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on Monetary Economics |
| By: | António Afonso; Leonardo Zorzi |
| Abstract: | In the aftermath of the 2007-2009 global financial crisis, a growing body of research questioned the conventional inflation-targeting framework that has long guided monetary policy, arguing that the inflation targets adopted by major central banks may have been set too low. We evaluate the likelihood that advanced economies will become constrained by the effective lower bound on nominal interest rates in the future. Therefore, using end-quarter data over the period 1999Q1 to 2025Q4, we develop a counterfactual framework that quantifies how this risk changes under alternative scenarios with higher average inflation. Using a vector autoregression model and an ARDL-ECM framework, we estimate the cumulative probability of hitting the Zero Lower Bound (ZLB), that is, the probability that policy rates reach the constraint at least once during the projection horizon. Our results indicate that Switzerland and Japan face the highest risk of encountering the ZLB, whereas Sweden, the Euro Area, the United States, and Canada exhibit an intermediate level of risk. By contrast, the United Kingdom and Norway appear to be the least vulnerable. These findings are broadly consistent with cross-country differences in average inflation and nominal interest rate levels. |
| Keywords: | inflation, inflation targeting, monetary policy, zero lower bound, VAR, ARDL |
| JEL: | E02 E31 E47 E52 E58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12920 |
| By: | Michael Irwin; Matías Vieyra |
| Abstract: | This note examines how monetary policy responses to shelter inflation affect both the overall economy and different households. We find that the aggregate macroeconomic effects of responding to shelter inflation are modest, whereas the redistributive consequences across households are substantially larger. Renters and homeowners differ sharply in their preferences over whether the central bank should react to elevated shelter inflation. Finally, mortgage interest cost (MIC) inflation responds mechanically to changes in interest rates. As a result, a monetary policy that reacts to these inflation movements generates an endogenous feedback loop, producing undesirable oscillations in consumption and output. |
| Keywords: | Monetary policy; Monetary policy framework and transmission |
| JEL: | E2 E3 E4 E5 G5 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-5 |
| By: | Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden |
| Abstract: | We introduce a tractable model of the two-tier monetary system with heterogeneous agents and incomplete markets. We use this model to characterize the dynamics of bank lending under general fiscal and monetary policy and derive the welfare optimal level of Central Bank reserves and the optimal interest rate on reserves. We also identify a new risk channel of monetary policy. In the model, banks have a dual role as loan providers and money creators, and cannot fully diversify credit risk. Central Bank reserves are used to settle interbank claims and serve as a safe asset, thereby buffering risks for banks. We show how the Central Bank and the Treasury can implement any desired allocation by setting interest rates, issuing a particular amount of reserves, and imposing taxes, and show that uncoordinated policy responses to shocks by the Central Bank alone may cause sub-optimal outcomes and significant instability. |
| Keywords: | Central Bank reserves, interest rate on reserves, liquidity requirements, mone tary system, incomplete markets |
| JEL: | E42 E43 E50 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_765 |
| By: | Bengui, Julien; Han, Lu; MacKenzie, Gaelan |
| Abstract: | Large swings in the expenditure shares of goods and services at the start of the pandemic have contributed to the inflation surge, posing new challenges for monetary policy. Using a multi-sector model featuring upward labor adjustment frictions, we analyze the transmission of monetary policy during a demand reallocation episode, focussing on sectoral heterogeneity in inflation and output responses. Following an unexpected contractionary monetary policy shock, (constrained) expanding sectors primarily respond by lowering prices, while (unconstrained) contracting sectors reduce output more significantly. At the aggregate level, monetary policy is thus more effective at curbing inflation when a larger proportion of sectors are expanding or expected to be expanding in the near future. |
| JEL: | E31 E52 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19409 |
| By: | Romain Baeriswyl |
| Abstract: | While money has evolved from natural commodities to digital tokens, the debate about the ideal money has remained the same throughout the ages. Historical controversies about the origin, nature, and double-spending of money offer valuable insights for navigating the new forms of money tokens such as cryptocurrencies, central bank digital currencies and stablecoins. |
| Keywords: | Natural law of money, State theory of money, Economic good theory of money, Credit theory of money, Double-spending of money |
| JEL: | E40 E42 E50 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-10 |
| By: | Auer, Raphael; Pedemonte, Mathieu; Schoenle, Raphael |
| Abstract: | Is inflation (still) a global phenomenon? We study the international co-movement of inflation based on a dynamic factor model and in a sample spanning up to 56 countries during the 1960-2023 period. Over the entire period, a first global factor explains approximately 58% of the variation in headline inflation across all countries and over 72% in OECD economies. The explanatory power of global inflation is equally high in a shorter sample spanning the time since 2000. Core inflation is also remarkably global, with 53% of its variation attributable to a first global factor. The explanatory power of a second global factor is lower, except for select emerging economies. Variables such as a broad dollar index, the US federal funds rate, and a measure of commodity prices positively correlate with the first global factor. This global factor is also correlated with US inflation during the 70s, 80s, the GFC, and COVID. However, it lags these variables during the post-COVID period. Country-level integration in global value chains accounts for a significant proportion of the share of both local headline and core inflation dynamics explained by global factors. |
| Keywords: | Globalization; Inflation; Phillips curve; Monetary policy; Global value chains; International inflation synchronization |
| JEL: | E31 E52 E58 F02 F41 F42 F14 F62 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19226 |
| By: | Nikolay Hristov; Dominik Menno |
| Abstract: | We study how long-run inflation affects systemic bank-run risk in a medium-scale New Keynesian model with banks and endogenous financial panics. In the benchmark calibration, the bank-run probability more than doubles when annual trend inflation increases from zero to six percent. Higher trend inflation makes price-setting firms more forward-looking, thereby muting expected real-rate declines and amplifying the fall in asset prices during crises. The zero lower bound raises run risk only at low long-run inflation rates. Disinflationary transitions can sharply increase short-run risk, especially if a "cold turkey" disinflation is pursued. Finally, we discuss implications for monetary and macroprudential policy trade-offs. |
| Keywords: | long-run inflation, bank runs, financial panics, crisis probability |
| JEL: | E12 E23 E31 E32 E44 E52 G01 G21 G33 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12918 |
