|
on Monetary Economics |
| By: | Edward Nelson |
| Abstract: | Central bank independence is a major area of study, but the economic literature has been characterized by numerous misstatements regarding how U.S. monetary policy independence has operated over time. Against this backdrop, this paper lays out major elements of the practice of central bank independence in the United States in the period from 1951 to 2006—a time span that encompasses the William McChesney Martin, Jr., through Alan Greenspan tenures as the head of the Federal Reserve. Many documentary materials and policymaker quotations not considered in previous research on U.S. monetary policy are highlighted. The analysis covers both institutional aspects (statutory objectives, formalities of Federal Reserve structure, and conventions followed in regularizing the central bank’s interactions with the legislative and executive branches) and the conceptual basis for independence, as expressed by leading Federal Reserve officials, particularly Chairs. It is shown—with heavy reliance on their own words—how Federal Reserve Chairs have characterized the position of the central bank within the governmental structure of the United States and how they have set out the case for monetary policy independence. What emerges is that successive Chairs over the decades made essentially the same, three-part, economic case for independence. This case does not rely on the arguments associated with economic research on time inconsistency. |
| Keywords: | Federal Reserve System; Board of Governors of the Federal Reserve System (U.S.); monetary policy rules; central banks |
| JEL: | E52 E58 |
| Date: | 2026–03–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:102903 |
| By: | Mahmood, Asif et al. |
| Abstract: | This study, drawing on domestic and international literature and new empirical results, finds that monetary policy affects inflation and output in Pakistan, but transmission is slow, incomplete, and uneven across channels due to entrenched structural frictions. The interest rate channel influences short-term market rates, yet pass-through to deposit and lending rates remains weak amid banking concentration, large sovereign portfolios, and distortions from concessional refinance schemes. The exchange rate channel reacts faster, with tighter policy supporting nominal appreciation and easing tradable inflation, but credibility gaps, discretionary interventions, and shallow FX markets reduce predictability. The credit channel tightens private credit, though fiscal dominance, high NPLs, and bank inefficiencies dilute responsiveness. Asset price transmission is largely absent given shallow capital markets and informality. Policy signals can shape inflation expectations, but repeated external shocks and administered energy price changes often dominate the outlook. Importantly, the updated results indicates that post-COVID shocks developments – subsidized credit, commodity price spikes, floods, and exchange rate instability – have exposed the structural weaknesses and raised the premium on reform and fiscal-monetary coordination. |
| Keywords: | Monetary policy, transmission channels, transmission lags, inflation, output, Pakistan |
| JEL: | C54 E31 E50 E52 E58 |
| Date: | 2025–06–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128120 |
| By: | Reiner Martin (National Bank of Slovakia); Piroska Nagy Mohacsi (London School of Economics and Political Science); Tatiana Evdokimova (Joint Vienna Institute); Jan Klacso (National Bank of Slovakia); Olga Ponomarenko (Caplight) |
| Abstract: | Central bank communication on financial stability has been less studied than on monetary policy. Our paper aims to contribute to the growing literature in this area. Our focus is the region of Central Europe, where financial sectors are intertwined through close cross-border ownership, and about half of the countries are members of the euro area. Using large language models (LLMs) combined with country-specific contextual analysis, we study executive summaries of Financial Stability Reports (FSRs) published since the early 2000s by seven Central, Eastern, and Southeastern European (CESEE) central banks, as well as by Austria and the European Central Bank (ECB). We construct a novel financial stability sentiment index and document that central bank communication is strongly risk-focused, most notably in the case of the ECB. In addition, prior to the Global Financial Crisis, the Austrian central bank was much less concerned than other central banks in the region although Austria plays a pivotal role in the financial system in the region. Our analysis of the link between financial stability sentiment communication and macroprudential policy action highlights that many central banks actively use and communicate about borrower-based measures, while most countries activated non-zero counter-cyclical capital buffers belatedly or not at all. Finally, comparing central banks’ communication on financial stability and monetary policy, we find that euro area national central banks and the ECB’s FSR communicated about the rising risks of post-Covid inflation in a timely manner, ahead of the ECB’s monetary policy communication. |
| JEL: | C55 E58 E61 H12 D83 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1139 |
| By: | Shunsuke Haba (Bank of Japan); Ryuichiro Hirano (Bank of Japan); Yuichiro Ito (Bank of Japan); Sohei Kaihatsu (Bank of Japan) |
| Abstract: | We estimate the policy reaction function of monetary policy as perceived by Japan's market participants, using market survey data. The key findings are as follows. First, consistent with previous research in other economies, the coefficient for inflation rate in the perceived policy reaction function in Japan is almost zero when the nominal interest rate is constrained by the effective lower bound. This coefficient tends to rise during subsequent interest rate hike periods, following changes in central bank policy, suggesting that market participants update their perceptions of monetary policy in response to actual policy changes. Second, although the coefficient for inflation rate generally increases, in the group with long-term inflation expectations deviating downward from the price stability target, it remains low even during recent interest rate hikes, suggesting that this subgroup of market participants may expect an extended period of low interest rates. Third, the market participants who assume a stronger monetary policy response to inflation tend to have more stable long-term inflation expectations around 2%. These results suggest that the perceptions of monetary policy among private agents are state-dependent, and that the macroeconomic stability and the effectiveness of monetary policy may vary over time. |
