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on Monetary Economics |
| By: | Arifovic, Jasmina; Salle, Isabelle; Schilling, Linda |
| Abstract: | This study examines currency competition between a centrally managed currency, the Dollar, and a rigid-supply alternative, Bitcoin, focusing on the role of monetary policy. Using theoretical modeling and laboratory experiments, we show that proportional transfers, modeled as interest on Dollar balances, increase Dollar trade shares (Dollar dominance) and reduce Dollar velocities, thereby weakening the pass-through of monetary policy to prices. These dynamics are self-fulfilling: low inflation expectations drive trade shifts and slower spending, which in turn suppress Dollar prices. In the lab, we observe how evolving expectations shape trade, velocity, and inflation. Dollar policy induces inflation spillovers into Bitcoin by crowding out trade, despite Bitcoin’s lack of a monetary authority, revealing the limits of central bank influence in an increasingly pluralistic monetary system. |
| JEL: | E5 E4 C92 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20529 |
| By: | Kara, A. Hakan; Simsek, Alp |
| Abstract: | Türkiye's response to post-pandemic inflation is a cautionary tale of how political pressure for low interest rates can create macroeconomic instabilities. While central banks worldwide raised interest rates to combat inflation in 2021-2023, Turkish authorities pursued the opposite strategy: cutting real rates to deeply negative levels while implementing financial engineering tools, FX interventions, and financial repression to stabilize markets. The centerpiece was a novel FX-protected deposit scheme (KKM) that guaranteed depositors against currency depreciation, shifting exchange rate risk to the government balance sheet. We provide a detailed account of this policy experiment and develop a theoretical model focusing on how KKM functions and creates vulnerabilities. Our model reveals that pressure to keep interest rates below inflation-targeting levels can lead to an interconnected destabilizing sequence. Low rates generate inflation, current account deficits, and exchange rate depreciation. KKM provides partial stabilization by effectively raising rates for savers while maintaining low rates for borrowers. However, this creates growing contingent fiscal burdens and vulnerability to self-fulfilling currency and sovereign debt crises. This explains additional policies adopted including capital flow management, financial repression, and return to orthodox monetary policy. As central banks worldwide face renewed pressure to set lower policy rates, Türkiye's experience illustrates the consequences. |
| Keywords: | Monetary policy; Central bank independence; Currency crises; Sovereign debt crises; Fx reserves; exchange rate |
| JEL: | E52 E58 E43 F31 F32 F41 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20647 |
| By: | Jorge Abad (EUROPEAN CENTRAL BANK); Saki Bigio (UCLA AND NBER); Salomón García-Villegas (CUNEF UNIVERSITY); Joël Marbet (BANCO DE ESPAÑA); Galo Nuño (BANCO DE ESPAÑA, CEMFI AND CEPR) |
| Abstract: | How does heterogeneity in banks’ interest-rate risk exposure shape monetary policy transmission? We develop a quantitative macroeconomic model of heterogeneous banks to answer this question. We establish an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter for transmission only when bank solvency concerns become relevant. By calibrating the model to the euro area, we show that idiosyncratic default risk pushes a substantial share of banks toward the solvency threshold, making heterogeneity quantitatively important. When policy rates rise, fixed-rate banks’ net interest margin is compressed – funding costs increase while legacy loan income stays unchanged – eroding capital and triggering sharper deleveraging. The elasticity of lending to monetary policy is one-third higher in fixed-rate economies. The effects extend to financial stability: tightening raises bank failure rates in fixed-rate systems while lowering them in variable-rate systems. The results provide a rationale for macroprudential and monetary policy coordination and for monetary policy gradualism. |
| Keywords: | Monetary policy transmission, bank lending channel, heterogeneous banks, interest-rate risk, fixed-rate loans, variable-rate loans, bank solvency, bank capital, macroprudential policy, euro area |
| JEL: | E44 E52 E58 G21 G28 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2620 |
| By: | Forbes, Kristin; Ha, Jongrim; Kose, M. Ayhan |
| Abstract: | Central banks often face tradeoffs in how their monetary policy decisions impact economic activity (including employment), inflation and the price level. This paper assesses how these tradeoffs have evolved over time and varied across countries, with a focus on understanding the post-pandemic adjustment. To make these comparisons, we compile a cross-country, historical database of “rate cycles†(i.e., easing and tightening phases for monetary policy) for 24 advanced economies from 1970 through 2024. This allows us to quantify the characteristics of interest rate adjustments and corresponding macroeconomic outcomes and tradeoffs. We also calculate Sacrifice Ratios (output losses per inflation reduction) and document a historically low “sacrifice†during the post-pandemic tightening. This popular measure, however, ignores adjustments in the price level—which increased by more after the pandemic than over the past four decades. A series of regressions and simulations suggest monetary policy (and particularly the timing and aggressiveness of rate hikes) play a meaningful role in explaining these tradeoffs and how adjustments occur during tightening phases. Central bank credibility is the one measure we assess that corresponds to only positive outcomes and no difficult tradeoffs. |
| Keywords: | Monetary policy; Interest rates; Central bank; Business fluctuations; Prices; Employment |
| JEL: | E31 E32 E43 E52 E58 F33 F44 N10 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20240 |
| By: | Alice Albonico; Guido Ascari; Qazi Haque; Kostas Mavromatis; Andra Smadu |
| Abstract: | We develop and estimate an open economy DSGE model for the euro area where global energy prices and the exchange rate jointly determine domestic inflation, because imported energy, priced in foreign currency, enters both consumption and production. Energy and exchange-rate disturbances account for the bulk of short-run volatility in headline euro area inflation, with energy price shocks driving most of the post-pandemic surge. Because energy and non-energy goods are poor substitutes, an adverse energy price shock raises import values, deteriorating the trade balance and depreciating the real exchange rate through the net-foreign-asset and UIP channels. The exchange-rate channel strengthens monetary transmission and improves the short-run inflation-output trade-off relative to a non-energy economy. Optimal policy can exploit this channel rather than looking through energy price shocks. The case for looking through such shocks becomes stronger when the central bank assigns a greater weight to output gap stabilization and prices become stickier. |
| Keywords: | monetary policy, inflation, energy, Bayesian estimation |
| JEL: | E52 E31 E32 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-55 |
| By: | Ascari, Guido; Carrier, Alexandre; Gasteiger, Emanuel; Grimaud, Alex; Vermandel, Gauthier |
| Abstract: | We study monetary policy where the price and wage Phillips curves exhibit true curvature. To this end, we propose a New Keynesian (NK) model featuring endogenous adjustment of price and wage setting frequencies, moving beyond the quasi-linear structure of the standard nonlinear NK Phillips curves (NKPC). Using euro area data spanning 1999Q1 to 2024Q4, we estimate and simulate the non-linear model. We then study the recent inflation surge and the implications of state-dependent prices and wages for monetary policy in the estimated non-linear model. Unlike conventional models, our framework does not primarily explain inflation dynamics by exogenous supply shocks. Instead, the impact of shocks on inflation depends on their timing, size, and the business cycle. Consequently, the inflation-output stabilization trade-off faced by monetary policy is state-dependent. For example, monetary policy is more effective in curbing inflation, and supply shocks have larger effects during periods of high inflation. |
| Keywords: | Phillips curve; Non-linearities; Inflation; Monetary policy |
| JEL: | C51 E31 E47 E52 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20489 |
| By: | Core, Fabrizio; De Marco, Filippo; Eisert, Tim; Schepens, Glenn |
| Abstract: | We provide novel evidence on the supply-side transmission of monetary policy through a floating-rate channel. After a rate hike, firms with floating-rate loans keep prices elevated to offset higher borrowing costs, thereby reducing the effectiveness of monetary policy. Using monthly data on product-level prices, industry-level inflation rates and the euro-area credit register from 2021 to 2023, we find that the short-run impact of monetary tightening on inflation is 50% smaller when firms rely on floating-rate loans. This effect is stronger for firms that rely more on working capital to finance production and when they can easily pass on higher prices to their sticky customer base (customer capital). Since firms with floating-rate loans face an increase in their financial burden, their loan terms are more frequently renegotiated, often resulting in reduced spreads and a shift from floating to fixed rates. Overall, if firms across the euro area had a lower reliance on floating-rate loans, inflation would have been 0.8 percentage points lower in 2022-2023. |
| Keywords: | Monetary policy transmission; Inflation; Product prices |
| JEL: | E31 E52 G21 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20354 |
| By: | Gregorio Impavido; Shuyu Wang |