| By: | Hannikainen, Lauri |
| Abstract: | Standard New Keynesian models treat aggregate total factor productivity as exogenous to monetary policy. This paper studies optimal monetary policy in the four-equation New Keynesian model of Baqaee, Farhi, and Sangani (2024), in which monetary expansions reallocate resources toward high-markup firms, reduce misallocation, and raise aggregate productivity. This endogenous productivity response flattens the Phillips curve and changes the optimal target criterion of a dual-mandate central bank. The resulting criterion is both forward- and backwardlooking. In my calibration, this criterion is closely approximated by a familiar New Keynesian target criterion adjusted only for the flatter Phillips curve. By contrast, applying a standard target criterion that ignores the effect of monetary policy on aggregate productivity leads the dual-mandate central bank to stabilize inflation too aggressively and generates excessive output fluctuations. |
| Keywords: | monetary policy, Phillips curve, aggregate productivity, misallocation, target criteria, firm heterogeneity |
| JEL: | E31 E52 E61 D24 D43 D61 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:343109 |
| By: | Carriere-Swallow, Yan; Firat, Melih; Furceri, Davide; Jiménez, Daniel |
| Abstract: | We estimate how the rate of pass-through from the exchange rate to domestic prices varies across states of the economy and depending on the shocks that drive fluctuations in the exchange rate. We confirm several results from the literature and uncover new facts. Drawing on the experience of a large sample of advanced and emerging market economies over the past 30 years, we document that exchange rate pass-through is significantly larger during periods of elevated uncertainty and when inflation is high. Using a novel identification strategy, we also show that pass-through is higher when exchange rate fluctuations are driven by U.S. monetary policy. |
| Keywords: | exchange rate |
| JEL: | F31 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19325 |
| By: | Nishaad Rao; Tao Wang |
| Abstract: | We use Canadian data to examine how monetary policy affects house prices and the consumer price index for rent (CPI-rent) through exogenous changes in the mortgage interest rates. Nationwide, tighter monetary policy lowers house prices but raises CPI-rent, likely due to higher user costs for landlords or greater relative demand for rental housing. City-level analysis shows that, in response to tighter monetary policy, house prices fall most in cities where supply is inelastic, while CPI-rent tends to rise in cities with lower proportions of households moving from renting to owning. |
| Keywords: | Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission |
| JEL: | E31 E52 R21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-2 |
| By: | Castillo-Martinez, Laura; Reis, Ricardo |
| Abstract: | Central banks have a primary goal of price stability. They pursue it using tools that include the interest they pay on reserves, the size and the composition of their balance sheet, and the dividends they distribute. We describe the economic theories that justify the central bank’s ability to control inflation and discuss their relative effectiveness, in light of both theory and the historical record. We present alternative approaches as consistent with each other, as opposed to conflicting ideological camps. While interest-rate setting is often superior, having both a monetarist pillar and fiscal support is essential, and at times pegging the exchange rate or monetizing the debt is inevitable. |
| JEL: | E31 E52 E61 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19334 |
| By: | Amina Enkhbold; Serdar Kabaca |
| Abstract: | This note finds evidence of a positive and nonlinear relationship between mortgage interest costs (MIC) and rental inflation: the impact of MIC on rents is small when population growth is near its historical norm, but significantly stronger during periods of rapid population growth. This pattern is consistent with a nonlinear Phillips curve, where cost pressures are more likely to feed into higher prices when demand is elevated. |
| Keywords: | Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission |
| JEL: | E31 E32 E52 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-14 |
| By: | De Fiore, Fiorella; Mojon, Benoit; Rees, Daniel; Sandri, Damiano |
| Abstract: | We evaluate the performance of alternative monetary policy rules during and after the post-pandemic inflation surge. We first document that inflation expectations remained well anchored in advanced economies irrespective of differences in monetary policy frameworks. We then show that an aggressive inflation targeting (IT) rule would have contained the inflation surge very modestly relative to a benchmark average inflation targeting (AIT) rule, at the cost of larger negative output gaps. Finally, looking at the post inflation surge period, we compare monetary policy frameworks with respect to potential changes in the distribution of the shocks hitting the economy, the slope of the Phillips curve, and the level of r*. We illustrate that the benefits of a dual mandate relative to a single mandate increase under a AIT rule and when the Phillips curve is flatter; that AIT rules tend to stabilize inflation and interest rates relative to IT rules but can generate higher output volatility; and that AIT is more robust than IT to a possible misperception of r*. |
| JEL: | E31 E42 E52 E58 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19299 |
| By: | Engel, Charles; Wu, Steve Pak Yeung |
| Abstract: | Exchange-rate models fit very well for the U.S. dollar in the 21st century. A “standard†model that includes real interest rates and a measure of expected inflation for the U.S. and the foreign country, the U.S. comprehensive trade balance, and measures of global risk and liquidity demand is well-supported in the data for the U.S. against other G10 currencies. The monetary and non-monetary variables play equally important roles in explaining exchange rate movements. In the 1970s – early 1990s, the fit of the model was poor but the fit (as measured by t- and F-statistics, and R2s) has increased almost monotonically to the present day. We make the case that it is better monetary policy (inflation targeting) that has led to the improvement, as the scope for self-fulfilling expectations has disappeared. We provide a variety of evidence that links changes in monetary policy to the performance of the exchange-rate model. |
| JEL: | F31 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19328 |
| By: | Bremer, Björn (Central European University); Baccaro, Lucio |
| Abstract: | Central bank decisions have become politically contested. In response, central banks communicate more with the public, since their effectiveness rests on public trust. Yet whether they reach ordinary citizens is largely unknown. We exploit the European Central Bank’s unexpected announcement of the Pandemic Emergency Purchase Programme (PEPP) during the fieldwork of a March 2020 survey in Germany and Italy. Our results show that the same decisive intervention was rewarded only where it aligned with the perceived national interest: in Italy, trust in the ECB rose, strongest among news-followers and the left; in Germany, trust in the ECB did not move at all, even as trust in national institutions surged. Preferences for central bank goal independence moved in neither country. Citizens thus notice exceptional monetary policy decisions, but their responses are mediated by national interests and discourses, with asymmetric consequences for a central bank that makes one policy for many publics. |