| Keywords: | Monetary Policy Rule; Survey Forecasts; Policy Reaction Function |
| JEL: | C32 E43 E52 E58 |
| Date: | 2026–03–25 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp26e05 |
| By: | Furukawa, Yoko |
| Abstract: | I construct a model that examines the behavior of the inflation rate considering multiple functions of money. The model demonstrates that Taylor Rules are effective when the inflation rate moves to the same direction with regard to money as a medium of exchange and a storage of value. Under deflation, these two functions of money diverge oppositely and that leads to a liquidity trap which the economy struggles to escape. |
| Keywords: | inflation rate, disequilibrium, money. |
| JEL: | E31 E43 E50 |
| Date: | 2026–01–27 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127878 |
| By: | Calvo, Guillermo A.; Velasco, Andres |
| Abstract: | We study the effects of monetary and fiscal policies when both money and government bonds provide liquidity services. Because money is the unit of account, the price of money is the inverse of the price level. If prices are sticky, so is the price of money in terms of goods, and this is one important reason why money is liquid and attractive. By contrast, the price of government bonds is free to jump and often does, especially in response to news about changes in fiscal policy and the supply of bonds. Those movements in government bond prices affect available liquidity, and therefore aggregate demand, inflation, and output. Under these conditions, bond-financed fiscal expansions can be contractionary, causing deflation and a temporary recession. To avoid those effects, changes in bond supply must be matched by changes in money supply and in the interest rate on money. We conclude that in a liquidity-dependent world, fiscal and monetary policies are joined at the hip. |
| Keywords: | obnd markets; fiscal policy; liquidity; monetary policy |
| JEL: | B22 E42 E44 E51 E52 E58 E61 |
| Date: | 2026–02–24 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137613 |
| By: | Ricardo J. Caballero; Alp Simsek |
| Abstract: | We analyze monetary policy responses to noisy financial conditions in an open economy where exchange rates and domestic asset prices affect aggregate demand. Noise traders operate in both markets, and specialized arbitrageurs have limited risk-bearing capacity. Monetary policy creates cross-market spillovers: by adjusting the interest rate to stabilize one market, the central bank influences volatility in the other. We show that targeting a financial conditions index (FCI)—a weighted average of exchange rates and domestic asset prices—delivers substantial macroeconomic benefits. FCI targeting commits the central bank to respond to unexpected movements in financial conditions beyond what discretionary monetary policy implies. These stronger responses improve diversification across markets: each market becomes more exposed to external shocks but less exposed to its own. This reduces volatility in both markets and activates the recruitment effect from Caballero et al. (2025b) in each market—lower variance induces arbitrageurs to trade against noise, further dampening volatility. Foreign exchange (FX) targeting can also be effective when the exchange rate is the primary source of noise, with benefits that increase as the economy becomes more open. In this case, FX targeting recruits arbitrageurs to stabilize the FX market, reducing volatility and dampening the macroeconomic impact of noise. However, FX targeting also raises volatility in non-targeted markets through anti-recruitment effects, limiting its effectiveness relative to FCI targeting, especially when domestic asset markets also matter for financial conditions and are comparably noisy. |
| JEL: | E32 E40 E44 E52 F30 F41 G12 G15 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34974 |
| By: | Hyeongwoo Kim (Department of Economics, Auburn University); Shuwei Zhang (Department of Economics, Towson University) |
| Abstract: | This paper investigates the design of optimal monetary policy responses to technology shocks in a two-country model framework featuring sticky prices and local currency pricing, where technology shocks propagate internationally. We demonstrate that technology shocks originating in the tradable sector, regardless of their country of origin, elicit monetary policy responses that are symmetric and closely aligned across countries, thereby providing a rationale for a fixed exchange rate regime. In contrast, technology shocks in the nontradable sector generate asymmetric policy reactions and weaken the source country's currency, supporting the case for exchange rate flexibility. In addition, the international transmission of technology shocks amplifies real-sector dynamics through news effects, prompting central banks to adopt contractionary policies, starkly contrasting with the findings of previous literature. |
| Keywords: | Sticky Price; Local Currency Pricing, Exchange Rate Regimes, Technology Diffusion, Interest Rate Rules. |
| JEL: | F31 F41 O0 E52 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:tow:wpaper:2026-03 |
| By: | Giannetti, Mariassunta; Jasova, Martina; Mendicino, Caterina; Supera, Dominik |