| Abstract: | This paper examines the impact of voluntary and involuntary excess liquidity on monetary policy effectiveness and inflation in Kazakhstan. Consistent with first-principles predictions, we find that voluntary liquidity held for precautionary motives is (i) negatively related to the opportunity cost of holding liquid assets and to the level of mandatory reserve requirements; (ii) positively related to average liquidity outflows, proxied by transactional demand for cash; and (iii) ambiguously affected by the magnitude and volatility of the business cycle. We further show that higher voluntary liquidity weakens monetary policy transmission and increases exchange rate pass-through to inflation. In contrast, involuntary liquidity hampers monetary policy effectiveness no matter its level and it increases average inflation primarily through its influence on the formation of inflation expectations. Overall, the results suggest that reforms aimed at reducing both forms of liquidity would enhance monetary policy effectiveness and, ceteris paribus, reduce inflation. |
| Keywords: | Liquidity risk; precautionary liquidity; involuntary liquidity; monetary policy; interest channel; credit channel; Kazakhstan. |
| Date: | 2026–06–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/109 |
| By: | Conrad, Christian; Enders, Zeno; Müller, Gernot |
| Abstract: | Under inflation forecast targeting, central banks such as the ECB adjust policy to keep expected inflation on target. We evaluate the ECB’s inflation forecasts: they are unbiased and efficient but contain little information at forecast horizons beyond three quarters. In a New Keynesian model with transmission lags, inflation forecast targeting is indeed effective in stabilizing inflation—provided there is no forward-looking behavior—though the information content of forecasts is unrealistically high. In the presence of forward-looking behavior, the information content declines because monetary policy becomes more effective in meeting the target, but inflation is best stabilized by targeting current inflation. |
| Keywords: | Inflation targeting |
| JEL: | C53 E52 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20467 |
| By: | Altavilla, Carlo; Bottero, Margherita; Imbierowicz, Björn; Abad, Jorge; Anyfantaki, Sofia; Benkovskis, Konstantins; Bredl, Sebastian; Burlon, Lorenzo; de Souza, Tomás Carrera; Giovannini, Massimo; Malovaná, Simona; Maruhn, Franziska; Nicoletti, Giulio; Vilerts, Kārlis; Gasparini, Tommaso; Gric, Zuzana; Modica, Alessandro; Silvo, Aino |
| Abstract: | This Occasional Paper reviews evidence from the ChaMP Research Network on the transmission of monetary policy to firms in the euro area. Overall, transmission to firms remains effective, including during the 2022-23 tightening cycle. However, new results show that this transmission is neither uniform nor mechanical. The pass-through from policy rates and other instruments to corporate financing conditions is shaped by multiple layers of heterogeneity that may, in some cases, have aggregate implications. Country-level segmentation, linked to sovereign risk, institutional frameworks and local lending practices, plays an important role in shaping transmission, especially during periods of stress. Beyond cross-country effects, bank balance sheets and business models also influence transmission by affecting the strength of lending responses. In particular, the composition of banks’ liabilities can lead to different speeds of transmission. Firm characteristics further differentiate the impact of monetary policy, with the funding mix playing a critical role. At the contract level, collateralisation and interest rate fixation materially affect both the magnitude and composition of transmission. As some of these heterogeneities may, in certain circumstances, have aggregate implications, this paper explains how a broad and flexible toolkit, centred on the main policy rate and, when needed, complemented by other policy instruments such as asset purchases and targeted liquidity operations, can be deployed in a proportionate manner to ensure effective monetary policy transmission across a structurally diverse monetary union. JEL Classification: E52, E58, G21, G32 |
| Keywords: | bank lending channel, country segmentation, financial fragmentation, firm financing and investment, loan contract features, monetary policy transmission |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026389 |
| By: | Jaemin Jeong; Eunseong Ma; Choongryul Yang |
| Abstract: | The expectations channel of monetary policy is state dependent because households endogenously adjust attention to macroeconomic conditions. We develop a behavioral framework in which attention trades off forecast accuracy against cognitive cost, so monetary policy operates through an expectations multiplier. Using the Michigan Survey, we proxy attentiveness from whether households’ reading of business conditions matches realized outcomes, measured before identified policy shocks arrive. Policy news moves inflation beliefs primarily among attentive households, especially those with greater economic exposure; others barely respond. In the aggregate, pass-through scales with attentiveness and strengthens in recessions and high-uncertainty periods, making monetary transmission nonlinear. |
| Keywords: | inflation expectations; monetary policy transmission; rational inattention; state dependence; expectations multipliers |
| JEL: | E31 E32 E52 E58 E70 |
| Date: | 2026–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:103552 |
| By: | Mateus Maquiadi |
| Abstract: | We identify FX demand and FX supply shocks using a Bayesian Structural VAR with sign restrictions and employ Local Projections to estimate their dynamic effects on inflation in Angola, comparing results obtained using the official and parallel exchange rates. In addition, State- Dependent Local Projections are used to assess whether the degree of exchange rate segmentation alters the intensity of exchange rate pass-through. The results show that FX demand shocks generate rapid, persistent, and statistically significant inflationary effects, whereas positive FX supply shocks produce weaker disinflationary effects. The findings further suggest that the parallel FX market plays an important role in price formation in some sectors of the economy and that exchange rate segmentation influences the transmission of exchange rate shocks to domestic prices. |
| Keywords: | Exchange Rate Pass-Through; Inflation Dynamics; FX Demand and Supply Shocks; Exchange Rate Segmentation; Angola. |
| JEL: | E31 F31 C32 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp04212026 |
| By: | Bofinger, Peter |
| Abstract: | The paper discusses the functions and potential of stablecoins as an innovative payment system. It is important to distinguish between bond-based and bank-based stablecoins. Bond-based stablecoins have an attractive business model, offering international direct payments based on a secure transaction asset. Market dynamics reveal significant network effects, with a single currency denomination, a duopoly of two issuers, and a limited number of blockchains. The dominant issuers have demonstrated resilience during periods of economic shock. The macroeconomic effects of bank-based stablecoins are limited, since they cannot create loans. However, bond-based stablecoins can create money by purchasing government bonds. While bank-based stablecoins create financial stability risks by interconnecting banks and stablecoin issuers, bond-based stablecoins do not present this risk. The Digital Euro is not an alternative to stablecoins. Its use is limited to the euro area, it is designed for retail payments, and it only allows asset holdings for private households. |
| Keywords: | Stablecoins; Blockchain; Cryptocurrencies; Central Bank Digital Money CBDC |
| JEL: | E42 E52 E58 G15 G21 G23 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20583 |
| By: | Guerrieri D'Amati, Andrea (University of Warwick); Hassall, Gavin (University of Bath) |
| Abstract: | This paper studies how forward-looking language in the Federal Open Market Committee (FOMC) minutes affects market expectations of future interest rates. We analyse the text of the FOMC minutes from 1997 to 2023 with structural topic modelling combined with LLM-based tone and tense analysis. We estimate market reactions in an event study that exploits the fact that the release of the minutes involves no policy change, ensuring any market response reflects pure expectation revisions. We show that forward-looking information about certain topics has systematically moved private sector expectations of future interest rates. In particular, hawkish forward-looking inflation language raises 2-, 5- and 10-year Treasury yields. We interpret these findings through a model where the private sector does not observe the central bank’s responsiveness to its inflation outlook, and learns about it via a signal extraction problem. We argue that communication effectiveness depends not only on what topics are discussed but on how they are temporally framed. |
| Keywords: | Central Bank Communication, Monetary Policy, Market Expectations JEL codes: E52, E58, E59 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1619 |
| By: | Ascari, Guido; Bijnens, Gert; Bobasu, Alina; Colciago, Andrea; Dhyne, Emmanuel; Elfsbacka-Schmöller, Michaela; Grimaud, Alex; Valderrama, Maria Teresa; Zlobins, Andrejs; Audzei, Volha |
