associated with the ELB. Using the US post-Covid experience as an example, we also find that the monetary policy shocks can have important feedback on the learning process. |
| Keywords: | new framework, central bank's communications, deflationary bias, inflation surprises, asymmetric average inflation targeting, imperfect credibility, liftoff, Bayesian learning |
| JEL: | E52 C63 E31 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1349 |
| By: | Aeimit Lakdawala (Wake Forest University); Timothy Moreland (University of North Carolina Greensboro) |
| Abstract: | When the Federal Reserve raises interest rates, prices faced by younger households fall more than prices faced by older households. Using age-specific distributional consumer price indices together with high-frequency monetary policy shocks, we document a monotone age gradient in inflation responses, from households under 25 through households 75 and older. A simple decomposition combining BLS major-group CPI responses with age-specific CEX expenditure shares accounts for most of the gap between the youngest and oldest households. Transportation and medical care drive the result: younger households spend disproportionately on transportation (including motor fuel, vehicles, and auto insurance), whose prices respond strongly to monetary policy, while older households spend disproportionately on medical care, whose prices respond less. |
| Keywords: | monetary policy;inflation heterogeneity;age |
| JEL: | E52 E31 J11 E58 |
| Date: | 2026–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:022481 |
| By: | Solon, Neo |
| Abstract: | This paper proposes the Citizens Standard, a constitutional monetary framework built on a dual-circuit pool architecture and a three-channel issuance mechanism that allows a society to constitutionally select among three operating Modes while preserving a single underlying Model. The framework replaces discretionary central banking with formula-bounded, citizen-anchored monetary creation distributed equally to all verified citizens at issuance. The architecture defines two pools — a circulating money pool used for wages, prices, and commerce, and a Stable Floor pool of locked, individually owned, total-market index shares (technically termed the Citizen Equity Stake) — and three issuance channels: K1 (citizenship endowment), K2 (growth dividend), and K3 (citizen dividend, active in Mode C only). Mode A targets approximately 1.6 percent annual deflation through minimal indirect circulating expansion (~0.35 percent of M2 annually via capital markets). Mode B targets approximate price stability with mild deflationary drift (~−0.5 percent annually) through K2 issuance calibrated to half the real-growth-matched amount, deliberately conservative to provide a meaningful Stable Floor without runaway accumulation. Mode C targets approximately 2 percent inflation through price-level path targeting, producing a citizen dividend that ramps from approximately $173 per month per citizen at launch to approximately $280 per month at steady-state, with annual calibration and monthly distribution. |
| Keywords: | Monetary Policy, Monetary Reform, Constitutional Economics, Retirement, Seigniorage, Sovereign Currency, Rules-Based, Monetary Policy, Chicago Plan, Central Banking, constitutional monetary system, inflation regimes, monetary architecture, structural inflation, dual‑circuit money, issuance rules |
| JEL: | E02 E4 E42 E5 E51 E52 E58 E59 H11 H55 K10 P16 |
| Date: | 2026–05–03 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129031 |
| By: | Jorge Abad; Saki Bigio; Salomon Garcia-Villegas; Joël Marbet; Galo Nuño |
| Abstract: | How does heterogeneity in banks' interest-rate risk exposure shape monetary policy transmission? We develop a quantitative macroeconomic model of heterogeneous banks to answer this question. We establish an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter for transmission only when bank solvency concerns become relevant. Calibrating the model to the euro area, we show that idiosyncratic default risk pushes a substantial share of banks toward the solvency threshold, making heterogeneity quantitatively important. When policy rates rise, fixed-rate banks suffer net interest margin compression — funding costs increase while legacy loan income stays unchanged — eroding capital and triggering sharper deleveraging. The lending elasticity to monetary policy is one-third larger in fixed-rate economies. The effects extend to financial stability: tightening raises bank failure rates in fixed-rate systems while lowering them in variable-rate systems. The results provide a rationale for macroprudential and monetary policy coordination and for monetary policy gradualism. |
| Keywords: | heterogeneous banks, bank lending channel, loan pricing |
| JEL: | G21 E51 E43 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12676 |
| By: | J. Scott Davis; Pon Sagnanert |
| Abstract: | During the initial weeks of the COVID-19 crisis, imbalances in the offshore dollar funding market led to safe-haven appreciation of the dollar. Fed swap lines between the U.S. central bank and counterparts abroad addressed these imbalances, subsequently helping reduce the cost of offshore dollar borrowing, reversing dollar appreciation and providing liquidity. |
| Keywords: | international economics; monetary policy; inflation; financial crises; COVID-19; swaps |
| Date: | 2024–05–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:98271 |
| By: | Maximilian Fandl; Boris Fišera; Adam Geršl; Christian Schmieder |