| Date: | 2026–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:zyvjh_v1 |
| By: | Jongrim Ha; Haroon Mumtaz; Franz Ruch |
| Abstract: | We develop a new dynamic factor model with stochastic volatility to quantify inflation tail risk across a large cross section of countries. The framework accommodates unbalanced panels and mixed-frequency data, allowing estimation of the full predictive distribution of inflation for over 200 economies over 1971-2023. Inflation risk - defined as the probability that inflation exceeds 5 percent over a twelve-month horizon - declined during the Great Moderation but rose sharply following the COVID-19 pandemic, with the global probability surpassing 50 percent from early 2021 through 2023. Exploiting the joint predictive distribution of inflation and real activity, we document a brief surge in global stagflation risk in late 2021. While inflation risk responds to both structural demand and supply shocks, it tends to decline during monetary policy tightening cycles. Cross-country evidence further shows that economies with greater trade and financial openness, stronger monetary policy frameworks, and fixed exchange rate regimes face systematically lower inflation risk, while commodity-exporting countries exhibit higher tail exposures. Overall, the results under-score the importance of monitoring inflation risks alongside inflation forecasts and highlight the role of institutions in mitigating macroeconomic tail vulnerabilities. |
| Keywords: | monetary policy, risk, FAVAR, stochastic volatility |
| JEL: | C32 E44 E52 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-72 |
| By: | Christopher S. Sutherland |
| Abstract: | We consider two trade-offs inherent to extraordinary forward guidance (EFG): potency versus flexibility, and the credibility of forward guidance versus the credibility of inflation targeting. We argue that the form of EFG used by the Bank of Canada during the COVID‑19 pandemic balanced both trade-offs relatively well. We also draw three lessons from the Bank’s pandemic EFG experience. |
| Keywords: | Monetary policy; Monetary policy tools and implementation |
| JEL: | D83 D84 E37 E52 E58 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-1 |
| By: | Tinn, Katrin |
| Abstract: | This paper considers introducing asymmetric privacy in the design of central bank digital currencies (CBDC) and digital currencies more generally, to preserve the privacy of money spent while keeping the benefits of digital records for money received. It is shown that this feature would help minimize real distortions between consumers, firms, and financiers, while enabling tax optimization and better access to external financing. Protecting the privacy of consumers is always desirable from an aggregate standpoint as long as there exist some privacy concerns. Implementing asymmetric privacy is technologically feasible, using for instance Zero-Knowledge proofs or other privacy tools. |
| Keywords: | Central bank digital currency design; Data privacy; Learning; Real effects of privacy preferences; Verification costs |
| JEL: | C70 D18 D83 E42 E58 G21 G23 L86 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19275 |
| By: | Stavrakeva, Vania; Tang, Jenny |
| Abstract: | In this paper, we study how the volatility of both \textit{realized} and \textit{expected} macroeconomic variables relates to the variation in exchange rate volatility through the prism of the Great Moderation hypothesis. We find significant heterogeneity in exchange rate trend volatility across currency pairs despite decreases in the volatility of expected future interest rate differentials and of realized yields themselves. We argue that time variation in the relationship between macroeconomic variables and exchange rates has prevented the Great Moderation in realized yield volatility from translating to a decrease in exchange rate volatility. Considering a Campbell-Shiller-type decomposition of exchange rate changes into forward-looking components linked to inflation, policy rate, and currency risk premia expectations, we find that the Great Moderation in volatility of expected yield differentials cannot explain the patterns in exchange rate volatility we observe. The main drivers of these patterns were trends in the volatility of the currency risk premium component and in the covariance between the components capturing the strength of the Fama puzzle and the expected responsiveness of monetary policy to inflation. |
| Keywords: | Exchange rates; International finance; Foreign exchange volatility; Currency risk premiums; Fama puzzle |
| JEL: | E44 F31 G15 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19265 |
| By: | Tyler Atkinson; Jim Dolmas; Rebecca Zarutskie |
| Abstract: | To gauge the medium-term trend in underlying inflation, the Dallas Fed’s Trimmed Mean personal consumption expenditures (PCE) inflation rate drops price changes in the tails of the monthly distribution of PCE components, minimizing the impact of outliers. |
| Date: | 2026–08–13 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:103649 |
| By: | Jonathan Witmer; Monica Jain |
| Abstract: | Central banks all over the world publicly provide varying degrees of information on future monetary policy underlying their projections. Such information ranges from very little information about the path, to publishing a path based on financial market interest rate expectations or an endogenous reaction function. The IMF, in their Article IV recommendations, has suggested that the Bank should provide more information about the policy rate path that is in the projections published in their Monetary Policy Report. This note discusses several ways the BoC could increase communication around future policy, leveraging methods other central banks have used, and discussing the pros and cons of each method for the BoC, keeping in mind that policy rate forecasts typically are not informative beyond 1 or 2 quarters. In doing so, it is important to recognize that most central bank projections are conditioned on market expectations or mathematic representations of policy reaction functions that may or may not reflect policymaker views. In this context, the Bank could consider providing more details on the inputs to GC policy deliberations, including policy recommendations of Bank staff and senior advisors. However, caution should be taken in providing more information about policy rate paths (especially beyond the near term), since such information could direct more public focus on a forecast that is not informative or could be misinterpreted by the public. |
| Keywords: | Monetary policy; Monetary policy framework and transmission; Monetary policy tools and implementation |
| JEL: | D83 E58 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-16 |
| By: | Kumhof, Michael; Salgado-Moreno, Mauricio |
| Abstract: | We develop a DSGE model in which commercial banks interact with the central bank through the reserves market, with each other through reserves and interbank markets, and with the real economy through retail loan and deposit markets. Because banks disburse loans through deposit creation, they never face financing risks (being unable to fund new loans), only refinancing risks (being unable to settle net deposit withdrawals in reserves). Permanent quantitative tightening, while reducing the equilibrium real interest rate, has significant negative effects on financial and real variables, by increasing the cost at which reserves-scarce parts of the banking sector create money. Temporary net deposit withdrawals, which affect the funding cost and loan extension of one part of the banking sector at the expense of another part, have highly asymmetric financial and real effects. The quantity and distribution of central bank reserves, and the extent of frictions in the interbank and reserves markets, critically affect the size of these effects, and can matter even in a regime of ample aggregate reserves. Countercyclical reserve injections can help to smooth the business cycle. We find that countercyclical reserve quantity rules can make sizeable contributions to welfare that can reach a similar size to the Taylor rule. |
