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on Monetary Economics |
| By: | Koichiro Kamada (Faculty of Business and Commerce, Keio University) |
| Abstract: | This paper reviews the Bank of Japan’s (BOJ) monetary policy from the perspective of surprise observed in the foreign exchange market and investigates the potential of central bank’s surprising announcement as a policy tool to change people’s deflationary mindset. We propose a surprise measure that is based on the daily candlestick-chart data on the yen-dollar exchange rate and identify surprise that occurred in the Tokyo and New York markets. Using the identified surprise, we evaluate monetary policies of BOJ governors and compare them with those of Fed chairs. We present statistical evidence that shows that under the command of Governor Haruhiko Kuroda, the BOJ was strongly dependent on surprise policy in the course of the quantitative and qualitative monetary easing. We also show that the surprise generated during the Kuroda term succeeded in raising the trend inflation rate, but failed to steepen the slope of the Phillips curve and to enhance the pass-through of the foreign exchange rate. |
| Keywords: | deflationary mindset, monetary policy surprise, exchange rate, candlestick chart, trend inflation |
| JEL: | C54 C58 E52 E58 G15 |
| Date: | 2025–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:dp2025-015 |
| By: | Bearce, David H.; Garriga, Ana Carolina |
| Abstract: | This research note reconsiders the question of whether central bank independence (CBI) and fixed exchange rates (FIX) function as substitutes or complements. We argue that these monetary institutions have neither served as substitutes nor performed as complements for either inflation control or exchange rate stability. In terms of their substitutability, our statistical evidence shows that while CBI has been used for inflation control, FIX has been more directed towards exchange rate stability using updated datasets with these monetary institutions measured both on a de jure and de facto basis with nearly global country/year coverage from 1970 to 2020. In terms of their complementarity, our results also demonstrate that CBI was not more effective at reducing inflation when paired with greater FIX and FIX was not more effective at promoting exchange rate stability when paired with greater CBI. If anything, both are less effective when paired with the other monetary institution. These results suggest a “third generation” framework for studying CBI and FIX together with a focus on macroeconomic objectives beyond just domestic price stability. |
| Keywords: | central banks; central bank independence; exchange rate regimes; inflation; exchange rate stability |
| JEL: | E02 E31 E42 E43 E58 F31 |
| Date: | 2025–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125748 |
| By: | Wentong Chen; Mr. Fazurin Jamaludin; Florian Misch; Alex Pienkowski; Mengxue Wang; Zeju Zhu |
| Abstract: | This paper studies domestic monetary policy transmission in European countries with a significant share of lending and deposits in foreign currency, referred to as ‘euroized economies’. We find that the impact of domestic monetary policy shocks on both inflation and GDP diminishes with the degree of euroization across countries: the effects are twice as high in non-euroized countries compared to countries in our sample with the highest level of euroization. We further examine the exchange rate, credit and interest rate transmission channels, which are typically less effective in euroized economies. We show that domestic monetary policy has at best limited effects on the exchange rate. In addition, during the post-pandemic monetary tightening episodes, an increase in foreign-currency loans often softened the decline in overall credit growth, and rates of foreign-currency loans have followed the ECB policy rate rather than the domestic ones. By contrast, our analysis suggests that the pass-through to interest rates of domestic currency loans is similar across countries with different levels of euroization. |
| Keywords: | Monetary policy transmission; Euroization; Emerging markets |
| Date: | 2025–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/177 |
| By: | Garriga, Ana Carolina; Rodriguez, Cesar M. |
| Abstract: | Central banks are often tasked with steering economies toward goals that exceed price stability, but the consequences of broader mandates are understudied. This paper focuses the case of central banks that have the explicit mandate of promoting both price stability and full employment (“dual mandates”). We explain how dual mandate adop- tion generates institutional constraints that increase inflation without delivering meaningful gains in employment. We test our theory using original data on central bank mandates in 176 countries from 1985 to 2023. The empirical analysis addresses challenges of staggered adoption and treatment heterogeneity through entropy balancing, and generalized synthetic control approaches focusing on countries with clean adoption patterns. We find that dual mandate adoption raises inflation by about eight percentage points relative to inflation-only mandates, with effects persisting over time. In contrast, we do not find systematic long-term employment benefits. These results suggest that broader central bank mandates may weaken the effectiveness of monetary policy and increase the risk of politicization. This has im- plications for debates over institutional design, delegation, and the limits of technocratic governance. |
