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on Monetary Economics |
| By: | André Binette; Colleen Smith |
| Abstract: | This note presents Segmented Inflation Dynamics (SID), a data-driven tool for assessing trend inflation. SID uses time-series segmentation to divide the price index into contiguous segments with stable inflation rates. The segmentation breaks are identified from the data. The slope of each segment provides a well-defined estimate of trend inflation that is stable but responsive to persistent shifts. Using Canadian data from 1992 to 2025, the note describes the resulting inflation segments, tests the robustness of the method and assesses its real-time properties. Results show that SID offers a stable, interpretable measure of trend inflation, with limited sensitivity to short-term volatility and quick adjustment to shifts in inflation dynamics. Based on data through December 2025, SID indicates that Canada’s trend inflation has been near 2 percent since early 2024. |
| Keywords: | Models and tools; Econometric, statistical and computational methods; Monetary policy; Inflation dynamics and pressures |
| JEL: | C C2 C22 E E3 E31 E5 E52 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-43 |
| By: | Gurung, Nirmal |
| Abstract: | Monetary policy transmission, the mechanism through which the monetary policy of the central bank impacts bank lending rates and, by extension, the broader economy, is of great interest to policymakers. This paper provides an in-depth analysis of the monetary policy transmission mechanism in the Nepalese context. It focuses on the interest rate pass-through channels and associated frictions in the Nepalese monetary policy framework. It uses the information published by NRB, the central bank of Nepal, as well as scholarly research and reports on the topic to perform the study. It highlights that the interest rate pass-through in Nepal is partial and delayed and discusses the reason why monetary policy transmissions in Nepal work as they do. The paper starts with an introduction to the topic of monetary policy transmission. Then, it proceeds to discuss research questions and objectives, theoretical background, and methodological background. Finally, it presents data analysis and discusses the findings to reach final conclusions and recommendations. |
| Date: | 2026–09–25 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:yvwhe_v1 |
| By: | Bremer, Björn (Central European University); Chwieroth, Jeffrey |
| Abstract: | Central banks relied for a decade on unconventional monetary policies (negative interest rates, large-scale asset purchases, and forward guidance) that carry significant distributive consequences and became intensely politicized. Yet little is known about the mass politics of central banking, or whether contestation over specific instruments threatens central banks' broader legitimacy. We provide evidence from two pre-registered survey experiments in Germany and the Netherlands. A conjoint experiment shows that citizens strongly oppose negative interest rates, the most penalized levels in the design, and are skeptical of unconditional asset purchases. A framing experiment shows support for negative rates responds to both egotropic and sociotropic arguments, with pocketbook concerns resonating most strongly. Exploiting a within-respondent measure of trust in the European Central Bank (ECB), we show that these same frames shift citizens' specific support for the policy without eroding their diffuse trust in the ECB, a highly insulated, technocratic, non-elected institution. |
| Date: | 2026–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:es7wf_v1 |
| By: | Anat Assoratgoon |
| Abstract: | This paper examines the role of misperception in shaping the inflation dynamics of Thailand following the 2022 energy price shock. For this purpose, I evaluate whether a New Keynesian model of a small open economy featuring a signal extraction problem can replicate the inflation and broader macroeconomic dynamics observed in Thailand during this episode. The signal extraction problem arises because agents observe the terms-of-trade shock but cannot distinguish its constituent components, transitory versus persistent, and must therefore infer the underlying state via the Kalman filter. Four information regimes are compared: full information, symmetric limited information in which both the central bank and the private sector misperceive, and two asymmetric cases in which only one agent misperceives while the other correctly identifies the shock. A simple distance-based comparison against Thai data indicates that the symmetric limited information regime most plausibly characterizes the prevailing dynamics of the 2022 Thai economy. The asymmetric cases further reveal that the consequences of misperception depend critically on who gets it wrong. Central bank misperception produces a prolonged inflation surge alongside a relatively muted output contraction, while private-sector misperception keeps inflation contained at the cost of a sharper and more persistent output decline – a stark illustration of the inflation–output trade-off in action. |
| Keywords: | Monetary policy; Signal extraction; Energy price shocks; Small open economy; New Keynesian model; Misperception; Inflation dynamics; Bank of Thailand |
| JEL: | E31 E52 E58 F41 Q43 D84 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:pui:dpaper:263 |
| By: | Michael D. Bordo; Carolyn Wilkins |
| Abstract: | This paper uses the history of private money to assess the conditions under which stablecoins could function safely at scale and what their growth may imply for U.S. monetary power. Historical systems of private money in the United Kingdom, the United States, Canada, Sweden, and Switzerland show that par circulation depended on institutional arrangements rather than payment technology. Drawing on the monetary history of private money, convertibility, and international currencies, the paper identifies five foundations for scalable private money: credible convertibility, high-quality and transparent backing, a uniform regulatory perimeter, par clearing infrastructure, and credible crisis management and loss allocation. Stablecoins may improve settlement speed, programmability, and cross-border access, but they do not remove these requirements. Applying this framework to contemporary stablecoins and the GENIUS Act, the paper finds that the Act addresses several of these foundations more fully than others, with crisis management and cross-border coordination less fully developed. Dollar stablecoins could extend the reach of dollar settlement, but historical experience reviewed here suggests that whether this strengthens the dollar system depends both on the institutional framework supporting stablecoins and on the deeper foundations of U.S. monetary dominance: confidence in U.S. institutions, fiscal capacity, monetary credibility, and the rule of law. |
| JEL: | E42 E44 G15 N20 N40 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35768 |