| Keywords: | Quantitative easing |
| JEL: | E51 E52 E58 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19228 |
| By: | Haskel, Jonathan; Martin, Josh; Brandt, Lennart |
| Abstract: | In recent years UK inflation has risen to levels not seen for decades and then fallen back. What caused this? We estimate a version of the Bernanke and Blanchard (2023) inflation model for the UK using quarterly data from 1990 to 2024. It is a semi-structural model that explains wage growth, price inflation, and short- and long-run inflation expectations, as functions of labour market tightness, shocks to energy and food prices, supply chain disruptions, and labour productivity. The estimated parameters are similar to those for the US, although the UK appears to have stickier wage and price inflation and more persistent effects of food price shocks. UK inflation in 2021 is explained by supply chain disruptions and energy price shocks, and in 2022 and 2023 also by food price shocks and labour market tightness. Inflation expectations have been more well-anchored than predicted by the model. Illustrative projections suggest inflation is ‘sticky’ and so may take time to return sustainably to target. |
| Keywords: | inflation; wages; monetary policy; Beveridge curve; inflation expectations |
| JEL: | E31 E37 E52 |
| Date: | 2025–09–24 |
| URL: | https://d.repec.org/n?u=RePEc:eoe:escoed:escoe-dp-2025-12 |
| By: | Pitters, Julia; Seitz, Franz |
| Abstract: | The decline of cash used for transaction purposes as well as the increase in total currency in circulation is usually discussed with respect to cost, efficiency and technological progress, i.e. digitalization. A large literature estimates the costs of cash production, distribution and handling. By contrast, the societal value of cash remains far less investigated and rarely quantified. This asymmetry matters because policy debates that monetize costs but leave benefits unconsidered may undervalue a payment instrument. The paper establishes a composite indicator capturing cash's value to society across five key dimensions: resilience, privacy, inclusion, cost control, and competition-supplemented by consumer surplus from seigniorage. We apply the methodology to Germany but the framework is designed to be replicable across countries and to support more balanced government and central-bank policy analysis. It combines a representative consumer survey, expert interviews, macro data and interdisciplinary workshops. In the base calibration, the aggregate value equals around 1.2 % of GDP. These results suggest that policy evaluations should incorporate cash's multifaceted benefits alongside costs. Recognizing cash's broader societal role can guide central banks and policymakers in fostering balanced payment ecosystems that preserve both innovation and public redundancy. |
| Keywords: | cash value, public money, payment system, inclusion, privacy, resilience |
| JEL: | D12 E41 E42 E58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:hawdps:343057 |
| By: | Henry Dyer; Tomas Jankauskas |
| Abstract: | A long-standing body of research, inspired by Bernanke and Kuttner (2005), has documented the effects of Fed interest rate surprises on stock markets. While stock markets provide valuable information about the investor risk premium and dividend growth expectations, researchers have only recently developed more comprehensive tools to estimate the term structure of equity risk premia and dividend growth expectations across a broad range of maturities. In this post, we investigate the impact of monetary policy surprises (or shocks) on short- and long-term estimates of risk premia and growth expectations through the lens of the Giglio, Kelly, and Kozak (2024) model. |
| Keywords: | equity term structure; monetary policy surprises |
| JEL: | E44 E58 E52 |
| Date: | 2026–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103636 |
| By: | Joshua Brault; Maryam Haghighi; Jing Yang |
| Abstract: | Recent advances in artificial intelligence (AI) have revived expectations of transformative productivity gains and large-scale labour-market disruption. Yet despite rapid improvements in AI capabilities, aggregate productivity growth in advanced economies remains subdued, and widespread job displacement has not materialized. This divergence between technological promise and measured outcomes—the “AI productivity paradox”—poses important challenges for policy. This article synthesizes emerging empirical evidence on AI’s effects on labour markets and productivity. Near-term impacts are concentrated in within-occupation task restructuring and early-career hiring, while causal micro-level studies document sizable productivity gains (15–60 percent) that have yet to appear in aggregate statistics because of diffusion lags, organizational adjustment costs, and measurement limitations. We then examine the macroeconomic implications for potential output (Y*) and inflation dynamics. While AI is likely to boost potential output and exert disinflationary pressures over the long run, the effect on inflation during transition is much less certain. For monetary policy, the central challenge is distinguishing structural adjustment from cyclical weakness in real time. We argue that effective policy during the AI transition should exhibit measured flexibility. |
| Keywords: | Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission; Structural challenges; Digitalization and productivity |
| JEL: | E24 E31 E50 E52 E58 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-4 |
| By: | Faia, Ester; Lewis, Karen K.; Zhou, Haonan |
| Abstract: | We re-examine monetary policy spillovers to Emerging Market Economies (EME) in the form of capital flow reversals, using sectoral-level securities holdings data for Euro Area investors. In response to a surprise monetary tightening, active investors such as investment funds re-balance their portfolios away from EME, while more passive, long term investors such as insurance funds and banks exhibit no significant reaction on average. For active investors, the reallocation out of EME appears stronger under synchronized monetary tightening between the Fed and the ECB. However, these investors may even inject more capital to EME securities when the monetary tightening surprises contain positive news about the Euro Area economy. Issuers’ monetary-fiscal stability may explain the heterogeneous impact of these spillovers. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19389 |
| By: | Rakesh Arora; Umar Faruqui; Scott Hendry; Dinesh Shah; André Usche; Mark Byrne; Caroline Cook; Kevin Fraites; Wally Forsyth; Alex Caridia; Chris Meston; Teresa Venturino; Devon Read; Chadrick Buffel; Anne Boulanger; Sylvie Lacombe; Marsha Loraas |