| Abstract: | This paper investigates how changes in monetary policy interest rates affect credit loss rates in advanced and emerging market economies using annual data for 113 countries over the past three decades. Applying local projections, we find that a 1 percentage point increase in policy rates raises loan loss rates, on average, by 0.1 percentage points - an economically significant effect that is larger in relative terms in advanced economies than in emerging market economies. These rule-of-thumb estimates are robust across methodologies, including instrumental-variable estimation, exogenous monetary policy shocks, and bank-level data. Crucially, the effect of rate hikes is strongly state dependent: it intensifies when pre-tightening monetary policy is loose, private debt is high, fiscal policy is contractionary, the economy is in a downturn, and central bank balance sheets are shrinking at the same time. Banks with riskier pre-tightening loan portfolios record larger increases in credit losses. Our findings suggest that central banks and prudential authorities should account for the side effects of monetary policy and incorporate credit-risk dynamics into macroprudential and stress-testing frameworks to safeguard financial stability. |
| Keywords: | credit loss rates, interest rates, monetary policy, financial stability, macro-financial conditions |
| JEL: | E32 E52 G21 G28 G32 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1346 |
| By: | Razzak, Weshah |
| Abstract: | We examine Reserve Bank of New Zealand (RBNZ) Monetary Policy Statements (MPS) from March 1990 to June 2025—real time data spanning four governors—to evaluate the performance of inflation targeting. Across the entire period, governors consistently acknowledged the long and variable lags of monetary policy and were therefore presented with one and two years ahead inflation forecasts. Each governor applied substantial judgment to these projections when setting the Official Cash Rate (OCR). Inflation was systematically underpredicted, and breaches of the upper bound of the target range occurred without being anticipated. Falling behind the curve meant policy was often reactive rather than forward looking. Forecast errors caused persistent policy errors. The data show that the real OCR, various proxies for real short- and long-term interest rates, and real spreads are uncorrelated with multiple measures of the output gap and with inflation itself, which begs the question of how monetary policy affects inflation. By contrast, certain measures of inflation expectations that incorporate government spending into the information set explain roughly 40 percent of New Zealand inflation. Therefore, institutional credibility explains the RBNZ’s record of maintaining inflation within the 1–3 percent target range, on average, over the past 35 years. |
| Keywords: | Monetary Polic, Fiscal Policy, Inflation Targeting, RBNZ, Inflation Forecast, Output Gap and Inflation Expectations |
| JEL: | C1 E0 E00 E3 E30 E4 E40 E5 E50 |
| Date: | 2026–04–27 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128887 |
| By: | Adnan Velic (Technological University Dublin) |
| Abstract: | This paper studies Ireland's idiosyncratic inflation dynamics. We find that Irish inflation is highly susceptible to trends in international inflation. Our results indicate that international inflation's gravitational pull strengthens over time, particularly in the decade leading up to the Global Financial Crisis, after which we see some signs of waning in inflation comovements. The results also suggest that goods are more responsible for higher speeds of convergence toward international inflation than services, which tend to exert more downward pressures. Adjustments in deviations from international inflation are found to be highly nonlinear. While shock persistence for moderate to large inflation gaps is negligible, half‐lives are in excess of a year for small deviations from international inflation. We find that factors such as economic size and openness attenuate inflation gaps by enhancing comovements with international inflation. While the impact on idiosyncratic inflation inertia depends on the absolute size of the inflation deviation, it also relies on how covariates influence market frictions and thus the rate of adjustment for a given inflation gap. This implies that the net effect hinges on the stronger channel in the case of opposing forces. |
| Keywords: | Irish inflation dynamics, international comovements, inflation gaps, nonlinearities, persistence |
| JEL: | E31 E32 F41 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep1026 |
| By: | Vincent Bignon; Benoit Mojon; Miguel Ortiz Serrano |
| Abstract: | The severity of financial crises is exacerbated by the lack of international liquidity or the absence of a global lender of last resort. This was evident during the Long Depression (1873–1896), the Great Depression (1929–1936), and, as we show in this paper, during the 1805–1806 crisis that followed the Battle of Trafalgar. The latter took Atlantic trade routes away from Spain and cut off Europe's access to Latin American silver, the key high-powered money of the time. This silver shortage led the Banque de France to cut lending by nearly 50% within three months, deliberately tightening credit to hoard specie and restore the value of its bank notes. In turn, no less than 20 Parisian banks failed, credit collapsed and European financial and money markets experienced acute stress, reflected in rising silver prices, pressure on the metallic reserves of other central banks such as the Banco de San Carlos in Madrid, and disruptions in bills of exchange markets across Europe, from Cádiz to Hamburg. The 1805–1806 crisis highlights how a safe asset's status requires both its resilient supply and the credibility of its issuer. |
| Keywords: | Spanish dollars, Kindleberger gap, International Monetary System |
| JEL: | E41 E58 F33 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1347 |
| By: | Moritz Pfeifer; Gunther Schnabl |