| Keywords: | Central bank independence; Central banks; Dual mandate; Employment; Inflation; Mandates |
| JEL: | E31 E52 E58 |
| Date: | 2025–08–22 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125925 |
| By: | Vîntu, Denis |
| Abstract: | This paper analyzes the implementation, effectiveness, and challenges of the inflation targeting framework in the Republic of Moldova. It explores the theoretical foundations of inflation targeting, reviews Moldova’s historical transition from high and volatile inflation to a structured monetary policy framework, and examines the National Bank of Moldova's strategies for achieving price stability. Empirical analysis of policy performance, including Taylor Rule estimates and responses to economic shocks, is presented. The study highlights the strengths of inflation targeting, such as enhanced credibility and anchored inflation expectations, while also addressing challenges related to external shocks, structural constraints, and data limitations. Finally, the paper provides perspectives for improving Moldova’s monetary policy framework, emphasizing forecasting, communication, and institutional capacity, thereby contributing to sustainable economic stability and growth. |
| Keywords: | Inflation Targeting, Taylor Rule, Monetary Policy, Republic of Moldova, Central Bank, Price Stability, Emerging Economies, Interest Rate Policy, Macroeconomic Stability, Policy Effectiveness |
| JEL: | E31 E52 E58 F41 O23 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125839 |
| By: | Karlye Dilts Stedman; Andrew Hanson |
| Abstract: | Using high frequency data, we find that spillovers to the U.S. yield curve from the European Central Bank increased following the Global Financial Crisis, and strengthened when the U.S. normalized policy out of sync with other advanced economies. These spillovers were amplified by a contemporaneous waning in the ”convenience” of Treasuries. This provides evidence for a portfolio balance channel of transmission that is time-varying based on the non-pecuniary characteristics of Treasuries. We rationalize these facts using a two-country model of preferred habitat investors, where time-varying price-elasticity of demand for Treasuries gives rise to time-varying spillovers. |
| Keywords: | treasuries; Convenience yield; monetary policy; international spillovers; quantitative easing; quantitative tightening; preferred habitat |
| JEL: | E44 E52 F42 G12 |
| Date: | 2025–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:101728 |
| By: | Kerstin Bernoth |
| Abstract: | This paper investigates the effectiveness of the European Central Bank’s (ECB) communication in shaping market expectations and real economic outcomes. Using a transformer-based large language model (LLM) fine-tuned to ECB communication, the tone of monetary policy statements from 2003 to 2025 is classified, constructing a novel ECB Communication Stance Indicator. This indicator contains forward-looking information beyond standard macro-financial variables. Identified communication shocks are distinct from monetary policy and central bank information shocks. A structural Bayesian VAR reveals that hawkish communication signals favorable economic prospects, raising output, equity prices, and inflation, but also increases bond market stress. These findings highlight communication as an independent and effective tool of monetary policy, while also underscoring the importance of carefully calibrating tone to balance market expectations, and financial stability. |
| Keywords: | Monetary Policy, Central Bank Communication, Text Sentiment, Transformerbased Large Language Model, Bayesian Vector Autoregression, Local Projections |
| JEL: | C32 E43 E47 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2137 |
| By: | Isabel Gödl-Hanisch; Jordan Pandolfo |
| Abstract: | We provide empirical evidence on banks' market power in financial services and its implications for monetary policy transmission through deposit rates. Banks with market power in financial services charge higher fees for their service and also offer lower deposit rates with less pass-through from monetary policy. We argue that this is the result of product tying: consumers must open a deposit account to access a bank's financial services. We develop and calibrate a quantitative model of the U.S. banking industry where banks generate non-interest income from services in addition to a standard loan-deposit model. Counterfactuals emphasize the importance of non-interest income for credit supply, financial stability, and deposit pricing. |
| JEL: | D43 E44 E52 G21 G51 |
| Date: | 2025–04–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:101732 |
| By: | Okan Akarsu; Emrehan Aktug; Huzeyfe Torun |
| Abstract: | We conducted a survey of Turkish firms, using randomized treatments to provide varied information about inflation in a high-inflation environment. By matching the survey data with administrative firm-level data on employment, sales, credit, and foreign exchange transactions, we explore the impact of exogenous variations in inflation expectations on firms’ behavior, borrowing decisions, and expectations. Our findings are summarized in seven facts: (i) information treatments are effective at generating exogenous variation in inflation expectations, even when inflation is high; (ii) the pass-through to firms’ own price, wage, and cost expectations is strong, reaching up to 60%; (iii) firms adopt a supply-side interpretation of inflation—lower inflation expectations make them more optimistic; (iv) firms with lower inflation expectations decrease credit demand by approximately 3% for a 1 percentage point decline in expected inflation, shifting from long-term to short-term loans to avoid higher perceived costs; (v) they dollarize their liabilities by increasing their share of FX-denominated debt; (vi) they de-dollarize their assets by decreasing their net foreign currency holdings; and (vii) they increase their real activity, leading to higher employment and sales, and lower inventory. |
