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on Monetary Economics |
| By: | Koundouros, Andreas; Nautz, Dieter |
| Abstract: | Inflation misperceptions of consumers complicate the conduct and communication of monetary policy and can undermine the credibility of the central bank's inflation target. This paper empirically investigates the determinants of inflation misperceptions by extending a rational inattention model to incorporate distorted signals from salient prices. We estimate the model using rich micro-level panel data for the euro area drawn from the ECB Consumer Expectations Survey. We find that consumers misperceive inflation both because they are inattentive to inflation and because they overweight food price inflation relative to headline inflation. In contrast, distortions stemming from energy prices are not significant. Financially literate consumers exhibit lower inflation misperceptions and greater attention to inflation, while women have more pronounced inflation misperceptions and place larger weights on salient prices. Finally, we show that attention to inflation is higher and misperceptions are lower in response to inflationary than to disinflationary news. |
| Keywords: | Inflation misperceptions, rational inattention, salient prices, inflationary news, financial literacy, gender differences, ECB Consumer Expectations Survey |
| JEL: | E31 E58 E71 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:fubsbe:343039 |
| By: | Hristov, Nikolay; Menno, Dominik |
| Abstract: | We employ a medium-scale New Keynesian model with banks and endogenous financial panics (system-wide bank runs) to study whether and how (non-zero) average trend inflation affects the risk of bank runs. Consistent with descriptive empirical evidence for a panel of advanced economies, we find that trend inflation significantly affects the probability of banking panics - this probability more than doubles when annual trend inflation rises from 0% to 6% p.a. The incidence of a banking panic mainly depends on the magnitude of the associated decline in asset prices. With higher trend inflation this decline is stronger. The presence of an occasionally binding zero lower bound increases the likelihood of bank runs, but only for low levels of long-run inflation. Disinflations engineered by the central bank are associated with significantly higher bank-run probability in the short- run, especially when a sharp "cold turkey" disinflation is pursued. Finally, we discuss how trend inflation affects some of the trade-offs faced by monetary and macroprudential policy. |
| Keywords: | Long-run inflation, bank runs, financial panics, crisis probability |
| JEL: | E12 E23 E31 E32 E52 E44 G01 G21 G33 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:343042 |
| By: | Alexander Goetz; Lucas Kyriacou; Florence Miguet Heimlicher; Stefanie Siegrist |
| Abstract: | This paper investigates the impact of monetary policy announcements (MPAs) on household inflation expectations using microdata from the Swiss Consumer Sentiment Survey. Employing an event study approach, we reveal an asymmetric response: while policy rate hikes or decisions to keep rates constant reduce household inflation expectations, rate cuts fail to elicit a reaction. The effect is particularly robust for short-term expectations, with a much less clear-cut influence on long-term expectations. Households across the expectation distribution - both moderate and extreme - react to announcements, indicating a broad impact. We find that household reactions are driven primarily by the anticipated component of policy rate changes, whereas surprising moves tend to be interpreted as signals of new information regarding inflationary pressure. Finally, we report that demographic heterogeneity matters: the effect of MPAs is driven by German-speaking households and tertiary-educated individuals, while others show no consistent response, underscoring the importance of targeted communication strategies for effective monetary policy transmission. |
| Keywords: | Household inflation expectations, Household heterogeneity, Event study, Monetary policy, Central bank communication, Reaction to news |
| JEL: | E31 E52 E71 D84 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-11 |
| By: | Martin Summer (Oesterreichische Nationalbank, Economic Studies Division) |
| Abstract: | Would widely adopted stablecoins affect the price level, and through which channels? We analyse this question in the monetary general-equilibrium framework of Dubey and Geanakoplos, in which payment capacity—money, bank credit and the spendable share of government bonds—determines nominal outcomes. Stablecoins backed by government debt open a channel of inflationary finance: the existing bond stock becomes spendable (a stock effect) and newly issued debt arrives spendable (a flow effect), with the price level rising in the payment capacity so created and in the breadth of adoption. Monetary policy can offset the rise, but only at the cost of suppressing the trade that bank credit finances. Beyond these bounded effects, current regulatory design does not close an escalation path on which stablecoins become a competing outside money, putting nominal determinacy at risk. Whether these effects materialise is largely a policy choice: they require adoption in ordinary payments, which regulation currently shapes. |
| Keywords: | stablecoins, inflation, public and private money, monetary architecture |
| JEL: | E31 E42 D52 E44 G21 G28 |
| Date: | 2026–09–03 |
| URL: | https://d.repec.org/n?u=RePEc:onb:oenbwp:280 |
| By: | Christopher Ashwell; Aleksandar Vasilev |
| Abstract: | This paper studies the relationship between unconventional monetary policy and the wider macroeconomic variables in the UK. Using VAR and subsequent impulse response analysis, the impact of shocks to bond yields, which are used as a representation of unconventional monetary policy, the impact of unconventional monetary policy is assessed. The model used includes variables of 5- and 10-year bond yields, and variables representing GDP per capita, inflation, interest rates and net exports. The results of the impulse response analysis show the effectiveness of unconventional monetary policy in both an expansionary- and a contractionary use. The response to 5-year yield increases result in positive GDP per capita growth whereas an increase in 10-year yields result in a negative effect on GDP per capita. The results on inflation for increases in both bond yield types result in low levels of inflation. However, both bonds predict periods of deflation, especially the 10-year bond. The results of 5-year yield increases are in line with the literature and predict net exports to fall. However, the increase in 10-year yields has predicted periods of increased net exports. Overall, the empirical results suggest unconventional monetary policy is an effective tool for central banks. |
| Keywords: | Unconventional Monetary Policy, Yield Curve, Quantitative Easing, Forward Guidance. |
| JEL: | C32 E43 E52 E58 |
| Date: | 2026–01–06 |
| URL: | https://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2026_06 |
| By: | Pablo D. Azar; Maryam Farboodi; Nish Sinha |
| Abstract: | We study how stablecoins impact global capital flows by constructing a novel wallet-level dataset linking geotagged Ethereum Name Service registrations to stablecoin transactions around banking restrictions, currency crises, sanctions, and monetary disruptions. We find that crisis-country wallets experience significant increases in USD stablecoin inflows and receipt activity during crisis weeks. Motivated by this evidence, we develop a small-open-economy New Keynesian model in which household adoption of programmable stablecoins weakens the government’s enforcement technology for capital controls by making capital mobility endogenous. The empirical evidence validates the model’s central assumption that flight pressure increases stablecoin adoption. Stablecoins therefore tighten the Mundell–Fleming trilemma by reducing the government’s ability to sustain independent monetary policy under a fixed exchange-rate regime. |
| Keywords: | Mundell–Fleming trilemma; capital controls; blockchain; stablecoins; financial infrastructure |
| JEL: | F32 F33 F38 E58 G28 |
| Date: | 2026–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103702 |
| By: | Naveed Javed; James Morley |