| Abstract: | We show that losses on banks’ securities portfolios matter for the transmission mechanism of monetary policy even in the absence of financial stability concerns. When banks experience losses in their pledgeable securities, their ability to tap liquidity through the interbank market is impaired, and they subsequently reduce illiquid corporate lending, regardless of whether the securities were recorded at market or historical value. These effects are less pronounced for banks with abundant collateral and reserves and for banks that receive liquidity through their group’s internal capital market. Our results highlight a collateral channel in the bank-based transmission of monetary policy. JEL Classification: G21, E43, E52, E58 |
| Keywords: | banking groups, foreign banks, interbank market, monetary policy tightening, securities losses |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263209 |
| By: | Ellis W. Tallman; Saeed Zaman |
| Abstract: | This paper develops a new empirical model that estimates trend inflation by combining modeling features that have advanced the literature on trend inflation over the past two decades. These features include incorporating information about long-term inflation expectations from surveys in a flexible way, modeling aggregate inflation via sectoral data (goods and services), allowing for stochastic volatility (SV) in the shocks to the trend and transitory components of inflation, allowing for a time-varying price Phillips curve, and allowing for time-varying uncertainty effects on the level of inflation. We estimate the model using state-of-the-art Bayesian methods. We document the competitive properties of the new model compared to variants that include only a subset of the above features. The new model provides a more interpretable historical decomposition of inflation data than the models it extends. The decomposition suggests that uncertainty effects play a greater role than cyclical effects in explaining inflation fluctuations. |
| Keywords: | disaggregates of inflation; inflation uncertainty; trend inflation; inflation expectations; nonlinear state space; Bayesian methods |
| JEL: | C11 C32 E31 |
| Date: | 2026–03–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:102922 |
| By: | Jonathan Benchimol; Sathya Mellina |
| Abstract: | We study how inflation-related language in Federal Reserve communication reprices market-based inflation compensation along the term structure. Using a domain-adapted transformer, we extract stance and inflation-narrative indices from post-meeting statements and Chair press conferences and embed them in a two-layer event study that conditions on target-rate surprises. We trace responses in breakeven inflation (BEI) yields and forwards from two to ten years and complement daily estimates with intraday BEI changes in narrow announcement windows. Four findings emerge. First, statement inflation language lowers BEI compensation across maturities, consistent with markets interpreting the committee-vetted document through the policy reaction function; this pattern is driven most strongly by the Delphic inflation index and is robust to alternative identification. Second, press conferences display the opposite pattern: inflation narratives are associated with positive repricing of long-horizon BEI forwards, consistent with the Chair conveying incremental information about medium-run inflation risks beyond the statement. Third, within press conferences, Delphic language maps into long-horizon forward repricing, while Odyssean language compresses belly-of-curve forwards, consistent with stabilization-window mechanisms. Fourth, intraday evidence shows a sign reversal: communication indices raise BEI compensation during the press conference, whereas the statement window drives the negative daily effect, clarifying how the two communication objects combine to produce net announcement-day repricing. Overall, inflation compensation is not monolithic: its repricing depends on communication format, narrative content, intraday timing, and maturity. |
| Keywords: | central bank communication, inflation compensation, high-frequency identification, event-study methods, Delphic and Odyssean forward guidance, natural language processing |
| JEL: | C45 E43 E52 E58 G12 G14 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-21 |
| By: | Michał Brzoza-Brzezina; Paweł Galiński; Makarski Krzysztof |
| Abstract: | We check how monetary and fiscal policies (in particular their open-economy dimensions) are affected by expectations being behavioral in the spirit of Gabaix (2020). We first show that the data strongly favor this setting compared with the standard rational expectations (RE) assumption. Then we document several novel findings. First, monetary policy is less powerful and faces a higher sacrifice ratio when agents are behavioral. Second, the Taylor principle is affected: determinacy regions are larger if the economy is more open or the central bank abroad is more hawkish. Third, fiscal policy and its international spillovers are amplified under behavioral expectations (BE). In contrast, the spillovers of monetary policy are dampened. Fourth, BE contribute to solving the puzzle of excess foreign currency returns (UIP puzzle). |
| Keywords: | behavioral agents, monetary and fiscal policy, open-economy model |
| JEL: | E30 E43 E52 E70 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:sgh:kaewps:2025110 |
| By: | Lea Best; Benjamin Born; Manuel Menkhof |
| 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 rates, aggregate investment |
| JEL: | D25 E43 E52 G31 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_737 |
| By: | Paweł Galiński |
| Abstract: | This paper examines shocks to inflation expectations and argues that distinguishing between households’ and firms’ expectations is crucial for understanding their macroeconomic role. First, using an analytical example, I demonstrate that shocks to firms’ expectations are stagflationary, whereas shocks to households’ expectations are expansionary. Second, household expectations are found to be more exposed to expectation shocks than those of firms. Third, shocks to firms' inflation expectations are a key driver of output, inflation, and real wages, while shocks to households' expectations contribute primarily to wage dynamics. These results imply that monetary policy should place greater weight on firms’ expectations than on those of households. |