| Keywords: | Expectations, Firms, RCT, High inflation, Macroeconomics |
| JEL: | E12 E24 E31 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2512 |
| By: | Grodecka-Messi, Anna (Financial Stability Department, Central Bank of Sweden); Zhang, Xin (Research Department, Central Bank of Sweden) |
| Abstract: | Private money creation lies at the heart of currency competition due to seigniorage rents that are an important contributor to banks’ franchise values. However, it undermines the role of central bank in money provision and has been historically a contentious issue. As shifting from private to public money may come at a cost of bank disintermediation and affect economic growth, such a swap should be well-planned to minimize its costs. In this paper, we study the transition from private to public money in a historical context. The 1897 banking law in Sweden granted the banknote monopoly to the Swedish central bank. To facilitate the shift, the central bank provided preferential liquidity support to formerly note-issuing private banks. Drawing on newly digitized monthly archival data, we show that this liquidity provision played a critical role in shaping private banks’ performances during the transition. Once the support started being withdrawn, affected banks experienced a 23% drop in profitability. No signs of bank disintermediation are found. |
| Keywords: | Money and Banking; Inside Money; Outside Money; Bank Profitability; Bank Lending; Banknote Monopoly |
| JEL: | E42 E50 G21 G28 N23 |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0454 |
| By: | Jonathan Benchimol (BoI - Bank of Israel); Sophia Kazinnik (Stanford University); Yossi Saadon (BoI - Bank of Israel) |
| Abstract: | In this study, we examine the Federal Reserve's communication strategies during the COVID-19 pandemic, comparing them with communication during previous periods of economic stress. Using specialized dictionaries tailored to COVID-19, unconventional monetary policy (UMP), and financial stability, combined with sentiment analysis and topic modeling techniques, we identify a distinct focus in Fed communication during the pandemic on financial stability, market volatility, social welfare, and UMP, characterized by notable contextual uncertainty. Through comparative analysis, we juxtapose the Fed's communication during the COVID-19 crisis with its responses during the dot-com and global financial crises, examining content, sentiment, and timing dimensions. Our findings reveal that Fed communication and policy actions were more reactive to the COVID-19 crisis than to previous crises. Additionally, declining sentiment related to financial stability in interest rate announcements and minutes anticipated subsequent accommodative monetary policy decisions. We further document that communicating about UMP has become the "new normal" for the Fed's Federal Open Market Committee meeting minutes and Chairman's speeches since the Global Financial Crisis, reflecting an institutional adaptation in communication strategy following periods of economic distress. These findings contribute to our understanding of how central bank communication evolves during crises and how communication strategies adapt to exceptional economic circumstances. |
| Keywords: | Data science, Machine leaning, Text analysis, Text analytics, COVID-19, Text mining, Financial stability, Unconventional monetary policy, Central bank communication |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05203069 |
| By: | Vîntu, Denis |
| Abstract: | This paper examines the macroeconomic implications of nominal rigidities in a non-Ricardian economy, where households face borrowing constraints and do not fully internalize the government’s intertemporal budget constraint. Departing from the Ricardian equivalence framework, we show that fiscal policy plays a central role in shaping aggregate demand when nominal wages or prices adjust sluggishly. The interaction between sticky prices, liquidity-constrained households, and active fiscal policy generates non-neutral effects of government spending and taxation, amplifying short-run fluctuations. Using a simplified dynamic model, we demonstrate how nominal rigidities magnify fiscal multipliers and alter the transmission of monetary policy, particularly under conditions of limited asset market participation. These findings highlight the importance of accounting for both non-Ricardian behavior and nominal stickiness when evaluating stabilization policy in economies with incomplete financial markets. |
| Keywords: | Nominal rigidity; Price stickiness; Wage rigidity; Sticky prices; Sticky wages; Inflation persistence; Monetary policy transmission; Labor market inflexibility; Menu costs; Contractual rigidity; New Keynesian economics; Phillips curve; Price adjustment; Wage adjustment; Expectations (rational and adaptive); External shocks; Economic fluctuations; Macro stabilization; Small open economy; Moldova economy (or country-specific context) |
| JEL: | E12 E24 E31 E32 E52 E58 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125865 |
| By: | Okan Akarsu; Mehmet Selman Colak; Hatice Karahan; Huzeyfe Torun |