| Abstract: | We consider empirically how fiscal stance influences the potency of monetary policy. New Zealand provides a compelling laboratory to study this form of monetary-fiscal interaction given its stable history of inflation targeting and substantial changes in its fiscal stance due to global forces acting on a small open economy (SOE). A simulation-based Bayesian Local Projection (BLP) framework is developed to estimate the macroeconomic effects of a narrative measure of monetary policy shocks when there are many possible omitted variables, especially in this SOE setting. Our BLP approach incorporates a novel shape prior on impulse response functions to help manage the substantial bias-efficiency tradeoffs given the relatively small effective sample sizes when considering nonlinearities inherent in policy interactions. For a smooth-transition regime-switching model with an endogenously-estimated threshold parameter, we find that monetary policy is clearly more potent, especially in terms of out-put and inflation, when there is a high degree of fiscal consolidation. Consistent with the fiscal theory of the price level, our results for a more general model that also allows for sign asymmetries suggest the effects of expansionary versus contractionary monetary policy shocks on output, inflation, and the exchange rate are actually reasonably symmetric, implying that the potency of monetary policy is more related to monetary-fiscal dominance than coordination. |
| Keywords: | monetary-fiscal interactions, Bayesian local projections, fiscal theory of the price level |
| JEL: | C32 E52 E58 E63 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-75 |
| By: | Ambrogio Cesa-Bianchi (Bank of England); Andrea Ferrero (University of Oxford); Shangshang Li (University of Liverpool) |
| Abstract: | In response to an unanticipated monetary policy tightening in the US, the demand/financial channel of the international transmission of the shock dominates over the expenditure‑switching effect. For a typical small open economy with flexible exchange rates, credit spreads increase, while real GDP and exports fall despite a depreciation of the local currency. In an estimated two‑country open economy model, financial and pricing frictions that assign a prominent role to the global reserve currency are key to account for the empirical evidence. Model‑based counterfactual policy analysis suggests that, even in the presence of a global financial cycle, the exchange rate regime matters. The volatility of output and inflation is an increasing function of the weight associated to the stabilisation of the exchange rate in the monetary policy rule. The introduction of countercyclical policy instruments that target either domestic credit or capital flows dampens economic fluctuations. In a fixed exchange rate regime, either instrument can limit the negative spillovers of foreign monetary policy shocks on real economic activity, but not on inflation. |
| Keywords: | Exchange rates flexibility;currency invoicing;dilemma;expenditure‑switching;foreign exchange liabilities;global financial cycle;trilemma. |
| JEL: | E44 E58 F32 F42 |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023263 |
| By: | Mathias Drehmann; Xuewen Fu |
| Abstract: | How far can central banks shrink their balance sheets? The answer sets the limits to quantitative tightening (QT), and depends critically on the demand for reserves and whether the drivers widely thought to have increased it over the past decade actually do so. We assess the impact of three such drivers: post-crisis liquidity regulation, monetization frictions, and fragmented interbank markets. Building on the canonical Poole (1968) model, we show that these drivers tend to reshape, rather than horizontally shift, reserve demand. Liquidity regulation, such as the Liquidity Coverage Ratio (LCR), does not raise reserve demand when banks can substitute reserves with other high-quality liquid assets (HQLA). Over some regions of the curve, the LCR even reduces demand. Frictions in monetizing non-reserve HQLA into reserves change both the slope of the reserve demand curve and the satiation point when demand flattens. With fragmented interbank markets, the mapping from aggregate reserve supply to the interbank rate becomes non-unique. In this case, the effective reserve demand curve also shifts outward on impact of negative supply shocks, and the more so, the greater the initial level of supply. These findings have direct implications for balance sheet normalization, especially for central banks operating floor or ample reserves frameworks near the satiation point of the reserve demand curve. |
| Keywords: | reserve demand, balance sheet normalisation, Liquidity Coverage Ratio, interbank market fragmentation, monetary policy implementation |
| JEL: | E41 E43 E52 E58 G21 G28 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1372 |
| By: | Bauer, Michael (Federal Reserve Bank of San Francisco and CEPR); Czarnota, Alexander (Monetary Policy Department, Central Bank of Sweden); Klein, Mathias (Research Department, Central Bank of Sweden) |
| Abstract: | Firm heterogeneity in financial constraints is a quantitatively important driver of how monetary policy transmits to inflation. Using detailed microdata on Swedish public and private firms, and high-frequency monetary policy surprises around Riksbank announcements, we document that smaller, financially constrained firms adjust prices significantly less than larger firms in response to changes in monetary policy. This heterogeneous price response materially dampens the aggregate PPI inflation response to monetary policy. Models of customer markets and financial frictions can explain our findings: because the external finance premium rises after a monetary contraction, constrained firms cut prices less to preserve cash flows, sacrificing future market share. Additional evidence on heterogeneous sales, debt, marginal cost, and markup responses further supports this channel. We consider several alternative explanations, including differences in price adjustments, working capital, market share, and export share, but these cannot rationalize our main heterogeneity result. |
| Keywords: | inflation; monetary transmission; firm heterogeneity; financial frictions |
| JEL: | E31 E32 E52 G32 L11 |
| Date: | 2026–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0468 |
| By: | Linda S. Goldberg; Oliver Zain Hannaoui; Sneha Parthasarathy |
| Abstract: | The dollar’s share of global official foreign exchange reserves fell from 64 percent in 2015 to 56 percent in 2025. This downward trajectory is sometimes read as evidence that the dollar’s role in international financial markets is eroding. However, aggregate statistics obscure the composition of changes occurring at the country level. In this post, we show that the aggregate decline is not a systematic global shift away from dollar assets. Rather, the aggregate decline reflects the actions of a handful of large reserve holders, changing either their currency preferences or the size of their reserve portfolio. From the perspective of the cross section of countries holding dollar assets, the dollar’s status in official portfolios is largely intact. |
| Keywords: | global foreign exchange reserves; global reserves; dollar status; Global FX reserves |
| JEL: | F3 F5 |
| Date: | 2026–09–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103729 |
| By: | Abdellah Belbouli (Sultan Moulay Slimane University, Higher School of Technology, Biology, Khenifra, Morocco); Salma Senhaj (Sultan Moulay Slimane University, Higher School of Technology, Biology, Khenifra, Morocco); Fatima Touhami (Sultan Moulay Slimane University, Higher School of Technology, Biology, Khenifra, Morocco); Gilbert Alan Okouanga Pira (Sultan Moulay Slimane University, Higher School of Technology, Biology, Khenifra, Morocco); Abdelati Zouine (Sultan Moulay Slimane University, Higher School of Technology, Biology, Khenifra, Morocco); Ahmed Bahbah (Sultan Moulay Slimane University, Higher School of Technology, Biology, Khenifra, Morocco) |
| Abstract: | This paper examines whether changes in cash in circulation contain predictive content for inflation in Morocco, and whether inflation itself feeds back into cash demand, during a period marked by major shocks (2017M01-2023M09). Using monthly data from official sources on currency outside banks, the consumer price index (CPI), the policy rate, and international oil prices, we estimate an Autoregressive Distributed Lag model in its Unconstrained Error-Correction (ARDL-UECM) form, which accommodates mixed integration orders and separates short-run dynamics from long-run adjustment. Lag orders are selected by the Akaike Information Criterion, and inference is based on HAC (Newey-West) standard errors. Bounds testing indicates a stable long-run relationship in the inflation equation once monetary policy and oil prices are controlled for. Short-run cash dynamics are jointly significant in the inflation equation, implying that cash growth contains incremental information for near-term price changes. At the coefficient level, a one-percentage point increase in monthly cash growth is associated with roughly 0.08 percentage points higher monthly inflation, with the lagged cash effect statistically strongest. In the reverse direction, the cash equation does not support a long-run equilibrium relationship within the same conditioning set, but it shows very strong short-run feedback from inflation to cash growth, consistent with higher prices raising nominal transaction needs. Overall, the evidence is most consistent with bidirectional short-run interactions, with particularly strong feedback from inflation to cash, while cash remains a useful auxiliary indicator for inflation when interpreted alongside policy-rate movements and imported cost pressures. These results suggest that monitoring cash growth can add value to inflation assessment in Morocco, especially in contexts where precautionary hoarding and informal cash-intensive activity may amplify the link between nominal spending needs and currency demand; however, conclusions on the exchange-rate channel remain limited by data availability at a consistent monthly frequency. |