| Abstract: | This paper reassesses whether the euro area satisfies the criteria of an optimum currency area. It contrasts early hopes of convergence with subsequent developments marked by persistent heterogeneity across member states. Differences in economic structures, fiscal policies, and financial cycles have produced asymmetries that a single monetary policy cannot offset. Labor mobility and fiscal integration remain limited, shifting adjustment burdens onto prices, wages, and financial flows. Credit expansion and later retrenchment amplified divergence, culminating in the sovereign debt crisis. Since then, cohesion has relied heavily on unconventional monetary policies and fiscal support mechanisms, with notable effects on inflation dynamics, growth performance, and income distribution. The analysis concludes that the euro area has not evolved toward optimality and faces rising risks unless institutional reforms or structural changes are undertaken. |
| Keywords: | optimum currency area, European Monetary Union, economic convergence |
| JEL: | E52 F33 F45 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12675 |
| By: | Assenza, Tiziana; Huber, Stefanie J.; 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, inflation, consumption, household decision making, survey methodology, framing effects, measurement |
| JEL: | C83 D12 D84 E31 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:341099 |
| By: | K. Peren Arin; Ozan Eksi; Neslihan Kaya Eksi; Moo-Sung Kim |
| Abstract: | We examine the international transmission of US monetary policy shocks to European firms using high-frequency identification and granular firm-level panel data. Exploiting monetary policy surprises around FOMC announcements combined with firm-level data across eight European economies over 2004-2024, we document a sharp divergence in spillover effects. A contractionary US monetary shock significantly reduces investment rates and sales growth among UK firms, with investment declining by approximately 4% and sales growth by around 0.7-0.8% at peak, with effects persisting for two to four years. By contrast, Continental European firms, whether members of the euro area or independent-currency economies such as Sweden and Switzerland, do not exhibit a significant response. Heterogeneity analysis reveals that large and small UK firms bear broadly similar average burdens, with large firms showing more precisely estimated responses, while leverage does not systematically differentiate transmission. The UK-EU divergence is not explained by the exchange rate regime: the null result for Continental Europe extends to non-euro countries, pointing instead to the exceptional depth of UK-US financial integration, and the centrality of London in global dollar funding markets. |
| Keywords: | monetary policy spillovers, firm-level heterogeneity, international transmission channels |
| JEL: | E52 F43 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-33 |
| By: | Willem THORBECKE |
| Abstract: | In 2013 the Bank of Japan (BoJ) began multiplying the monetary base. In 2016 it fixed the uncollateralized overnight call rate at -0.1% and the 10-year Japanese government bond (JGB) rate in a narrow band around zero. In 2021 it allowed JGB rates to increase. In 2024 it began increasing target rates for the overnight call rate. This paper investigates how monetary policy impacts stock returns both during the ultra-low and negative interest rate era and as the BoJ began normalizing monetary policy. Using Krippner’s (2013) shadow monetary policy rate to measure monetary policy, the results indicate that expansionary monetary policy did little to raise stock returns before 2021. After August 2021, however, contractionary monetary policy lowered returns on many stocks. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:26038 |
| By: | Tomohito HONDA; Chihiro SHIMIZU; Iichiro UESUGI |
| Abstract: | This study investigates how unconventional monetary policy affects the economy when the central bank purchases equities issued by non-bank institutions, focusing on the Bank of Japan's Real Estate Investment Trust (REIT) purchase program. Unlike previous studies that examine the impact of monetary policy on the real estate sector primarily through the bank lending channel, this program influences the sector through the risk-taking channel by purchasing equities issued by non-bank institutions. Using detailed data on REITs, we find that: (1) the central bank’s purchases lowered both equity and loan costs for targeted REITs; (2) these REITs acquired riskier properties with higher expected returns; (3) banks reallocated lending from listed real estate companies toward the REIT sector, especially targeted REITs; and (4) real estate prices of properties adjacent to those purchased by REITs increased more than those of more distant properties and the tendency is more pronounced when the properties were purchased by targeted REITs. Together, these findings indicate that central bank equity purchases stimulate risk-taking in targeted non-bank institutions and affect the broader loan and real estate market. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:26037 |
| By: | Tyler Atkinson; Ron Mau |
| Abstract: | In the short run, running the economy hot—with output growth above potential—comes with the cost of additional inflation. But policymakers cannot exploit this relationship forever because inflation expectations won’t remain anchored, as the public comes to expect a higher level of inflation for any given level of output. |
| Keywords: | monetary policy; inflation; forecasting; Phillips curve |
| Date: | 2024–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:98649 |
| By: | Ran Huang |