| Abstract: | This study examines the impact of monetary policy surprises on credit usage, borrowing costs, default probabilities, and foreign-currency (FX) trading behavior, emphasizing heterogeneity by firm size, leverage, export orientation, and sector. Using a comprehensive administrative dataset linking firm-level balance sheets, employment, firm–bank credit records, and FX transactions, we document four main results: (1) unexpected tightening reduces borrowing, raises loan rates, and increases default risk, with markedly stronger effects for SMEs and highly leveraged firms than for large and less-leveraged firms; (2) export-oriented firms are relatively resilient, consistent with diversified foreign-currency revenues and broader funding options; (3) sectoral responses are uneven—construction is most responsive, services are intermediate, and industry is least affected; and (4) policy surprises reallocate FX flows—following unexpected tightening, firms (especially SMEs and non-exporters) reduce FX purchases and increase FX sales, while exporters adjust less. Collectively, the findings underscore systematic variation in firms’ responses to monetary policy shaped by size, financial structure, export orientation, and sectoral characteristics. |
| Keywords: | Monetary policy transmission, Monetary policy surprises, Credit, Firm heterogeneity |
| JEL: | E12 E24 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2514 |
| By: | Michael D. Bordo (Rutgers University, NBER, and Hoover Institution); John V. Duca (Oberlin College); Barry E. Jones (Binghamton University) |
| Abstract: | The rise of U.S. inflation in 2021 and 2022 and its partial subsiding have sparked debates about the relative role of supply and demand factors. The initial surge surprised many macroeconomists despite the unprecedented jump in money growth in 2020-21. We find that the relationship between consumption and the theoretically based Divisia M3 measure of money (velocity) can be well modeled both in the short- and long-runs. We use the estimated long-run relationship to calculate the deviation of actual velocity from its long-run equilibrium and incorporate it into a P-Star framework. Our model of velocity significantly improves the performance of the P-Star model relative to using a one-sided HP filter to calculate trend velocity as, for example, used by Belongia and Ireland (2015, 2017). We also include a global supply pressures index in the model and find that recent movements in U.S. inflation largely owed to aggregate demand driven macroeconomic factors that are tracked by Divisia money with a smaller role played by supply factors. |
| Keywords: | Money, Divisia, Inflation, Supply Chain Disruptions |
| JEL: | E51 E41 E52 E58 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:pri:cepsud:345 |
| By: | Jonathan Adams; Philip Barrett |
| Abstract: | Empirical monetary policy shocks (EMPS) mix information about both current and future policy. Policy news shocks at different horizons have different macroeconomic effects, so quantifying this mix is essential to use EMPS to evaluate theory. To disentangle these shocks, we develop an IV method to estimate the term structure of monetary policy news, which captures how an EMPS affects policy residuals at each future horizon. Applying our method to popular monetary policy shocks, we learn that they do not represent textbook surprises Instead, they mix information about policy at many horizons, and this mix varies depending on how the EMPS is identified. We can use the estimated term structures to construct synthetic shocks with arbitrary term structures and assess their macroeconomic effects. Synthetic surprise interest rate hikes are contractionary with little effect on prices, while long-term forward guidance is deflationary. |
| Keywords: | monetary policy shocks; forward guidance; term structure |
| JEL: | E32 E43 E52 |
| Date: | 2025–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:101723 |
| By: | Maksym Homeniuk (National Bank of Ukraine) |
| Abstract: | This paper estimates Ukraine's inflation attention threshold using a text-based proxy derived from the relative frequency of the word "inflation" in parliamentary speeches. During a relatively stable macroeconomic period between 2017 and 2022, the estimated threshold is approximately 9-10 percent. This finding aligns with results obtained using Google Trends data, where attention increased just prior to inflation reaching double-digit levels. Crucially, the parliamentary proxy also facilitates estimation for another stable period preceding the global financial crisis (2002-2007). The remarkably similar threshold estimates across both stable periods suggest that attention dynamics in Ukraine exhibit structural consistency under non-crisis conditions. These findings underscore the value of parliamentary speech analysis as a robust tool for tracking inflation salience in contexts with limited data availability. |
| Keywords: | inflation; attention; parliamentary speeches; threshold regression; monetary policy |
| JEL: | C82 D83 E31 E52 E71 |
| Date: | 2025–09–02 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp14-2025 |
| By: | Barmes, David; Claeys, Irene; Dikau, Simon; Pereira da Silva, Luiz Awazu |