| Keywords: | money demand, ARDL-UECM modeling, imported cost pressures, informal sector channel, monetary aggregation dynamics |
| Date: | 2026–06–15 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05715333 |
| By: | Carlos Giraldo (Fondo Latinoamericano de Reservas - FLAR); Iader Giraldo-Salazar (Fondo Latinoamericano de Reservas - FLAR); Jose E. Gomez-Gonzalez (Department of Finance, Information Systems, and Economics, City University of New York – Lehman College); Jorge M Uribe (Universitat Oberta de Catalunya) |
| Abstract: | We study the impact of inflation on bank asset allocation. Utilizing a Distributed Lag Non-linear Model (DLNM) within a panel data framework, we analyze a comprehensive dataset of commercial banks across 63 emerging and developing economies from 2000 to 2021. Our empirical strategy isolates the marginal effects of country-standardized inflation on the share of investments relative to total assets, while controlling for bank heterogeneity and macroeconomic cycles via a two-way fixed effects specification. Results show a remarkable asymmetry in bank portfolio dynamics following low and high relative inflation. While asset allocation remains relatively insensitive to mild business cycle fluctuations and moderate deflationary environments, extreme positive inflationary environments trigger a severe, compounding structural effect. Specifically, when inflation exceeds two standard deviations above the domestic historical mean, banks persistently reallocate their portfolios toward investments. Crucially, this effect does not quickly dissipate but accelerates over time, reaching its maximum magnitude at a five-year lag horizon. These findings suggest that extreme inflation inadvertently crowds out traditional private sector lending and impairs monetary policy transmission, underscoring the need for macroprudential oversight by central banks and proactive asset-liability management by financial institutions to mitigate long-tail duration risks. |
| Keywords: | Bank Asset Allocation; Inflationary Shocks; Emerging Markets; Distributed Lag Non-linear Models; Monetary Transmission |
| JEL: | E31 G21 E44 C23 |
| Date: | 2026–09–02 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:023577 |
| By: | Jess Benhabib; Pengfei Wang; Yi Wen |
| Abstract: | This paper incorporates the Lucas (1973) island model into a standard DSGE framework. It demonstrates that self-fulfilling stochastic inflation equilibria, which are driven by intrinsic uncertainty or pure sentiments, can exist under rational expectations. Furthermore, it shows that these sentiment-driven stochastic equilibria exhibit monetary non-neutrality, even when the fundamental equilibrium is unique and monetarily neutral. As the aggregate price or inflation rate can appear to fluctuate independently of the money supply, our model explains the complex relationship between inflation and the money supply in the real world, where the basic quantity theory of money often seems invalid. |
| JEL: | D8 D84 E03 E32 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35563 |
| By: | Ludovica Ambrosino (London Business School); Jenny Chan (Bank of England); Silvana Tenreyro (London School of Economics) |
| Abstract: | How does trade fragmentation affect inflationary pressures? What is the response of monetary policy needed to sustain inflation at target? To answer these questions, we develop a two‑sector, small open‑economy model featuring imperfect international risk‑sharing and household heterogeneity that captures both the supply‑side and demand‑side effects of fragmentation. The impact of fragmentation on inflationary pressures, and the appropriate policy response, depend not only on the direct effect of higher import prices on supply but, crucially, on how aggregate demand adjusts in response to lower real incomes and productivity. In turn, this depends on the pace of fragmentation (whether it is gradual or front‑loaded), as well as several other structural factors elucidated by the model analysis. We compare the outcomes resulting from a central bank following Taylor‑type monetary policy rules to a constrained‑efficient allocation. |
| Keywords: | Monetary policy;trade fragmentation;open economies;inflation;heterogeneity;globalisation. |
| JEL: | F12 F15 F41 F62 |
| Date: | 2025–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023268 |
| By: | Marcus Buckmann (Bank of England); Galina Potjagailo (Bank of England); Philip Schnattinger (Bank of England) |
| Abstract: | We propose the Blockwise Boosted Inflation Model (BBIM), a boosted tree framework that decomposes inflation dynamics into predictive components aligned with an open-economy hybrid Phillips curve. Demand and supply contributions are identified by imposing monotonicity constraints, ensuring theory-consistent links between inflation and key indicators. Applied to monthly UK CPI inflation, the model shows that the recent surge has been driven mainly by global supply shocks transmitted through supply chains. We also uncover an L-shaped Phillips curve relationship between inflation and labour market tightness, with tight labour markets amplifying recent inflationary pressures. By contrast, earlier episodes saw non-linearities more strongly tied to broader slack, particularly during recessions. The model further accounts for trend shifts informed by inflation expectations. Short-term household expectations have recently displayed persistent non-linear effects, temporarily raising trend inflation and prolonging inflationary pressures, while longer-term expectations remain anchored. Out-of-sample, the BBIM delivers competitive forecasting performance relative to linear benchmarks and unstructured machine learning methods. Our approach provides a flexible yet interpretable framework that combines economic structure with machine learning for policy-relevant analysis of inflation dynamics. |
| Keywords: | Inflation;Phillips curve;boosted decision trees;machine learning |
| JEL: | E31 E37 C14 C53 |
| Date: | 2025–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023265 |
| By: | Reis, Ricardo |
| Abstract: | This article uses inflation expectations to investigate the mechanisms that linked supply and demand shocks to inflation outcomes during 2021–2024. It describes several theoretical mechanisms through which shocks led to inflation, highlighting the role of expectations in this process. It uses multiple sources of expectations data for the United States, Euro area, and United Kingdom to evaluate each of these channels. Finally, it surveys the literature that has used expectations data to make sense of the 2021–2024 inflation surge. The article applies the results from this investigation to assess how well-anchored inflation expectations were during the surge and at the end of it. |
| Keywords: | inflation disaster;market expectations;surveys;Phillips curve;fiscal theory;doves |
| JEL: | E31 E52 D84 |
| Date: | 2026–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:138478 |
| By: | Kazuhiro Hiraki; Meryem Rhouzlane |
| Abstract: | A key objective of exchange rate pegs is to achieve price stability by stabilizing the value of the currency. However, the effectiveness of an exchange rate peg as a nominal anchor crucially depends on its operational design. This note provides guidance on how different exchange rate peg arrangements—such as bilateral exchange rate pegs, pegs to a basket of currencies, crawling pegs, and currency bands—can be effectively implemented. Specifically, the note focuses on operational considerations relevant to ensuring long-run price stability, such as choosing an appropriate anchor currency, setting the rate of crawl, and designing bands. The note also discusses how to conduct monetary and foreign exchange operations consistent with the chosen exchange rate peg arrangement. |