| Abstract: | This paper surveys research from the ESCB ChaMP Research Network on how ongoing structural change is affecting monetary policy transmission in the euro area. It shows that transmission is state-dependent and varies systematically with changesin the sectoral composition of the economy, in its international integration, in financial conditions and in inflation regimes. More service-intensive economies exhibit weaker real responses to monetary tightening, while high-inflation environments areassociated with faster and stronger price pass-through, helping explain why the recent disinflation episode entailed relatively low output costs. The paper also shows that variations in leverage, supply shocks and energy-related disturbances alter theinflation-output trade-off and can make appropriate policy responses more contingent on the source and persistence of shocks. Finally, it reviews evidence that monetary policy can affect the supply side through innovation, reallocation and productivity, implying that structural change influences transmission and may itself be influenced by policy. JEL Classification: E52, O33, Q54 |
| Keywords: | climate and energy transition, frictions, innovation, monetary policy transmission, reallocation, structural transformation |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026393 |
| By: | Elton Beqiraj; Giuseppe Ciccarone; Giovanni Di Bartolomeo |
| Abstract: | We examine how expectations of future inflation influence current inflation in a generalized time-dependent (GTD) price-setting framework. We find that the expectational pass-through depends only on discounting and on the parameters of the hazard function governing price resets. It increases with the initial hazard, is hump-shaped with respect to the hazard slope, and varies with the effective pricing horizon implied by the hazard func-tion, which shapes aggregation-driven rollback and catch-up effects across price vintages. Using GTD estimates, we show that the Calvo approximation systematically overestimates pass-through. In the 1980s–1990s period, commonly associated with stronger nominal anchors, pass-through is often higher, although changes are heterogeneous across economies. |
| Keywords: | Expectational pass-through; Inflation persistence; Price-setting models; Hazard functions; Monetary policy transmission; Generalized time-dependent pricing |
| JEL: | E31 E52 D84 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:sap:wpaper:wp282 |
| By: | Hedlund, Aaron; Larkin, Kieran; Mitman, Kurt; Ozkan, Serdar |
| Abstract: | This paper examines the impact of mortgage market structures on shaping economic responses to the unprecedented interest rate and inflation dynamics of 2021-2024. We first empirically document that economies with a larger share of variable-rate mortgages exhibit stronger responses in house prices to monetary policy shocks. We then develop and calibrate a structural model of the housing market to demonstrate that these mortgage structures can account for a substantial portion of the divergent house price paths observed across the U.S., Canada, Sweden, and the U.K. during the Great Inflation. Our analysis reveals that early pandemic mortgage rate cuts drove 45% of the U.S. house price boom. Economies dominated by adjustable-rate mortgages (ARMs) show greater price sensitivity to monetary tightening, while fixed-rate mortgage (FRM) regimes exhibit more pronounced path dependence due to a lock-in effect. These dynamics have significant distributional consequences, with low-income homeowners benefiting most from the initial low-rate environment, especially in FRM regimes. Finally, we show that the preferred monetary tightening path is regime-dependent, as a policy counterfactual reveals that FRM-dominant economies benefit more from a shorter and sharper tightening schedule. |
| Keywords: | Housing; Mortgages; Inflation |
| JEL: | D31 E21 E52 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20364 |
| By: | Fukui, Masao; Gormsen, Niels; Huber, Kilian |
| Abstract: | We show that firms' nominal required returns (i.e., discount rates) are sticky with respect to expected inflation. Sticky discount rates generate distinct theoretical predictions that are broadly consistent with stylized empirical patterns: increases in expected inflation directly raise real investment; demand shocks generate investment-consumption comovement; and the sensitivity of investment to interest rates is low. Sticky discount rates imply monetary non-neutrality, even when all other prices are flexible, because of a direct link from expected inflation to investment. In the New Keynesian optimal monetary policy problem, the central bank steers long-run inflation expectations, even in response to temporary shocks. |
| Keywords: | investment |
| JEL: | E1 E2 E3 E4 E5 G1 G3 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20502 |
| By: | Mohamed, Saladin |
| Abstract: | \noindent This paper demonstrates how a purely random central bank policy generates endogenous economic fluctuations in an overlapping generations (OLG) model. By pivoting from traditional physical stores of value (like capital or renewable resources) to nominal fiat money, we explore how a completely random, noisy central bank money supply affects precautionary savings, inflation volatility, and macroeconomic stability. We find that the economy's stability depends entirely on the intertemporal elasticity of substitution, echoing the mathematical mechanics of earlier resource-based models, and proving that monetary unpredictability is a systemic distortion rather than neutral noise. |
| Keywords: | Complex Dynamics, Inflation Volatility, Overlapping Generations Approach} |
| JEL: | E5 |
| Date: | 2026–04–02 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128547 |
| By: | Antoine Camous; Natalia Garcia Soto |
| Abstract: | Can the memory of past inflation shape how people form expectations about prices today? Using regional inflation data from Austria’s 1921–22 hyperinflation linked to quarterly consumer surveys (May 2020–Oct 2024), we document a persistent association between historical inflation exposure and contemporary inflation expectations: individuals from regions more exposed to the historical hyperinflation episode report higher inflation expectations, a century later. We further show that regional newspapers in historically high-inflation areas devote greater attention to inflation, suggesting that local media environments contribute to the intergenerational transmission of inflation attitudes. These findings indicate that the collective memory of major inflation episodes can durably shape expectation formation, with implications for managing heterogeneous regional responses during inflationary episodes. |
| Keywords: | Inflation, Inflation Expectations, Long-Term Persistence |
| JEL: | D14 E31 E71 G41 N14 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1050 |
| By: | Michael D. Bauer; Alexander Czarnota; Mathias Klein |
| 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: | prices; monetary policy; financial constraints; firm heterogeneity |
| JEL: | E31 E32 E52 G32 L11 |
| Date: | 2026–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103550 |
| By: | Anyfantaki, Sofia; Cucic, Dominic; Fricke, Daniel; Hartmann, Philipp; Kaufmann, Christoph; Lukmanova, Elizaveta; Maddaloni, Angela; Barahona, Ricardo |
| Abstract: | The growing importance of non‑bank financial intermediaries (NBFIs) also has important implications for the transmission of monetary policy in the euro area. It alters the composition of credit supply and strengthens the role of market‑based finance for the corporate sector. In the aggregate, NBFIs tend to amplify the transmission of monetary policy within the financial sector. In particular, intermediaries with uninsured short‑term funding amplify monetary transmission to credit. This becomes particularly pronounced during episodes of financial stress, when liquidity pressures and valuation losses can trigger asset sales and spillovers to banks. By contrast, institutions that benefit from stable long-term funding, such as insurers, pension funds and certain specialised finance companies, may attenuate the transmission of monetary policy to credit, although only to a limited extent. The implications for monetary policy transmission arising from NBFIs also extend beyond lending, notab JEL Classification: G2, G23, G28 |
| Keywords: | collateral, insurers, investment funds, monetary policy, non-bank intermediation |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026391 |
| By: | Caballero, Ricardo; Caravello, Tomás; Simsek, Alp |
| Abstract: | Central banks rely on r*—the neutral interest rate—to assess policy stance. However, monetary policy affects activity through broad financial conditions, not only the short-term rate. We propose FCI*, the neutral level of a financial conditions index consistent with output at potential. Unlike r*, FCI* is insulated from financial fluctuations: when asset prices move, FCI captures their estimated effect on output, leaving FCI* to reflect only what the macroeconomy requires. In U.S. data, r* co-moves with the equity premium; FCI* does not. FCI gaps provide useful real-time guidance on policy stance, especially when financial conditions diverge from the policy rate. |
| JEL: | E52 E58 E43 E44 C32 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20362 |
| By: | Gebauer, Stefan; Nakov, Anton; Nuño, Galo; Osbat, Chiara; Paz-Pardo, Gonzalo; Paulus, Alari; Quintana, Javier; Valderrama, Maria Teresa; Palazzolo, Alberto |
| Abstract: | The repeated occurrence of supply-chain disruptions since the COVID-19 pandemic reveals the need to complement traditional macroeconomic frameworks with approaches that better capture the complexity of modern economic productionstructures. This paper synthesises the findings of the ChaMP Research Network, highlighting how production network models and heterogeneity across firms, sectors and countries enrich our understanding of monetary policy transmission. Bycapturing input-output relationships between firms and economic sectors, these approaches show how the propagation and persistence of shocks depend on network structure, the position of sectors within the network – where central sectorsexert disproportionate influence – and differences and variations in price and wage flexibility. The inflationary effects of supply shocks tend to be amplified, while the effects of demand shocks, including monetary policy shocks, are dampened. Inaddition, large shocks can give rise to nonlinearities, such as a steepening of the Phillips curve. This aligns with the conclusions of the ECB’s most recent strategy assessment, which emphasise the need to analyse the risks surrounding the inflationoutlook. The findings also point to the emergence of trade-offs between inflation and output gap stabilisation, as production networks and heterogeneity weaken the alignment between price and output dynamics. As a result, stabilising inflation andoutput simultaneously calls for astute fiscal policy. Overall, incorporating production networks provides a more nuanced and policy-relevant framework for designing state-contingent and data-informed monetary policy. JEL Classification: E52, E58, D57, E32 |