| Keywords: | Inflation expectation shocks, firms' expectations, households' expectations, wage setting, behavioral macroeconomics |
| JEL: | E31 E32 E52 D84 E24 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:sgh:kaewps:2026120 |
| By: | Momo Komatsu |
| Abstract: | During the energy crisis in 2022 some Euro Area countries introduced price caps on energy, while others did not, leading to about 30 percentage points higher energy inflation in uncapped countries. This paper investigates the trade-offs policymakers face with energy price caps in a two-country currency union model with shared energy supply. The cooperative, optimal outcome is for neither country to impose a price cap, since the cap is a costly market distortion. However, capping allows a country to avoid a crisis at the cost of negative spillovers on the uncapped country, characterized by high inflation and lower output. The quantitative model with non-homothetic preferences and substitutability of energy sources shows that the cost of the price cap exceeds the cost of such spillovers, explaining why some countries capped prices while others did not. Moreover, I show that the spillovers from price caps contributed to about 10 (0.5) percentage points of energy (headline) inflation in the uncapped Euro Area countries in 2022. Targeted transfers, an alternative policy to the price cap, is a cheaper and more effective way to boost consumption of the poor without creating divergence within the union. |
| Keywords: | energy crisis; energy price cap; inflation; international spillovers |
| JEL: | E31 E63 F45 Q41 |
| Date: | 2025–12–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:102901 |
| By: | Budnik, Katarzyna |
| Abstract: | This paper maps the euro-area digital-banking segment and assesses how digital banks transmit monetary policy relative to brick-and-mortar peers. I compile a hand-checked universe of over 170 digital banks (2016–2025) from supervisory data, classifying institutions by business model (e-retail, e-service, e-wholesale). Digital banks are small on average yet growing fast, rely more on household deposits—predominantly overnight—and hold larger cash buffers and intangibles than traditional banks. Using a difference-in-differences design around the ECB tightening cycle that began in July 2022 and the initial 2024 easing. Three results stand out. (i) The funding channel is stronger and faster at digital banks in tightening: household deposit rates rise more and retail-funding spreads compress less, especially at overnight maturities and for stand-alone digital banks. Corporate-funding results are directionally similar but weaker and less robust. (ii) Loan-rate pass-through is not stronger, implying margin compression and a later slowdown in lending growth at digital banks despite continued retail inflows. Household deposits are markedly more rate-sensitive than corporate or unsecured funding. (iii) In early easing, digital banks cut new funding rates relatively quickly —particularly at longer maturities — yet effective deposit premia persist and retail inflows soften while margins begin to normalise. Policy implications concern the interaction of market digital adoption and banks’ capacity to adjust balance-sheet duration through the monetary cycle, along with financial stability. JEL Classification: E52, G21, E51, E43, E58, O3 |
| Keywords: | deposit competition, deposit rate pass-through, digital banks, ECB tightening cycle, household deposits, monetary policy transmission, neobanks, overnight deposits, retail funding |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263206 |
| By: | Paweł Kopiec |
| Abstract: | When central banks announce future interest rate cuts, the expected costs of servicing government debt decrease, freeing up additional resources in future budgets. This paper demonstrates that if the rational-expectations assumption is dropped, fiscal authority can exploit these savings by allocating them to future transfers. By announcing these transfers to households today, fiscal authorities can enhance the output effects of forward guidance. Employing a version of the New Keynesian setup with bounded rationality in the form of level-k thinking, I derive an analytical expression that captures the output effects of this additional fiscal announcement. A similar formula is then derived in a tractable heterogeneous agent New Keynesian model, incorporating bounded rationality, uninsured idiosyncratic risk, and targeted transfers. Finally, these analytical insights are used to investigate the effects of a forward-guidance-induced fiscal announcement in a fully-blown heterogeneous agent New Keynesian model with level-k thinking, calibrated to match U.S. data. The findings suggest that fiscal communication can amplify the output effects of standard one-year-ahaed forward guidance by 42%. Moreover, those gains can reach 85% when the debt-to-GDP ratio doubles. This indicates that forward guidance, when complemented by fiscal announcements regarding future transfers, can be an effective policy tool, particularly when both monetary and fiscal policies are constrained, such as during liquidity trap episodes accompanied by high levels of public debt. |
| Keywords: | Forward Guidance, Monetary Policy, Fiscal Policy, Heterogeneous Agents, Bounded Rationality |
| JEL: | D31 D52 D81 E21 E43 E52 E58 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:sgh:kaewps:2025109 |
| By: | Vincent Notte (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | Despite extensive evidence that Exchange Rate Pass-Through (ERPT) has declined in both developing and advanced economies, the mechanisms behind it remain debated. This paper shows that shifts in dollarization can explain a substantial part of this decline in Latin America. Using panel data for seven countries from 1995–2019, we find that ERPT fell sharply from 42 to 15 percent. Lower dollarization significantly dampens ERPT: a one-percentage-point decline in dollarization reduces ERPT by 0.25 percentage points. This channel is quantitatively important—for example, in Peru, de-dollarization can explain a 10-percentage-point fall in ERPT over the sample period. Given the persistently high levels of dollarization in the region, further reductions could significantly dampen the ERPT. Our findings highlight dollarization as a central, yet previously underappreciated, determinant of ERPT. |
