|
on Monetary Economics |
| By: | Rami Najjar; Adam Hale Shapiro |
| Abstract: | We show that the underlying source of inflation impacts financial market perceptions of the persistence of monetary policy tightening. Investors expect policy tightening to be more persistent inflation is driven by demand factors. During supply-driven episodes, however, investors perceive tightening as less persistent and less effective at producing a disinflation. These results point to a state-dependent financial market response to monetary policy: credibility, and therefore financial-market transmission, depends on what kind of inflation the central bank is perceived to be fighting. |
| Keywords: | monetary transmission; inflation expectations; high frequency; taylor rule |
| JEL: | E43 E52 E58 |
| Date: | 2024–11–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:102150 |
| By: | Nautz, Dieter |
| Abstract: | This paper investigates how the ECB's monetary policy affects consumers' perceptions about the credibility of the inflation target. Monetary policy is assessed by the gap between the actual policy rate and a Taylor rate to approximate the interest rate expected by the public. Drawing on survey data for German consumers from 2019 to 2024, we find that the ECB's interest rate policy contributes significantly to the credibility of the inflation target. In particular, the massive dent in inflation target credibility observed from 2021 to the end of 2023 could have been ameliorated by an earlier and more decisive tightening of monetary policy. This suggests that simple outcome-based Taylor rules may deserve more attention in the communication of the ECB's monetary policy strategy. |
| Keywords: | Credibility of Inflation Targets, Consumer Inflation Expectations, European Central Bank, Taylor Rules |
| JEL: | E43 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:fubsbe:333391 |
| By: | Ciftci, Muhsin; Wieland, Elisabeth |
| Abstract: | In this paper, we evaluate a set of measures of underlying inflation for Germany using conventional measures, such as core inflation (excluding energy and food items), and alternative measures based on econometric models, machine learning, and micro-price evidence. We compare these measures through detailed in-sample and out-of-sample evaluations. The alternative measures exhibit lower volatility, minimal bias, and superior out-of-sample forecasting accuracy performance. While we find no evidence that any single measure clearly outperforms the others over time, the range of alternatives measures also reflects a somewhat earlier uptick and downturn in light of the recent inflation surge in comparison to traditional ones. In addition, all measures under consideration are highly sensitive to monetary policy shocks. |
| Keywords: | Underlying inflation, monetary policy, local projections, machine learning |
| JEL: | E31 E37 C22 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:333424 |
| By: | Hie Joo Ahn; Thomas R. Cook; Taeyoung Doh; Elias Kastritis; Jesse Wedewer |
| Abstract: | This paper uses text data from Federal Open Market Committee (FOMC) meeting transcripts to estimate the reference levels of full employment, inflation, and financial conditions perceived by voting members and to uncover time variation in the Taylor rule parameters. We construct topic dictionaries on economic slack, inflation, and financial markets, and infer reference levels from members’ sentiment using a state-space model. The estimated employment reference level indicates that FOMC voting members generally perceived the labor market as tighter than implied by the Congressional Budget Office’s estimates between the mid-1980s and early 2000s, whereas the two measures align closely during the Great Recession and its subsequent recovery. The members’ perceived inflation target varies widely in the 1970s and 1980s, trends downward in the 1990s, and stabilizes slightly below two percent thereafter. The estimated Taylor rule exhibits shifting policy weights over time—stronger emphasis on inflation stabilization before the mid-1990s, greater responsiveness to employment deviations thereafter, and renewed emphasis on the inflation trend following the Great Recession—while interest-rate smoothing remains substantial throughout. |
| Keywords: | Federal Open Market Committee (FOMC); Taylor rule; Federal Reserve monetary policy; sentiment |
| JEL: | C32 E43 E52 E58 |
| Date: | 2025–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:102162 |
| By: | Adnan Velic (Technological University Dublin) |