| Abstract: | Negative supply shocks caused by climate change and interconnected crises may increasingly fuel persistent inflationary pressures. Responding to these shocks with standard monetary tightening would involve significant trade-offs, including impacts on economic output, financial stability, fiscal space, income equality and the green transition. While flexible inflation-targeting (FIT) regimes have faced supply shocks in the past, central banks may encounter new challenges in assessing and responding to these trade-offs, particularly when it comes to long-term macroeconomic stability. Consequently, this report proposes the case for adaptive inflation targeting (or ‘adaptive-IT’), which aims to equip central banks with a framework, analysis and toolkit that enables them to better navigate these supply-side disruptions. The report reviews existing literature on climate change and price stability, considers the risk posed by more persistent climate-related inflationary pressure and explores the trade-offs, challenges and implications for monetary policy. It proposes a shift from flexible inflation targeting to adaptive inflation targeting. This would prepare central banks to navigate supply-side headwinds while enabling fiscal policymakers to take a proactive role in preventing and mitigating negative supply shocks. |
| JEL: | F3 G3 L81 |
| Date: | 2024–12–09 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129331 |
| By: | Michael D. Bordo (Rutgers University and NBER); Oliver Bush (Bank of England); Bank of England |
| Abstract: | Discussion of the causes of the Great Inflation in the UK during the 1970s has centered around the relative importance of two potential explanations, which we label “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 stabilize the public finances. Instead, it was used to keep unemployment down and growth up, to subsidize losers from terms of trade shocks and to secure deals with the unions. |
| Keywords: | United Kingdom; Great Britain |
| JEL: | N10 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:pri:cepsud:347 |
| By: | Kenji Miyazaki |
| Abstract: | This paper argues and analytically demonstrates that, in a fully analytical Two-Agent New Keynesian model with Rotemberg-type nominal rigidities, monetary transmission is amplified if and only if two conditions hold: first, the heterogeneity-induced IS-slope effect dominates; second, the price-stickiness channel is active. We also show when amplification weakens or disappears, most notably under pure wage stickiness, where the price channel shuts down and the heterogeneity-driven term vanishes. The framework features household heterogeneity between savers and hand-to-mouth households and adheres strictly to microeconomic foundations while avoiding restrictive assumptions on relative wages or labor supply across types that are common in prior analytical work. The closed-form solution makes transparent how price stickiness, wage stickiness, and the share of hand-to-mouth households jointly shape amplification. We further derive a modified aggregate welfare loss function that quantifies how heterogeneity, operating through distributional effects from firm profits, re-weights the relative importance of stabilizing inflation. Overall, the tractable yet micro-founded analytical framework clarifies the interaction between household heterogeneity and nominal rigidities and pinpoints the precise conditions under which monetary policy gains or loses traction. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.12073 |
| By: | Michael D. Bordo (Rutgers University, Hoover Institution, and NBER); John H. Cochrane (Hoover Institution and NBER); Jonathan S. Hartley (Stanford University and Hoover Institution) |
| Abstract: | John B. Taylor is one of the greatest macroeconomists of the late 20th and early 21st centuries. This paper surveys his seminal contributions to monetary theory, policy rules, and macroeconomic modeling. Taylor’s work on rational expectations, staggered contracts, and the development of the Taylor Rule transformed the theory and practice of monetary policy. Through scholarship, policy engagement, and public service, Taylor has profoundly influenced academic research and central banking practice, establishing rules-based policy as a central paradigm in macroeconomics |
| Keywords: | Monetary Policy, Central Banks, Policy Objectives, International Monetary Arrangements and Institutions |
| JEL: | E52 E58 E61 F33 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:pri:cepsud:346 |
| By: | Fiona Xiao Jingyi; Lili Liu |
| Abstract: | Forecasting central bank policy decisions remains a persistent challenge for investors, financial institutions, and policymakers due to the wide-reaching impact of monetary actions. In particular, anticipating shifts in the U.S. federal funds rate is vital for risk management and trading strategies. Traditional methods relying only on structured macroeconomic indicators often fall short in capturing the forward-looking cues embedded in central bank communications. This study examines whether predictive accuracy can be enhanced by integrating structured data with unstructured textual signals from Federal Reserve communications. We adopt a multi-modal framework, comparing traditional machine learning models, transformer-based language models, and deep learning architectures in both unimodal and hybrid settings. Our results show that hybrid models consistently outperform unimodal baselines. The best performance is achieved by combining TF-IDF features of FOMC texts with economic indicators in an XGBoost classifier, reaching a test AUC of 0.83. FinBERT-based sentiment features marginally improve ranking but perform worse in classification, especially under class imbalance. SHAP analysis reveals that sparse, interpretable features align more closely with policy-relevant signals. These findings underscore the importance of integrating textual and structured signals transparently. For monetary policy forecasting, simpler hybrid models can offer both accuracy and interpretability, delivering actionable insights for researchers and decision-makers. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.22763 |
