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on Monetary Economics |
| By: | Jesús Fernández-Villaverde (UNIVERSITY OF PENNSYLVANIA); Joël Marbet (BANCO DE ESPAÑA); Galo Nuño (BANCO DE ESPAÑA); Omar Rachedi (ESADE BUSINESS SCHOOL) |
| Abstract: | This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully non-linear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households’precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality. |
| Keywords: | heterogeneous agents, HANK models, neural networks, non-linear dynamics |
| JEL: | D31 E12 E21 E31 E43 E52 E58 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2407 |
| By: | Khazan Bakhshaliyev (Central Bank of the Republic of Azerbaijan); Vugar Ahmadov (Central Bank of the Republic of Azerbaijan) |
| Abstract: | The balance between supply and demand influences inflation and understanding whether one factor predominates the other has significant implications for economic policy. Distinguishing the contributions of supply and demand factors to inflation offers insight into the primary drivers of inflation during economic shocks and is especially important for monetary policymaking. Decomposition serves as a tool for testing theoretical frameworks and enables policymakers and practitioners to monitor the factors contributing to inflation in real-time. In this context, the paper aims to decompose inflation into supply- and demand-driven components using an alternative micro-founded approach. It relies on a fundamental theory of price formation: the relationship between price and quantity, based on monthly data for 2, 559 goods sold in one of the largest supermarket chains in Azerbaijan from 2020 and 2025. For each item, a structural vector autoregression (SVAR) model is estimated individually, resulting in 2, 559 SVAR models used to identify whether observed inflation is driven by demand or supply shocks. Preliminary findings from SVAR models highlight that demand is one of the main contributors to inflation, particularly in the post-COVID recovery period, which macro-founded models had previously underestimated. Consequently, this study contributes to the Central Bank of Azerbaijan by providing a tool to estimate the importance of demand-pulled inflation, helping policymakers stay ahead of the curve. |
| Keywords: | Supply and demand driven inflation; SVAR model; supermarket data |
| JEL: | E30 E31 E52 E58 |
| Date: | 2025–08–11 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp12-2025 |
| By: | Yusifzada, Tural; Cömert, Hasan; Ahmadov, Vugar |
| Abstract: | This study introduces a novel composite approach to nonlinear inflation dynamics in identifying historical inflation patterns and forecasting future regime shifts. Assuming inflation's responsiveness to its determinants varies across inflation regimes and that inflation shock magnitude shapes the dynamics, we endogenously identify distinct inflation regimes and analyze nonlinear behaviors within such regimes for the BRICS countries (Brazil, Russia, India, China, and South Africa) and Türkiye. In the first stage of our analysis, we employ a Hidden Markov Regime Switching Model combined with Monte Carlo simulations to establish high- and low- inflation thresholds. In the second stage, we utilize an ordered probit model to identify nonlinear probabilistic relationships between inflation regimes and key drivers of inflation such as unit labor costs, exchange rates, and global inflation. Our method achieves over 90% accuracy in predicting inflation regimes based on historical data. It also shows particularly strong out-of-sample performance in the post-pandemic period, outperforming the forecasts of international financial institutions. Even without prior knowledge of exogenous variables, the method anticipates re- gime shifts in five of the six countries analyzed for 2022 and 2023. Our approach offers researchers and central bankers a robust alternative analytical framework for managing high- and low-inflation environments where traditional linear or equilibrium-based models fall short. |
| Keywords: | high inflation, regime switching model, probit model, early warning |
| JEL: | E31 E37 E12 C24 C51 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:323946 |
| By: | Kaiji Chen; Yiqing Xiao; Tao Zha |
| Abstract: | We examine how interbank wholesale funding shapes the transmission of interest-rate-based monetary policy in China and contributes to systemic risk. Using a bank-level quarterly panel dataset and an estimated policy rule for the 7-day repo rate, we find that access to wholesale funding amplifies the transmission of monetary policy easing to lending by non-state banks, but also heightens their vulnerability to systemic risk during economic downturns. Since 2018, non-state banks with greater reliance on wholesale funding have experienced larger increases in expected capital shortfalls. To interpret these findings, we develop a structural model that incorporates a dual-track interest rate system and a segmented deposit market. The model quantifies the role of a liquidity reallocation channel from state to non-state banks and reveals a macroprudential trade-off: tighter regulation of wholesale funding weakens the effectiveness of monetary policy but mitigates systemic risk. |