| Abstract: | Project Samara was a limited, real world experiment designed to evaluate the use of distributed ledger technology (DLT) and wholesale central bank digital money (W CAD) in Canadian capital markets. The project involved the issuance of a single tokenized bond by Export Development Canada to a closed investor group, with RBC Capital Markets and TD Securities acting as joint lead managers. Settlement was conducted in central bank money issued by the Bank of Canada through a purpose built DLT platform integrating a securities ledger and a cash ledger to support end to end market processes. The experiment assessed whether DLT could improve efficiency, reduce settlement risk through atomic settlement, and enhance settlement finality and transaction speed. Project Samara showed that DLT based issuance and settlement of real financial instruments is technically feasible and can improve data integrity and reduce counterparty and settlement risk. These benefits were partly offset by increased system complexity, governance and liquidity costs, and new operational risks, as well as legal and regulatory frictions stemming from the need to reconcile decentralized ledger designs with existing centralized market roles. Given its narrow scope and experimental design, the findings are preliminary and illustrative, but they provide useful insights for future research and policy discussions on tokenization and DLT based financial market infrastructure. |
| Keywords: | Financial markets and funds management; Funds management; Market structure; Money and payments; Digital assets and fintech; Payment and financial market infrastructures |
| JEL: | E42 E58 G28 O33 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-8 |
| By: | Istrefi, Klodiana; Odendahl, Florens; Sestieri, Giulia |
| Abstract: | This paper introduces the Euro Area Communication Event-Study Database (EACED), a new dataset tracking intraday financial market movements around 304 ECB Governing Council meetings (ECBGC) and 5, 100 inter-meeting communication (IMC) events by GC members, primarily in the form of speeches and interviews. We document that IMC events are associated with significant market movements often comparable to, or larger than, those following ECB policy announcements, particularly for longer maturity yields. Importantly, these effects are not limited to communication from the ECB President but also from other Governing Council members. Like ECBGC announcements, IMC events convey multidimensional information: three structurally identified factors explain a large share of the yield curve movements around IMC surprises. Finally, we show that IMC events provide relevant information for identifying the effects of monetary policy shocks on euro area output and inflation in a Bayesian Vector Autoregression model. |
| Keywords: | Monetary policy; Ecb; Financial markets; Euro area |
| JEL: | E03 E50 E61 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19242 |
| By: | Ean Lay, Sam; Phon, Sophat; Som, Vuddneath; Lum, Sothearak |
| Abstract: | This study assesses whether the central Bank in Cambodia’s (NBC) cash circulation system can support its goals of expanding riel use and sustaining trust as Bakong scales. While functional, the system faces gaps in rural access, data, analytics, and public education. Comparative evidence suggests current infrastructure is insufficient for de‑dollarization at the pace NBC projects. Theoretically, the review shows that currency substitution depends on governance capacity, not macroeconomic conditions alone; extends lifecycle models to integrate digital and physical currency governance; and provides a case of CBDC deployment preceding mature cash systems. Practically, comparator cases highlight lessons in data use (U.S.), resilience (Sweden), rural access (Brazil), and counterfeit defence (South Africa). Scenario analysis indicates riel circulation could reach mid‑thirties by 2034 under current policy, or half under sustained reform. Cambodia’s position—building infrastructure deliberately rather than inheriting legacy systems—offers a unique advantage for monetary sovereignty. |
| Keywords: | Central Bank, Sovereignty, Banking System |
| JEL: | B30 B4 B40 B5 G1 G15 K0 K00 |
| Date: | 2026–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:130364 |
| By: | Jean-Sébastien Fontaine; Neil Maru; Sofia Tchamova |
| Abstract: | The CORRA benchmark interest rate experienced sustained pressures in Canada around the Fall of 2025. The growing imbalance between repo lenders and borrowers meant that funding markets increasingly relied on Canadian banks’ balance sheets to absorb this funding gap. The Bank of Canada’s adjustments to its term repo operations, together with an eventual reduction in the imbalance between lenders and borrowers, both contributed to relieve pressures. The episode highlights that pressures on the CORRA benchmark can emerge from the interaction of client borrowing behavior and dealer balance sheet constraints, even if the level of settlement balances is in a range deemed sufficient to meet the requirement of the payment system and the precautionary demand of its members. |
| Keywords: | Financial markets and funds management; Market functioning; Monetary policy; Monetary policy tools and implementation |
| JEL: | E52 G23 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-15 |
| By: | Wongpiyabovorn, Oranuch; Lence, Sergio; Plastina, Alejandro |
| Abstract: | Multiple price measures in the United States may deliver differing signals about inflation, potentially complicating policy decision-making. This study evaluates the consistency of three major price indexes—Personal Consumption Expenditure Price Index (PCEPI), Consumer Price Index (CPI), and Producer Price Index (PPI)—across three headline measures and nine core measures. The results show that all headline price indexes are pairwise consistent, whereas only half of the core measures exhibit similar co-movement. Headline PCEPI is identified as the preferred headline index, while median CPI is preferable to the traditional core measures. Despite its inconsistency with median CPI, trimmed-mean PCEPI is found to be the most effective measure for capturing underlying trend inflation, based on Kalman filter estimates. Estimated trend inflation averaged 2.46% annually from May 2010 through August 2025. |
| Keywords: | Agricultural and Food Policy |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea26:404382 |
| By: | Forbes, Kristin; Ha, Jongrim; Kose, M. Ayhan |
| Abstract: | We analyse cycles in policy interest rates in 24 advanced economies over 1970-2024, combining a new application of business cycle methodology with rich time-series decompositions of the shocks driving rate movements. “Rate cycles†have gradually evolved over time, with less frequent cyclical turning points, more moderate tightening phases, and a larger role for global shocks. Against this backdrop, the 2020-24 rate cycle has been unprecedented in many dimensions: it features the fastest pivot from active easing to a tightening phase, followed by the most globally synchronized tightening, and an unusually long period of holding rates constant. It also exhibits the largest role for global shocks— with global demand shocks still dominant, but an increased role for global supply shocks in explaining interest rate movements. Inflation and the growth in output and employment have, on average, largely returned to historical norms for this stage in a tightening phase. Any recalibration of interest rates going forward should be gradual, however, taking into account the interactions between increasingly important global factors and domestic circumstances, combined with uncertainty as to whether rate cycles have reverted to pre-2008 patterns. |
| Keywords: | Interest rates |
| JEL: | E31 E32 E52 E58 F42 F44 N10 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19272 |
| By: | Giannone, Domenico; Primiceri, Giorgio |