| By: | Garriga, Ana Carolina; Gavin, Michael A. |
| Abstract: | A large literature explores how loan conditionalities and policy recommendations embedded in International Monetary Fund lending programs influence country behavior and policy choices. We argue that the IMF’s influence extends beyond these intentional efforts. This paper shows that the growth in the IMF’s lending capacity has failed to keep pace with financial globalization, and that this has incentivized emerging and developing economies to strengthen their domestic institutions for financial stability, particularly, their central bank’s capabilities to act as a lender of last resort. We conceptualize this as influence by omission, whereby the IMF shapes behavior not through direct engagement but through its declining ability to serve as an effective financial backstop. Using original data coding central bank lender of last resort powers for 60 developing countries between 1994 and 2020, we find that countries with relatively limited access to IMF resources are significantly more likely to strengthen their central banks’ lender of last resort authority. This finding is robust across a range of model specifications, instrumental variable analyses, and dynamic estimations. An event study of countries’ response to the Covid shock reveals that countries with stronger lending of last resort capabilities were much more likely to manage the crisis without drawing on IMF resources. Importantly, this effect is specific to lender of last resort powers and does not extend to other aspects of central bank governance such as independence or transparency, suggesting that distinct international and domestic incentives shape different reform trajectories. |
| Keywords: | Central Banks, Domestic Reforms, Financial Stability, International Monetary Fund, Lender of Last Resort |
| JEL: | E58 E61 F33 F34 F55 G15 G28 H12 H81 |
| Date: | 2025–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125739 |
| By: | Fabio Gómez-Rodríguez (Department of Economic Research, Central Bank of Costa Rica); Catalina Sandoval-Alvarado (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | This study proposes a structural model to estimate the exchange rate pass-through to prices in Costa Rica, extending the traditional focus on unexpected exchange rate shocks by considering the inflation response to general fluctuations in the nominal exchange rate. It also reviews the main previous estimates for the country, highlighting their contributions and methodological limitations. The analysis yields three key findings: (i) existing approaches tend to underestimate the influence of the nominal exchange rate on prices; (ii) recursive identification schemes such as the Cholesky decomposition impose theoretically questionable assumptions; and (iii) the systematic pass-through exhibits a semi-elasticity of 25 %, significantly higher than the 4 % associated with the unconditional pass-through. Moreover, the study shows that pass-through effects conditional on monetary policy have a substantial impact on inflation, underscoring the importance of explicitly incorporating policy responses in the analysis. ***Resumen: Este estudio propone un modelo estructural para estimar el efecto de traspaso (ET) del tipo de cambio nominal (TCN) a precios en Costa Rica. El modelo permite estimar tres medidas complementarias del efecto traspaso. El ET incondicional representa la respuesta de la inflación a choques inesperados del TCN. El ET condicional recoge el efecto en inflación de choques del TCN inducidos por otros factores. Adicionalmente, se estima el ET sistemático que recoge la respuesta de la inflación ante fluctuaciones generales del TCN. También se revisan las principales estimaciones previas para el país, destacando sus aportes y limitaciones. El análisis ofrece tres conclusiones clave: (i) los enfoques existentes tienden a subestimar la influencia del tipo de cambio en los precios; (ii) la identificación recursiva tipo Cholesky impone supuestos teóricamente cuestionables; y (iii) el traspaso sistemático alcanza una semielasticidad del 25 %, muy superior al 4 % del traspaso incondicional. Además, se demuestra que los efectos de traspaso condicionados a la política monetaria tienen un impacto relevante sobre la inflación, resaltando la necesidad de incorporar explícitamente estas respuestas en el análisis. |
| Keywords: | Inflation; Pass-Through of the Nominal Exchange Rate; Structural VAR, Inflación, Traspaso del tipo de cambio nominal, VAR estructural |
| JEL: | E31 F31 F32 C11 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:apk:doctra:2503 |
| By: | Ren\'eee Men\'endez; Viktor Winschel |