| JEL: | E02 E5 G28 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34056 |
| By: | Afees A. Salisu (Centre for Econometrics & Applied Research, Ibadan, Nigeria; Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Ahamuefula E. Ogbonna (Centre for Econometrics & Applied Research, Ibadan, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Yunhan Zhang (Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China; School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing 100049, China) |
| Abstract: | We investigate the predictive content of climate policy uncertainty (CPU) for forecasting the inflation rate of the United States (US) over the monthly period of 1987:05 to 2024:11. We evaluate the performance of our proposed CPU-based predictive model, estimated via the Feasible Quasi Generalized Least Squares (FQGLS) approach, against a historical average benchmark model, with the FQGLS technique adopted to account for heteroscedasticity and autocorrelation in the data. We find statistical evidence in favor of a CPU-based model relative to the benchmark, as well as in case of an extended model involving physical risks of climate change and financial and macroeconomic factors, extracted from a large data set, when CPU is included. The predictive superiority of climate policy-related uncertainties relative to the historical mean continues to be robust under alternative local and global metrics of CPU, as well as in a mixed-frequency set-up, given the availability of high-frequency (weekly) CPU data. Moreover, the importance of local- and global-CPUs is also found to hold in forecasting the inflation rates of 11 other advanced and emerging countries in a statistically significant manner compared to the historical average model. Though across all the 12 economies, own- and global-CPUs perform equally well in forecasting the respective inflation rates. The general importance of uncertainties surrounding policy decisions to tackle climate change in shaping the future path of inflation, understandably, carries implications for the monetary authority. |
| Keywords: | Climate Policy Uncertainty, Inflation, Forecasting |
| JEL: | C22 C53 E31 E37 Q54 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202525 |
| By: | Miguel Acosta-Henao (CENTRAL BANK OF CHILE); María Alejandra Amado (BANCO DE ESPAÑA); Montserrat Martí (CENTRAL BANK OF CHILE); David Pérez-Reyna (UNIVERSIDAD DE LOS ANDES) |
| Abstract: | This paper investigates the granular transmission of U.S. monetary policy shocks to deviations from the uncovered interest rate parity (UIPDs) in emerging economies. Using a comprehensive dataset from Chile that accounts for firm-bank relationships and the time-variant characteristics of both firms and banks, we uncover several key findings: (1) Shocks to the federal funds rate (FFR) increase banks’ costs of foreign borrowing. (2) These higher credit costs disproportionately affect small firms, raising their UIPDs more than for large firms. (3) This size-differentiated impact stems from the relatively higher interest rates on domestic currency loans faced by small firms. (4) In contrast, interest rates on dollar-denominated loans respond homogeneously across all firms. (5) We find no differential effect on loan quantities, suggesting an active role of credit supply and demand. We rationalize these findings with a small open economy model of corporate default that incorporates heterogeneous firms borrowing from domestic banks in both foreign and domestic currencies. In our model, a higher FFR reduces the marginal cost of defaulting on domestic-currency debt for small firms more than for large firms. |
| Keywords: | uncovered interest rate parity, U.S. monetary policy, bank lending, firm financing, firm heterogeneity |
| JEL: | E43 E44 F30 F41 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2530 |
| By: | Xuesong Huang; Todd Keister |
| Abstract: | We ask whether imposing fees on redeeming investors can prevent runs on money market mutual funds (MMFs) and related intermediation arrangements. We first show that imposing a fee only in extraordinary times often leaves the fund susceptible to a preemptive run where investors rush to redeem before the fee applies. We then show how a policy that imposes a fee when current redemption demand is above a threshold, even in normal times, can make the fund run proof. We characterize the best policy of this type, which is immune to a run of any size. We show that the reform adopted in the U.S. in 2023 leaves funds vulnerable to runs in some market conditions and imposes an inefficiently large fee in others. |
| Keywords: | financial stability policy; preemptive runs; shadow banking |
| JEL: | G28 G23 D82 |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:101378 |