| Abstract: | This paper examines the link between international inflation comovements, deviations from international inflation, and idiosyncratic inflation persistence. Our results indicate that stronger international comovements produce smaller, more persistent gaps between domestic and international inflation. We find that international inflation continues to exert a strong pull on domestic inflation despite notable fluctuations in international comovements. Detecting adjustment nonlinearities, we estimate the typical half-life of inflation shocks for relatively large, moderate, and small inflation deviations to be under 1 month, 2 months, and 18 months respectively. Geographic proximity, openness, exchange rate rigidity, international reserves, economic size, and uncertainty are found to be inversely related to the size of inflation gaps, due to their positive effects on international comovements. The impact on persistence, however, is ambiguous, as it is a function of not just the inflation gap, but also the speed of adjustment for a given size of the deviation. As the latter component covaries positively with most drivers, the net impact on persistence ultimately depends on the channel that dominates in the sample. |
| Keywords: | inflation dynamics, international comovements, inflation gaps, nonlinear adjustment, persistence, openness |
| JEL: | E31 E32 E5 F41 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep1825 |
| By: | Gaballo, Gaetano (HEC Paris); Paciello, Luigi (Einaudi Institute for Economics and Finance (EIEF)) |
| Abstract: | How do swings in inflation affect shopping behavior? We build on the idea that households' price hunting intensifies with surprise inflation. In our model, households observe only local monopolists' prices and must exert effort to see other sellers' prices to eventually buy from them. This friction leads households to doubt that local price changes are idiosyncratic, even when all prices change uniformly in response to a nominal aggregate shock. In such a case, households overestimate the benefits of exerting effort, reallocating more spending toward lower-markup sellers. We show that, through this channel, output can expand significantly with surprise inflation, despite flexible shop pricing and acyclical posted markups. Using U.S. retailer scanner data, we validate our model's distinctive prediction that inflation measured over paid prices moves more slowly than inflation measured over posted prices, both unconditionally and in response to monetary policy shocks. |
| Keywords: | Inflation; Consumers’ Search; Shop-Switching; Information Frictions; Countercyclical Markups; Business Cycles |
| JEL: | D80 |
| Date: | 2025–07–24 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1581 |
| By: | Jeremy Srouji (International Institute of Social Studies, Erasmus University Rotterdam, The Netherlands; Université Côte d'Azur, CNRS, GREDEG, France); Dominique Torre (Université Côte d'Azur, CNRS, GREDEG, France); Qing Xu (ICL, Junia, Université Catholique de Lille, LITL, Lille, France) |
| Abstract: | This article examines proposals to establish a BRICS Central Bank Digital Currency (CBDC) aimed at facilitating trade flows among the members, as part of their broader discussions around reforming the international monetary and financial system. It sets these proposals within the context of global CBDC efforts, South-South convergence processes and the challenges the BRICS have faced in navigating global geo-political tensions, while aligning national CBDC efforts with groupwide initiatives. We focus on a Brazilian proposal to establish a unified BRICS cross-border payment system, seen as a first step towards a full-fledged BRICS CBDC. Our main finding is that while this cross-border digital currency can be useful for smoothing payments and reducing the trade deficits of the smaller BRICS members, it does little to redress their asymmetric position vis-à-vis the larger country, China. The implication is that sustainable convergence among the grouping through the adoption of a unified cross-border currency would require a higher level of monetary and policy coordination than that set out in the Brazilian proposal. |
| Keywords: | CBDC, BRICS, cross-border payments, international currency, international trade, stablecoins |
| JEL: | F33 F36 E12 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2025-48 |
| By: | Barbora Livorova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & Czech National Bank); Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper contributes to studying the impacts of monetary policy on labour income inequality in the euro area using subnational regional data on compensation per employee. The dataset covers 932 NUTS3 regions from 16 countries over the period 2000 - 2022 at a yearly frequency. Using sub-sample analysis combined with local projections, the results show that monetary policy rate changes have heterogeneous effects on the growth of real compensation per employee (deflated by the GDP deflator) at both the bottom and upper ends of the regional distribution within individual countries. From the whole euro area perspective, monetary policy tightening has a heterogeneous effect on labour incomes between regions - in times of monetary policy easing, shortening the gap between average low- and high-income regions. |