| Keywords: | Exchange Rate Pass-Through; Dollarization; Inflation; Latin America |
| JEL: | F31 F33 O54 |
| Date: | 2026–03–13 |
| URL: | https://d.repec.org/n?u=RePEc:ctl:louvir:2026007 |
| By: | Marcin Kolasa; Sahil Ravgotra; Pawel Zabczyk |
| Abstract: | We analyze the implications of adding boundedly rational agents a la Gabaix (2020) to the canonical New Keynesian open economy model. We show that accounting for myopia mitigates several ``puzzling" aspects of the relationship between exchange rates and interest rates and helps explain why some of them only arise in the nested case of rational expectations. Bayesian estimation of the model demonstrates that a high degree of ``cognitive discounting" significantly improves empirical fit. We also show that this form of bounded rationality makes positive international monetary spillovers more likely and exacerbates the unit root problem in small open economy models with incomplete markets. On the normative side, the model with behavioral agents provides arguments against using the exchange rate as a nominal anchor. |
| Keywords: | Monetary Policy, Exchange Rates, UIP Condition, Bounded Rationality |
| JEL: | F41 E70 E52 E58 G40 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:sgh:kaewps:2025111 |
| By: | Di Casola, Paola; Grothe, Magdalena |
| Abstract: | This paper quantifies the role of housing wealth in the transmission of monetary policy to consumption in 20 advanced economies. Using Bayesian VAR models we identify structural shocks with a novel combination of sign and maximum forecast error variance restrictions, isolating the housing wealth channel through counterfactual impulse responses. We find that the housing wealth multiplier — the sensitivity of consumption to exogenous house price changes — is strongly correlated with outright homeownership rates and is higher for durable consumption. Cross-country differences in the monetary policy transmission to consumption are largely driven by the cash-flow channel. JEL Classification: E21, E52, E44, R31, C32 |
| Keywords: | cash-flow channel, consumption, local projections, structural BVAR |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263204 |
| By: | Sugata Marjit; Suryaprakash Mishra; Sanghita Mandal; Mayukh Basu |
| Abstract: | Inequality of wealth or liquid finance in a system with credit market imperfection adversely affects investment by poor investors. This is well known in the literature. In this paper we prove that the aggregate credit demand function would be relatively inelastic with unequal wealth distribution as the average borrowing cost would be greater for people with lower endowment of self-owned capital. Hence, the supply side impact of monetary policy would have different impact on the rate of interest in markets with different degrees of inequality as measured by the elasticity of credit demand. Volatility of interest rate would be higher with greater inequality. For similar types of monetary policy, attaining policy targets would be relatively difficult in such markets. |
| Keywords: | inequality, monetary policy, capital flows, credit market |
| JEL: | D63 E43 E51 E52 F21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12556 |
| By: | Ambler, Kate; Bakhtiar, M. Mehrab; Bloem, Jeffrey R.; Uddin, Mohammad Riad |
| Abstract: | In places such as rural Bangladesh, cash is the dominant medium for payments despite potential benefits of digital payments. We offer survey respondents an incentive-compatible choice for compensation: 200 Taka cash or randomly varied mobile money amounts (200-400 Taka). Only eight percent chose digital payment at parity and respondents exhibit an average willingness-to-pay of 43 percent of the payment value to receive cash payment. This preference persists across demographics, including among mobile money account holders. Within-household analysis reveals that 77 percent of the effect stems from individual-level rather than household-level factors, highlighting the importance of demand-side barriers on digital payments. |
| Keywords: | rural areas; payment agreements; consumer behaviour; smartphones; digital technology; willingness to pay; Bangladesh; Asia; Southern Asia |
| Date: | 2025–12–16 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:gsspwp:178890 |
| By: | Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa |
| Abstract: | How do business cycles redistribute between generations, what are the redistribution channels and what role is played by monetary policy? We construct a New-Keynesian life-cycle model and estimate it for the United States. Business cycles redistribute significantly: fluctuations impact welfare of some cohorts by an equivalent of 30% of annual consumption. These first-order effects do not net out over a typical life cycle: some cohorts have been much less lucky than others. Life cycle aspects also amplify second-order costs of fluctuations. Monetary policy shocks are highly redistributive and, hence play an over-proportional role in driving redistribution: they are responsible for over 20% of its total amount. Systematic monetary policy has a quantitatively significant impact on redistribution as well: policy that responds strongly to inflation and output can substantially increase intergenerational redistribution. |
| Keywords: | Business Cycles, Welfare Redistribution, Monetary Policy, Life-cycle Model |
| JEL: | E24 E32 E47 E52 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:sgh:kaewps:2026121 |
| By: | Yining Ding; Ruyi Liu; Marek Rutkowski |