| Abstract: | The Spanish Price Revolution is usually treated as a classic case in which American bullion inflows expanded the money supply and generated inflation. This view captures the first phase of the episode but fails to explain why the same monetary expansion did not continue to produce proportional price growth after 1600. We develop a two-phase Money Phase Transition Theory (MPTT) model in which the classical monetary relation is recovered before a transition point, while a second-phase correction term modifies the money-price transmission coefficient after the transition. Using annual Spanish CPI and reconstructed money-supply data, we show that 1500-1600 was a high-transmission metallic inflationary phase: CPI increased approximately 3.35-fold while money supply increased approximately 3.73-fold. After 1600, money supply continued to rise, increasing approximately 1.82-fold during 1600-1650, while CPI rose only approximately 1.22-fold. A classical one-phase model fitted on 1500-1600, therefore, overpredicts post-1600 prices when extrapolated forward. The MPTT two-phase model with transition point tau=1600 estimates beta_1=0.949, gamma=-0.812, and beta_2=beta_1+gamma=0.137, indicating a sharp post-transition weakening of monetary transmission. An unrestricted break scan identifies a deeper BIC-minimizing break around 1636. These results suggest that the Spanish Price Revolution was not a single monotonic bullion-inflation process but the rise and exhaustion of high-transmission metallic money inflation. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.08788 |
| By: | Simone Arrigoni; Massimo Ferrari |
| Abstract: | This paper provides novel evidence on how income inequality shapes the heterogeneity of US monetary policy spillovers to GDP across foreign economies. Using state-dependent local projections and exploiting variation in disposable income inequality across a panel of 87 countries over the period 1966-2020, we show that household heterogeneity influences how foreign GDP responds to a US monetary policy tightening. GDP contracts by up to one and a half times more when inequality is above average. However, while higher inequality amplifies negative spillovers in advanced economies, it mitigates them in emerging markets. To rationalise this finding, we use a three-country open economy Two-Agent New Keynesian (TANK) model, which suggests that this divergence is driven by differences in participation in international financial markets. Households in emerging market economies face greater barriers to international investment, limiting their ability to re-balance portfolios towards higher-return foreign bonds after the shock. |
| Keywords: | US Monetary Policy, Spillovers, Income Inequality, Local Projections, State-Dependence |
| JEL: | D31 E21 E52 E58 F42 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1043 |
| By: | Ronald Albers; Staffan Lindén |
| Abstract: | The paper proposes an explanatory framework to account for long-term movements in the nominal rate of the Swedish krona against the euro. A model with few variables (short-term interest rate differentials, broad money and a measure of market volatility) tracks trend developments quite well. Our approach is anchored in purchasing power parity theory and empirics. The results show that interest rate differentials affect the exchange rate immediately, while broad money works more slowly as its effects take time to spread, but has a larger impact. The VIX, a measure of market uncertainty, captures short-term volatility and explains large swings during economic crises, consistent with the view that the Swedish krona is a risk-sensitive currency. This results in the euro-krona nominal exchange rate showing broad alignment with purchasing power parity measures over a longer period. |
| Keywords: | Euro-Swedish krona, exchange rates, purchasing power parity, effective exchange rates, uncovered interest parity. |
| JEL: | C3 E31 E4 F31 F37 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:euf:ecobri:090 |
| By: | Bahaj, Saleem; Fuchs, Marie; Reis, Ricardo |
| Abstract: | At the end of 2025, there were 177 cross-border liquidity lines between central banks connecting countries that accounted for 81% of world GDP. This paper maps the evolution of these arrangements since 2000. We show that the lines form a network through which banks can indirectly obtain access to the USD even when their central bank has no agreement with the Federal Reserve. These indirect connections give the People’s Bank of China a central role and show the fragility of liquidity provision to geopolitical tensions. We present cross-country evidence that the indirect connections reduce CIP deviations at the tails, and causal evidence that liquidity lines are substitutes to FX reserves. |
| Keywords: | swap lines; capital flow; financial crises; IMF; cross-currency basis |
| JEL: | E44 F33 G15 |
| Date: | 2026–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137636 |
| By: | Braden Strackman; Mark A. Wynne |
| Abstract: | Many individual price changes make up widely used gauges of inflation. Their relative importance changes over time and may affect how consumers perceive inflation. Such perceptions can prompt households to update their inflation expectations, decreasing optimism about real economic activity. |
| Keywords: | inflation; COVID-19; monetary policy; Consumer Price Index (CPI) |
| Date: | 2024–06–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:98443 |
| By: | Martin Bruns (School of Economics, University of East Anglia); Helmut Lütkepohl (DIW Berlin & FU Berlin); James McNeil (Department of Economics, Dalhousie University) |
| Abstract: | Several recent studies consider a set of proxies to identify different monetary policy shocks for different regions in the world. We show that the way the proxies are used to identify the monetary policy shocks may lead to correlated shocks and dubious structural analysis and we demonstrate how to overcome the problem of correlated shocks. We illustrate that, if correlated shocks are used in applied studies, key statistics of interest such as impulse responses and forecast error variance decompositions can be severely distorted and we consider bench mark studies on monetary policy in the euro area (EA), the US and the UK to demonstrate the problems. |