| By: | Lucia Esposito (Bank of Italy); Elisa Guglielminetti (Bank of Italy); Elia Moracci (Bank of Italy); Andrea Papetti (Bank of Italy); Massimiliano Pisani (Bank of Italy) |
| Abstract: | This paper assesses the impact of artificial intelligence (AI) on monetary policy transmission and on central banks' reaction functions. By speeding up routine and repetitive tasks through automation and accelerating the incorporation of incoming information into decision-making, AI may affect productivity, market structure and broader macroeconomic developments. AI may also increase macro-financial complexity and systemic vulnerabilities by amplifying interconnectedness, heightening operational and cyber risks, and reinforcing procyclical and herding dynamics in an environment characterized by faster and partly algorithmic decision-making. Central banks' reaction functions will need to adapt to a setting marked by a different transmission mechanism, new uncertainty surrounding the natural rate of interest and tail risks. At the same time, AI could enhance the effectiveness of monetary policy by improving assessments of the macroeconomic outlook and the distribution of risks around it, as well as by strengthening monetary policy communication and the management of expectations. |
| Keywords: | artificial intelligence, credit markets, financial markets, inflation, business cycle, monetary policy |
| JEL: | O33 E44 E32 E31 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_1051_26 |
| By: | Evan Dudley; Jean-Sébastien Fontaine; Dimitri Hadjistavropoulos; Neil Maru; Sofia Tchamova; Andreas Uthemann; Jun Yang |
| Abstract: | Banks and their dealers’ arms play a key role in balancing clients’ demand in the Canadian repo market. Repo market imbalances can be large and persistent, at times putting upward pressure on the cost of short-term funding in Canada, including the CORRA benchmark. This note examines the main funding sources that banks use to absorb these imbalances. We show that during QE and early during quantitative tightening, banks’ holdings of settlement balances were the main buffer to absorb clients’ net repo demand, but by the end of QT they had become far less central to balancing the repo market. Despite this, we find that throughout QT, banks and dealers accommodate increasingly volatile shifts in their clients’ repo demand through a more active redistribution among them, a somewhat more active use of foreign currency markets and a more active use of the Receiver General (RG) and Bank of Canada (BoC) facilities. |
| Keywords: | Financial system; Financial institutions and intermediation; Monetary policy; Monetary policy tools and implementation |
| JEL: | E E5 E52 E58 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-40 |
| By: | Guney, Dogukan |
| Abstract: | This paper shows that central bank communication reduces monetary policy uncertainty, which in turn generates substantial effects on real economic activity. I construct a novel monthly measure of Federal Reserve communication from 9, 298 speeches by FOMC members between 1951 and 2022 and relate it to a newspaper-based measure of U.S. monetary policy uncertainty. To address the simultaneity between communication and uncertainty, I exploit a shift in the volatility of communication associated with the Fed’s transition toward greater transparency in the early 2000s and use the resulting heteroskedasticity to identify causal effects. An unexpected one-standard-deviation increase in communication lowers monetary policy uncertainty by about 0.25 standard deviations. Structural VAR estimates show sizable and persistent real effects: within two months, industrial production rises by about 0.3 percent, unemployment falls by 0.2 percentage points, and durable goods consumption increases by about 0.5 percent. These findings highlight an uncertainty channel of monetary policy communication and show that active communication can serve as an independent policy tool. |
| Keywords: | Monetary Policy Communication; Uncertainty; Textual Analysis; Identification Through Heteroskedasticity |
| JEL: | C32 D80 E52 E58 |
| Date: | 2026–09–14 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:132139 |
| By: | Trautmann, Simon; Hellenkamp, Detlef |
| Abstract: | The digital euro is intended to preserve access to public central bank money in an increasingly digital payments landscape while strengthening European payments sovereignty. Its potential success, however, will not depend on institutional legitimacy alone. The decisive question is whether it can offer consumers a discernible advantage over established payment instruments and be embedded in a viable intermediated model. This working paper therefore examines the design requirements under which a digital euro could generate tangible everyday utility while preserving the intermediation role of commercial banks. Methodologically, the analysis draws on recent primary sources issued by European institutions and central banks, relevant academic literature and selected international CBDC case studies. The findings indicate that user-friendliness, privacy, online and offline functionality, a sufficiently broad acceptance network and robust integration into existing payment infrastructures are particularly important. At the same time, the digital euro gives rise to tensions between attractiveness and financial stability, privacy and regulatory traceability, and public infrastructure and private-sector innovation. Holding limits, waterfall and reverse-waterfall mechanisms, and an appropriately calibrated remuneration model may help to mitigate these tensions. The digital euro can therefore contribute to European payments sovereignty, provided that it is designed as a user-oriented public infrastructure and underpinned by the functional and economically viable involvement of commercial banks. |
| Keywords: | Digital euro, Retail central bank digital currency (CBDC), European payments sovereignty, Consumer adoption, Bank intermediation, Payment systems, Financial stability, Offline payments |
| JEL: | E42 E58 G21 G28 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:343664 |
| By: | Henricot, Dorian; Sette, Enrico |
| Abstract: | This paper studies whether securitisation affects monetary policy transmission via banks. Using granular loan-level data from the euro area, we show that banks actively engaged in securitisation adjust credit supply more strongly in response to monetary policy shocks than a matched sample of non-securitising banks. This is because securitisation expands banks’ lending capacity, but by increasing reliance on investors whose required returns and risk appetite are more sensitive to monetary policy conditions. Following a monetary tightening, these investors demand higher compensation and reduce their exposure to securitised assets, leading securitising banks to contract lending more than other banks. Effects are stronger for loans more likely to be securitised — i.e., to safer borrowers with longer maturities — and are primarily driven by synthetic securitisations, which provide additional capital relief through Significant Risk Transfers. Firms exposed to securitising banks cannot fully substitute tighter loan supply through existing or new bank relationships. JEL Classification: G21, G23 |