| Abstract: | The role of collateral in derivative pricing has evolved beyond credit risk mitigation, particularly following the global financial crisis, when funding costs and basis spreads became central to valuation practices. This development coincided with the transition from the London Interbank Offered Rate (LIBOR) to risk-free rates (RFRs) and the increasing standardization of collateralised trading. We study the valuation and hedging of a class of differential swaps referencing backward-looking averages of overnight rates, with SOFR swaps appearing as a particular instance. The focus is on the impact of the collateral currency. Extending earlier results Ding et al. [Math. Finance 36 (2026), pp.~180--202], we allow the collateral account to be denominated in a currency different from that of the contractual cash flows and derive explicit pricing and hedging strategies using a futures-based replication approach. We show that the choice of collateral currency can have a non-trivial effect on both valuation and risk management. In particular, foreign-currency collateral can introduce additional risk exposures even when contractual cash flows are entirely denominated in the domestic currency. Numerical study demonstrates that collateral effects can lead to significant valuation adjustments and therefore need to be properly incorporated in modern multi-currency modelling frameworks. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.07863 |
| By: | Thomas Ferguson (University of Massachusetts, Boston); Jie Chen (University of Massachusetts, Boston); Matthias Lalisse (Johns Hopkins University); Paul Jorgensen (University of Texas Rio Grande Valley) |
| Abstract: | In November, 2022, the giant cryptocurrency exchange FTX filed for bankruptcy. The financial fallout from that event, including two bank failures, made crypto politically radioactive. Yet less than three years later, crypto, like Donald Trump himself, staged a triumphant Second Coming, as the President signed into law the so-called "GENIUS Act" - short for Guiding and Establishing National Innovation for U.S. Stablecoins. Analysts have traced the industry's phoenix-like resurrection, showing how key crypto billionaires and companies aligned with Trump early in the 2024 campaign, transforming him from a skeptic into a political champion. But the flip side of the story is much less discussed: how support for crypto has grown among Democrats. This paper analyzes voting by House Democrats on the GENIUS and Clarity Acts, in the context of the campaign for sweeping financial deregulation mounted by both crypto and traditional finance. The implications of a growing race to the bottom in financial regulation and emerging challenges in cybersecurity receive attention. |
| Keywords: | crypto, financial deregulation, central bank digital currency, Donald Trump, money, regulation, campaign contributions |
| JEL: | E42 G28 E58 K23 L51 P16 |
| Date: | 2026–01–12 |
| URL: | https://d.repec.org/n?u=RePEc:thk:wpaper:inetwp245 |
| By: | Takagi, Shinji |
| Abstract: | We explore a phenomenon observed during the Second Sino-Japanese War in which the value of the Japanese yen in Shanghai fell below the official rate. Shanghai provided a parallel market in which yen could be traded indirectly against British pounds through the intermediation of the Chinese yuan. The implied yen-pound rate was broadly approximated by purchasing power parity (PPP) before a significant divergence from PPP emerged in favour of the pound. This likely reflected negative news that signalled, among other things, a prospective withdrawal of Japanese yen as occupation money, which meant that the parallel market would close. |
| Keywords: | China during the Second Sino-Japanese War, parallel foreign exchange market, occupation currency, Japanese occupation currency in China, Sino-Japanese War |
| JEL: | F31 F33 E42 N25 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:agi:wpaper:02000262 |
| By: | Falk Bräuning; Joanna Stavins |
| Abstract: | The response of credit card spending to interest rate changes has significant implications for how monetary policy affects consumer spending and therefore the broader economy because credit cards have become a dominant payment method in the United States. However, the aggregate effect masks important differences across types of cardholders. As the authors show, the impact of interest rate changes on individual consumers depends critically on whether they carry a balance on their card, and it depends on their credit score, indicating that different segments of the population respond differently to monetary policy. |
| Keywords: | credit cards; interest rates; consumer spending |
| JEL: | D12 D14 E43 G21 |
| Date: | 2026–03–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbcq:102937 |
| By: | Ruthira Naraidoo |
| Abstract: | Commodity-exporting economies, such as South Africa, are susceptible to wide fluctuations in their business cycles, closely tied to commodity price fluctuations. In this research, we develop a prototype dynamic stochastic general equilibrium (DSGE) model with specific features for emerging small open commodity-exporting economies, together with investigating the implications for monetary and fiscal policies following a commodity price shock. |
| Keywords: | Emerging markets, Commodity shocks, Monetary and fiscal policy |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2026-24 |
| By: | Maxime Malafosse (COACTIS - COnception de l'ACTIon en Situation - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne, FAYOL-ENSMSE - Institut Henri Fayol - Mines Saint-Étienne MSE - École des Mines de Saint-Étienne - IMT - Institut Mines-Télécom [Paris], Mines Saint-Étienne MSE - École des Mines de Saint-Étienne - IMT - Institut Mines-Télécom [Paris]); Amandine Pascal (LEST - Laboratoire d'Economie et de Sociologie du Travail - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | After the 2008 financial crisis, the role of money and the structure of modern monetary systems have become subject to renewed scrutiny. The existing system, marked by extensive financialisation, power concentration, and rising social inequality, is considered incompatible with social justice and ecological sustainability goals. Consequently, decentralised monetary initiatives have emerged as alternatives reshaping and rethinking the nature and governance of money. Of these initiatives, locally managed community currencies (CCs) have risen to prominence, as they view money as a commons designed to serve community needs rather than generate profit. However, the design and