| Keywords: | nominal anchor; exchange rate peg; crawling peg; basket peg; band; uncovered interest rate parity |
| Date: | 2026–08–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfhtn:2026/006 |
| By: | Luigi Bocola; Gastón Chaumont; Alessandro Dovis; Rishabh Kirpalani |
| Abstract: | We develop a model for fiscal and monetary policy determination in the tradition of Sargent and Wallace (1981). Ex-ante, the government has incentives to delegate monetary policy to a central bank with an inflation targeting mandate. Ex-post, however, the government faces temptations to revoke the mandate to generate seigniorage revenues. The likelihood that the government will adhere to its commitment depends on shocks to fiscal fundamentals and the costs of reneging on the mandate. The economy endogenously transitions between a “monetary-dominant” regime where monetary policy adheres to its commitment and a “fiscal-dominant” regime where the fiscal authority interferes with monetary policy. These two regimes sharply differ in their implications for the comovement of inflation and debt-to-GDP ratios. We use the model as a measurement device to interpret the fiscal and monetary history in Colombia, Chile, and the U.S. |
| JEL: | E0 E50 E6 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35691 |
| By: | Stefania D'Amico; Thomas B. King; Francisco Torralba |
| Abstract: | The public pays close attention to Federal Reserve communications about future monetary policy, but it remains an open question how those communications shape the public’s expectations for the path of policy rates. We explore how market expectations adjust to the information provided in the “dot plot” of the Summary of Economic Projections, which contains the Federal Open Market Committee’s assessment of the appropriate future path of the federal funds rate. The results shed light on the market interpretation of forward guidance and its efficacy as a communication tool. We find that financial markets respond to the Federal Reserve’s “dot plot” projections by adjusting their expectations for future interest rates, but only partially and gradually, reflecting the understanding that these projections are conditional forecasts rather than firm commitments. Over time, both market expectations and FOMC projections for interest rates tend to converge, showing that the dot plot is informative to market participants. This gradual adjustment highlights the dot plot’s role as a communication tool that shapes, but does not dictate, market expectations. |
| Keywords: | Summary of Economic Projections (SEP); SEP federal funds rate projections; interest rate expectations; market reaction; forward guidance |
| JEL: | E43 E58 G13 |
| Date: | 2026–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103737 |
| By: | Breitenlechner, Max (University of Innsbruck); Geiger, Martin (Liechtenstein Institute); Klein, Mathias (Research Department, Central Bank of Sweden) |
| Abstract: | We empirically document that contractionary monetary policy shocks, in addition to low ering output and prices, trigger an expansion in primary deficits and government debt. Inflation follows an S-shaped adjustment, implying that monetary policy shifts rather than permanently alters inflation. Structural counterfactuals show that front-loading fiscal con solidation considerably amplifies the monetary effects, and that the timing of consolidation alters the composition of the fiscal adjustment, with distinct implications for real and nom inal outcomes. The temporary impact of a monetary policy shock on prices is more than halved by the endogenous adjustment in social transfers, whereas the tax system significantly reduces the effect on output. |
| Keywords: | Monetary policy; fiscal channel; monetary fiscal policy interaction; structural counterfactuals; Bayesian proxy structural VAR models |
| JEL: | E32 E52 E63 |
| Date: | 2026–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0469 |
| By: | Anna CIeslak; Stephen Hansen; Hao Pang |
| Abstract: | We review recent research on how the Fed's risk-management approach shapes the overall policy stance and how it affects financial market conditions. The evidence shows that the policy stance contains a forward-looking, conditional component that has long been an integral part of the Fed's policymaking toolkit. Asymmetric forward-looking policy tilts—motivated by risk-management considerations and revealed via the Fed’s communication—complement and extend beyond the effects of direct policy actions. Drawing on the transcripts of FOMC meetings between 1976 and 2019, we provide an institutional history of the tilt and its connection to how the Committee’s thinking about risk evolved over decades. Going back at least to the early 1990s, the Fed has relied on tilts not only to steer market expectations but, equally importantly, to stabilize risk premia and maintain easy financial conditions. We discuss successes and challenges associated with communication via tilts and draw lessons for the renewed debate over the form and extent of central bank forward-looking guidance. |
| Keywords: | risk management; uncertainty; monetary policy; asset prices; large language models; text as data |
| JEL: | E52 E58 C55 |
| Date: | 2026–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:103760 |
| By: | Coleman, Winnie |
| Abstract: | A persistent gender gap in inflation expectations, i.e., women systematically reporting higher expected inflation than men on average, has been documented across countries and over time, yet its underlying causes remain under debate. Using more than half a million responses from the ECB Consumer Expectations Survey and a double machine learning framework that provides valid inference on many dimensions of heterogeneity at once, I show that there is no single gender gap: individualized gaps range from roughly -1 to +5 percentage points. This heterogeneity is shaped primarily by subjective belief-formation variables, such as forecast uncertainty and the rounding of inflation beliefs, and only to a much lesser extent by objective ones, such as financial literacy. When inflation is high enough to attract consumers' attention, the average gap narrows, but the distribution of individual gaps fans out, widening precisely for economically vulnerable women. Since the women who diverge most from men hold the most imprecise beliefs, communication that reduces ambiguity, rather than solely providing information, is a promising policy lever. |
| Keywords: | Consumer Inflation Expectations, Expectation Formation, Gender, Double Machine Learning, Big Data |
| JEL: | C55 D84 E31 E58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:fubsbe:343048 |
| By: | Mr. Suman S Basu; Pablo Winant |
| Abstract: | We propose a tractable small-open-economy model in which uncovered interest parity premia on foreign exchange (FX) markets arise from the endogenous lack of insurability of exchange rate risks. Asymmetric information about monetary policy can make the tails of the exchange rate distribution uninsurable in FX hedging markets, which in turn generates premia in FX spot markets because of the risk aversion of lenders holding the external debt. There is a role for government intervention because of an information sensitivity externality: agents do not internalize that their actions can reduce the insurability of exchange rates. The model predicts that premia may be amplified by weaknesses in monetary, fiscal, and financial policy frameworks, and can be reduced through reforms which reduce the sensitivity of exchange rates to private information. The constrained efficient policy depends on the composition of external lenders and may include delegation of monetary policy to an “aloof central banker”, constraints on fiscal policy, more active use of macroprudential tools, and institutions which limit asymmetric information. |
| Keywords: | foreign exchange market; asymmetric information; monetary policy; fiscal policy; macroprudential policies |
| Date: | 2026–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/188 |
| By: | Huberto M. Ennis; Alexander L. Wolman |