| Keywords: | bank lending channel, monetary policy transmission, securitisation |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263289 |
| By: | Chakraborty, Lekha (National Institute of Public Finance and Policy); Prasanth C. (Christ (Deemed to be University), Bengaluru) |
| Abstract: | This paper investigates whether AI adoption has induced structural changes in the determinants of Indian sovereign bond yields across the maturity spectrum. The rapid global adoption of artificial intelligence (AI) in times of macroeconomic turmoil, particularly generative AI technologies since late 2022, has prompted intense debate about its potential macroeconomic consequences, including the measurement issues. Using monthly data from 2000 to 2025 and autoregressive distributed lag (ARDL) models augmented with an AI dummy variable and slope interactions on expected inflation and broad money (M3) growth, we identify significant regime shifts. Results indicate that in the post-AI period, longer-maturity yields exhibit markedly reduced sensitivity to expected inflation and money supply growth. This dampening is statistically significant, with interaction terms largely offsetting baseline positive elasticities. By contrast, short-term yields (91-day Treasury bills) show heightened inflation sensitivity in the AI era, while intermediate yields display mixed patterns. These findings are consistent with theoretical predictions that AI-driven productivity gains could lower equilibrium real interest rates and weaken traditional monetary transmission channels at the long end of the yield curve. For an emerging market like India, where inflation expectations have historically influenced borrowing costs, such changes may enhance monetary policy independence but complicate fiscal-monetary coordination. The paper contributes to the sparse empirical literature on AI’s financial market implications in emerging economies. Policy implications include the need for the Reserve Bank of India (RBI) to recalibrate forward guidance and liquidity operations in light of evolving yield dynamics. |
| Keywords: | Sovereign bond yields ; artificial intelligence ; ARDL bounds testing ; structural change ; monetary transmission ; India |
| JEL: | E43 E44 O33 G12 C22 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:npf:wpaper:26/450 |
| By: | Tatjana Dahlhaus |
| Abstract: | Climate change is becoming an increasingly important consideration for central banks because of its implications for economic stability, inflation, and output. In Canada, physical climate hazards such as wildfires, floods, and storms can destroy productive capacity, housing, and critical infrastructure while disrupting domestic and global supply chains. These shocks can reduce economic activity while simultaneously putting upward pressure on prices, creating challenging trade-offs for monetary policy. The challenge may be particularly acute in small open economies, where disaster impacts can also affect external demand and terms of trade. This note examines the implications of physical climate risks for monetary policy by reviewing evidence on how climate-related disasters affect output and inflation, with a focus on Canada, and by using a structural macroeconomic model to assess how more frequent and severe natural disasters could shape macroeconomic outcomes and the inflation-output trade-offs facing policymakers. |
| Keywords: | Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission; Structural challenges; Climate change |
| JEL: | C C6 C68 E E1 E12 E3 E31 E5 E52 F F4 F41 Q Q5 Q54 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-44 |
| By: | Guilherme Alves da Silva; Gergely Buda; Vasco M. Carvalho; Giancarlo Corsetti; João B. Duarte; Stephen Hansen; Afonso S. Moura; Alberto Ortiz; Tomasa Rodrigo; José V. Rodriguez Mora |
| Abstract: | We examine the transmission of monetary policy shocks to the macroeconomy at high frequency. To do so, we construct daily consumption and investment aggregates from bank transaction records and leverage administrative data on daily corporate sales and employment for Spain. We show that variables typically viewed as slow-moving, such as consumption and corporate sales, respond significantly within weeks. By contrast, aggregate employment and (monthly) consumer prices adjust only gradually. Disaggregating responses by sector, consumption category and supply-chain distance from final demand, we find that fast demand adjustment is led by downstream sectors closely tied to consumption—especially luxury goods and durables—while upstream sectors respond more slowly but more persistently, ultimately accounting for the contraction in aggregate activity. Excess inventories accumulate first in retail and wholesale trade and only later among upstream manufacturers, reconciling the rapid adjustment of sales with the slower response of production and employment. Finally, we show that time aggregation to the quarterly frequency obscures the timing of monetary policy transmission by shifting estimated responses to longer horizons, whereas weekly and monthly aggregation preserve the patterns observed at daily frequency. |
| Keywords: | event-study; monetary policy; economic activity; high-frequency data; local projections |
| JEL: | E31 E43 E44 E52 E58 |
| Date: | 2026–09–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:103794 |
| By: | Nicu Sprincean (Universitatea „Alexandru Ioan Cuza“) |
| Abstract: | This study examines the influence of green rhetoric from central banks on banking institutions. Using a sample of 437 publicly listed banks from 43 countries between 2000 and 2019, I find a positive correlation between an increased proportion of climate-related discourse in central bank speeches and a reduction in both systematic and systemic risk for banks. This may be attributed to improved transparent communication by central banks, which reduces individual and systemic risk for banks. This, in turn, supports the accountability and independence of central banks, which are negatively correlated with bank risk-taking behavior. In a similar vein, central banks that are most vocal about climate issues are also leading the way in adopting climate-related policies that facilitate the transition to net zero, which are positively associated with financial stability. The findings of this study have significant policy implications in the context of central bank's growing involvement in climate-related issues and their consequent shaping of market participants' perceptions. |
| URL: | https://d.repec.org/n?u=RePEc:boc:carp26:10 |
| By: | Rishabh Choudhary; Chetan Dave; Chetan Ghate |