governance of CCs remain underdeveloped due to either too broad design principles or empirical insights lacking a theoretical foundation. This study proposes a structured set of design principles, which link theoretical insights to practical guidance. Drawing on a design science approach in a European project, we develop four actionable design principles that guide local communities in creating and adapting CCs to their respective socioeconomic contexts. By integrating insights from contemporary CC literature and practitioners' guidance research, this study offers a flexible yet structured toolkit for designing, deploying, and maintaining CCs. The framework emphasises the importance of balancing technological opportunities with community needs, ensuring the association of CCs with local realities and collective goals. This study helps redefine and design money as a democratic, socially embedded institution capable of fostering equity, resilience, and ecological transition. As such, it contributes to design science knowledge about solving the problem of societal and ecological transformation. |
| Keywords: | Community currencies, Commons, Design Science, Design principles, Blockchain technology, Local Complementray Currencies |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:emse-05520945 |
| By: | Schöller, Vanessa |
| Abstract: | The smooth functioning of the repo market is essential to financial stability. However, the market has faced repeated episodes of stress in recent years. This paper examines the resilience of the euro-denominated repo market during recent episodes of elevated financial stress, drawing on transaction-level data and applying network analysis. The institutional repo network displays a core–periphery structure, with connectivity intensifying during stress periods. At the sectoral level, trading volumes and repo spreads remain broadly stable. For the euro repo market as a whole, financial stress is associated with lower spreads, consistent with the interpretation that the market functions as a shock absorber. JEL Classification: G01, G21, G23, E44 |
| Keywords: | haircuts, network analysis, non-banks, repo spreads |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263205 |
| By: | Joseph Kopecky (Department of Economics, Trinity College Dublin) |
| Abstract: | As major powers deploy trade policy as coercion, what fiscal capacity does a currency union need to sustain a credible collective response? I embed the multi‐sector trade model of Caliendo and Parro (2015) into a monetary union with heterogeneous members, calibrated to the world input‐output database (WIOD) for 20 individual Eurozone members. A US tariff escalation of 20% plus EU retaliation requires 0.69% of Eurozone GDP (€97 billion); a Chinese critical minerals restriction requires 0.44% (€62 billion); both simultaneously require 1.12% (€157 billion). A substantial share of the fiscal need arises from the asymmetric costs of collective action itself: the costs that EU counter‐tariffs impose on members with concentrated trade exposures. This reframes the fiscal requirement as the price of strategic credibility. Single market deepening generates welfare gains, but barely reduces the fiscal requirement, showing that integration and fiscal capacity are complements. Joint borrowing is needed, as budget‐balanced redistribution cannot sustain collective action. However, the headline fiscal requirement is an upper bound. Embedding the model in existing EU institutions (cross‐conditionality of EU fiscal flows and qualified majority voting rules) reduces the practical requirement to 0.33% of Eurozone GDP (€46 billion) in the combined scenario, since the EU need only compensate a handful of pivotal large members to prevent a blocking minority. |
| Keywords: | Fiscal unions, currency unions, trade policy, economic coercion, Eurozone, strategic autonomy |
| JEL: | F13 F15 F42 F45 E62 H77 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep0426 |
| By: | Ferrari Minesso, Massimo; Lebastard, Laura; Bagur, Olga Triay |
| Abstract: | This paper provides the first causal estimate of the economic impact of interlinking payment systems across countries. We exploit a new dataset of payment systems interlinking initiatives, which identifies over 2, 000 connections, and employ standard gravity methods to estimate their impact on trade flows. Consistent with trade costs theory, we find that inter-connected countries have around 4% higher trade volumes, roughly half the effect of a trade agreement and a quarter of the effect of a common currency area. Our results isolate the average effect on trade, of directly connecting fast payment systems, net of country pairs already accessing the correspondent banking network. The estimated impact is larger for payment systems that allow wholesale transactions, those that link small countries, which, typically, are less connected to the correspondent banking network, and for geographical areas that face high cross-border payment costs. This suggests that the benefits from interlinking are derived from reduced cross-border trade costs. Our findings are causal – proved by parametric and semi-parametric estimators – and robust to numerous additional controls, including exclusion of the largest interlinked country group, the euro area. JEL Classification: E42, F15, F30 |
| Keywords: | fast payment systems, interlinking, trade |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263202 |
| By: | Ricardo Lagos; Gastón Navarro |
| Abstract: | We propose a new reserve-demand estimation strategy---a middle ground between atheoretical reduced-form econometric approaches and fully structural quantitative-theoretic approaches. The strategy consists of an econometric specification that satisfies core restrictions implied by theory and controls for changes in administered-rate spreads that induce rotations and shifts in reserve demand. The resulting approach is as user-friendly as existing reduced-form econometric methods but improves upon them by incorporating a minimal set of theoretical restrictions that any reserve demand must satisfy. We apply this approach to U.S. data and obtain reserve-demand estimates that are broadly consistent with the structural estimates. |