| By: | Marina Azzimonti; Vincenzo Quadrini |
| Abstract: | The rise of the Digital Economy has the potential to reshape international financial markets and the role of traditional reserve assets such as the US dollar. While the creation of Stablecoins may increase the demand for safe dollar-denominated instruments due to reserve backing requirements, they may also serve as substitutes, reducing the global demand for traditional reserve assets. We develop a multicountry model featuring the US, the rest of the world, and a distinct Digital Economy to quantify the impact of the potential expansion of the digital economy. Our results show that, in the long run, the reserve demand effect dominates the substitution effect, leading to lower US interest rates and greater US foreign borrowing. We also find that the expansion of the Digital Economy increases idiosyncratic consumption volatility in the US, while reducing it in the rest of the world. |
| JEL: | F30 F40 G51 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34066 |
| By: | Volz, Ute; Wicknig, Florian |
| Abstract: | We propose novel measures to evaluate the risk profile of longer-term inflation expectations, using data on inflation probabilities from the ECB's Survey of Professional Forecasters (SPF). Unlike existing indicators, these measures specifically incorporate the central bank's inflation target. This allows for a more precise assessment of forecasters' perceptions of risks to the central bank's ability to achieve its target. Consequently, these measures provide a valuable additional criterion for assessing the degree of expectation anchoring. In contrast to other metrics, our measures indicate that, between 2014 and 2017 as well as during the Covid-19 crisis, professional forecasters saw the risk that inflation could undershoot the target in the longer term. Moreover, our indicators suggest that, following Russia's invasion of Ukraine, survey participants perceived a risk of inflation overshooting the target four to five years ahead. |
| Keywords: | Inflation, Expectations, Monetary Policy, Survey of Professional Forecasters |
| JEL: | E31 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:323949 |
| By: | Ethan Buchman; Paolo Dini; Shoaib Ahmed; Andrew Miller; Toma\v{z} Fleischman |
| Abstract: | For centuries, financial institutions have responded to liquidity challenges by forming closed, centralized clearing clubs with strict rules and membership that allow them to collaborate on using the least money to discharge the most debt. As closed clubs, much of the general public has been excluded from participation. But the vast majority of private sector actors consists of micro or small firms that are vulnerable to late payments and generally ineligible for bank loans. This low liquidity environment often results in gridlock and leads to insolvency, and it disproportionately impacts small enterprises and communities. On the other hand, blockchain communities have developed open, decentralized settlement systems, along with a proliferation of store of value assets and new lending protocols, allowing anyone to permissionlessly transact and access credit. However, these protocols remain used primarily for speculative purposes, and so far have fallen short of the large-scale positive impact on the real economy prophesied by their promoters. We address these challenges by introducing Cycles, an open, decentralized clearing, settlement, and issuance protocol. Cycles is designed to enable firms to overcome payment inefficiencies, to reduce their working capital costs, and to leverage diverse assets and liquidity sources, including cryptocurrencies, stablecoins, and lending protocols, in service of clearing more debt with less money. Cycles solves real world liquidity challenges through a privacy-preserving multilateral settlement platform based on a graph optimization algorithm. The design is based on a core insight: liquidity resides within cycles in the payment network's structure and can be accessed via settlement flows optimized to reduce debt. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.22309 |
| By: | Montano, Pierina; Quineche, Ricardo; Tipo, Royer |
| Abstract: | This study challenges the conventional assumption of uniform monetary policy transmission by examining interest rate pass‑through across the conditional distribution using quantile cointegration. Using U.S. data from 1994–2024, we estimate long‑run relationships between the federal funds rate and both lending rates and Treasury yields at quantiles 0.1–0.9, employing the Phillips–Hansen fully modified quantile estimator with quantile CUSUM stability tests. We find that transmission is fundamentally asymmetric and varies systematically with economic conditions. Under conventional policy measures, pass‑through mechanisms display marked instability, with cointegration frequently breaking down in crisis periods when policy effectiveness is most crucial. The prime rate remains stably linked to the policy