| Keywords: | monetary policy transmission, Phillips curve, production networks, sectoral structure, supply chains, supply shocks |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026392 |
| By: | Dudley Cooke |
| Abstract: | This paper presents new evidence on the role of collateral in bank-firm lending and its interaction with monetary policy. Loans secured with collateral have lower spreads than unsecured loans and financial assets generate greater spread discounts than other collateral types, including real assets. The valuation of collateral is sensitive to monetary policy shocks. Contractionary policy shocks cause the spread discount on loans secured with real assets to rise by more than other collateral types. Contractionary policy shocks also cause the spread discount smaller firms receive on secured loans to fall. This monetary policy-contingent valuation of collateral puts smaller firms at a disadvantage because they lack real assets to pledge. |
| JEL: | E32 E44 E52 G20 O16 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202604 |
| By: | Bonfim, Diana; Moretti, Laura; Auer, Simone; Bandoni, Emil; Briglevics, Tamás; Ferrando, Annalisa; De Jonghe, Olivier; Kho, Stephen; Mendicino, Caterina; Rodriguez-Moreno, Maria; Moura, Afonso S.; Aguilar, Alicia; Cucic, Dominic; Pica, Stefano |
| Abstract: | This Occasional Paper reviews evidence from the ChaMP Research Network on the transmission of monetary policy to households in the euro area – an area of monetary policy that has attracted less attention among researchers. It highlights thecentral role of banks and non-bank intermediaries in shaping how policy affects borrowing, saving and consumption. Despite the overall effectiveness of monetary policy in the euro area, the pass-through of policy rates to household borrowingcosts is incomplete and heterogeneous, reflecting differences in funding structures, market power and institutional settings.A key insight is that transmission depends on household heterogeneity. Differences in balance sheets, credit access and housing market characteristics produce uneven effects across income, age and wealth groups, with important implications foraggregate demand and distributional consequences. Another key finding is that several components of consumption respond more rapidly to changes in interest rates than previously thought, especially in high-debt, variable-rate environments.Overall, the findings point to the need for an integrated, system-wide perspective that accounts for multiple aspects of financial structure and heterogeneity when assessing monetary policy transmission. ChaMP research also highlights the valueof readily available granular data, as many novel findings stem from a major coordinated effort to use new data on households obtained from national credit registers, as well as novel granular data on household expenditure. JEL Classification: E52, E21, G21 |
| Keywords: | banking sector, household heterogeneity, monetary policy transmission |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026390 |
| By: | Best, Lea; Born, Benjamin; Menkhoff, Manuel |
| Abstract: | We study how firms’ investment responds to interest rate changes based on a German firm survey, combining hypothetical vignettes, open-ended questions, and rich firm data. We estimate a 7 percent semi-elasticity of investment to loan rates—about half the total corporate investment response to monetary policy shocks. Adjustment is heterogeneous: many firms do not react, citing cash buffers or a lack of opportunities, while adjusters revise sharply. Managers’ narratives about monetary policy transmission to investment emphasize direct borrowing-cost effects and rarely mention general-equilibrium channels. Local projections show this direct channel is central to output dynamics after monetary policy shocks. |
| Keywords: | Interest rates; Firm investment; Survey experiment; Monetary policy; Narratives; Hurdle rate; Aggregate investment |
| JEL: | D25 E43 E52 G31 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20695 |
| By: | Felipe Alves; Giovanni L. Violante |
| Abstract: | The current monetary policy framework of the Fed intends to be more ’inclusive’ by running the economy hot for longer during expansions. The logic of this strategy rests on Okun’s (1973) hypothesis that sustaining a ‘high-pressure economy’ persistently improves labor market outcomes of low-wage workers. To evaluate this conjecture, we develop a Heterogeneous Agent New Keynesian framework with a three-state frictional model of the labor market where low-skilled workers are more exposed to the business cycle and recessions have a long-lasting effect on their labor force participation and earnings, in line with the evidence. Under a canonical Inflation Targeting rule, the ZLB generates a deflationary bias and severely amplifies the persistent scars of recessions at the bottom of the wage distribution. The Lower-for-Longer strategy is an effective antidote to the ZLB-driven hysteresis and leads to notable earnings gains for low-wage workers and a reduction to overall earnings inequality. If pursued aggressively, however, the policy reverts the inflation bias from negative to positive. Since policymakers might prioritize differently inflation relative to inclusion, we conclude by quantifying the inflation-inclusion trade-off implied by various monetary policy rules. |
| Keywords: | Models and tools, Economic models, Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission |
| JEL: | E21 E24 E31 E32 E52 J24 J64 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-3 |
| By: | Bergholt, Drago; Røisland, Øistein; Sveen, Tommy; Torvik, Ragnar |
| Abstract: | There is a common view that if monetary and fiscal policy are to be used together for macroeconomic stabilization, they should pull in the same direction. We challenge this view by analyzing the optimal policy mix in a small open economy. We show that when the economy is hit by inflation shocks or exchange rate shocks, monetary and fiscal policy should pull in opposite directions. This policy mix makes more effective use of the exchange rate channel of monetary policy, allowing inflation to be reduced after a shock with lower costs in terms of unemployment. Only in the case of demand shocks, or if there are significant costs associated with the active use of the interest rate, should monetary and fiscal policy pull in the same direction. We then consider automatic stabilizers. As we show, for demand shocks, automatic stabilizers imply that monetary and fiscal policy pull in the same direction. For inflation and exchange rate shocks, on the other hand, automatic stabilizers imply that the two policy instruments pull in opposite directions. These policy interactions are all consistent with our results on the optimal policy mix. Strong automatic stabilizers could therefore serve as a substitute for optimal discretionary fiscal policy in open economies. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20391 |
| By: | Andrew Lee Smith; Victor J. Valcarcel |
| Abstract: | We show that operationally similar central bank asset purchases can have markedly different effects. Combining security-level data on the Federal Reserve’s duration-adjusted asset holdings with narrative event-based identification reveals that purchases made for accommodation strongly affect yields, while purchases made for market functioning primarily enhance liquidity. We advance a partial equilibrium model of an intermediated bond market that can reconcile these findings. When trading flow is orderly, large-scale asset purchases (LSAPs) operate through the expected supply of duration with large effects on yields. When trading flow is disorderly, LSAPs reduce dealer inventories, improve liquidity, and compress bid-ask spreads. |
| Keywords: | monetary policy; balance sheet policy; SOMA; quantitative easing; primary dealers; market making; narrative restrictions; structural VAR; liquidity; intermediation |
| JEL: | E3 E4 E5 |
| Date: | 2026–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:103551 |
| By: | Lunardelli, Andre |
| Abstract: | The notion that much of the reduction in disinflation costs in recent decades is due to better anchoring converges with the proposition of Dow, Simonsen and Werlang (1993) that part of the sacrifice ratios of poorly anchored economies may be caused by this coordination problem, which they modeled with ambiguity. The present paper relates ambiguity in disinflation with fairness in a labor market in which past inflation is a reference for wage readjustments, but with the threat of reducing effort not materializing, thus leading to labor hoarding. It therefore presents similarities with Bhaskar (1990) and Driscoll and Holden (2004), but using a new Keynesian DSGE model. Bayesian inference with North American data using the model shows that this pattern was especially pronounced during the Volcker disinflation, had local peaks after the oil shocks during the great inflation, and has not happened after that, including in the disinflation immediately after the COVID-19 pandemic. This provides an explanation for the results of some well-known works with increases in a wide concept of wage markups during the Volcker disinflation and a line of reasoning to analyse Central Bank policy in disinflation. Regarding policy, the analysis recommends an exchange rate anchor (or a coordination device similar to that oh the Real plan) when initial inflation and ambiguity are very high, a transition with the announcement of a future inflation targeting (IT) when they are in a moderate level, the implementation of an explicit IT when passing from moderate to low inflation regime and an implicit target when low inflation is consolidated. |