| Abstract: | Post-covid inflation was predominantly driven by unexpectedly strong demand forces, not only in the United States, but also in the Euro Area. In comparison, the inflationary impact of adverse supply shocks was less pronounced, even though these shocks significantly constrained economic activity. With output already weakened by these unfavourable supply conditions, any attempt by the European Central Bank to further mitigate the demand-driven inflationary pressures---to maintain inflation near its 2-percent target---would have severely hampered an already anaemic recovery. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19377 |
| By: | Olivier Armantier; Gizem Koşar; Giorgio Topa; Wilbert Van der Klaauw; John C. Williams |
| Abstract: | We document three stylized facts about household inflation expectations that stood out during the 2021–23 inflation surge: i) a temporary dislocation in the term structure of expectations, ii) an earlier peak at longer horizons, and iii) a sharp increase in the share of households expecting deflation at medium and long horizons. We show that these stylized facts are consistent with households’ narratives attributing the inflation surge to temporary labor and supply disruptions. We also argue that they pose an empirical challenge to existing models of expectation formation. Implications for theory and expectations surveys are discussed. |
| Keywords: | household expectations; Inflation expectation; inflation; Narratives |
| JEL: | E31 D84 |
| Date: | 2026–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103672 |
| By: | Maximiliano Dvorkin; Fernando Leibovici; Melanie LeTourneau; Ana Maria Santacreu |
| Abstract: | The upward pressure that tariffs exert on U.S. inflation appears to have moderated in the first half of 2026, according to new estimates of effective tariffs and pass-through. |
| Keywords: | tariffs; inflation; pass-through; consumer prices |
| Date: | 2026–08–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:103654 |
| By: | Zixuan Huang; Mr. Aki Yokoyama |
| Abstract: | This paper analyzes a global map of dollar exposures and examines the relationship between net dollar exposures, defined as the difference between dollar assets and liabilities, and covered interest parity (CIP) deviations. We find that the cross-sectional relationship is significantly negative in advanced economies but positive in emerging markets. CIP deviations represent the hedging cost that foreign holders of dollar assets or liabilities incur to manage exchange rate risk. To explain, we develop a model in which the CIP deviations are determined by the demand and the supply side of hedging. The negative correlation in advanced economies can be explained by the variations in hedging demand. Larger net dollar exposures increase the hedging demand, raising hedging costs (reflected as more negative CIP deviations) and producing a negative correlation. In contrast, the positive correlation in emerging markets is explained by the supply side of the hedging market. Limited hedging supply leads to wider CIP deviations (more negative), encouraging firms to borrow in U.S. dollars rather than local currencies, thereby reducing net dollar exposures and generating a positive correlation. |
| Keywords: | Dollar assets; dollar liabilities; banks and non-banks; covered interest parity |
| Date: | 2026–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/169 |
| By: | Erik Hurst; Christina Patterson; Nela Thomas Richardson; Ye Liv Wang |
| Abstract: | We use a sample of administrative payroll data covering a large and nationally representative share of U.S. workers to study how wages adjusted during the recent inflation period. Most firms apply a single modal annual nominal wage increase to the majority of their workers, and these firm-level norms changed little during the recent period of unexpected inflation. As a result, nominal wages did not keep pace with prices for a large share of workers who stayed at their firms. Forty-three percent of workers continuously employed at the same firm over the four years spanning 2021–2024 experienced a real wage decline, with a mean loss of roughly nine percent among those who fell behind. Workers could escape sticky wage norms by changing employers — job-changers’ wages rose nearly one-for-one with inflation — but switching was too infrequent to matter for most. Even accounting for job-changers, 37 percent of all workers saw real wages decline over the 4-year period. Indexing firms’ modal raises one-for-one to inflation would have closed roughly 40 percent of the resulting shortfall relative to prepandemic trend. Drawing on cross-country evidence from Belgium, whose wages are automatically indexed to inflation, we show that incomplete wage indexation, rather than inflation itself, helps explain the persistence of depressed consumer sentiment during the 2021–2024 period. |
| JEL: | E20 E31 J30 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35624 |
| By: | Wang, Kaiwei |
| Abstract: | This paper asks whether innovations in Federal Open Market Committee (FOMC) statement language explain high-frequency movements in the U.S. Treasury yield curve beyond conventional monetary-policy surprises. The analysis covers 211 scheduled statement releases from March 2000 through July 2026 and uses 30-minute asset-price changes from the Federal Reserve Bank of San Francisco U.S. Monetary Policy Event-Study Database. A transparent text-as-data pipeline classifies sentences as hawkish, dovish, or neutral using word- and character-level TF-IDF features with multinomial logistic regression. The meeting-level innovation score measures the net stance of language added to, removed from, or replaced relative to the preceding scheduled policy statement. Baseline regressions control for the futures-implied current-meeting surprise (MP1) and simultaneous Summary of Economic Projections releases; an expanded specification adds the next-meeting path surprise (MP2). Inference combines HC3 covariance estimates, a meeting-clustered maturity system, permutation and wild-bootstrap tests, multiplicity corrections, equivalence tests, minimum detectable effects, leave-one-year-out prediction, and resampling of the labeled text corpus. The estimated coefficients are small at all six Treasury maturities: 0.001, 0.121, 0.132, 0.119, -0.013, and 0.072 basis points per one-standard-deviation hawkish innovation at three months, six months, two years, five years, ten years, and thirty years. Every 95 percent confidence interval includes zero, and a joint six-maturity test yields p = 0.439. Adding MP2 does not materially change the estimates; the text score does not improve out-of-year prediction, and no result in the predeclared robustness family survives multiplicity adjustment. Equivalence tests reject average effects outside plus or minus 1 basis point at every maturity. Under this design, scalar statement hawkishness provides little incremental average information for Treasury-yield reactions once market-based policy surprises are controlled for, although smaller, state-dependent, or multidimensional communication effects remain plausible. |
| Keywords: | FOMC communication; monetary policy surprises; Treasury yield curve; text as data; high-frequency event study; equivalence testing |
| JEL: | E43 E52 E58 G12 G14 |
| Date: | 2026–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:130358 |
| By: | Felipe Alves; William Beaudoin; Hélène Desgagnés; Wei Dong; Jan David Schneider; Eugene Trostin; Argyn Toktamyssov; Hannes Twieling |