rate only at select quantiles, while Treasury yields show clear maturity‑dependent patterns—medium‑term maturities are generally more resilient than short‑ or long‑term yields. Temporal robustness checks reveal that transmission was more unstable during the pre‑Global Financial Crisis era than often assumed, but markedly more stable in the pre‑COVID period, consistent with institutional learning and enhanced policy frameworks. Using the Wu‑Xia shadow rate in place of the federal funds rate delivers complete stability for the prime rate and substantial stability gains for most Treasury maturities. This indicates that many breakdowns observed under conventional measures reflect policy‑measurement limitations at the zero lower bound rather than genuine transmission failures. The results suggest central banks should adopt state‑contingent frameworks that recognize transmission asymmetries, deploy unconventional tools proactively in stressed conditions, and invest in institutional improvements that can sustain transmission effectiveness across diverse economic environments. |
| Keywords: | Quantile cointegration, Monetary policy transmission, Interest rate pass-through, Asymmetric interest rate effects |
| JEL: | E43 C32 C21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:323756 |
| By: | Sithole, Mixo Sweetness |
| Abstract: | This study investigated the impact of extreme climate change on inflationary expectations and its implications for macroeconomic policy in South Africa over the period 1970 to 2023. Using an Autoregressive Distributed Lag (ARDL) model, the analysis explores both the short run and long run relationships between inflation and key climate and macroeconomic indicators, including temperature anomalies, agricultural output, food production, broad money supply, real interest rates, and carbon dioxide (C02) emissions. The ARDL bounds test confirmed the existence of a long run cointegration relationship among the variables. Empirical findings revealed that rising temperatures and C02 emissions exert significant inflationary pressures in both the short run and long run. Conversely, increases in agricultural output and money supply are associated with disinflationary effects. The error correction term is negative and statistically significant, indicating a rapid adjustment towards equilibrium following short-term shocks. Diagnostic tests confirmed the stability and robustness of the model. These findings underscored the macroeconomic significance of climate change and highlighted the need for the South African Reserve Bank (SARB) to incorporate climate-related risks into its inflation-targeting framework and broader policy formulation. |
| Keywords: | Climate change, inflation, temperature, central bank, microeconomic policy, South Africa |
| JEL: | Q11 Q18 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125395 |
| By: | Stephany Griffith-Jones; Mario Giarda; Jorge Arenas |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchep:75 |
| By: | Kase, Hanno; Rigato, Rodolfo Dinis |
| Abstract: | We introduce an estimated medium scale Heterogeneous-Agent New Keynesian model for forecasting and policy analysis in the Euro Area and discuss the applications of this type of models in central banks, focusing on two main exercises. First, we examine an alternative scenario for monetary policy during the early 2020s inflationary episode, showing that earlier hikes in interest rates would have affected more strongly households at the lower end of the wealth distribution, whose consumption our model suggests was already depressed relative to the rest of the population. To provide intuition for this result, we introduce a new decomposition of the effects of monetary policy on consumption across the wealth distribution. Second, we show that introducing heterogeneous households does not come at the cost of forecasting accuracy by comparing the performance of our model to its exact representative-agent counterpart and demonstrating nearly identical results in predicting key aggregate variables. JEL Classification: D31, E12, E21, E52 |
| Keywords: | forecasting, heterogeneous-agent New Keynesian models, inequality, monetary policy |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253086 |
| By: | Matthes, Jürgen |