| Keywords: | Monetary Policy, Regional Inequality, Compensation of employees, Local Projections |
| JEL: | E52 J31 R10 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2025_27 |
| By: | Christopher D. Cotton |
| Abstract: | Markets systematically misprice interest rate changes around central bank announcements. I show that the strongest predictor of this mispricing is recent change in global interest rates. More specifically, a 1 percentage point increase in global short-term interest rates in the 15 days before a central bank meeting is associated with a 12-basis point surprise increase in short-term rates at that meeting. I demonstrate that this is the result of markets underreacting to signals coming from the global interest rate cycle. |
| Keywords: | monetary policy surprise; central bank; global interest rate cycle; predictability |
| JEL: | E43 E52 E58 |
| Date: | 2025–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:102186 |
| By: | Ginn, William; Saadaoui, Jamel; Salachas, Evangelos |
| Abstract: | We investigate how the European Central Bank (ECB) and the US Federal Reserve (Fed) re-spond to climate-related shocks, assessing whether the green transition can advance without compromising price stability. Using data from 2000 to 2025 and employing time-varying local projection (TVP-LP) models, we examine the monetary policy reactions to both physical and transition climate risks. Our results show that physical shocks, such as extreme weather events and natural disasters, exert stronger and more inflationary effects on monetary policy than tran-sition shocks related to decarbonization and climate policy. The ECB systematically tightens policy in response to physical shocks, viewing them as supply-side disturbances that threaten price stability, while the Fed’s response is more state-dependent and event-driven, loosening policy during crises like Hurricane Katrina but tightening in the post-COVID inflationary peri-od. For transition risks, both central banks show subdued reactions until 2015, after which the ECB increasingly interprets them as inflationary, whereas the Fed remains more cautious and output oriented. A one standard deviation physical risk shock raises the shadow rate by about 30 bps in the EA and 20 bps in the US after 20 months. These findings reveal that climate shocks have become an integral part of monetary transmission, shaped by mandates and macro-economic context, underscoring the need for price stability to enable the green transition. |
| Keywords: | Climate Risks, Monetary Policy, ECB; Fed, Time-varying Local Projections, Price Stability. |
| JEL: | E52 E58 Q54 Q56 |
| Date: | 2025–10–20 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126542 |
| By: | Altavilla, Carlo; Gürkaynak, Refet S.; Laeven, Luc; Kind, Thilo |
| Abstract: | We empirically examine the role of both official monetary policy announcements and policymakers’ speeches in the transmission of monetary policy to financial markets and the real economy in the euro area. Using intraday data covering a broad cross-section of financial assets, we construct the Euro Area Extended Monetary Policy Event-Study Database (EA-EMPD). We refine the identification of monetary policy surprises by exploiting granular, quote-level data on individual participants’ bid and ask submissions. This novel dataset expands the set of identifiable policy events by an order of magnitude relative to databases based solely on scheduled rate-setting meetings. Our analysis yields three main findings. First, speeches by euro area policymakers exert statistically and economically significant effects on asset prices across maturities, with magnitudes comparable to those observed following official policy announcements. Second, the transmission of speech-induced short-rate changes to the real economy closely mirrors that of policy decisions and combining both types of surprises significantly enhances the precision of statistical inference. Finally, when speeches are included in the measurement of policy surprises, the share of real-economy variance attributable to monetary policy increases fivefold, although its absolute magnitude remains relatively modest. JEL Classification: E43, E44, E52, E58, G14 |
| Keywords: | BVAR, event study, monetary policy surprise, speeches |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253157 |