| Abstract: | This paper presents Bank of Canada staff’s current assessment of the US and Canadian neutral rates of interest. The neutral rate is where the Bank expects the policy rate would settle once output is at its long-run potential level and inflation is at target, after the effects of all cyclical shocks have dissipated (Mendes 2014). The Bank does not target the neutral rate, but this is an important input for its economic projections. We assess the Canadian nominal neutral rate to be in the range of 2.25% to 3.25%, unchanged from our assessment in 2025. We assess the US nominal neutral rate to be in the range of 2.50% to 3.50%, somewhat higher than the range of 2.25% to 3.25% reported in the 2025 assessment. In Canada, lower long-term population growth offsets higher long-term productivity growth. In the US, the revision is explained by a stronger outlook for potential output growth. |
| Keywords: | Monetary policy; Monetary policy framework and transmission |
| JEL: | E43 E52 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-21 |
| By: | Gerresheim, Nils; Krahé, Max; van 't Klooster, Jens |
| Abstract: | The United States is increasingly willing to weaponise the global dependence on the dollar, raising the costs of that dependence for economies around the world. China offers the most instructive case of a major economy trying to reduce that dependence. In this report we analyse China's effort and draw lessons for Europe. Our findings: progress has differed markedly across the three use-cases of an international currency (settlement, invoicing, and investment). China made most progress on settlement, with more than half of its own trade now settled in RMB. It achieved this largely by providing efficient payment infrastructure, such as an offshore clearing-bank network, the CIPS payment system, a central bank digital currency (the e-CNY), and a broad network of central bank swap lines. Progress on invoicing and investment has been more limited, held back by the network effects that entrench the dollar and by the shallowness of RMB markets. Two lessons follow for Europe: first, providing more efficient payment infrastructure can meaningfully reduce reliance on dollar settlement. This reduces dependence where Europe is most vulnerable. Second, to reduce dollar dependency in invoicing and investment, too, a more thorough approach would be needed. |
| Keywords: | Dedollarisation, China, Geoeconomics, Europe |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:dzimps:343004 |
| By: | Amin Izadyar |
| Abstract: | I revisit the exchange rate disconnect puzzle, first documented by Meese and Rogoff (1983), using generative artificial intelligence (AI) to forecast currency returns based on economic fundamentals. Using ChatGPT and DeepSeek, I analyze a comprehensive dataset of economic data releases for major currency pairs and measure the fundamental strength of each currency. These AI-powered fundamentals exhibit significant cross-sectional predictive power. A simple trading strategy that goes long currencies with strong fundamentals and short currencies with weak fundamentals generates a Sharpe ratio exceeding 0.7 per annum. The excess returns of this strategy remain significant after controlling for traditional currency factors. To mitigate concerns of look-ahead bias, I run multiple exercises to ensure that predictability stems from AI reasoning rather than memorization. Finally, I explore the potential sources of predictability and find evidence that the Taylor rule framework, generally used by central banks to set interest rates, is a key mechanism connecting exchange rates to economic fundamentals. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.00761 |
| By: | Kuong, John Chi-Fong; O'Donovan, James; zhang, jinyuan |
| Abstract: | We document aggregate outflows from corporate bond mutual funds days before and after the announcement of increases in the Federal Funds Target rate (FFTar). To rationalize this phenomenon, we build a model in which funds’ net-asset-values (NAVs) are stale and investors strategically redeem to profit from the mispricing when they learn about the increases of FFTar. Consistent with the model's predictions, we find that stale NAVs and loose monetary policy environments weaken (strengthen) outflows sensitivity to increases in FFTar during illiquid (liquid) market conditions. Our results highlight when and how monetary policy could systematically exacerbate the fragility of corporate bond funds. |
| JEL: | E52 G14 G23 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19361 |
| By: | Yanis Belkacem; Fabienne Schneider; Adrian Walton |
| Abstract: | We develop an approach to quantify transaction costs in the repo market using OTC transaction data, where quoted bid-ask spreads are not observable. By estimating effective spreads at the level of individual trades, we construct a novel metric to evaluate intermediation costs across different segments of the market. Effective spreads function as a high-frequency gauge of market conditions and functioning. They are particularly informative about balance sheet pressures, as reflected in recurring year-end spikes and elevated levels during the early stages of the COVID-19 pandemic. They offer complementary information to cash market spreads and provide a useful tool for further analysis of monetary policy transmission and the behavior of market participants. |
| Keywords: | Financial markets and funds management; Financial system; Financial institutions and intermediation; Financial stability and systemic risk |
| JEL: | G10 G12 G20 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-10 |
| By: | Farmer, Roger |
| Abstract: | I introduce money into an incomplete markets model with heterogeneous agents and uninsurable income risk. I show that the model exhibits both non-monetary and monetary equilibria, with the latter existing when income risk is sufficiently high. Using numerical methods, I characterize the properties of these equilibria and analyze their stability. I find that for a range of realistic parameter values, the non-monetary equilibrium is dynamically inefficient and indeterminate, and there is a second determinate monetary equilibrium with positive valued fiat money. |
| Keywords: | Indeterminacy |
| JEL: | E30 D52 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19333 |
| By: | Irwin, Douglas A.; Obstfeld, Maurice |
| Abstract: | Korea’s real exchange rate has displayed a mild downward trend since the 1980s, with fluctuations of ±20 percent around that trend. This pattern is surprising because the classic Harrod-Balassa-Samuelson framework suggests that countries experiencing rapid growth in the productivity of their tradable industries should experience real currency appreciation over time. The paper decomposes the sources of change behind the Korean won’s real exchange rate into internal price drivers (the relative price of nontradable goods) and external price drivers (the international relative price of tradable consumption goods, which is heavily dependent on the nominal exchange rate). The paper finds that, on average, the variability in Korea’s real exchange rate, even over long periods, is overwhelmingly due to external price factors. Given the persistent medium-term effects of nominal exchange rate changes on the real exchange rate, the Korean policy of intervening in foreign exchange markets to smooth exchange rate fluctuations appears prudent. However, the paper also finds that over the entire period 1985-2023, internal price factors are the main explanator of the won’s real depreciation. This finding poses a puzzle for standard accounts of the linkage between productivity growth and real exchange rates. |
| JEL: | F31 F41 F63 N15 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19302 |