| Abstract: | The Federal Reserve implements monetary policy using an ample reserves system, which does not require active management of the total quantity of reserves to maintain interest rate control. The distribution and the diffusion of reserves across banks, and groups of banks, is a key factor in determining the (minimum) ample level of reserves consistent with that objective. If large portions of the outstanding amount of reserves can become effectively "trapped" in segments of the banking system, then the total level of reserves needed to achieve the intended objective may be higher. We propose a Markovian framework to study the weekly flow of reserves across groups of banks between 2010 and 2024. We group banks according to types (foreign and domestic, large and small) and Fed districts. The diffusion process depends on how reserves flow in and out of the system. We compute counterfactuals which shed light on the way the distribution of reserves would adapt to plausible changes in conditions. In general, the distribution of reserves tends to be highly persistent during periods of abundant reserves, but redistribution intensifies when reserves reach lower (yet, still ample) levels. |
| Keywords: | Banking; Federal Reserve; Central Bank Balance Sheet |
| Date: | 2026–09–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:103733 |
| By: | Kevin Hjortshøj O'Rourke (CNRS and Sciences Po); Roger Vicquéry (Bank of England) |
| Abstract: | We present a new global index indicating how fixed the world’s exchange rates are. Our index measures the probability of two units of GDP, randomly selected anywhere in the world, of being involved in a fixed exchange rate arrangement. This approach is invariant to alternative classifications of the Eurozone and is able to account for both direct and indirect exchange rate linkages between countries. In contrast to the 'New Consensus' view, which posits a continuity in exchange rate arrangements from the Bretton Woods era to the present, our index restores the conventional account of international monetary history over the last 70 years. Our findings indicate that global exchange rate regimes are currently nearly three times as flexible as they were prior to the 1971 Nixon shock. Furthermore, our measure partially puts into perspective the view that dollar dominance is now stronger than ever: we find that global anchoring to the US dollar was significantly more prevalent during Bretton Woods, particularly when accounting for indirect links. |
| Keywords: | Fixed exchange rate regimes;Bretton Woods;Nixon Shock;anchor currencies;US dollar dominance |
| JEL: | E5 F3 F4 N2 |
| Date: | 2025–06–27 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023253 |
| By: | Birta B. Haraldsdottir; Bjarni G. Einarsson |
| Abstract: | We apply a sufficient statistics framework to detect nonoptimal monetary policy decisions in Iceland. The method relies on two sufficient statistics: (1) forecasts of policy objectives and (2) impulse responses of those objectives to monetary policy shocks. The weighted product of these two sufficient statistics forms the gradient of the policy maker’s loss function. The Optimal Policy Perturbation (OPP) statistic, derived from this gradient, provides the test for optimization failures. Our results suggest that the Central Bank of Iceland’s key interest rate has, on average, been set too low over the past two decades. There are two notable deviations from optimality: the periods leading up to the financial crisis and following the Covid-19 pandemic. |
| JEL: | E31 E32 E43 E52 E58 E61 E65 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:ice:wpaper:wp101 |
| By: | Brent Bundick; Nicolas Petrosky-Nadeau |
| Abstract: | Since employment dynamics are persistent, a central bank’s dual mandate to promote maximum employment and price stability naturally generates history dependence in monetary policy. This history dependence under a dual mandate flattens the reduced-form Phillips curve, reduces the volatility of inflation in response to demand shocks, and improves outcomes at the zero lower bound. Moreover, we show that a dual mandate can be observationally equivalent to average inflation targeting following a demand shock. However, this equivalence breaks down in the presence of supply shocks. We first illustrate these findings analytically and then examine their quantitative importance in a model with nominal rigidities and labor search frictions calibrated to match U.S. business-cycle moments. An employment mandate can naturally provide the stabilization benefits associated with history-dependent policy frameworks. |
| Keywords: | inflation; monetary policy; dual mandate |
| JEL: | E32 E52 J64 |
| Date: | 2026–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:103722 |
| By: | Monique Reid; Anis Foresto; Pabalelo Mosoma |
| Abstract: | Questions in the 2025Q4 Bureau for Economic Research inflation expectations survey are used to assess whether South African firms are aware that the inflation target was lowered to 3%. |
| Date: | 2026–09–08 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:oboens:11061 |
| By: | Micheal Bordo (Rutgers University); Oliver Bush (Bank of England); Ryland Thomas (Bank of England) |
| Abstract: | Discussion of the causes of the Great Inflation in the UK during the 1970s has centred around the relative importance of ‘bad luck’ – the occurrence of unusually large commodity price and supply-side shocks – and ‘bad policy’ reflecting failures in both monetary and prices and incomes policies. By reconsidering the historical and empirical record of inflation from 1950s to the early 1990s we show that the persistence of the Great Inflation in the UK cannot fully be explained by these factors, although these can account for some of the major fluctuations. Instead, underlying inflation and inflation expectations appear to be the result of a sequence of regime shifts. We argue those regime shifts are as much related to fundamental changes in fiscal policy as they are to monetary policy and union reforms. Our empirical evidence suggests that fiscal policy was at the heart of many of the problems in the UK during the Great Inflation. In contrast to most of British history, it was not used to stabilise the public finances. Instead, it was used to keep unemployment down and growth up, to subsidise losers from terms of trade shocks and to secure deals with the unions. |
| Keywords: | Great Inflation;fiscal policy;inflation expectations;money growth |
| JEL: | E4 E6 N10 |
| Date: | 2025–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023257 |
| By: | Benedikt Ballensiefen; Fabricius Somogyi; Hannah L Winterberg |
| Abstract: | We study the determinants of US dollar demand across market participants and traded instruments using survey-based exchange rate and macroeconomic expectations. To empirically establish the relevance of survey-based expectations for currency flows, we leverage granular foreign exchange trading data and present three main findings. First, end-user investors increase their dollar purchases when they expect the US dollar to appreciate. Investment funds and non-dealer banks adjust their synthetic dollar borrowing in the FX swap market in response to forecasted changes in synthetic dollar funding costs. Second, cross-sectionally, investors rebalance along the factor structure of currency risk into dollars following an expected dollar appreciation. Third, the predictive power of survey forecasts weakens when forecaster disagreement or uncertainty rises. Overall, our findings show that long-horizon expectations predict dollar demand across spot, forward, and swap currency markets. |
| Keywords: | Exchange rate expectations; dollar demand; currency flows; FX swaps; survey forecasts |
| Date: | 2026–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/186 |
| By: | Jeffery (Jinfan) Chang; Wei Xiong |
| Abstract: | This paper investigates why China’s recurrent credit expansions have coincided with persistently weak inflation. We argue that this pattern reflects the country’s production-oriented monetary regime. At the aggregate level, faster monetary-financial expansion temporarily raises PPI inflation but depresses it over longer horizons. At the sectoral level, liability growth among listed industrial firms is followed by weaker producer prices, lower profitability, higher leverage, rising inventories, and reduced capacity utilization. We also find asymmetric supply-chain transmission: downstream liability growth raises upstream PPI inflation, while upstream liability growth does not generate a corresponding downstream price response. These findings indicate that credit expansion in China tends to sustain production and balance sheets rather than stimulate final demand. As a result, monetary policy operates less as a conventional tool for demand management and durable reflation, and more as a mechanism for preserving production capacity and supporting growth. |
| JEL: | E5 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35562 |
| By: | Arisa Chantaraboontha (Graduate School of Economics, The University of Osaka) |