| Keywords: | Structural vector autoregression, proxy VAR, GMM, correlated structural shocks |
| JEL: | C32 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:uea:ueaeco:2026-02 |
| By: | Gustav Olaf Yunus Laitinen-Fredriksson Lundstr\"om-Imanov |
| Abstract: | We develop a unified microeconomic and monetary theory of artificial intelligence inference costs and their pass-through to inflation, welfare, and optimal monetary policy. We introduce the Inference-Cost Phillips Curve (ICPC), an augmented New Keynesian Phillips curve in which firm-level marginal costs of producing differentiated goods include a non-trivial AI inference component lambda-bar, and prove a closed-form structural slope kappa*_inf = lambda-bar * kappa, where kappa is the standard Calvo-Yun slope. We derive a welfare-relevant Hicks-Kaldor decomposition of consumer welfare under inference-cost shocks, prove a generalized Taylor principle for the inference-augmented economy, and characterize the optimal monetary policy response coefficient psi*_inf = (1 + phi*rho) * lambda-bar * kappa under commitment. A second-order welfare loss formula closes the model in closed form. We confront the theory with U.S. monthly data 2022:M01-2026:M04 using a two-step GMM estimator with Newey-West HAC standard errors and Hansen J-test, recovering an empirical slope kappa-hat_inf = 0.087 (HAC s.e. 0.021) which lies within one standard error of the structural prediction. A scaling regression over 50 rolling-window subwindows yields b-hat = 0.987 (R^2 = 0.998), consistent with a near-unit-elasticity pass-through. A G7 reduced-form panel with Driscoll-Kraay HAC standard errors yields b-hat^G7 = 0.094 (s.e. 0.026), and a Wald test fails to reject cross-country homogeneity (p = 0.78). The framework provides a single equilibrium scaffold for the joint study of AI inference cost dynamics, monetary policy under generative-AI shocks, and the welfare cost of inference-driven inflation. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.20281 |
| By: | Firmin Ayivodji (International Monetary Fund); Etienne Briand (University of Quebec in Montreal); Kevin Moran (Laval University); Dalibor Stevanovic (University of Quebec in Montreal) |
| Abstract: | News media coverage of monetary policy is not a passive transcript of central-bank communication: it filters announcements, macroeconomic news, and editorial choices into narratives that move expectations and policy decisions. We embed media sentiment into a behavioral New-Keynesian model in which the central bank reacts to sentiment and sentiment follows an explicit law of motion. We construct monetary-policy sentiment indicators from more than 50, 000 Canadian newspaper articles using dictionary methods, transformer models, and a generative-AI framework. Media sentiment shifts household inflation and wage expectations, improves out-of-sample forecasts of GDP growth and inflation, and loads positively on the Bank of Canada's estimated Taylor rule once treated as endogenous. A Bayesian SVAR identifies anticipated and unanticipated monetary-policy shocks together with a narrative shock; the narrative shock contributes a non-trivial share of medium-horizon macroeconomic variance, and a counterfactual that shuts down the dynamic feedback from media sentiment attenuates the propagation of monetary policy to output and prices. |
| Keywords: | Monetary policy, text analysis, news media, machine learning, forecasting |
| JEL: | E52 E58 E71 D84 C32 C55 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bbh:wpaper:26-03 |
| By: | Cara Bordier; Lukas Frei; Simon Stalder |
| Abstract: | The US dollar (USD) is involved in 88% of global foreign exchange transactions, partly due to its role as a vehicle currency. Using high-frequency data from primary interdealer platforms, we develop a novel methodology to identify USD cross-trades. We show both theoretically and empirically that such trades can generate price fluctuations in USD exchange rates. Employing an instrumental variables approach, we find that increased cross-trading activity amplifies aggregate USD volatility. These results highlight a fundamental trade-off: while dollar dominance enhances market liquidity, it also increases the currency’s exposure to shocks originating in other currency pairs. |
| Keywords: | Dollar dominance, Volatility, Foreign exchange markets, High-frequency trading |
| JEL: | F31 G12 G14 G15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-05 |
| By: | den Besten, M J; Stadhouders, N W; Cylus, Jon; Jeurissen, P P T |
| Abstract: | Hospital inflation reflects changes in prices of labour, materials, energy, and capital. Depending on actual cost structures and contracts, individual hospitals may experience different price pressures on their budgets. If hospitals are compensated uniformly for inflation, high inflation can induce significant disparities in profitability. To analyse the differential impact of inflation on hospitals in the Netherlands. We test the hypothesis that differences in hospital-specific inflationary pressures were reflected in hospital compensation for inflation. Under this hypothesis, hospital-specific inflation rates correlate with overall budget growth. Using hospital financial data, we calculated hospital-specific inflation rates by combining cost categories with corresponding inflation rates for 2006-2023. Using linear regression analysis, we tested whether hospital-specific inflation rates correlated with reimbursements between 2006-2021. Next, we simulated differential impact for hospitals of high inflation in 2022-2023. Five stakeholder interviews validated results and explored inflation compensation mechanisms in practice. We found that inflation causes significant variance in individual hospital inflation rates, magnified after 2021 by high overall inflation. Linear regression showed no significant correlation between variation in observed hospital reimbursement and variation in hospital specific inflation rates, indicating that historically no differential inflation adjustments occurred. Interviewees stated that insurers do not explicitly take into account differential inflation impact between hospitals, and that hospitals were only partly compensated for general inflation. Dutch hospitals are not fully compensated for cost inflation and health insurers do not differentiate for differences in hospital-specific inflation rates. High inflation rates could thus induce significant disparities in hospital profitability. [Abstract copyright: Copyright © 2026 The Author(s). Published by Elsevier B.V. All rights reserved.] |