| Keywords: | Disinflation, ambiguity, fairness, wage markups, sacrifice ratios, Volcker disinflation, Phillips curve, coordination failure, inflation targeting, inflation persistence, indexation, labor hoarding. |
| JEL: | D80 E31 E32 E42 E52 E58 J39 J64 |
| Date: | 2025–08–29 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128590 |
| By: | James C. MacGee; Yuxi Yao |
| Abstract: | An economy with fixed-amortization mortgages and borrowing-constrained consumers leads to the non-superneutrality of money as the level of inflation targeted has real effects on home ownership, consumption, and debt. Higher trend inflation increases nominal interest rates, which increases nominal mortgage payments at origination and crowds out non-housing consumption by borrowing-constrained homeowners. Using a life-cycle housing tenure choice model where trend inflation proportionately shifts nominal income growth and interest rates, we show that by front-loading real mortgage payments, higher inflation lowers steady-state home ownership and the mortgage debt-to-income (DTI) ratio. After an unanticipated permanent change in trend inflation, such as the 1980s Volcker disinflation, it can take 20 years for home ownership and the DTI ratio to reach the new steady state. While refinancing of fixed-rate mortgages (FRMs) narrows the differences between economies with FRMs and those with adjustable-rate mortgages (ARMs) after a fall in inflation, the mortgage lock-in effect leads to a longer transition following an increase in inflation with FRMs than ARMs. In our calibrated economy, the fall in inflation from around 8% in the early 1980s to under 3% by 2000, combined with lower mortgage financing costs, can account for half of the rise in US mortgage debt between 1983 and 2001. |
| Keywords: | Financial system, Monetary policy, Inflation dynamics and pressures |
| JEL: | E21 E50 G51 R21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-1 |
| By: | Monti, Francesca; Van Keirsbilck, Leila |
| Abstract: | This paper explores the dynamics of U.S. sectoral producer prices in a large Bayesian vector autoregressive (BVAR) model where information from the Input-Output (IO) matrix is used to structure the long-run relationships between these time series. The forecasts of headline inflation generated with this model have accuracy comparable to those from the Survey of Professional Forecasters (SPF) and greater than those generated by a standard BVAR with Minnesota priors, confirming that the IO matrix long-run prior conveys relevant information about the data. We analyze the effects of different types of shocks on sectoral prices and aggregate inflation, identified using instrumental variables, and trace the cascade effects through which sectoral shocks propagate along the pricing chain, finding substantial heterogeneity in both adjustment dynamics and sectoral contributions. The analysis of the propagation of an aggregate shock like monetary policy through the network of sectors instead sheds light on the importance of each sector in the transmission of the monetary policy shock. |
| Keywords: | Bayesian vector autoregression; Input-output linkages; Modelling producer prices |
| JEL: | C52 E37 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20621 |
| By: | Leandro Lyra Braga Dognini |
| Abstract: | This paper uses the generalized Cass criterion $\sum^{\infty}_{t=1}(\Vert p_{t}\Vert\sum_{h\in G_{t}}\Vert e^{h}_{t}\Vert)^{-1}=\infty$ to extend the results from Dognini (2026) regarding the existence of efficient monetary equilibria on consumption-loan overlapping generations economies. These results reveal that if the economy is prone to savings, then monetary equilibria will emerge in a pure non-stationary general equilibrium model with heterogeneous households, thus providing a solution to the Hahn (1965) problem. It is also proved that, in prone-to-savings economies, non-vanishing relative aggregate real savings fully characterize efficient monetary equilibria. I use this result to show that a Taylor rule based on an inflation ceiling and a relative aggregate real savings floor can be used to control the price level and lead the economy towards an efficient monetary equilibrium. In contrast, a Taylor rule based solely on an inflation target is able to control the price level but generally leads the economy towards an inefficient monetary equilibrium. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.06599 |
| By: | Leiva-Leon, Danilo; Sheremirov, Slavik; Tang, Jenny; Zakrajšek, Egon |
| Abstract: | This paper develops an econometric framework for identifying latent factors that provide real-time estimates of supply and demand conditions shaping goods- and services-related price pressures in the U.S. economy. The factors are estimated using category-specific personal consumption expenditures (PCE) data on prices and quantities, using a sign-restricted dynamic factor model that imposes theoretical predictions of the effects of fluctuations in supply and demand on prices and associated quantities through factor loadings. The resulting estimates are used to decompose total PCE inflation into contributions from common factors -- goods demand, goods supply, services demand, services supply, and inflation expectations -- and category-specific idiosyncratic components. Validation exercises demonstrate that the estimated factors provide an informative and coherent narrative of inflation dynamics over time and can be effectively used for forecasting and policy analysis. |
| Keywords: | Inflation; Services; Supply; Demand; Expectations; Dynamic factor models; Sign restrictions |
| JEL: | C11 C32 E31 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20574 |
| By: | Zhou, Sili; Ma, Chang; Rebucci, Alessandro |
| Abstract: | Chinese private portfolio equity outflows, though small compared to other Chinese outflows, are growing rapidly because of capital account liberalization and capital flight. Using granular stock-holding data on Qualified Domestic Institutional Investor (QDII) mutual funds, we identify a nascent financial channel of international transmission of Chinese monetary policy to world stocks. Event study analysis around monetary policy announcement days reveals that monetary policy tightening depresses returns of country equity indexes and individual U.S. stocks with QDII fund exposure relative to non-exposed stocks. The results are robust to controlling for the real transmission channel of Chinese monetary policy and other confounders. The effect is driven by smaller and less liquid firms, but not by China-concept stocks or those highly exposed to China's macroeconomic shocks. We also find that the results are driven by household portfolio rebalancing from more to less risky assets following the announcement. |
| JEL: | F30 G10 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20672 |
| By: | Basten, Christoph; Juelsrud, Ragnar |
| Abstract: | We show theoretically how the anticipated cross-selling of loans incentivizes banks to offer lower deposit spreads to attract and retain depositors, more when policy rates are lower and future cross-selling is more valuable. Utilizing comprehensive data on every Norwegian bank household relationship, we then establish empirically how banks facing identical loan demand respond to policy rate cuts with greater deposit spread reductions for clients with higher cross-selling potential, thereby raising both deposit and loan growth. Cross-selling constitutes a complementary, novel channel for monetary policy transmission through banks, elucidates loss-making deposit pricing in low-rate periods, and connects banks’ deposit and loan franchises. |
| JEL: | D14 D43 E52 G21 G51 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20507 |
| By: | Marcellino, Massimiliano; Tornese, Tommaso |
| Abstract: | We assess empirically the effects of monetary policy shocks on the Italian economy through the lenses of a heteroskedastic SVAR model. The identifying information provided by the time variation in the volatility of the structural shocks is complemented with sign and narrative restrictions. The presence of heteroskedasticty is strongly supported by the data and sharpens significantly the uncertainty about IRFs. Our results show that monetary policy contractions reduce inflation and output growth, generating a significant increase in the Corporate Bond Spread. On the other hand, the response of the Euro-Dollar exchange rate and the Italy-Germany sovereign spread is not significantly affected. |
| Keywords: | Heteroskedasticity |
| JEL: | C11 C32 E32 E52 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20661 |
| By: | Andrea De Polis (Banco de España); Álvaro Fernández-Gallardo (Banco de España); José Nicolás Rosas (Banco de España) |
| Abstract: | We analyze the asymmetric transmission of oil supply news shocks to the inflation distribution in the United States, the euro area, and the United Kingdom. Using quantile local projections and high-frequency identification, we document a stark asymmetry across these three large advanced economies: while median responses are transitory, the 90th quantile exhibits significant and persistent increases beyond one year. This upside tail sensitivity, consistent with state-dependent pricing, suggests that supply shocks are structural innovations to the skewness of the inflation distribution. Monetary policy should actively monitor such persistent inflation tail risks to keep expectations anchored. |