| Abstract: | This paper implements a panel VECM to investigate whether fiscal policy plays a significant role in price determination using an annual panel dataset covering advanced and emerging economies from 2010 to 2024. The empirical results indicate that, during normal periods, most fiscal authorities worldwide restore intertemporal budget constraints through fiscal balance adjustments rather than price adjustments, consistent with a Ricardian regime. However, following the onset of the pandemic, fiscal policy in most countries appears to shift toward a non-Ricardian regime, in which the price level adjusts to satisfy the intertemporal budget constraint, providing empirical support for the Fiscal Theory of the Price Level (FTPL). Greater budget transparency is found to moderate inflationary pressures arising from fiscal imbalances during crisis periods, although no significant effect is observed during normal times. Moreover, higher budget transparency helps slow the accumulation of public debt across countries under both normal and crisis conditions. |
| Keywords: | Fiscal Theory of the Price Level, Fiscal Policy, Inflation, Government Debt, Ricardian Regime |
| JEL: | E31 E62 E63 H63 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:osk:wpaper:2611 |
| By: | Ludovica Ambrosino (London Business School); Jenny Chan (Bank of England); Silvana Tenreyro (London School of Economics) |
| Abstract: | How does higher productivity affect inflation? Productivity shifts both supply and demand (through real incomes), and its effect on inflation depends on their relative magnitude and timing, as well as on the monetary policy response. We distinguish between a one-off level shock that increases productivity temporarily (relative to trend) and a persistent rise in productivity growth. A one-off, temporary increase in productivity lowers marginal costs and raises potential output, generating downward pressure on the price level. Once prices adjust however, inflation returns to target. By contrast, higher productivity growth raises expected permanent income and stimulates investment and consumption, increasing the natural real rate. Absent a tightening of monetary policy, inflationary pressures may emerge. Anticipation effects are central: if demand rises ahead of realised supply gains, inflation can increase despite higher productive capacity. In an open economy, the sectoral incidence of the shock also determines the impact on inflation. In summary, the inflationary consequences of productivity gains are a priori ambiguous and depend on the balance and timing of demand and supply responses, the composition of demand, and crucially, the monetary policy response. |
| Keywords: | Monetary policy;productivity;inflation;natural rate of interest |
| JEL: | E3 E4 E5 F4 O4 |
| Date: | 2026–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023542 |
| By: | Drishan Banerjee; Galina Hale; Harrison Shieh |
| Abstract: | Post-pandemic inflation raised fears that U.S. monetary tightening would trigger a repeat of the 1982 sudden stop in capital flows to emerging economies. Yet as of 2026 no global recession has followed. We establish three stylized facts distinguishing the 1980s from the 2020s, beyond the shift to flexible exchange rates: monetary policy effectiveness, fiscal space, and external vulnerabilities. We rationalize them in a Mundell-Fleming framework with a fiscal space constraint, which predicts a central role for fiscal space in transmitting foreign currency risk-free rate increases. Cross-country evidence confirms that fiscal space shapes economic performance post-tightening. |
| JEL: | F34 F42 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35673 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | We study the causes and consequences of bank runs. By applying large language models to historical newspapers, we create a comprehensive database of bank runs in U.S. history with information on 3, 984 runs on individual banks from 1863 to 1934. Our novel data allow us to establish that runs are considerably more likely in weak banks but also occur in strong banks, especially in response to negative news about the real economy or the broader banking system. However, runs typically only result in failure for banks with poor fundamentals. Strong banks survive runs through various mechanisms, including signaling strength, interbank cooperation, and temporary suspension. At the local level, runs on banks with poor fundamentals translate into substantially larger declines in deposits, lending, and manufacturing activity than runs on strong banks. Our findings imply that poor fundamentals are central to explaining both when runs occur and when they have severe economic effects, tempering the view that small shocks can generate discontinuous jumps to bad equilibria through self-fulfilling run dynamics. |
| JEL: | G0 G01 G21 N1 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35504 |
| By: | Frederic Boissay; Harald Uhlig |
| Abstract: | We examine the role of central bank reserves and public liquidity when secondary markets may freeze. Central bank reserves help intermediaries purchase assets during stress but crowd out investment. Under laissez-faire, intermediaries hold insufficient reserves, overlooking how aggregate liquidity reduces freeze risk. We propose a "market-backstop principle", akin to Bagehot’s principle for intermediaries. It combines state-contingent buyer-of-last-resort interventions to restore trading with modest liquidity requirements to limit moral hazard. The welfare benefits of restoring market functioning exceed the fiscal costs of interventions. We explore implications for the size and composition of central bank balance sheets. |
| JEL: | E44 E58 G01 G21 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35548 |
| By: | Abdelkader Aguir (ESPI - Ecole Supérieure des Professions Immobilières, ESPI2R - Laboratoire ESPI2R Research in Real Estate [Lyon] - ESPI - Ecole Supérieure des Professions Immobilières, MOFID-Université de Sousse); Fernanda Sabrini-Chatelard (ESPI2R - Laboratoire ESPI2R Research in Real Estate [Lyon] - ESPI - Ecole Supérieure des Professions Immobilières); Marouene Mbarek (ESPI2R - Laboratoire ESPI2R Research in Real Estate [Nantes] - ESPI - Ecole Supérieure des Professions Immobilières, LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université) |
| Abstract: | Climate change and the transition toward a low-carbon economy have intensified the debate on the interaction between environmental factors and macroeconomic stability. While recent studies have mainly focused on how monetary policy can address climate-related risks, much less attention has been devoted to the potential influence of environmental indicators on inflation. This paper examines the relationship between carbon emissions and inflation dynamics across 20 Eurozone countries over the period 2010–2023. Using annual panel data, we estimate a dynamic model based on the System Generalized Method of Moments (System GMM) to account for inflation persistence and potential endogeneity. The empirical framework incorporates carbon emissions per capita together with final energy consumption, the EUR/USD exchange rate, and the trade balance as key macroeconomic control variables. The baseline specification does not reveal a statistically significant relationship between carbon emissions and inflation. However, robustness analysis based on a first-differenced System GMM specification identifies a significant negative association, suggesting that environmental factors may influence inflation dynamics under alternative model specifications. Energy consumption and exchange rate movements also emerge as important determinants of inflation. These findings contribute to the growing literature linking climate-related variables and monetary policy by highlighting the relevance of incorporating environmental indicators into inflation analysis while emphasizing the need for cautious interpretation and further empirical investigation. |
| Keywords: | Carbon emissions, Climate macroeconomics, Eurozone, System GMM, Environmental indicators, Inflation |
| Date: | 2026–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05734117 |
| By: | Freddy Cepeda-Lopez; Fredy Gamboa; Javier Miguelez-Márquez |
| Abstract: | This paper analyzes the intraday timing of transactions in Colombia's large-value payment system (CUD) from 2018 to 2025, focusing on how changes in reserve requirements affect liquidity management by financial institutions. Using high-frequency transaction data, we document that reductions in reserve requirements in April 2020 and September 2024 are associated with a shift of settlement activity toward later hours of the day. The effects are heterogeneous, as smaller institutions remain more dependent on marginal liquidity and incoming payments in an interdependent payment network. We also find that the launch of the new Central Securities Depository (DCV) system in April 2024, along with changes in payment volume and value, further reinforces the move toward later settlements. Greater reliance on intraday repos relative to reserves has also reduced early-day activity while improving liquidity management later in the business day. |