| Abstract: | Compared to 2020, the deficit in merchandise goods trade with China is 3.6 times higher for Germany in 2025 (annualised based on data from January to April 2025) and it has doubled for the Euro area. However, the nominal exchange rate of the Yuan against the Euro has hardly changed between 2020 and 2025. This is all the more striking as European goods have become much more expensive: Producer prices have risen by more than 35 per cent in Germany and the Euro area compared with early 2020, whereas Chinese producer prices have hardly increased at all. The immense producer price divergence is mostly due to an external shock in Europe that resulted from supply chain restrictions in the course of the COVID-19-pandemic and from the energy cost increases after the Russian invasion of Ukraine. This constellation has caused a very large real appreciation (based on producer prices) of the Euro against the Yuan of more than 40 per cent for Germany and for the Euro area between early 2020 and spring 2025. The resulting huge cost disadvantage has likely contributed considerably to the rise in the trade deficit as an appreciation of the Euro renders European exports more expensive and imports from China less costly. Moreover, the real appreciation appears to be an important reason why about half of German industrial firms facing Chinese competition reported in 2024 that Chinese competitors undercut their prices by more than 30 per cent (Matthes, 2024). This large European cost disadvantage would have been prevented if the Yuan had appreciated against the Euro to a significant degree. In fact, a rising trade deficit leads to higher netdemand for Yuan in Euro on the exchange rate market as European importers sell Euro to obtain Yuan in order to buy goods from Chinese sellers. Thus, the Yuan should have appreciated if it was floating freely. However, the Yuan exchange rate is managed by the central bank of China relative to the US Dollar and to a basket of other currencies. As the Yuan did not appreciate against the Euro, the question arises whether this is a case of currency manipulation and whether China's significant cost advantage can be deemed unfair. To investigate this question, also other components of the bilateral balance of payments between the Euro area and China have to be taken into consideration as they also influence the net demand for Yuan in Euro. Indeed, the balances in services trade and in primary incomes (other components of the current account apart from the balance in merchandise goods trade) are positive. Thus, these components reduce the net demand for Yuan in Euro that is caused by the negative goods trade balance, but only to a small degree. Moreover, also capital flows have to be considered (that are measured in the financial account balance). However, there is a lack of data for portfolio investment inflows from China to the Euro area so that total capital inflows cannot be calculated. However, this missing component can be estimated (Chapter 3.2). Based on this estimation, the overall change in the net demand for Yuan in Euro between 2020 and 2024 can also be estimated: it has significantly risen by EUR 125 billion. These findings provide strong indications for currency manipulation and for a significant and unfair undervaluation of the Yuan against the Euro. If there had been a free and market-based bilateral exchange rate market, the rising net demand for Yuan in recent years should have led to a significant appreciation of the Yuan against the Euro. As this was prevented by the central bank of China's currency management policies, a considerable unfair price advantage for China has resulted, which comes at the expense of European companies that compete with Chinese firms on the world market. The large increase in the merchandise trade deficit with China is a clear indication of the relevance of the Yuan's undervaluation against the Euro. As European industry is seriously threatened by this development, trade policy action is urgently warranted in order to re-establish a level playing field. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwkrep:323227 |
| By: | Alexander Lam |
| Abstract: | US trade protectionism is making the economic outlook increasingly uncertain. To assess how consumer prices may respond to tariffs, we examine a tariff episode from 2018 using detailed microdata and the synthetic control method. |
| Keywords: | Inflation and prices; International topics; Recent economic and financial developments; Trade integration |
| JEL: | E3 E30 E31 F1 F10 F13 F14 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-18 |
| By: | Delia Ruiz (Central Reserve Bank of Peru); Diego Franco (Central Reserve Bank of Peru); Walter Cuba (Central Reserve Bank of Peru) |
| Abstract: | This paper examines the existence and magnitude of an "LCR premium" in Peru's interbank market by exploiting the July 1, 2019 reform that eliminated the punitive outflow weights on repo collateral under the Liquidity Coverage Ratio (LCR). Using daily transactions from January 2019 to February 2020, a Difference-in-Differences (DiD) design reveals repo rates declined by an additional 3–4 pp relative to unsecured loans. We then embed this supply-shock in a structural IV-2SLS framework, finding that a 1 pp increase in the rate reduces repo volumes by 2, 495.5 mm PEN. Robustness checks — including alternative ±3/4/6-month windows, dynamic DiD and placebo DiD— confirm instrument validity and parallel trends. Post-reform, average monthly repo activity jumped from ~5, 800 mm to ~22, 400 mm PEN, demonstrating that even modest liquidityrule adjustments can quickly eliminate the pre-reform penalty on secured funding and reorient banks toward collateralized trades. |