| Keywords: | oil supply shocks, inflation at risk, quantile local projections, non-linearities, state-dependence |
| JEL: | E31 E52 Q43 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2622 |
| By: | Bacchetta, Philippe; Davis, J. Scott; van Wincoop, Eric |
| Abstract: | Global non-US banks have significant dollar exposure both on and off their balance sheet. We develop a model to analyze their adjustment to dollar funding shocks, whether from reduced direct lending or external dollar shortages. The model provides insight into banks’ responses through borrowing, lending, and FX swap positions, as well as the impact on their net worth, their probability of default and CIP deviations. Implications of the model are confronted with data on the response of non-US global banks to major dollar funding shocks. We examine the benefits from buffering these shocks through central bank dollar swap lines or local currency lending by the central bank. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20497 |
| By: | David Borner; Heiko Sorg |
| Abstract: | The general search for US dollars in forward currency markets, combined with the balance-sheet constraints of intermediary dealers, induces persistent failure of covered interest parity (CIP). We investigate these CIP deviations across the entire maturity spectrum by analyzing the daily dynamics of the USD/CHF cross-currency basis curve. Applying functional principal component analysis, we identify three components that explain virtually all curve dynamics: a persistent, slow-moving level component, a temporary steepener, and a short-end component inducing sharp basis widenings and contractions around quarter-end dates. We provide empirical evidence that CIP-implied carry opportunities and US monetary policy announcements widen the entire basis curve, whereas Fed swap line announcements tend to narrow it. During periods of global turmoil, the slope inverts in response to rising credit and capital stress among dealer banks, while funding stress steepens the curve as swap line usage mitigates short-end distortions. Reporting date effects, funding stress, and deteriorating market liquidity widen the basis primarily at the short- end. We further show that regulatory reporting dates generate systematic window-dressing distortions not only at the short end but also in the slope of the basis curve. This effect has weakened since 2022, which is consistent with recent changes in the regulatory landscape. |
| Keywords: | Covered interest parity, FX swaps, Cross-currency basis, Limits to arbitrage, US dollar funding |
| JEL: | F31 G15 G2 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-09 |
| By: | Ghassibe, Mishel; Nakov, Anton |
| Abstract: | Business cycles with pronounced inflation can have sectoral origins and often feature a growing share of price-adjusting firms. Rationalizing such phenomena requires enhancing our modeling toolkit. We do that by building a non-linear equilibrium multi-sector framework featuring a general input-output network and optimal decisions on the timing and size of price adjustments. The interaction of our ingredients creates equilibrium cascades: large movements in aggregates trigger price adjustment decisions on the extensive margin. Following demand shocks, such as monetary interventions, networks dampen cascades, thus slowing down price adjustment decisions and giving central banks substantial power to stimulate the real economy with limited inflationary consequences. In contrast, under supply shocks, networks amplify cascades, leading to fast increases in the frequency of repricing and large inflationary swings. Applied to Euro Area data, the interaction of networks with cascades allows to quantitatively match the surges in inflation and repricing frequency in the post-Covid era. |
| JEL: | E31 E32 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20605 |
| 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. |
| Keywords: | bank runs; bank failures; banking crises; financial stability; financial history; artificial intelligence (AI) |
| JEL: | G01 G21 |
| Date: | 2026–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103544 |
| By: | Mfaume, Justin |
| Abstract: | Inflation in Malawi is not an abstract statistic. It is the transport fare that doubled before wages moved, the fuel queue that delays inputs from reaching farms, and the exchange rate movement that raises landing costs before any policy response arrives. At the centre of these dynamics sits agriculture, a sector generating over 80% of export earnings, determining foreign exchange availability, shaping the economy's capacity to import fuel and fertiliser, and ultimately governing the conditions under which goods move from farms to markets to households. This study investigates the impact of agricultural supply chain disruptions on headline inflation in Malawi using annual time-series data from 1970 to 2024. A Vector Error Correction Model (VECM) captures dynamic relationships between headline inflation, climatic shocks proxied by annual rainfall, fertiliser prices, fuel prices, and exchange rate movements. Johansen cointegration tests confirm stable long-run equilibrium relationships among variables integrated of order one. Exchange rate depreciation emerges as the dominant long-run driver of inflation, inseparable from agricultural performance given the sector's control over export earnings and forex generation. Fuel price shocks transmit strongly through transport and distribution costs across the supply chain. Climatic shocks influence inflation through production cycles with a lag consistent with harvest timing. Contrary to standard cost-push assumptions, fertiliser prices exert no statistically significant effect on headline inflation, a finding explained by the cushioning role of government subsidy programmes and household remittances that insulate smallholder farmers from global input price movements. The error correction coefficient of -0.48 indicates rapid adjustment toward long-run equilibrium. Controlling inflation in Malawi requires more than monetary tightening and praying for good rains; it requires strengthening agricultural supply chains, improving energy logistics, and building structural resilience to shocks that cascade through the entire economy. |
| Keywords: | headline inflation, agricultural supply chain, climatic shocks, exchange rate, fuel prices, fertilizer prices, Vector Error Correction Model, cointegration, time series, macroeconomics, Malawi, Africa |
| JEL: | C01 C32 E31 O11 O13 Q11 Q54 |
| Date: | 2026–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129759 |
| By: | Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael R. |
| Abstract: | We implement a quantitative empirical test of the fiscal theory, FTPL, defined as a non-Ricardian model of fiscal policy (the 'FTPL model') in which accumulated debt is ultimately devalued by a rising price level. Thus inflation is caused by expected fiscal policy. We used indirect inference to compare its match to postwar US data with that of a standard New Keynesian model with Ricardian fiscal policy. This FTPL model is first treated as a permanent regime, expected throughout the postwar period, with equilibrating real interest rates set by monetary policy; we also repeated this within a classical RBC model with market-clearing real interest rates. In both cases we found that there was no stable solution, due to the 'doom loop' linking debt, interest rates and inflation. We then modelled FTPL as a temporary regime including a monetary policy with a weak response to inflation, expected to revert to the Ricardian New Keynesian (Orthodox) regime eventually. While this hypothesis was rejected over the whole postwar sample, it was accepted for the post-GFC period alone, with the Orthodox regime prevailing otherwise. However the model fitting the whole period best was the New Keynesian with an orthodox monetary regime and a fiscal regime the credibility of whose Ricardian commitment was limited by the debt-related probability of a future switch to the FTPL. This gives a key role to the FTPL in explaining postwar US behaviour. |
| JEL: | E31 E61 E62 E63 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20597 |
| By: | Malliaropulos, Dimitris; Passari, Evgenia; Petroulakis, Filippos |
| Abstract: | We show that text-based indicators of supply and demand disturbances in commodity markets provide distinct information about future inflation movements relative to existing predictors, inflation expectations and survey forecasts. Specifically, we document that demand-side disturbances play a significantly larger role in prediction because they typically lead to uniform increases in quantities and prices of goods across the consumer basket, resulting in a clear and positive relationship between commodity prices and overall inflation. Supply-side disturbances matter in particular circumstances, for instance during the recent period of the pandemic and geopolitical shocks. In terms of magnitudes, the commodity-specific indicators reduce out-of-sample inflation forecast errors by up to 30 percent. We finally apply our indexes to the inflation decomposition framework of Blanchard and Bernanke (2023) and corroborate their finding that the bulk of pandemic-era inflation can be attributed to commodity supply disruptions, resulting in price increases in goods markets. |
| JEL: | C19 E31 E37 Q02 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20404 |
| By: | Reuter, Marco; Agur, Itai; Copestake, Alexander; Martínez Pería, Maria Soledad; Teoh, Ken |