| Abstract: | Managing rapid economic growth in India naturally brings into focus the role of inflation forecasts for monetary and fiscal policy making. We investigate whether any of a large set of forecasting models improves upon a univariate auto-regression in forecasting core consumer price inflation. Using a monthly panel of forty macroeconomic and financial indicators we estimate nine classes of models that range from an auto-regression to various factor models, quantile regressions and machine learning specifications. In doing so, we also account for inflation expectations and climate change variables. Our root mean square forecast error model comparison metric operates at horizons of one, three, six and twelve months. With respect to the conditional mean, no model produces a forecast error significantly below that of an auto-regression at any horizon over the full comparison sample. With respect to the conditional distribution, quantile regressions that include estimated factors reduce forecast loss relative to a specification without such factors at every quantile and horizon. Our approach is general enough to be applicable to forecasting core inflation in other emerging market economies. |
| Keywords: | inflation forecasting in EMEs, core inflation, diffusion index models, quantile regression, machine learning, inflation targeting |
| JEL: | C22 C53 E31 E37 O23 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-83 |
| By: | Edson Roberto Vieira (FACE/UFG); Vinícius Alencar Moreira (FACE/UFG); Antonio Marcos de Queiroz (FACE/UFG) |
| Abstract: | This study investigates the main determinants of Brazilian inflation from January 2010 to December 2022. An autoregressive distributed lag (ARDL) model was estimated, and a historical contextualization was carried out to examine the dynamics of these determinants during the period studied. The results suggest that the strength and direction of the impacts of the variables in explaining Brazilian inflation have been influenced by adverse factors in the recent period, such as the Covid-19 pandemic and government interference in fuel prices during the Dilma (2011-2015) and Bolsonaro (2018-2022) governments. |
| Keywords: | Inflation; exchange rate; oil; commodities; ARDL Model. |
| JEL: | E31 F41 C32 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ufb:wpaper:103 |
| By: | Heyran Aliyeva (Central Bank of Azerbaijan Republic); Ramiz Rahmanov (Central Bank of Azerbaijan Republic) |
| Abstract: | This paper examines the interaction between the fiscal and monetary policies in Azerbaijan using the VAR methodology and quarterly data for the period 2003Q1-2018Q4. The results of the Granger causality tests and impulse response analysis show that although both the monetary and fiscal policies demonstrate activity, the fiscal policy dominates over the monetary policy. In terms of the fiscal regime classification, we find the regime in the country to be non-Ricardian. |
| Keywords: | Fiscal policy, Monetary policy, Interaction, Policy regimes, Azerbaijan |
| JEL: | F31 F39 |
| URL: | https://d.repec.org/n?u=RePEc:aze:wpaper:1901 |
| By: | Fonseca, Luís; Martorana, Giulia; Schupp, Fabian; Trebbi, Giovanni |
| Abstract: | Theory suggests inflation risk premia are positive when supply shocks are expected to dominate demand shocks and negative otherwise. We measure these beliefs using demand and supply narratives derived from inflation news via Causality Extraction, which identifies causal relations between inflation and its drivers. Using narrative extracted from inflation news from the Financial Times for the Euro Area and the Wall Street Journal for the US, our key variable, NetDemand, measures the difference in articles attributing inflation to demand versus supply factors. Consistent with asset pricing theory, inflation risk premia are inversely related to NetDemand across maturities in both regions. This relationship holds even after controlling for the composite PMI and VIX, strengthens with risk aversion in the US and inflation volatility in the Euro Area, and is not subsumed by other measures of demand and supply contributions to inflation, views of professional forecasters, or narratives obtained from LLMs. JEL Classification: C53, E44, G12 |
| Keywords: | demand and supply, natural language processing, news media |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263288 |
| By: | Xudong An; Jan Harren; Saket Hegde; Mete Kilic; Rodney Ramcharan |
| Abstract: | This paper shows that monetary policy changes the risk composition of bank lending by altering the perceived tail risk of bank equity: when FOMC announcements compress the likelihood of costly low-equity states, banks originate riskier commercial and industrial loans. We measure bank-specific tail-risk shocks using equity put option returns and link them to originations in supervisory loan data. The shift toward riskier lending emerges after announcements and extends to lending within existing bank-borrower relationships. Stress-test capital and banks' own reports tying lending standards to risk tolerance corroborate the mechanism. Short-term compensation, earnings pressure, and competition amplify this risk-taking channel. |
| Keywords: | Fed put, risk-taking channel, credit policy, monetary policy, bank equity tail risk |
| JEL: | E52 G12 G21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12980 |
| By: | Madiha Riaz (Pakistan Institute of Development Economics) |
| Abstract: | This knowledge brief examines the ongoing structural shift in the global monetary and energy-pricing system from the long-standing U.S. dollar-based petrodollar regime toward the emerging Petroyuan framework. Drawing on historical analysis, theoretical insights, and empirical data from 1970 to 2026, it explores how oil pricing shapes global liquidity, inflation, exchange rates, capital flows, and financial stability. The petrodollar system historically reinforced U.S. dollar dominance and enabled the large-scale recycling of oil revenues into global financial markets. Recent structural changes - geopolitical fragmentation, China's rise, Western sanctions, and diversification of energy trade - have begun to erode these relationships. The emerging Petroyuan introduces a more multipolar monetary landscape. For oil-importing economies such as Pakistan, currency diversification may offer marginal but meaningful benefits, yet external vulnerabilities remain binding constraints. Pakistan's structural deficit with China - $9.5 billion in imports versus $1.2 billion in exports in H1 FY2025-26 - combined with $29-30 billion in Chinese bilateral debt, creates a paradoxical yet compelling case for a calibrated yuan-based settlement that could reduce dollar dependence without deepening single-counterparty risk. The brief concludes that the transition will be gradual and potentially destabilizing without coordinated domestic and multilateral policy responses. |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:pid:kbrief:2026:152 |
| By: | Burak Deniz; Tarik Alperen Er; Ibrahim Yarba |