| Keywords: | Liquidity coverage ratio; Liquidity coverage ratio premium; interbank funding; repo markets |
| JEL: | G21 G28 E43 C32 |
| Date: | 2025–08–11 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp13-2025 |
| By: | Luyao Zhang |
| Abstract: | Stablecoins have become a foundational component of the digital asset ecosystem, with their market capitalization exceeding 230 billion USD as of May 2025. As fiat-referenced and programmable assets, stablecoins provide low-latency, globally interoperable infrastructure for payments, decentralized finance, DeFi, and tokenized commerce. Their accelerated adoption has prompted extensive regulatory engagement, exemplified by the European Union's Markets in Crypto-assets Regulation, MiCA, the US Guiding and Establishing National Innovation for US Stablecoins Act, GENIUS Act, and Hong Kong's Stablecoins Bill. Despite this momentum, academic research remains fragmented across economics, law, and computer science, lacking a unified framework for design, evaluation, and application. This study addresses that gap through a multi-method research design. First, it synthesizes cross-disciplinary literature to construct a taxonomy of stablecoin systems based on custodial structure, stabilization mechanism, and governance. Second, it develops a performance evaluation framework tailored to diverse stakeholder needs, supported by an open-source benchmarking pipeline to ensure transparency and reproducibility. Third, a case study on Real World Asset tokenization illustrates how stablecoins operate as programmable monetary infrastructure in cross-border digital systems. By integrating conceptual theory with empirical tools, the paper contributes: a unified taxonomy for stablecoin design; a stakeholder-oriented performance evaluation framework; an empirical case linking stablecoins to sectoral transformation; and reproducible methods and datasets to inform future research. These contributions support the development of trusted, inclusive, and transparent digital monetary infrastructure. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.02403 |
| By: | Felipe Saffie; Liliana Varela; Kei-Mu Yi |
| Abstract: | We study empirically and theoretically the effects of international financial flows on resource allocation. Using the universe of firms in Hungary, we show that removing capital controls lowers firms’ cost of capital and increases household consumption, with the latter playing a dominant role. The consumption channel leads to reallocation of resources toward high expenditure elasticity activities—such as services—promoting both the expansion of incumbents and firm entry. A multi-sector heterogeneous firm model replicates these dynamics. Our model shows that non-homotheticity in consumption can quantitatively account for the reallocation of resources towards services and successfully replicates the dynamics of aggregate productivity following episodes of financial openness. |
| Keywords: | firm dynamics; financial liberalization; reallocation; capital flows; TFP; non-homothetic preferences |
| JEL: | F15 F41 F43 F63 |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:101404 |
| By: | Eliezer Borenstein (Bank of Israel) |
| Abstract: | I analyze a setting in which monetary policy has a state dependent effect due to an endogenously driven information channel. Specifically, I develop a model of investment in risky capital, where a central bank holds private information regarding the state of the economy and sets an interest rate accordingly in order to stabilize aggregate demand. Lowering the interest rate stimulates investment via the standard channel, but also signals weaker economic conditions, which reduces investors' confidence and their desire to invest. The information effect is negligible when the economy is strong, but can become significant when the economy is weaker. In a sufficiently weak economy, reducing the interest rate generates a decline in investment. Thus, a policy aimed at stimulating investment might unintentionally cause the opposite result, weakening aggregate demand even further. The reduction in aggregate demand is inefficient, as it reflects a coordination failure among investors. In line with the model's s prediction, I provide empirical evidence suggesting that the information effect of monetary policy is stronger in times of weaker economic conditions. |
| Keywords: | Central bank information effects, Monetary policy, Financial crisis, Stock market |
| JEL: | D83 E43 E44 E52 G01 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2025.03 |
| By: | Egan, Paul; McQuinn, Kieran |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:esr:wpaper:wp797 |
| By: | Corell, Felix |