| Abstract: | Cross-border payments are changing: existing intermediaries are upgrading their networks and new platforms based on novel digital forms of money are being explored, even as geoeconomic fragmentation is introducing new frictions. We develop a stylized model to assess the potential implications for the level and volatility of capital flows and exchange rates. On levels, we find that lower frictions in cross-border payments reduce UIP deviations and increase capital flows. On volatility, we find that the impact of lower frictions depends on the type of shock and the degree to which frictions decline. For real shocks, lower frictions increase capital flow volatility and reduce exchange rate volatility. For financial shocks, lower frictions increase exchange rate volatility while the impact on capital flow volatility is ambiguous. Specifically, when frictions decline by a small amount, capital flow volatility increases, while the opposite holds when the reduction in frictions is large. An increase in frictions reverses these results. |
| JEL: | E42 F31 F32 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20722 |
| By: | Stavrakeva, Vania; Tang, Jenny |
| Abstract: | In this paper, we build a general equilibrium model that takes the institutional details of the foreign exchange market into account and allows for deviations from full information rational expectations (FIRE) in a way consistent with forecast survey data and traders’ asset positions. We show that the testable implications of this model — related to foreign exchange derivatives positions, and both realized and expected exchange rates — are strongly supported in the data. Moreover, we argue that the particular form of deviation from FIRE implied by the data can help resolve important exchange rate puzzles, such as the Fama puzzle and the delayed overshooting puzzle, and can generate hump-shaped dynamics of exchange rates. |
| Keywords: | Survey forecasts; Exchange rate dynamics; Belief formation |
| JEL: | E52 F31 G01 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20321 |
| By: | Diego Franco (Central Reserve Bank of Peru); Delia Ruiz (Central Reserve Bank of Peru); Walter Cuba (Central Reserve Bank of Peru) |
| Abstract: | This paper develops an intraday early-warning framework to predict deviations of the volumeweighted overnight interbank rate from the BCRP policy rate after the close of the Central Bank’s second intervention window. We study both upward deviations, associated with liquidity-scarcity episodes, and downward deviations, associated with liquidity-abundance episodes. Using a unique high-frequency dataset spanning 2015-2025, we evaluate whether morning liquidity indicators can anticipate rate deviations exceeding 5 basis points. We compare a regularized logistic regression with a nonlinear artificial neural network (ANN), estimating separate models for each direction of deviation. Both models are calibrated on a chronological development sample and evaluated on a held-out test period. The logit model outperforms the ANN in both cases, with a statistically significant ranking advantage (ROC-AUC of 0.95 vs. 0.88 for upward deviations; 0.77 vs. 0.75 for downward deviations). Average marginal effects reveal an economically coherent asymmetry. Market concentration, measured by the HHI, and cross-bank dispersion in reserve requirement compliance reduce the probability of upward deviations and increase the probability of downward deviations. We interpret this as reflecting the presence of a small number of large, readily identifiable liquidity providers: their visibility reduces search frictions and prevents rate spikes when the market is short, while the same concentration shifts bargaining power toward borrowers, who become the scarce side of the negotiation, when the market is long. Overall, the findings support the feasibility of a simple, interpretable early-warning tool for BCRP money market operators. |
| Keywords: | Interbank money market ; Monetary policy implementation ; Earlywarning models ; Machine learning ; Market concentration ; Peru |
| JEL: | E58 E43 G21 C53 |
| Date: | 2026–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp17-2026 |
| By: | Acharya, Viral; Rajan, Raghuram; Shu, Zhi Quan (Bill) |
| Abstract: | Theory suggests that in the face of fire-sale externalities, banks have incentives to overinvest in order to issue excessive money-like deposit liabilities. The existence of a private market for insurance such as contingent capital can eliminate the overinvestment incentives, leading to efficient outcomes. However, it does not eliminate fire sales. A central bank that can infuse liquidity cheaply may be motivated to intervene in the face of fire sales. If so, it can crowd out the private market and, if liquidity intervention is not priced at higher-than-breakeven rates, induce overinvestment. We examine various forms of public intervention to identify the least distortionary ones. Our analysis helps understand the historical prevalence of private insurance in the era preceding central banks and deposit insurance, their subsequent disappearance, as well as the continuing incidence of banking crises and speculative excesses. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20550 |
| By: | Allan Pedersen |
| Abstract: | What sets the boundary of the safety net? In a crisis a central bank rescues some private near-monies and lets others fail, and a tempting answer to which is that rescue tracks an entity's position in the payment, settlement and collateral plumbing, its "circulation-centrality", rather than its size or its legal category. This paper builds that hypothesis into a falsifiable test and reports that it fails. On a panel of thirty rescue decisions from 1970 to 2023, a blind-coded index of circulation-centrality at first appears to separate the rescued from the abandoned. The appearance does not survive scrutiny. Blind coding removes a thirteen-point hindsight inflation in the author's own scoring; dropping two index components that quietly restate the rescue trigger removes the construct's circular content; and correcting two contested keystone cases (Lehman Brothers, whom the Federal Reserve could have saved, and Washington Mutual, whose depositors were in fact protected) removes the rest. Conditioning on legal-political capacity rather than deleting the inconvenient cases, the circulation signal falls to a partial correlation of 0.13, and under an independent coder's blind reconstruction of the covariates it does not appear at all. The boundary of last-resort lending is governed by size and political-legal capacity, the familiar too-big-to-fail account, not by a distinct circulation construct. The paper offers the test as a reusable template and the false positive as a cautionary anatomy. |
| Keywords: | lender of last resort; too big to fail; systemic importance; central-bank rescue; financial safety net; blind coding; replication; null result |
| JEL: | E58 G01 G28 N20 B41 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:pmt:wpaper:6 |
| By: | Hünewaldt, Victoria; Weinig, Max |
| Abstract: | We study how newspaper narratives shape public beliefs and policy preferences during a period of high inflation in Germany 2021–2023. We conducted an online survey experiment with a broadly representative sample of 4, 150 respondents, half of them randomly assigned to one of three inflation narrative treatments: 1) pent-up demand, 2) the energy-price crisis, or 3) corporate price gouging. We find strong baseline political polarization in support for inflation-mitigating policies, while respondents broadly agree on the distributional consequences of inflation. Pre-existing individual causal attributions about inflation correlate with inflation inequality beliefs and policy preferences but prove largely resistant to experimental updating, on average. Among right-leaning respondents, however, exposure to inflation narratives substantially increases support for redistributive and regulatory policies, reducing the baseline partisan gap by up to 80%. This effect is concentrated among respondents on the moderate right who identify with the AfD and exhibit low trust in government, suggesting that, when confronted with inflation as an economic problem, government skepticism is channeled into demand for stronger state protection. |
| Keywords: | inflation;public perceptions;polarization;survey experiment |
| JEL: | D63 D72 D83 E31 E60 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:140238 |
| By: | Aldasoro, Inaki; Hördahl, Peter; Schrimpf, Andreas; Zhu, Sonya |
| Abstract: | Using newly constructed market conditions indicators (MCIs) for three pivotal markets centered around the US dollar (Treasury, foreign exchange, and money markets), we demonstrate that tree-based machine learning (ML) models significantly outperform traditional time-series approaches in predicting the full distribution of future market stress. Through quantile regressions, we show that the random forest method achieves up to 27\% lower quantile loss than autoregressive benchmarks, particularly at longer horizons (up to 12 months). Shapley value analysis reveals that variables related to macro expectations and uncertainty — especially about the monetary policy stance — are important predictors of future tail realizations of market conditions. For individual market segments, the state of the global financial cycle, as well as liquidity conditions, also play important roles. These results highlight the value of ML in forecasting tail risks and identifying systemic vulnerabilities in real time, bridging the gap between high-frequency data and macroeconomic stability frameworks. |
| Keywords: | Shapley value |
| JEL: | G01 C53 G17 G12 G28 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20439 |
| By: | Djourelova, Milena; Ferroni, Filippo; Melosi, Leonardo; Villa, Alessandro |
| Abstract: | We analyze 481 speeches by FOMC members since 2007, excluding official press conferences. Combining high-frequency financial data with text analysis, we identify monetary policy surprises and measure each speech’s similarity to the preceding Chair’s press conference. On average, monetary surprises around these speeches have no significant effect on inflation expectations or stock prices. Yet, speeches closely aligned with the Chair amplify policy transmission, while less coordinated remarks dilute earlier effects on yields, inflation expectations, and equities. A general equilibrium model with incomplete information rationalizes these findings. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20636 |