| Abstract: | This study investigates how banks' foreign exchange (FX) position affects their lending behavior following an exchange rate shock, and the resulting effects on firms' real economic activities. Utilizing bank-firm level credit registry data along with financial statements of all incorporated firms, we show that banks with higher exposure to FX risk cut their lending and shorten their loan maturities compared to banks with lower exposure. Our further analyses indicate that banks transmit the shock they experience not only to the firms with FX risk but also to the firms with no direct FX risk. Moreover, we find that firms could not avoid the lending contraction by switching to low-exposure banks. This is evident only for SMEs, and not for large firms. We also document real effects, stemming from the banks’ role in propagation of FX shock. Consistent with the contraction in bank lending, SMEs with high-exposure banks exhibited a comparatively negative performance in their net sales, employment, and investment. Our findings underscore the importance of macroprudential policies that monitor and reduce banks’ currency mismatches, thereby mitigating the adverse effects of currency shocks on the real economy. They also highlight the importance of incorporating balance-sheet effects stemming from foreign exchange risk into the conduct of monetary policy. |
| Keywords: | Bank lending, Foreign exchange risks, Exchange rate shock, SME |
| JEL: | E44 F31 G21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2617 |
| By: | Donato Ceci (Bank of Italy); Francesco Corsello (Bank of Italy); Marco Fruzzetti (Bank of Italy); Matteo Izzo (Bank of Italy) |
| Abstract: | We study the drivers of the post-pandemic inflation episode in Italy and its implications for households' consumption baskets. Using granular monthly data on prices and quantities consumed, we disentangle supply from demand-driven inflationary pressures across expenditure categories. We show that the rise in inflation since 2021 was initially driven mainly by supply-side shocks, reflecting bottlenecks in global value chains and the exceptional increase in energy prices, while demand-side factors have gained importance since 2023. The inflationary shock affected consumption categories unevenly, with particularly large increases in the relative prices of essential items such as energy, food and housing-related expenditure. Since these goods are characterized by low price and income elasticities, households reduced their consumption only marginally and absorbed the shock by allocating a higher nominal share of expenditure to essential goods. As a result, the nominal weight of necessary items in the consumption basket increased persistently, while the adjustment of the basket in real terms and the reallocation towards discretionary components took place only gradually. |
| Keywords: | business cycle, inflation dynamics, elasticities |
| JEL: | E31 E32 E52 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_1053_26 |
| By: | Laurence M. Ball (Johns Hopkins University); Daniel Leigh (International Monetary Fund); Prachi Mishra (Ashoka University) |
| Abstract: | Why did US inflation rise over 2021-22 and why has it retreated since then? Ball, Leigh, and Mishra (2022), writing near the inflation peak, explained the rise with a framework in which inflation depends on three factors: long-term expectations; the tightness of the labor market as measured by the vacancy-to-unemployment (V/U) ratio; and large changes in relative prices in particular industries such as energy and autos. This paper finds that the same framework explains the retreat in inflation since our earlier work. |
| Date: | 2026–09–18 |
| URL: | https://d.repec.org/n?u=RePEc:ash:wpaper:169 |
| By: | Guillermo Calvo; Emilio Colombi; Fabrizio Coricelli; Pablo Ottonello |
| Abstract: | We document the macroeconomic patterns that characterize labor market recovery from financial crises. Using a sample of postwar recession episodes from around the world, we show that financial crises are typically followed by jobless recoveries, with a sluggish recovery in employment relative to output. A departure from this empirical regularity occurs in emerging-market crises with high inflation, which feature strong employment recoveries but persistent declines in real wages and result in “wageless recoveries.” Our findings highlight the central role of financial components in labor input costs and nominal wage rigidities in shaping labor market dynamics following economic crises. |
| Keywords: | Monetary policy; Inflation dynamics and pressures; Real economy and forecasting |
| JEL: | E E2 E3 E31 E4 E44 F F3 F32 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-31 |
| By: | Donato Ceci (Bank of Italy); Claudia Pacella (Bank of Italy); Fabrizio Venditti (Bank of Italy) |
| Abstract: | This paper examines the unexpectedly weak consumption dynamics of euro-area households following the COVID-19 crisis. Despite a recovery in disposable income during the 2022 reopening and the government measures mitigating the energy shock after Russia's invasion of Ukraine, the saving rate rose and remained high through 2025. We show that tighter monetary policy dampened consumption via higher interest rates, while inflation eroded real financial wealth, limiting spending further. Persistently weak consumer confidence also weighed on expenditure. However, even after taking account of these factors, the increase in savings remains unusually large by historical standards. We discuss two possible explanations: heightened pessimism about future income due to the exceptional sequence of shocks, and the disproportionate contribution of wealthier households to aggregate savings, as suggested by micro-level evidence. |
| Keywords: | consumption, savings, energy, monetary policy |
| JEL: | C11 C32 C53 C54 E21 E31 E37 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_1047_26 |
| By: | Itskhoki, Oleg; Mukhin, Dmitry |
| Abstract: | Tariffs, trade wars, and financial sanctions have become a common feature of the global economy. In response, many governments consider departing from the Washington Consensus and adding unconventional tools such as foreign exchange interventions, capital controls, and financial repression. This paper asks when, and how, financial repression can be used in the currency market, and how it compares with foreign exchange (FX) interventions and conventional monetary and fiscal policy. We show that although the use of financial repression is welfare-reducing in response to international shocks, even when FX interventions are fully constrained, it can be effectively used for redistributive and fiscal reasons. Greater international financial isolation makes financial repression more potent in extracting fiscal surplus from the private sector. |
| Keywords: | currency market;financial repression;financial sanctions;official reserves |
| JEL: | F3 G3 L81 |
| Date: | 2026–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:140876 |
| By: | Matthew Read |