| Abstract: | We develop a monetary macro accounting theory (MoMaT) and its software specification for a consistent national accounting. In our money theory money functions primarily as a medium of payment for obligations and debts, not as a medium of exchange, originating from the temporal misalignment where producers pay suppliers before receiving revenue. MoMaT applies the legal principles of Separation and Abstraction to model debt, contracts, property rights, and money to understand their nature. Monetary systems according to our approach operate at three interconnected levels: micro (division of labor), meso (banking for risk-sharing), and macro (GDP sharing, money issuance). Critical to money theory are macro debt relations, hence the model focuses not on the circulation of money but on debt vortices: the ongoing creation and resolution of financial obligations. The Bill of Exchange (BoE) acts as a unifying contractual instrument, linking debt processes and monetary issuance across fiat and gold-based systems. A multi-level BoE framework enables liquidity exchange, investments, and endorsements, designed for potential implementation in blockchain smart contracts and AI automation to improve borrowing transparency. Mathematical rigor can be ensured through category theory and sheaf theory for invariances between economic levels and homology theory for monetary policy foundations. Open Games can structure macroeconomic analysis with multi-agent models, making MoMaT applicable to blockchain economic theory, monetary policy, and supply chain finance. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.21651 |
| By: | Nicholas Gray; Finn Lattimore; Kate McLoughlin; Callan Windsor |
| Abstract: | In a world of increasing policy uncertainty, central banks are relying more on soft information sources to complement traditional economic statistics and model-based forecasts. One valuable source of soft information comes from intelligence gathered through central bank liaison programs -- structured programs in which central bank staff regularly talk with firms to gather insights. This paper introduces a new text analytics and retrieval tool that efficiently processes, organises, and analyses liaison intelligence gathered from firms using modern natural language processing techniques. The textual dataset spans 25 years, integrates new information as soon as it becomes available, and covers a wide range of business sizes and industries. The tool uses both traditional text analysis techniques and powerful language models to provide analysts and researchers with three key capabilities: (1) quickly querying the entire history of business liaison meeting notes; (2) zooming in on particular topics to examine their frequency (topic exposure) and analysing the associated tone and uncertainty of the discussion; and (3) extracting precise numerical values from the text, such as firms' reported figures for wages and prices growth. We demonstrate how these capabilities are useful for assessing economic conditions by generating text-based indicators of wages growth and incorporating them into a nowcasting model. We find that adding these text-based features to current best-in-class predictive models, combined with the use of machine learning methods designed to handle many predictors, significantly improves the performance of nowcasts for wages growth. Predictive gains are driven by a small number of features, indicating a sparse signal in contrast to other predictive problems in macroeconomics, where the signal is typically dense. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.18505 |
| By: | Kerry Loaiza-Marín (Department of Economic Research, Central Bank of Costa Rica); Jose Pablo Barquero-Romero (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | This work shows that the credit channel is a potential determinant of the effectiveness of monetary policy in Costa Rica. Monetary policy decisions can be transmitted on economic activity not only through changes in interest rates, but also by impacting the availability and terms of bank loans. Microdata is used that cover the universe of new loans granted by financial entities monthly and it is observed that the impact of changes in the monetary policy rate is asymmetric, and that said asymmetry depends on the decision that commercial banks make about whether allocate resources to grant credit or place it in securities. Particularly, it is identified that the credit channel has a high probability of being activated when the proportion of securities with respect to credit held by banking entities is around 21, 8%. When the credit channel is inactive, an increase of 100 basis points (b.p.) in the monetary policy rate (MPR) is associated with a response in the interannual rate of variation of the Monthly Economic Activity Index (IMAE) of -0, 24 percentage points. (p.p.) twelve months after the change. With the channel active, this response is -2, 61 p.p. Given this, the cyclical and financial conditions of the local economy are fundamental to understanding the effectiveness of monetary policy. ***Resumen: Este trabajo muestra que el canal de crédito es un potencial determinante de la efectividad de la política monetaria en Costa Rica. Las decisiones de política monetaria pueden transmitirse sobre la actividad económica no solamente mediante cambios en las tasas de interés, sino también al impactar la disponibilidad y los términos de los préstamos bancarios. Se utilizan microdatos que cubren el universo de préstamos nuevos otorgados por las entidades financieras con frecuencia mensual y se observa que el impacto de cambios en la tasa de política monetaria es asimétrico, y que dicha asimetría depende de la decisión que tomen los bancos comerciales sobre si destinar recursos a otorgar crédito o bien colocarlo en títulos valores. Particularmente, se identifica que el canal de crédito tiene alta probabilidad de activarse cuando la proporción de títulos valores con respecto al crédito que mantienen las entidades bancarias se ubica en torno a 21, 8 %. Cuando el canal crediticio está inactivo, un incremento de 100 puntos base (p.b.) en la tasa de política monetaria (TPM) se asocia con una respuesta de la tasa de variación interanual del Índice Mensual de Actividad Económica (IMAE) de -0, 24 puntos porcentuales (p.p.) doce meses después del cambio. Con el canal activo, esta respuesta es de -2, 61 p.p. Ante ello, las condiciones cíclicas y financieras de la economía local son fundamentales para entender la efectividad de la política monetaria. |