| JEL: | E4 E41 E5 E50 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34972 |
| By: | Michał Król; Andrzej Torój |
| Abstract: | Currency Demand Analysis – one of the most popular macroeconometric techniques of shadow economy (SE) measurement – builds on equation explaining the share of cash in circulation in broader monetary aggregates, estimated as time series or panel regression. In the latter case, the homogeneity of slopes between panel units is usually assumed. We demonstrate that the data clearly reject this assumption with Pesaran-Yamagata test, and the resulting peril is using estimates obtained from inconsistent estimation for SE calculation. Due to an adverse T/N ratio, we refrain from using random coefficient or mean group estimators and propose the application of Regression Clustering and Classifier-Lasso procedures, splitting the sample in cross-sectional dimension into a limited number of homogeneous-coefficient groups, considerably smaller than N, whose number or composition remain unknown in advance. For both 2-group and 3-group partitioning, we find substantial differences between the relevant slopes, including the slopes of SE determinants impactful for SE measurement. Notably, a group dominated by Sub-Saharian and Central Asian economies exhibits higher sensitivity to all potential SE determinants: unemployment & inactivity rate, self-employment frequency and government effectiveness. |
| Keywords: | shadow economy, Currency Demand Analysis, panel heterogeneity, regression clustering, Classifier-Lasso |
| JEL: | C23 C51 E26 H26 O17 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:sgh:kaewps:2025106 |
| By: | Zhang, Yuliang |
| Abstract: | I introduce an index that formulates the vulnerability of the banking sector from a systemic risk perspective. It is expressed in terms of the size-weighted leverage and the illiquidity-weighted Herfindahl–Hirschman Index. The empirical implementation is demonstrated using balance sheet data from U.S. bank holding companies during 2001–2024 and national banks during the Great Depression. The index can be used to monitor financial instability, activate macroprudential capital buffers, and analyse historical banking crises. |
| Keywords: | measurement; financial vulnerability; macroprudential policy; banking crises |
| JEL: | F3 G3 |
| Date: | 2026–03–10 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137224 |
| By: | Vladimir Asriyan; Priit Jeenas; Alberto Martin |
| Abstract: | Financial crises are characterized by depressed asset prices, tight financial constraints, and misallocation of resources. Standard policy responses—such as asset purchases and low interest rates—are generally intended to alleviate these symptoms. This paper distinguishes between two types of crises that appear similar but differ fundamentally in their underlying mechanisms: fire-sale crises, where productive firms are forced to sell assets; and demand-freeze crises, where productive firms are unable to purchase assets. While both lead to similar observable outcomes, they have contrasting general equilibrium effects and may call for different policy interventions. Notably, conventional policies can be counterproductive in demand-freeze crises, as they may exacerbate financial constraints and further distort resource allocation. Empirical evidence on the pattern of capital reallocation among U.S. firms suggests that demand-freeze crises are, in fact, more common. |
| Keywords: | Financial crises, financial frictions, demand freezes, fire sales, asset purchases, monetary loosening, credit easing, capital reallocation, cleansing effects. |
| JEL: | E22 E44 E60 D53 G01 G18 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:upf:upfgen:1941 |
| By: | Tjantana Barro (University of Konstanz); Michal Marencak (National Bank of Slovakia); Giang Nghiem (Leibniz University Hannover) |
| Abstract: | We provide causal evidence that the economic framing of a structural policy changes households’ macroeconomic expectations. In a randomized survey experiment in the Bundesbank Online Panel of Households, all participants first read an identical neutral primer about climate policy measures and are then randomly assigned to receive no further text or an additional narrative interpreting the policy primarily as a negative demand or supply shock. Both narratives reduce expected growth. However, only the supply-shock framing raises inflation expectations, while the demand-shock framing does not reduce them—contrary to a simple demand-channel benchmark. These findings suggest that communication that makes different macro channels salient can materially shape expectations, with implications for economic policy communication during structural transitions. |
| JEL: | C33 D84 E31 E52 Q4 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1138 |
| By: | Pawel Janas |
| Abstract: | This paper studies the long-run labor market consequences of lender-of-last-resort (LLR) intervention during the Great Depression. I exploit a natural experiment created by the Federal Reserve district border separating counties under the jurisdiction of the Atlanta and St. Louis Federal Reserve Banks. During the banking panic of 1930, the Atlanta Fed aggressively extended liquidity to distressed banks, while the St. Louis Fed largely refrained from intervention. Using newly digitized county-level manufacturing data and linked individual-level census records from 1930 and 1940, I examine how exposure to this liquidity support affected local economic activity and worker outcomes. Counties within the Atlanta district experienced fewer bank failures and stronger manufacturing performance in the early 1930s. These differences translated into persistent labor market effects: individuals in treated counties were more likely to remain in manufacturing employment and less likely to migrate across state lines by 1940. The results suggest that financial stabilization policies can shape the long-run allocation of labor across regions and sectors. |
| JEL: | E58 G01 N22 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34988 |