| Abstract: | Sign restrictions on the slopes of supply and demand curves are often used to identify historical decompositions in structural vector autoregressions. I show that the identifying power of these restrictions depends on both reduced-form parameters and realised forecast errors. Consequently, unlike many other structural objects, the strength of identification cannot be assessed from reduced-form parameters alone. Empirically, identified sets for historical decompositions of US inflation are typically largely uninformative, both in aggregate and in most expenditure categories. Existing inflation decompositions are therefore sensitive to auxiliary assumptions used to select among observationally equivalent models. |
| Keywords: | historical decomposition, set identification, sign restrictions, structural vector autoregression |
| JEL: | C32 E31 E32 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-82 |
| By: | Louis-Alexandre Bayol (Banque de France) |
| Abstract: | Using Google Search Volumes (GSV), I develop the GSV-based Digitization of Payments Index (GSVDPI), a multidimensional metric built via machine and deep learning models, to track the evolution of digital payments. This index allows for quantifying the changes in the use of digital payment instruments (card, contactless, mobile, and others) in France and comparison with other European countries like Germany, Italy, and Spain. Compared with standard payment digitization statistics published by institutions like the European Central Bank (ECB), the GSVDPI offers distinctly valuable and real-time insights. Consequently, the GSVDPI accounts for the complex dynamics and policy expectations of the digitization process, which are typically overlooked by univariate metrics. I contribute to the literature by identifying the economic mechanisms driving digital payment adoption and examining its macroeconomic effects through a cross-country analysis. I show that incorporating the GSVDPI into the explanatory variables of a multivariate cash demand framework significantly enhances model performance, thereby offering deeper insights into future payment trends. |
| URL: | https://d.repec.org/n?u=RePEc:boc:carp26:11 |
| By: | Drechsel, Thomas; McLeay, Michael; Tenreyro, Silvana; Turri, Enrico |
| Abstract: | We show that the optimal monetary and exchange rate frameworks depend critically on the economy’s commodity exposure. We develop a flexible but tractable model economy with commodity exports and imports, in which international financial conditions depend on the commodity cycle. Stabilizing domestic prices is optimal for commodity exporters, in line with standard open-economy policy prescriptions. But when economies import commodities as production inputs, optimal policy largely ‘looks through’ their direct and indirect effects on domestic prices. In emerging economies, where financial conditions are closely related to commodity cycles, trade-offs are starker and limited credibility may make implementing optimal policy challenging. |
| Keywords: | monetary policy;exchange rates;inflation targeting;commodity prices;small open economy |
| JEL: | E31 E52 E58 F41 Q30 |
| Date: | 2026–09–07 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:140771 |
| By: | Juan Diego Chavarría Mejía (Department of Economic Research, Central Bank of Costa Rica); Fabio Gómez-Rodríguez (Department of Economic Research, Central Bank of Costa Rica); Claudio Mora-García (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | This article proposes a structural vector autoregression (SVAR) to study the forces driving inflation in Costa Rica, a small open economy. We estimate the model using Bayesian methods and combine several identification strategies. The resulting historical decomposition attributes inflation dynamics to structural drivers, including supply, demand, exchange-rate, and monetary-policy shocks, classified according to their global or domestic origin. The historical decomposition attributes the inflation surge from 2021Q4 to 2023Q1 primarily to global factors. The subsequent disinflation from 2023Q2 to 2024Q1 reflected both a decline in global inflationary pressures and additional downward pressure from domestic factors. Domestic monetary-policy shocks contributed little to realized inflation, averaging about +0.07 percentage points per quarter. Long-run expectations remained considerably more stable than headline inflation, while the model implied inflation target displayed a gradual downward drift and its associated shock contributed to the initial disinflation. Taken together, these results identify relative resilience, but not perfect alignment, of the perceived nominal anchor and highlight the implicit inflation target as a useful indicator for evaluating Costa Rica's inflation-targeting regime. ***Resumen: Este artículo propone un modelo estructural de vectores autorregresivos (SVAR) para estudiar las fuerzas que impulsan la inflación en Costa Rica, una economía pequeña y abierta. Estimamos el modelo mediante métodos bayesianos y combinamos varias estrategias de identificación. La descomposición histórica resultante atribuye la dinámica de la inflación a distintos determinantes estructurales, incluidos choques de oferta, demanda, tipo de cambio y política monetaria, clasificados según su origen global o doméstico. La descomposición histórica atribuye el aumento de la inflación entre el cuarto trimestre de 2021 y el primer trimestre de 2023 principalmente a factores globales. La posterior desinflación, entre el segundo trimestre de 2023 y el primer trimestre de 2024, reflejó tanto una disminución de las presiones inflacionarias globales como una presión adicional a la baja proveniente de factores domésticos. Los choques domésticos de política monetaria contribuyeron poco a la inflación observada, con un promedio de alrededor de +0, 07 puntos porcentuales por trimestre. Las expectativas de largo plazo se mantuvieron considerablemente más estables que la inflación general, mientras que la meta de inflación implícita en el modelo mostró una tendencia gradual a la baja y el choque asociado a esta contribuyó a la desinflación inicial. En conjunto, estos resultados muestran una relativa resiliencia, aunque no una alineación perfecta, del ancla nominal percibida y destacan la meta de inflación implícita como un indicador útil para evaluar el régimen de metas de inflación de Costa Rica. |
| Keywords: | monetary policy; inflation targeting; implicit target; expectations anchoring; small open economy; Bayesian SVAR; sign restrictions; block exogeneity; historical decomposition; Costa Rica; política monetaria; metas de inflación; meta implícita; anclaje de expectativas; economía pequeña y abierta; SVAR bayesiano; restricciones de signo; exogeneidad por bloques; descomposición histórica |
| JEL: | E31 E52 F41 C32 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:apk:doctra:2607 |
| By: | Hellmers, Emilio; Henry, Jérôme; Santone, Arianna Pilar |