| Keywords: | economic inflation; hospitals; compensation mechanisms |
| JEL: | I11 I18 E31 H51 G32 |
| Date: | 2026–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:138008 |
| By: | Stefan Tanevski; Marjan Petreski |
| Abstract: | This paper investigates how institutional rigidities shape inflation persistence in transition economies, focusing on labor market institutions and exchange rate regimes. Using a large panel of transition countries over the period 2013-2024, the analysis combines newly constructed indices of wage rigidity and labor protection, derived from AI-assisted coding of legal texts, with de facto measures of exchange rate regime rigidity and standard macroeconomic controls. The empirical strategy adopts a dynamic panel framework in which inflation persistence is conditioned on institutional characteristics through interaction terms, estimated using GMM techniques. Identification follows a cohort-based approach, comparing inflation dynamics across countries with different institutional configurations. To address potential measurement and classification uncertainty in institutional variables, the analysis incorporates a simulation-based sensitivity framework. The results show that inflation persistence varies systematically across institutional settings. Both wage rigidity and exchange rate regime rigidity tend to dampen inflation persistence, indicating that institutional constraints can weaken the transmission of past inflation into current price dynamics. This effect is particularly strong and robust for exchange rate regimes, while the effect of wage rigidity is more sensitive to measurement assumptions. Findings highlight the importance of institutional structures in shaping inflation processes and suggest that nominal rigidities may play a stabilizing role in certain macroeconomic environments. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.16862 |
| 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: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-31 |
| By: | Ozan Eksi; K. Peren Arin; Neslihan Kaya Eksi; Moo-Sung Kim |
| Abstract: | This paper investigates the international transmission of Federal Reserve monetary policy shocks to European firms across four firm-level outcomes: investment, sales growth, profit margins, and debt growth. Using high-frequency identification of Fed shocks combined with local projections on firm-level panel data from five Eurozone countries over 2004-2024, we find that Fed tightening reduces investment and sales, leaves profit margins largely unchanged, and increases debt accumulation. These effects are broadly observed across sectors, with Wholesale Retail Trade and Manufacturing somewhat more affected, while Agriculture, Forestry, Fishing, and Services (Health and Education) remain largely irresponsive across all outcomes. The Finance, Insurance, and Real Estate sector is a notable exception, exhibiting a positive investment response to Fed tightening. All results are robust to controlling for concurrent ECB policy shocks, highlighting the independent global reach of U.S. monetary policy through international credit and dollar funding channels. |
| Keywords: | monetary policy transmission, sectoral heterogeneity, high-frequency identification, local projections |
| JEL: | C32 E52 E58 F42 G31 L16 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-32 |
| By: | Firmin Ayivodji; Etienne Briand; Kevin Moran; Dalibor Stevanovic |
| Abstract: | News media coverage of monetary policy is not a passive transcript of central-bank communication: it filters announcements, macroeconomic news, and editorial choices into narratives that move expectations and policy decisions. We embed media sentiment into a behavioral New-Keynesian model in which the central bank reacts to sentiment and sentiment follows an explicit law of motion. We construct monetary-policy sentiment indicators from more than 50, 000 Canadian newspaper articles using dictionary methods, transformer models, and a generative-AI framework. Media sentiment shifts household inflation and wage expectations, improves out-of-sample forecasts of GDP growth and inflation, and loads positively on the Bank of Canada's estimated Taylor rule once treated as endogenous. A Bayesian SVAR identifies anticipated and unanticipated monetary-policy shocks together with a narrative shock; the narrative shock contributes a non-trivial share of medium-horizon macroeconomic variance, and a counterfactual that shuts down the dynamic feedback from media sentiment attenuates the propagation of monetary policy to output and prices. %The results suggest that media narratives are an integral part of monetary-policy transmission, not merely an additional source of information. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.15092 |
| By: | Hugo De Vere; Ipek Ozil; Srini Ramaswamy; Seth Searls |