| By: | Robert Minton; Hugo Monnery |
| Abstract: | Using survey data from U.S. firms, we study the primitive beliefs for pricesetting: firms’ forecasts of their own marginal costs. These forecasts are disconnected from CPI expectations, (over)react to current and past costs systematically, and underreact to aggregate shocks until costs move. We show that under empirically realistic cost beliefs the New Keynesian Phillips curve is steeper and less forward-looking. Supply shocks are more inflationary because they hit costs quickly. Demand shocks are less inflationary because firms fail to anticipate future wage pressure. Forward guidance weakens at long horizons but strengthens in the near term. |
| Date: | 2026–07–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103588 |
| By: | James Chapman; Ajit Desai; Maryam Haghighi; James (Jim) C. MacGee |
| Abstract: | Rapid advances in artificial intelligence (AI)—including machine learning, natural language processing, and generative AI—are expanding the ability to extract meaningful insights from non-traditional data sources such as text, speeches, images, and real-time transactions, thereby strengthening policy analysis and operational decision-making. These tools also enable more sophisticated analytical approaches to the study of economic dynamics while creating opportunities to improve efficiency across institutional processes and operations. This paper documents the growing use of non-traditional data and AI at the Bank of Canada and their contribution to deeper insight and operational effectiveness. The experience highlights critical considerations for accelerating the responsible integration of AI into central banking functions, including evolving ways of working and career paths, fostering a robust ecosystem for innovation, and addressing emerging risks. A successful AI strategy must balance innovation with trust, transparency, security, reproducibility, sound model governance, data residency, and effective operational risk management. |
| Keywords: | Financial system; Financial stability and systemic risk; Monetary policy; Monetary policy tools and implementation; Money and payments; Payment and financial market infrastructures |
| JEL: | C45 C55 C88 L23 M15 O33 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-17 |
| By: | Philippe Andrade; Alexander Dietrich; John Leer; Jenny Tang; Egon Zakrajšek |
| Abstract: | Do firms adjust prices to realized costs, expected costs, or both? We address this question using a new survey of U.S. businesses that separately measures realized cost changes since the last price adjustment and expected cost changes over the subsequent year, including portions attributable to 2025 trade policies. Using perceived tariff exposure as an instrument, we identify the causal effects of realized and expected costs on prices. Reset prices incorporate almost 70 percent of current costs and nearly 45 percent of expected costs over the next year. The importance of these channels varies significantly across firms. Frequent price adjusters respond mainly to current costs, while sticky-price firms weight expectations more heavily. Goods producers adjust contemporaneously, whereas service firms are more forward looking, as are firms with a high labor share or facing high trade uncertainty. This evidence favors endogenous pricing frameworks in which uncertainty reshapes the reset-price kernel across horizons or imperfect-information models in which uncertainty amplifies the role of expectations over standard time-dependent models. |
| Keywords: | survey; small and medium-sized enterprises; Price setting; realized cost; pass-through; expected cost |
| JEL: | E31 C26 F14 |
| Date: | 2026–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:103642 |
| By: | Zhang, Yuxiang; Liu, Yizao |
| Abstract: | Recent food price inflation has placed substantial pressure on household budgets, food security, and mental well-being. Using Household Pulse Survey data, we combine k-modes clustering and Double Machine Learning to identify distinct household coping groups and examine and examine differences in how households respond to rising food prices across groups. Results show that higher food prices are associated with increased grocery and prepared meal spending, elevate risks of food insufficiency, and worsen mental health conditions, with heterogeneity across coping groups. Households employing moderate substitution strategies show limited buffering, while those using more intensive coping behaviors remain highly vulnerable, highlighting the need for policy responses that address the multiple, co-occurring dimensions of hardship including food access, financial strain, and mental health, rather than any single dimension in isolation. |
| Keywords: | Consumer/Household Economics, Labor and Human Capital |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea26:404617 |
| By: | C.O. Olaniyi (University of South Africa); N.M. Odhiambo (University of South Africa) |
| Abstract: | Abstract Purpose This study examines the roles of cross-sectional dependence, asymmetric structure, and country-to-country policy variations in the inflation-poverty reduction causal nexus in selected sub-Saharan African (SSA) countries from 1981 to 2019. Design/methodology/approach To account for cross-sectional dependence, heterogeneity, and policy variations across countries in the inflation-poverty reduction causal nexus, this study uses robust Hatemi-J data decomposition procedures and a battery of second-generation techniques. These techniques include cross-sectional dependency tests, panel unit root tests, slope homogeneity tests, and the Duitrescu-Hurlin panel Granger non-causality approach. Findings Unlike existing studies, the panel and country-specific findings exhibit several dimensions of asymmetric causality in the inflation-poverty nexus. Positive inflationary shocks Granger causes poverty reduction through investment and employment opportunities that benefit the impoverished in SSA. These findings align with country-specific analyses of Botswana, Cameroon, Gabon, Mauritania, South Africa, and Togo. Also, a decline in poverty causes inflation to increase in the Congo Republic, Madagascar, Nigeria, Senegal, and Togo. All panel and country-specific analyses reveal at least one dimension of asymmetric causality or another. Practical implications All stakeholders and policymakers must pay adequate attention to issues of asymmetric structures, nonlinearities, and country-to-country policy variations to address country-specific issues and the socioeconomic problems in the probable causal nexus between the high incidence of extreme poverty and double-digit inflation rates in most SSA countries. Originality/value Studies on the inflation-poverty nexus are not uncommon in economic literature. Most existing studies focus on inflation's effect on poverty. Existing studies that examine the inflation-poverty causal relationship covertly assume no asymmetric structure and nonlinearity. Also, the issues of cross-sectional dependence and heterogeneity are unexplored in the causal link in existing studies. All panel studies covertly impose homogeneous policies on countries in the causality. This study relaxes this supposition by allowing policies to vary across countries in the panel framework. Thus, this study makes three-dimensional contributions to increasing understanding of the inflation-poverty nexus. |
| Keywords: | Inflation; Poverty; Cross-sectional dependence; Asymmetric causality |
| JEL: | E31 I32 |
| Date: | 2024–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:afa:wpaper:wp102024 |