| Keywords: | Payment clearing and settlement systems, intraday liquidity management, reserve requirements |
| JEL: | C5 E42 E58 G20 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1373 |
| By: | Rawend Brahem (Central Bank of Tunisia) |
| Abstract: | Forecasting inflation in the presence of changing economic conditions, external shocks, and evolving transmission mechanisms remains an active area of research. This paper applies machine learning (ML) models to forecast headline and core inflation in Tunisia at 1-, 3-, and 6-month horizons, comparing their performance with standard econometric benchmarks within a rolling forecasting framework. Conformal prediction intervals are used to assess forecast uncertainty, while SHAP values serve as an exploratory tool to examine the contribution of explanatory variables to model predictions. The results reveal a clear horizon-dependent pattern, with the predictive gains of ML models increasing at medium and longer horizons. These gains are particularly pronounced at the 6- month horizon, where Support Vector Regression reduces the RMSE by more than 40 percents relative to the best-performing benchmark. Furthermore, SHAP analysis suggests that the relative contribution of predictors varies across forecasting horizons, with inflation persistence playing a more prominent role at short horizons and monetary, external, and commodity price variables becoming more relevant at longer horizons. Overall, these findings suggest that machine learning methods are most valuable as a complement to, rather than a substitute for, traditional forecasting approaches, particularly at longer horizons where nonlinearities become more pronounced. |
| Keywords: | Inflation Forecasting; Machine Learning; Conformal Inference; SHAP Values; Tunisia |
| JEL: | C53 E31 E37 |
| Date: | 2026–09–08 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp25-2026 |
| By: | Krishan Shah (Bank of England); Phillip Bunn (Bank of England); Jonathan Haskel (Imperial College Business School, London) |
| Abstract: | This paper investigates the role of the credit channel of monetary policy transmission in the 2022–23 tightening cycle in the UK. Using novel firm survey data, we validate three predictions of a simple model of the credit channel: firstly, firms using external finance report a higher cost of capital than those using internal funds; secondly that firms using external finance see a larger rise in their cost of borrowing for a given increase in the policy interest rate than those using internal funds; and finally that firms reliant on external financing for investment report reducing investment by more than the internally funded firms when baseline interest rates rise. Our results suggest that credit channel effects may account for up to a quarter of the total impact that monetary policy has on investment. |
| Keywords: | Credit channel;monetary policy;firms;investment;survey data. |
| JEL: | D25 D22 E22 E52 |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023260 |
| By: | Jonathan Hambur; Martin McCarthy; Sam Munn; Emily Shaw |
| Abstract: | Households' expectations for future interest rates influence their decisions and play a key role in the transmission of monetary policy, yet they remain understudied. Our paper analyses household survey microdata for Australia. Firstly, using a regression discontinuity design, we show that household interest rate expectations respond to monetary policy announcements. This finding differs from previous literature finding no effect of announcements in the United States. Secondly, we document how household interest rate expectations develop over time and differ across demographic groups. We show that household expectations differ greatly from that of market participants and professional forecasters, with the largest gaps among young people, lower-income earners, and renters. Household recall of, and attention to, economic news plays an important role in their expectations, and this differs across time and groups in a way somewhat consistent with rational inattention models. |
| Keywords: | expectation formation, interest rate expectations, monetary policy announcements |
| JEL: | D84 E43 E52 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-76 |
| By: | Johannes Fischer (Deutsche Bundesbank); Christoph Herler (Bank of England); Philip Schnattinger (Bank of England) |
| Abstract: | We study the causal effect of inflation uncertainty on household consumption and saving decisions. Using a representative household survey, we separate the effects of uncertainty from expected inflation by providing respondents with randomised information about the first and second moments of inflation forecasts. Lower inflation uncertainty raises planned spending and expected income, but reduces uncertainty about expected income and interest rates. Higher planned spending is driven by less precautionary saving. In the months following the treatment, households reduce their monthly savings, but report an increase in fixed‑return asset holdings. Finally, we show that households primarily attribute changes in inflation uncertainty to variation in supply‑side shocks. |
| Keywords: | Inflation;uncertainty;household spending and saving;household finance |
| JEL: | D14 E21 E24 E31 E50 G51 |
| Date: | 2025–06–27 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023255 |
| By: | Jens H. E. Christensen; Glenn D. Rudebusch |
| Abstract: | Following decades of secular decline, many estimates of r∗—the natural or steady-state short-term real interest rate—have risen roughly 1 percentage point since 2020 in the United States. The most prominent explanations attribute this reversal to heightened expectations of rising government debt and faster productivity growth from artificial intelligence (AI). However, a high-frequency event study finds that news about fiscal and AI developments does not explain this increase. Furthermore, contrary to earlier evidence that persistent shifts in longer-term yields occurred around monetary policy meetings, we find that monetary policy news does not account for the recent rise in r∗. |
| Keywords: | r star; fiscal policy; artificial intelligence; monetary policy |
| JEL: | C32 E43 E52 G12 |
| Date: | 2026–08–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103705 |
| By: | Kai Arvai; Nuno Coimbra; Marco Pinchetti |
| Abstract: | This paper investigates the determinants of international investors’ portfolio choices between gold and sovereign bonds in an environment shaped by economic and geopolitical shocks. We develop an endogenous portfolio choice model where reserve safety has a political dimension — sovereign bonds issued by the dominant reserve country are more liquid but exposed to the issuer’s sanctions authority, while gold offers sanctions protection at the cost of lower liquidity. Our model implies that US convenience yields fall during periods of high sanction risk, as safe-asset demand fragments along geopolitical lines. Empirically, periods of elevated geopolitical risk coincide with higher gold prices and 10-year Treasury yields. In such periods, the average composition of official reserves shifts toward gold, with countries less aligned with the US increasing their holdings to a greater extent. |
| JEL: | E41 F02 F33 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35669 |
| By: | Thomas W L Norman (Magdalen College, Oxford); Tim Willems (Bank of England and Centre for Macroeconomics) |
| Abstract: | The fiscal theory of the price level (FTPL) posits that the price level adjusts to ensure the Government’s budget equation is met in equilibrium, but is silent on the exact adjustment mechanism. By modelling the Government as a large, satiable player in a game with households, we demonstrate that the FTPL’s outcome can be understood as a 'dividend equilibrium', achieved via price level driven revaluation of initial debt. It coincides with the Core (ensuring stability) and the unique outcome consistent with players receiving their Shapley Value. The price level adjustment envisioned by the FTPL thus emerges endogenously as the sole stable outcome when agents are compensated according to their marginal contributions, rather than it being imposed as an assumption. This provides a formal foundation for non-Ricardian fiscal policies, central to the FTPL. |
| Keywords: | The Core;Shapley Value;the fiscal theory of the price level |
| JEL: | D51 E31 E62 |
| Date: | 2025–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023259 |
| By: | Zhengyang Jiang |