| Abstract: | Term premium plays an important role in understanding the evolution of interest rates, and has even been the target of monetary policy when short-term rates were at or near an effective lower bound. It is commonly defined as the difference between a long-term interest rate and the geometric average of short-term rates over the same horizon, making it unobservable. While many approaches exist to estimate term premium, they treat term premium as the market’s price for bearing interest rate risk. Although such frameworks have sufficed historically, they cannot explain the premium embedded in Treasury Floating Rate Notes (which carry no interest rate risk), or the premium implicit in swap spreads. In this paper, we present evidence from financial markets arguing for the explicit recognition of a different kind of premium that is associated with terming out funding without bearing interest rate risk—we call this term funding premium. We argue that in a market where the extension of term funding and the bearing of term interest rate risk are separable, it is useful to think of traditional notions of term premium as being comprised of term funding premium and term rate premium. We describe a model-independent approach to estimating term funding premium, define term rate premium as the difference between term premium (from three commonly used estimation models) and term funding premium, and examine their empirical characteristics. Finally, we identify a few possible applications to policy. Term funding premium has the potential to serve as a real-time signal of Treasury market stress. It may also have a role to play defining “convenience yields” and in guiding optimal Treasury issuance decisions. |
| Keywords: | term structure of interest rates; term funding premium; term premium; term rate premium; swap spreads |
| JEL: | E43 G12 E44 |
| Date: | 2026–05–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:103259 |
| By: | Takushi Kurozumi; Willem Van Zandweghe |
| Abstract: | Motivated by evidence documented in labor economics, we introduce firms' monopsonistic wage-setting in an otherwise standard DSGE model. Our model identifies shocks to the wage markdown as labor demand shocks—a feature absent from standard models. With both labor demand and supply shocks, our model empirically outperforms its standard counterpart model. Firms' monopsonistic wage-setting allows real unit labor cost to be decomposed into not only real marginal cost but also the wage markdown. This refined measure of real marginal cost enhances the Phillips curve's ability to describe inflation dynamics while obviating the need for price markup shocks. |
| Keywords: | DSGE model; Labor market monopsony; Wage markdown; Labor demand shock; Real marginal cost |
| JEL: | E24 E31 J23 J42 |
| Date: | 2026–05–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:103287 |
| By: | Petre Caraiani (Institute for Economic Forecasting, Romanian Academy, Romania, Bucharest University of Economic Studies, Romania); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | Using a unique firm-level survey from the Bureau of Economic Research in South Africa covering a panel of 1, 444 South African firms surveyed at quarterly frequency between 2000 and 2023, we examine how global oil news shocks shape firms' inflation and wage expectations. We identify exogenous oil supply news shocks following Kanzig (2021) and embed them in a fixed-effects panel regression that controls for domestic macroeconomic and financial conditions through four estimated factors. A one-quarter-lagged oil news shock has a positive and statistically significant effect on firm-level inflation expectations (0.14 percentage points at the one-year horizon, 0.09 at two years) and wage expectations (0.13 percentage points). The responses are robust to alternative shock identifications and sub-sample estimations. Sectoral analysis reveals heterogeneity, more substantial for wage, that we interpret in light of two channels documented in the literature -- cost pass-through and salience. The findings have direct implications for inflation-targeting policy in emerging economies, particularly in light of South Africa's ongoing debate over a lower target. |
| Keywords: | oil shocks, firm-level expectations, inflation, wages |
| JEL: | C67 E31 E32 Q43 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202615 |
| By: | Anton Cheremukhin; Sewon Hur; Ron Mau; Alexander W. Richter |
| Abstract: | U.S. population growth increased sharply recently following to a wave of immigration. This article examines what this surprise immigration surge could mean for the macroeconomy. |
| Keywords: | immigration; inflation; forecasting |
| Date: | 2024–07–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:98529 |
| By: | Martha Elena Delgado Rojas; Juan Herreño; Marc Hofstetter; Mathieu Pedemonte |
| Abstract: | We construct a novel measure of one-year-ahead exchange rate forecasts and nowcasts for non-financial firms. We then study a randomized information intervention that provides a subset of firms with a publicly available exchange rate forecast. This information treatment persistently shifts exchange rate expectations and perceptions, with stronger effects for non-exporting firms. We link survey responses with administrative customs data and estimate a positive intertemporal elasticity of import demand to exogenous changes in expected future exchange rates. Our findings highlight the role of intertemporal substitution after anticipated changes in trade costs. |
| JEL: | E31 E71 F31 G41 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35175 |
| By: | Stefan Tanevski |
| Abstract: | The aim of this study is to empirically investigate the existence of a sectoral asset price channel of monetary policy in the region of the six republics of former Yugoslavia. The study constructs sectoral indices for the entire region, building on the idea that one regional stock exchange may provide more efficiency for the listed companies in the region, while monetary policy relevance for it may be sector-specific. We employ panel vector autoregressive model to observe impulse responses of sectoral indices to innovations in monetary policy, while then disentangle the long- from the short-run relationships per index through a Pooled Mean Group estimation. Overall, we document presence of the asset price channel in the finance and telecom sectors, likely driven by the established multinational corporate networks fostering sub-market regionalization. Yet, this is not the case for the manufacturing and electricity sectors, which may imply that local stock markets are yet too fragmented and space for a more efficient regional stock market, either in the true sense of the word or, more realistically, though enhanced regional cooperation of the stock exchanges certainly exists. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.14575 |