| Keywords: | Time Series Models, Money Supply, Credit, Smooth Transition SVAR, VAR de transición suave, Crédito, Oferta de dinero, Modelos de series de tiempo |
| JEL: | C32 E51 E52 E58 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:apk:doctra:2504 |
| By: | Umberto Collodel |
| Abstract: | This paper develops a novel method to simulate financial market reactions to European Central Bank (ECB) press conferences using a Large Language Model (LLM). We create a behavioral, agent-based simulation of 30 synthetic traders, each with distinct risk preferences, cognitive biases, and interpretive styles. These agents forecast Euro interest rate swap levels at 3-month, 2-year, and 10-year maturities, with the variation across forecasts serving as a measure of market uncertainty or disagreement. We evaluate three prompting strategies, naive, few-shot (enriched with historical data), and an advanced iterative 'LLM-as-a-Judge' framework, to assess the effect of prompt design on predictive performance. Even the naive approach generates a strong correlation (roughly 0.5) between synthetic disagreement and actual market outcomes, particularly for longer-term maturities. The LLM-as-a-Judge framework further improves accuracy at the first iteration. These results demonstrate that LLM-driven simulations can capture interpretive uncertainty beyond traditional measures, providing central banks with a practical tool to anticipate market reactions, refine communication strategies, and enhance financial stability. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.13635 |
| By: | Zájac, Jan (University of Bristol); Paczos, Wojtek (Cardiff Business School, Cardiff University; Institute of Economics, Polish Academy of Sciences) |
| Abstract: | Using panel data for 92 banks in 11 CEE countries over 2006–2020, we investigate how joining the euro affects bank profitability. Overall the effect is statistically indistinguishable from zero, but in tranquil periods euro membership lowers returns. Higher capital ratios and larger size raise profitability, whereas greater liquidity and loan intensity reduce it. |
| Keywords: | Banks profitability; Euro adoption; Central & Eastern Europe |
| JEL: | F36 G21 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cdf:wpaper:2025/17 |
| By: | Philippe Bergault; S\'ebastien Bieber; Olivier Gu\'eant; Wenkai Zhang |
| Abstract: | In traditional financial markets, yield curves are widely available for countries (and, by extension, currencies), financial institutions, and large corporates. These curves are used to calibrate stochastic interest rate models, discount future cash flows, and price financial products. Yield curves, however, can be readily computed only because of the current size and structure of bond markets. In cryptocurrency markets, where fixed-rate lending and bonds are almost nonexistent as of early 2025, the yield curve associated with each currency must be estimated by other means. In this paper, we show how mathematical tools can be used to construct yield curves for cryptocurrencies by leveraging data from the highly developed markets for cryptocurrency derivatives. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.03964 |
| By: | Sophia Cho; John C. Williams |
| Abstract: | Recently, there has been renewed attention on the natural rate of interest—often referred to as “r-star”—and whether it has risen from the historically low levels that prevailed before the COVID-19 pandemic. The natural interest rate is the real (inflation-adjusted) interest rate expected to prevail when supply and demand in the economy are in balance and inflation is stable. Some commentators claim that the prior decline in r‑star has reversed, pointing to the recent rise in future real interest rates implied by the bond market. But before declaring the death of this “low r‑star” era, a natural question to ask is: how reliable are market-based measures of r‑star? In this Liberty Street Economics post, we evaluate whether such measures provide additional information on future real interest rates beyond what is already contained in macroeconomic model-based estimates of r-star. Our findings suggest they do not, and we conclude that reports of the death of low r-star are greatly exaggerated. |
| Keywords: | natural rate of interest; Holston-Laubach-Williams model; Treasury Inflation-Protected Securities (TIPS); term structure models; macroeconomic models; Blue Chip survey |
| JEL: | C32 E43 E52 |
| Date: | 2025–08–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101693 |
| By: | Yoseph Getachew; Richard Kima; Nyemwererai Matshaka |
| Abstract: | This paper develops a two-agent worker-capitalist heterogeneous household monetary Schumpeterian growth model to examine the effects of R&D and monetary policies on economic growth and inequality. The model is then calibrated to the South African economy, an upper-middle-income African country infamous for its consistently high level of inequality. A higher nominal interest rate reduces innovation and economic growth but help to mitigate inequality. However, the reduction in consumption inequality comes from a disproportionate decline in the capitalists' condition. |
| Keywords: | Economic growth, Inequality, Monetary policy, Research (Technological innovations) |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2025-55 |