| By: | Allan Pedersen |
| Abstract: | Is a digital euro-claim that promises to be worth one euro a new kind of money, or a new kind of bank? And does the answer depend on who issues it? Digital Money, the eighth Future of Banking report (Cecchetti, Niepelt, Rey and Vives, CEPR Press / IESE, 2026), gives the right answer to the first question and most of the right answer to the second. It treats digital money as a question of monetary architecture rather than technology, judges instruments by the institutions that stand behind them, likens stablecoins to money-market funds, and concludes that tokenised bank deposits are the better-positioned form of private digital money. This comment agrees, and is offered in that spirit. It adds five refinements from two vantage points the report, working globally and at the level of principle, had less room to develop: the operational detail of the European Union's Markets in Crypto-Assets Regulation (MiCA), and the economic history of offshore money. First, the report's verdict that "MiCA provides no central-bank backstop" is true of only half the regime, because the issuer is the fork. Second, the three-country comparison gains from an organising principle, a trilemma between par stability, private credit and the absence of a backstop. Third, "functional equivalence" is necessary but not sufficient, because the legal category still governs which risks supervisors are told to watch. Fourth, the report passes over a concrete consumer-protection gap that its own conclusion implies. Fifth, "no backstop" is, at systemic scale, an illusion, and saying so sharpens the report's strongest point into a clean policy choice. Two of the five are external to the report: the bank/non-bank split inside MiCA's own e-money-token category, and a deposit-guarantee gap that reaches even bank-issued tokens. The other three reformulate the report's own logic rather than contest it. |
| Keywords: | stablecoins; e-money tokens; MiCA; tokenised deposits; deposit guarantee schemes; lender of last resort; regulatory perimeter; eurodollar market |
| JEL: | E42 E58 G21 G28 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:pmt:wpaper:5 |
| By: | Nielsson, Ulf; Rangvid, Jesper Rangvid; Saidi, Farzad; Seyrich, Fabian; Streitz, Daniel |
| Abstract: | When monetary policy is constrained, how large a fiscal transfer substitutes for a given interest rate cut? Using full-population Danish administrative data, we estimate household consumption responses to adjustable-rate mortgage resets and to unanticipated cash inheritances. A 1 percentage point rate cut maps to uniform transfers of approximately $1, 000 per person over 5 years, totaling 1.3% of GDP. These macro-equivalent policies operate through distinct balance-sheet channels with different distributional incidence: rate cuts disproportionately stimulate high-income mortgage holders, while transfers are progressive. Marginal propensities to consume vary only modestly across income and liquid-wealth distributions, limiting efficiency gains from targeting. |
| Keywords: | Marginal propensity to consume; Monetary policy; Fiscal policy; Mortgages |
| JEL: | D12 E21 E43 E52 E63 G51 H31 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20499 |
| By: | Eichengreen, Barry; Razo-Garcia, Raul |
| Abstract: | In a paper 20 years ago, we analyzed the evolution of the international monetary system over the preceding 20 years and projected its evolution 20 years into the future, on the assumption of unchanged transition probabilities. Here we compare those projections with outcomes and provide new projections, again 20 years into the future. Although the world as a whole has seen financial opening and movement away from intermediate exchange rate regimes, as projected, movement has been slower than projected on the basis of observed transition probabilities in the 20 years preceding our forecast. New projections again based on unchanged transition probabilities but allowing countries to shift between advanced, emerging and developing country groupings and reclassifying exchange rate regimes to accord with current practice again suggest that policy regimes will be modestly different in 2045 than today. There will be a continued decline in intermediate exchange rate arrangements, and gains for hard pegs, as emerging markets move in this direction, and for more freely floating rates, driven by developing countries. There will be a further increase in the share of countries with open capital accounts, driven by emerging markets and developing countries. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20763 |
| By: | Barthélemy, Jean; Mengus, Eric; Plantin, Guillaume |
| Abstract: | This paper introduces a general and parsimonious framework to study whether a state can control the value of its currency by declaring it to be the legal tender for claims between itself and the private sector, and by trading it for desirable commodities according to a mechanism of its choice. In an economy in which all agents are price-setters, we identify when such policies elicit a single equilibrium price level. For policies that fail to do so, for example because different official and unofficial prices may coexist in equilibrium, we still offer tight restrictions on the set of predictable price levels. We discuss how our framework sheds light on common mechanisms driving various historical and recent forms of monetary or/and fiscal instability. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20716 |
| By: | Rogoff, Kenneth; Rossi, Barbara; Schmelzing, Paul |
| Abstract: | Utilizing critical recent data advances, we analyze short-maturity real interest rates as well as term spreads based on conceptually consistent multi-century data. In contrast to an extensive literature the past few decades, we find strong evidence of trend stationarity in long horizon series, relatively fast adjustment speeds, and a paucity of structural breaks — results that survive out of sample tests. Our evidence runs contrary to consensus in the literature that long-run r* is permanently lower post-financial crisis. Relatedly, we show that term spreads are secularly rising while inflation volatility falls — a finding questioning some influential term structure models. |
| JEL: | E4 F3 N20 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20790 |
| By: | Chen, Yuchen; Salomao, Juliana; Sharma, Varun; Wang, Yicheng |
| Abstract: | We develop a novel methodology to estimate firm-specific markup premiums using highly granular product-level data that controls for common shocks, isolating the premium as a residual. We validate this measure by comparing it to existing accounting-based estimates and by showing that it exhibits expected correlations with firm size and market share. Unlike traditional approaches, our method can be applied to both public and private firms, enabling an analysis of how financial structure and managerial incentives influence pricing decisions. We find that financial structure matters: public firms systematically increase markups following an IPO. Moreover, during the 2021–2022 inflation surge, publicly listed firms expanded their margins by capitalizing on inflationary pressures—especially among firms with high retail ownership, large early-pandemic stock declines, and strong equity-based pay incentives. |
| Keywords: | Markup |
| JEL: | E31 G23 G32 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20577 |
| By: | Ozdenoren, Emre; Tian, Yuan; Yuan, Kathy |
| Abstract: | This paper examines how a platform's ability to create its own money affects its pricing decisions, the search and matching dynamics between buyers and sellers, and overall economic welfare. We show that by pricing in its own currency, the platform can extract seignorage from buyers while imposing higher fees on sellers. In contrast, the legacy market uses fiat money, cannot recoup seignorage from buyers and thus operates at a competitive disadvantage, even when inflation costs are less salient compared to direct fees. In environments where the platform's technology is identical with that of the legacy market, the resulting market tightness on the platform is lower than socially optimal. However, when the platform's technology is superior, the introduction of platform money moves the equilibrium outcome closer to the social optimum than a fee-only platform, primarily because it is more cost-effective in attracting buyers. |
| JEL: | G10 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20436 |
| By: | Niklas Humann; Dimitrios Kanelis; Lars H. Kranzmann; Pierre L. Siklos |
| Abstract: | We study how financial markets respond to the incremental information conveyed by FOMC minutes. Using paragraph-level embeddings, we score each paragraph by its semantic distance to the closest paragraph in previously released public communications. Aggregating these paragraph-level scores yields two indices: overall novelty, which captures the degree of novelty, and novelty tilt, which captures the composition of novelty, i.e., whether new content is concentrated in the staff review or the committee discussion sections. In high-frequency event study regressions around minutes releases, overall novelty is associated primarily with the magnitude, rather than the sign, of asset-price responses, whereas novelty tilt is informative about the direction of repricing. Methodologically, we develop a disclosure-based framework for quantifying novelty in FOMC minutes over time. |
| Keywords: | artificial intelligence, central bank communication, high-frequency event study, FOMC minutes, textual novelty |
| JEL: | E44 E52 E58 G14 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-54 |