| By: | Pedro Bordalo; Nicola Gennaioli; Florencio Lopez-de-Silanes; Simon G. Schröder; Andrei Shleifer; Maarten van Rooij |
| Abstract: | We present a model of “animal spirits” in which context and emotions affect macroeconomic beliefs by shaping which experiences people recall to simulate similar future aggregate states. We test this mechanism by priming Dutch National Bank Survey respondents to recall personal financial or health adversities before eliciting inflation and home price expectations. The treatment causes instability in beliefs and reasoning tied to the measured similarity of the primed experiences to different macro states. This similarity structure also accounts for heterogeneity in beliefs and reasoning based on a range of other personal experiences we measure. The model micro founds several features of macroeconomic beliefs, including narratives, and yields a “confidence multiplier”: spending by some agents cues optimistic context for others, raising their spending. |
| JEL: | D84 E03 E31 E71 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35214 |
| By: | Sarah Mouabbi; Jean-Paul Renne; Adrien Tschopp |
| Abstract: | Is inflation driven primarily by demand or by supply? Using surveys, we measure inflation and growth risks in the United States from 1981 to 2024. We disentangle demand and supply drivers of inflation and GDP growth and track stagflation fears. The post-pandemic surge in US inflation reflected temporary supply disruptions and persistent demand. Risks of a stagflationary episode rose in 2022 following three decades at near-zero levels. <p> L'inflation est-elle principalement due à la demande ou à l'offre ? À l’aide d’enquêtes, nous mesurons les risques d’inflation et de croissance aux États-Unis entre 1981 et 2024. Nous distinguons les déterminants de la demande et de l’offre à l’origine de l’inflation et de la croissance du PIB, et effectuons un suivi des craintes de stagflation. La poussée de l’inflation américaine après la pandémie reflétait des perturbations temporaires de l’offre et une demande persistante. Les risques d’un épisode de stagflation étaient en augmentation en 2022 après trois décennies proches de zéro. |
| Date: | 2026–05–07 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:econot:450 |
| By: | Solon, Neo |
| Abstract: | This paper provides the first retrospective empirical reconstruction of the Citizens Standard monetary framework against US historical data. The architectural paper (Neo-Solon, 2026) proposes a constitutional monetary framework with three mode configurations and projects substantial retirement wealth outcomes under 2025 launch parameters. The present paper asks a different question: applied to actual US economic data from 1960 to 2025, what outcomes would the framework's Mode B configuration have produced for representative citizens, and how do those outcomes compare to what citizens actually experienced under the discretionary monetary system? Using an annual dataset drawn from authoritative public sources — FRED M2SL, BEA nominal GDP, BLS CPI-U, Census population, and S&P 500 total returns from Damodaran/NYU Stern through 2024 — we apply Mode B's K1 and K2 issuance formulas to four cohorts born in 1960, 1970, 1980, and 1990. The central finding is that Mode B reliably produces a Stable Floor at retirement that exceeds the median American's actual retirement wealth by a factor of 1.9 to 4.0 across all four cohorts under central return assumptions. This finding holds for fully retrospective cohorts with high empirical confidence and for projected cohorts under all three return scenarios including pessimistic assumptions. A decomposition analysis reveals that approximately 96 percent of the framework's projected retirement wealth derives from compound equity returns on deposited principal; only 4 percent is the monetary principal itself. The Citizens Standard's contribution is to guarantee the structural conditions under which compounding can occur — universal participation, automatic deposits, constitutional locking, fee minimization, no early withdrawal — rather than to provide the wealth directly. Stress tests using Depression-era and stagflation-era equity sequences show that under catastrophic equity conditions during peak accumulation years, the framework's median advantage is significantly diminished or eliminated for the most adversely timed cohorts. Non-survivor analysis drawing on the Dimson, Marsh, and Staunton global returns dataset shows that the framework's structural advantages persist in any equity market that avoids confiscation, though absolute outcomes are proportional to country-level long-run equity returns. The paper concludes that the Citizens Standard is most accurately described as a structural retirement-security architecture — one that eliminates the behavioral and institutional leakages that cause median Americans to accumulate far less than a disciplined investor — rather than as a monetary-stimulus mechanism. Its principal social contribution is eliminating the savings-discipline lottery. |
| Keywords: | Mode B, constitutional monetary architecture, retirement security, k-formulas, equity, compounding, counterfactual, monetary |
| JEL: | D31 E21 E42 E58 G11 G17 H55 N11 N12 |
| Date: | 2026–05–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129035 |