| Abstract: | In modern macroeconomics, the marginal propensity to consume out of transitory income shocks is a central object of interest. This paper empirically explores a parallel concept in banking: the marginal propensity to lend out of unsolicited deposit inflows (MPLD). Using county-level dividend payouts as an instrument for deposit inflows, I estimate the MPLD for U.S. banks and show that before QE, the average bank operated “hand-to-mouth” — it transformed approximately every dollar of deposit inflow into new loans, consistent with tight liquidity constraints. However, since then, the MPLD has dropped to 0.35. Moreover, the MPLD decreases in banks’ cash-to-asset ratio and deposit market power. The findings suggest that the QE-induced abundant reserves regime significantly relaxed liquidity constraints for the majority of banks, but did not eliminate them entirely. JEL Classification: G21, E42, E51 |
| Keywords: | banking, deposits, loans, money creation, reserves |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253085 |
| By: | Carola Binder; Pascal Frank; Jane M. Ryngaert |
| Abstract: | This paper studies the response of household inflation expectations to television news coverage of inflation. We analyze news data from CNN, Fox News, and MSNBC alongside a daily measure of inflation expectations. Using a local projection instrumental variables approach, we estimate the dynamic causal effect of inflation news coverage on household inflation expectations at a daily frequency. Increased media coverage of inflation raises expectations, with effects peaking within a few days and fading after approximately 10 days. Additionally, we document a key nonlinearity: release days with positive CPI surprises—i.e., inflation exceeding market expectations—lead to stronger expectation responses than release days with negative surprises. |
| JEL: | D04 D83 D84 E31 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34088 |
| By: | Fabienne Schneider |
| Abstract: | The premium on “on-the-run†Treasuries (i.e., the most recently issued ones) is an anomaly. I explain it using a model in which primary dealers hold inventories of Treasuries. There is less variation across primary dealers’ inventories of on-the-run Treasuries compared with off-the-run Treasuries. Because there is less inventory uncertainty, on-the-run Treasuries fail to settle less frequently and trade at a premium. My theory is consistent with the USD 33 billion of Treasury contracts that fail to settle each day, with the median failure rate of off-the-run Treasuries being almost twice that of on-the-run Treasuries. I use the model to analyze the effects of granting access to central bank facilities to non-banks active in the Treasury market. Broad access stimulates trading and reduces the on-the-run premium, but settlement fails increase and, counterintuitively, only primary dealers benefit. |
| Keywords: | Asset pricing; Financial markets; Market structure and pricing; Monetary policy |
| JEL: | G12 G19 G23 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-19 |
| By: | Marc Dordal i Carreras; Seung Joo Lee |
| Abstract: | This paper introduces a business cycle model that integrates financial markets and endogenous financial volatility at the Zero Lower Bound (ZLB). We derive three key insights: first, central banks can mitigate excess financial volatility at the ZLB by credibly committing to future economic stabilization; second, a commitment to refraining from future stabilization can steer the economy toward more favorable equilibrium paths, thereby revealing a trade-off between future stabilization and reduced financial volatility at the ZLB; third, maintaining uncertainty regarding the timing of future stabilization is strictly superior to alternative forward guidance commitments. |
| Keywords: | monetary policy, forward guidance, financial volatility, risk premium |
| JEL: | E32 E43 E44 E52 E62 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12034 |
| By: | Michael D. Bordo; Oliver Bush; Ryland Thomas |
| Abstract: | Discussion of the causes of the Great Inflation in the UK during the 1970s has centred around the relative importance of two potential explanations, which we label “bad luck” – the occurrence of unusually large commodity price and supply-side shocks - and “bad policy” reflecting failures in both monetary and prices and incomes policies. By reconsidering the historical and empirical record of inflation from 1950s to the early 1990s we show that the persistence of the Great Inflation in the UK cannot fully be explained by these factors, although these can account for some of the major fluctuations. Instead, underlying inflation and inflation expectations appear to be the result of a sequence of regime shifts. We argue those regime shifts are as much related to fundamental changes in fiscal policy as they are to monetary policy and union reforms. Our empirical evidence suggests that fiscal policy was at the heart of many of the problems in the UK during the Great Inflation. In contrast to most of British history, it was not used to stabilise the public finances. Instead, it was used to keep unemployment down and growth up, to subsidise losers from terms of trade shocks and to secure deals with the unions. |
| JEL: | N10 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34063 |