| Abstract: | Does financial opening necessarily lead to currency internationalization? To study the competition between incumbent and rising powers under financial interdependence, we develop a model of asset demand with microfounded network effects. Search frictions with currency-specialized intermediaries generate distinct notions of liquidity at asset-market and currency-area levels, which jointly shape the trajectory of currency competition. In the U.S.-China context, China at early stages of financial development benefits from pooling its assets with the dollar area, which reinforces the status quo. As China's financial markets deepen, RMB issuance allows China to internalize network effects and erode the dollar's dominance, triggering a discrete shift toward fragmentation. This transition is further shaped by sanctions, financial repression, and third-country responses, highlighting how financial interdependence transforms cooperation into rivalry in the evolution of the international financial order. |
| JEL: | E42 F34 G15 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35541 |
| By: | Ozge Akinci; Ṣebnem Kalemli-Özcan |
| Abstract: | We study how increased uncertainty about U.S. asset returns affects global asset prices and exchange rates in a two-country model with intermediary balance-sheet constraints. Empirically, uncertainty shocks widen global credit spreads, appreciate the dollar, and increase currency risk premia. In our model, higher uncertainty tightens intermediary constraints and lowers asset prices, reversing the counterfactual asset price increase in frictionless models. Because constraints make net worth especially valuable in bad times, risk premia respond strongly to uncertainty shocks. This interaction allows the model to match the credit spread, currency premium, and dollar responses in the data. |
| Keywords: | financial frictions; time-varying uncertainty; intermediary asset pricing |
| JEL: | E32 E44 F41 |
| Date: | 2026–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103716 |
| By: | Martin Bodenstein; Junzhu Zhao |
| Abstract: | We investigate Barro's random walk hypothesis according to which distortionary labor taxes should follow a random walk for any stochastic process of government expenditures, see Barro (1979). When agents experience cognitive discounting as in Gabaix (2020), they perceive government debt as wealth, and the random walk result breaks down except for knife-edge combinations of limited rationality by policymakers and the private sector. For these specific parameter values, the result can reemerge, but minor deviations from these knife-edge combinations lead to stationary equilibrium dynamics, reflecting the wealth effect of government debt. However, the dynamics turn explosive when policymakers discount the future excessively. Our results extend to other models with limited foresight such as Blanchard (1985), Weil (1989), or Woodford (2019). |
| Keywords: | monetary policy; fiscal policy; limited foresight |
| JEL: | D91 E12 E52 E62 E63 E70 |
| Date: | 2026–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103681 |
| By: | Mary Amiti; Sebastian Heise; David E. Weinstein |
| Abstract: | Tariffs raise the prices of goods made at home, not just the imports they tax—an effect that standard pass-through estimates largely miss. Studying the 2025 U.S. tariffs, we find that about 26 percent of the tariff increase passes through to consumer prices. These estimates are measured relative to less-exposed goods and hold aggregate conditions fixed. The direct effect accounts for 64 percent of this increase, as tariffs raise the consumer prices of foreign varieties of a good. The remaining 36 percent arises indirectly—tariffs raise the cost of imported inputs used by U.S. producers, and domestic producers raise their markups because they face less competition from higher-priced imports. The direct effect passes through quickly, since tariffs raise import prices almost immediately, but the indirect effect takes nine to twelve months to work its way through supply chains. As a result, tariffs have a larger and more drawn-out impact on consumer prices than the direct effect alone would suggest. |
| Keywords: | tariffs; pass-through; inflation; consumer prices; import prices |
| JEL: | E31 F13 F14 |
| Date: | 2026–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103701 |
| By: | Alexei Miksjuk; Yipei Zhang |
| Abstract: | As low-income countries (LICs) gain access to international capital markets, the scope for increased financing rises but so does the risk of shocks. Our empirical results suggest that, after the global financial crisis (GFC), the global financial cycle has been a significant driver of private capital flows to LICs. In particular, a stronger US dollar (against advanced economy currencies) was associated with weaker net inflows. We also find that external government borrowing in LICs had a statistically significant but relatively small counter-cyclical component, inversely related to global financial and economic cycles, complementing policy responses to shocks. |
| Keywords: | capital flows; external borrowing; global financial cycle; government loans; low-income countries |
| Date: | 2026–08–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/179 |
| By: | Tobias Adrian; Domenico Giannone; Matteo Luciani; Mike West |
| Abstract: | Central banks monitor macroeconomic risk through two traditions: scenario analysis, regularly used since the mid-1990s, and distributional forecasting, practiced since the late 1960s. The two are complementary but separate: scenarios provide narratives without probabilities, while predictive distributions provide probabilities with limited economic interpretation. Treating baseline forecasts and scenarios as conditional predictive densities, and distributional forecasts as reference predictive distributions, places both within a common framework and clarifies their roles. The Scenario Synthesis assigns weights to scenarios consistent with the reference distribution, offering a practical and reproducible tool for risk assessment and policy deliberation under deep uncertainty. |
| Keywords: | scenarios; fan charts; growth-at-risk; model uncertainty; Bayesian predictive synthesis |
| JEL: | C1 C11 C53 E32 E37 E58 |
| Date: | 2026–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103751 |
| By: | Mahmoud Fatouh (Bank of England, Prudential Policy Directorate); Simone Giansante (dSEAS, University of Palermo, Italy); Meryem Duygun (Nottingham University Business School, University of Nottingham, UK) |
| Abstract: | We assess the real economy impact of the Bank of England’s quantitative easing (QE) operations through the corporate bond market between 2009 and 2021. Using difference-in-difference exercises on secondary market yields, and the cost of borrowing and issuance in the primary market, we document increased issuance of investment-grade bonds with long maturity resulting from the lower cost of borrowing caused by QE. Corporates directed additional funds towards share buybacks and reduced bank borrowing rather than increasing real investment. We also isolate the marginal impact of purchases under the Corporate Bond Purchase Scheme (CBPS), the direct effect, from the total effect (arising from all purchases) of QE on the corporate bond market. We find that yields of eligible bonds fell by 40–60 basis points relative to ineligible bonds. However, this fall did not translate into a lower cost of borrowing or higher issuance in the primary market. |
| Keywords: | Quantitative easing;corporate bond purchase scheme;bond issuance;bond yields;cost of borrowing. |
| JEL: | E22 E58 G12 G30 Q51 |
| Date: | 2025–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023256 |
| By: | Finck, David (Deutsche Bundesbank); Klein, Mathias (Research Department, Central Bank of Sweden); Tillmann, Peter (University of Giessen) |
| Abstract: | We compile a unique dataset linking micro price data underlying the official Swedish producer price index with administrative firm level data and provide new evidence on the inflationary effects of global supply chain shocks. For identification, we interact exogenous shocks to global supply chains, obtained through a VAR model, with firm specific import shares. Shocks to global supply chains lead to a signif icant and persistent increase in producer prices with a peak response after two years. Importantly, average responses mask heterogeneous responses across firms. Relatively larger firms, firms with lower labor costs and a higher market share raise prices more strongly. |
| Keywords: | Global supply chain shocks; producer prices; microdata; firm characteristics; price setting |
| JEL: | E31 F14 F61 |
| Date: | 2026–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0470 |