| Abstract: | This paper reviews system-wide liquidity stress-testing (SLST) frameworks in the European Union and illustrates the impact of a common aggregate liquidity shock on the EU financial system using a range of modelling approaches. Motivated by recent episodes of market turmoil, including the COVID-19 crisis, the 2022 energy shock and the 2023 banking stress, the analysis focuses on the propagation of liquidity stress across financial sectors and institutions. The paper combines a survey of SLST practices among EU authorities, a mapping of cross-sectoral financial interconnections in the euro area, and stress-testing simulations based on jurisdiction-specific models, an ESRB cross-sectoral balance sheet tool and the ECB’s system-wide stress-testing framework. The results suggest that the financial system remains broadly resilient to a severe aggregate liquidity shock over a 30-day horizon, with net outflows ranging from 0.5% to 0.7% of total financial assets. However, second-round effects, including fire sales, mark-to-market losses and behavioural responses, can significantly amplify the initial shock. The findings highlight the importance of financial interconnections, the role of non-bank financial intermediaries in shock transmission and the stabilising effect of central bank interventions. This paper also provides a stocktake of existing SLST practices and discusses priorities for the further development of SLST in Europe. JEL Classification: C63, G01, G21, G23, G28, E58 |
| Keywords: | contagion, financial interconnectedness, financial stability, fire sales, liquidity stress testing, macroprudential policy, non-bank financial intermediaries, stress testing, system-wide liquidity stress testing, systemic liquidity risk |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:srk:srkops:202631 |
| By: | Arvind Krishnamurthy; Miguel Chumbo |
| Abstract: | We measure the convenience yield on dollar safe assets over the last 5 years to answer this question. We find that within the set of U.S. dollar assets, safe asset convenience yields are about the same in 2025 as they were in 2019, and these levels are expected to persist for the next decade. Across the globe, the richness of U.S. dollar safe assets, particularly Treasurys, compared to the safe assets of other currencies have fallen considerably. There is also evidence that the U.S. dollar repo is currently the highest convenience dollar safe asset. In short, our answer is, no for domestic liquidity purposes, and yes for global liquidity purposes. |
| JEL: | G12 G15 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35742 |
| By: | Vugar Rahimov (Central Bank of Azerbaijan Republic); Nijat Guliyev (Central Bank of Azerbaijan Republic); Vugar Ahmadov (Central Bank of Azerbaijan Republic) |
| Abstract: | In this study, we build and use a factor-augmented vector autoregressive (FAVAR) model to forecast inflation and output in Azerbaijan. The FAVAR model is particularly effective in data-rich environments, alleviating the curse of dimensionality of the standard VAR model and handling omitted variable bias. Using 77 variables for factor extraction and quarterly data for the period 2003 to 2018, we build several multivariate models, including a FAVAR model, and compare their performance with that of a benchmark univariate model. Our findings show that almost all of the multivariate models underperform in comparison with the univariate model. This result is in line with the literature, which finds that simple models are better forecasters of some macroeconomic variables, especially inflation. We acknowledge that the results might be affected by the relatively short length of the sample period and existence of irregularities in the data. |
| Keywords: | Ä°nflation, output, principal components, forecasting ability, FAVAR, Azerbaijan |
| JEL: | C53 E3 E17 E31 E37 |
| URL: | https://d.repec.org/n?u=RePEc:aze:wpaper:1903 |
| By: | Behn, Markus; Forletta, Marco; Reghezza, Alessio |
| Abstract: | We construct a novel bank-level index that quantifies fragmentation in the capital buffer framework faced by euro area banks. Defined at quarterly frequency, it measures fragmentation by looking at the number of simultaneously active buffers, their geographical dispersion, and the frequency of buffer rate changes within the preceding year. The index is orthogonalised with respect to the level of capital requirements, bank size, and the financial cycle, thus controlling for these factors when measuring fragmentation as defined above. We then show that a one standard deviation increase in the index is associated with about 36 basis points higher capital headroom and around 50 basis points lower corporate lending growth within existing bank-firm relationships. We interpret these results as suggestive evidence that banks facing more fragmented buffer requirements retain extra capital and adjust lending more cautiously to account for higher uncertainty with respect to future adjustments in buffer requirements. JEL Classification: E5, E51, G18, G21, G28 |
| Keywords: | banking, capital buffers, credit supply, financial regulation |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263287 |
| By: | Valerio Astuti; Adriano Baldeschi; Luca Bastianelli; Giuseppe Bruno; Riccardo Russo; Ajit Desai; Danica Marsden |
| Abstract: | In McMahon et al. (2024) the authors demonstrated the effectiveness of a hybrid quantum solver in improving the liquidity efficiency of Canada’s high-value payments system (HVPS), altering the payment queue in order to minimize liquidity requirements. In this work, we apply a similar technique to the Italian segment of TARGET2, the Eurosystem’s HVPS, using the Constrained Quadratic Model (CQM) solver provided by D-Wave. This application achieves improvements in optimizing payment batches of size 70 and 140, showing daily average liquidity savings of respectively EUR 23 million and EUR 38 million over a 35 days sample. In addition we clarify the causes and possible extent of the liquidity savings realized. Introducing a machine learning framework to identify batch features that enhance liquidity savings, we find that batch optimizability increases with the number of participants acting as both senders and receivers, as well as the number of unique receivers within the batch. Finally we benchmark the CQM solver results against those obtained using a simulated annealing algorithm (SAA) under the same time constraints, finding comparable liquidity savings for batch sizes of 70 and 140 payments. The SAA is extended to handle batch sizes of up to 700 payments, a scale that is challenging for current quantum hardware, demonstrating a more than tenfold increase in liquidity savings. |
| Keywords: | Models and tools; Econometric, statistical and computational methods; Money and payments; Payment and financial market infrastructures |
| JEL: | C C6 C61 C63 C8 C83 E E4 E42 E5 E58 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-32 |
| By: | Xi Chen |
| Abstract: | Under the classical gold standard, historians have long debated what guided the Bank of England's adjustments to Bank Rate: whether policy followed a mechanical gold-standard rule or discretion when City or exchange conditions required it, and whether domestic money-market stability or external convertibility carried greater weight. This paper revisits those questions with a London-specific monthly panel, 1870-1913, jointly testing ten domestic and external indicators the Court watched when setting the published minimum rate. The findings fit neither a single frozen channel nor unstructured ad hoc policy. Instead, the Bank appears to have drawn repeatedly on a multivariate information set-trade settlement, gold movements, City asset prices, bill-market conditions, and episodic convertibility pressure-with state-dependent weights across subperiods. In the confirmatory specification, exports, gold flow, and industrial share prices carry the clearest joint forecasting content for changes in Bank Rate. Gold flow forecasts rate changes even when reserve stock does not, separating bullion settlement from balance-sheet position. Bill-market and convertibility pressures also carry incremental forecasting content in the multivariate specification, though their prominence depends on how domestic and external indicators are modeled together. The overall pattern is most consistent with systematic discretion under the classical gold standard. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.10544 |
| By: | Marco Grotteria (London Business School); Alex Kontoghiorghes (Bank of England) |
| Abstract: | Does the price of synthetic dollar funding depend on which dealer intermediates the trade? We answer this question by comparing FX forwards in the same dollar currency pair, half-hour, and maturity bucket, which removes the common forward curve and isolates dealer-specific pricing. These dealer-specific prices vary substantially: their standard deviation is about 4 basis points per year, and the large dispersion is present both across dealers at a point in time and over time for a given dealer. Dealers charge 2.5 basis points more for buying dollars forward than for selling them, and the gap widens to 11.8 basis points at maturities under one month. The asymmetry survives controls for client-dealer relationships and trade characteristics. Differences in funding costs account for little of the observed price dispersion. Synthetic dollar funding therefore has many prices, reflecting dealer clientele and pricing power more than underlying funding conditions. |
| Keywords: | FX forwards;dealer market power;covered interest parity;synthetic dollar funding;funding constraints;EMIR |
| JEL: | E43 E52 G12 G15 G21 |
| Date: | 2026–09–18 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023631 |
| By: | Antonio Diez de los Rios |
| Abstract: | We show that the parameters of a broad class of portfolio-balance models can be recovered from estimates of Gaussian dynamic term structure models (GDTSMs) using a two-step estimator that bypasses the fixed-point problem that characterizes portfolio balance models. Specifically, we develop a novel canonical representation of bond supply in terms of factor-mimicking portfolios, whose returns replicate the structural shocks to the pricing factors. We identify these structural shocks by assuming that each shock corresponds to a distinct, mutually exclusive dimension of bond-supply variation. Using U.S. Treasury yields and macroeconomic data, we show the recovered shocks admit interpretations as hedging-risk-premium, risk-bearing-capacity, and monetary policy shocks. |
| Keywords: | Financial markets and funds management; Funds management; Models and tools; Econometric, statistical and computational methods |
| JEL: | E E4 E43 E44 G G1 G12 H H6 H63 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-33 |
| By: | Angelika Welte; Stephen Wild; Patrick Fogaing kouamo |
| Abstract: | The Bank of Canada has a mandate to make adequate arrangements for the supply of bank notes as required for circulation in Canada. Therefore, understanding access to cash for small and medium-sized businesses (SMBs) is essential. In this study, we measure SMBs’ access to cash using the driving distance to financial institution (FI) branches. First, we measure the distance between SMBs and their nearest FI branch. The average driving distance to the nearest branch ranges from 1.3 km in large urban census subdivisions (CSDs) to 6.9 km in rural CSDs. In addition, 84% of SMBs are within a 5 km drive of the nearest branch. Second, we use a sample of 651 SMBs from the 2023 Merchant Acceptance Survey to examine SMBs’ banking choices. We compute driving distance and driving time from each SMB to the nearest branch and to a branch of its chosen financial institution. The average distance to the nearest branch is 2 km, while the average distance to the chosen branch is 6 km. Fewer than one-quarter of SMBs bank with the financial institution that operates the nearest branch. Rural SMBs are more likely than urban SMBs to bank with the financial institution that operates the nearest branch. |
| Keywords: | Money and payments; Cash and bank notes; Retail payments |
| JEL: | D D8 D83 E E4 E41 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-41 |
| By: | Michael King (Department of Economics, Trinity College Dublin); Paolina Medina (University of Houston); Roland Umanan (Department of Economics, Trinity College Dublin, University of Dublin); Ray Charles Howard (University of Virginia) |
| Abstract: | Cash remains a dominant payment method in many markets despite the widespread availability of digital alternatives such as debit cards, creating costs for consumers, firms, and governments. This research examines which interventions most effectively increase debit‐card use, how effectiveness varies with incentive form and amount, and whether average effects conceal meaningful differences across customers. A large‐scale randomized field experiment with approximately 1.5 million customers of a Mexican bank tests cash and gift‐card incentives of 60 and 300 MXN, repeated benefit‐focused nudges, and combinations of nudges with cash incentives. Estimated treatment effects on debit‐card transaction frequency and spending range from approximately 0% to 5%, with larger incentives producing less‐than‐proportional gains in transaction frequency and incentive‐form effects varying across outcomes and incentive amounts. Causal‐forest estimates show substantial treatment‐effect heterogeneity: for example, the effect of the 300 MXN cash incentive is concentrated among customers with relatively high baseline debit‐card use, while some near‐zero average effects mask offsetting positive and negative subgroup responses. Nudges have small nonsignificant effects alone and no detectable incremental effect when combined with cash incentives. These findings show that effective payment‐activation strategies depend not only on intervention design but also on which customers receive them. |
| Keywords: | Financial Inclusion, Debit Cards, Cash and In-kind Incentives, Nudges, Spillover Effects |
| JEL: | C93 D12 D14 D18 G21 G51 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep1826 |