| By: | Hecker, Dominik; Wolters, Maik H. |
| Abstract: | We estimate a New Keynesian model that allows endogenous transitions between a target equilibrium, with inflation fluctuating around the central bank's target and interest rates typically positive, and a low-inflation equilibrium, where the effective lower bound binds and de-anchored expectations keep inflation persistently below target. The model is estimated using Bayesian methods, employing an ensemble MCMC sampler with a particle filter to handle nonlinearities. We find that the United States remained in the target equilibrium after the global financial crisis, the euro area transitioned to the low-inflation equilibrium in 2015, with the subsequent inflation surge initiating a return to the target equilibrium in 2021, and Japan entered the lowinflation equilibrium in the early 2000s. Bayes factors strongly favor the equilibrium-transition model over an alternative specification in which the lower bound binds only occasionally and expectations remain anchored. |
| Keywords: | Multiple Equilibria, Nonlinear Estimation, Particle Filter, Deflation, Zero Lower Bound, Natural Interest Rate, Inflation Expectations |
| JEL: | C51 E31 E43 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:333406 |
| By: | Emilio Ocampo; Nicolás Cachanosky |
| Abstract: | In this brief note, we evaluate the conclusions of a recent paper by Lopez Almirante and Neumeyer (2024). Simulations of a well-known model calibrated for Ecuador led them to conclude that dollarization can lead to a higher probability of a sovereign default and that only a high inflation rate would make it a welfare enhancing option for a non-dollarized economy. We find data misspecification and erroneous assumptions invalidate the results of the analysis. |
| Keywords: | Dollarization, Default Risk, Latin America. |
| JEL: | E31 E52 E58 F31 F32 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:cem:doctra:871 |
| By: | Trebbi, Giovanni |
| Abstract: | I study how demand-supply narrative disagreement between general and specialized newspapers can explain households’ absolute gap in inflation expectations with experts. I measure inflation narratives via a Causality Extraction algorithm that can identify causal relationships between events in a text and, hence, extract the perceived triggers of inflation. Causal relations can explain why narratives affect people’s beliefs and cannot be captured by dictionary methods, topic models, and word embeddings. I then classify inflation narratives into demand and supply narratives based on their focus on demand and supply triggers. I measure narrative disagreement between general and specialized newspapers from their attention difference on demand and supply narratives. The absolute expectation gap widens when narrative disagreement increases, especially for non-college-educated and older households. Unlike the narratives of specialized newspapers, the narratives of general newspapers incorrectly align with experts’ demand-supply views. JEL Classification: C53, D1, D8, E3 |
| Keywords: | causality extraction, natural language processing, news media |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253158 |
| By: | Robert Barro (Harvard University); Francesco Bianchi (Johns Hopkins University; CEPR; and NBER); Carlos Giraldo (Latin American Reserve Fund); Iader Giraldo-Salazar (Latin American Reserve Fund) |
| Abstract: | This paper investigates the relationship between fiscal policy and inflation in a group of Latin American countries during the period 2002 to 2023. Building on the fiscal theory of the price level and recent empirical work by Barro and Bianchi (2025), we examine how fiscal expansions affected inflation dynamics in the region, with a particular focus on fiscal expansions during the pandemic era. Using both OLS and dynamic panel models, we find robust evidence that increases in primary government expenditure significantly contributed to higher headline and core inflation. Our analysis incorporates a composite spending variable that adjusts for the size and maturity of public debt, revealing that inflationary effects are more pronounced in countries with shorter debt maturities and weaker fiscal credibility. Unlike in OECD countries, the inflationary impact of fiscal policy in Latin America persists even outside the COVID-19 period, suggesting structural vulnerabilities. These findings underscore the importance of credible fiscal frameworks and coordinated macroeconomic policies to maintain price stability in emerging markets. |
| Keywords: | Fiscal inflation; fiscal spending; COVID pandemic; Latin America. |
| JEL: | D91 E32 E71 |
| Date: | 2025–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:021801 |
| By: | Rod Garratt; Michael Junho Lee |
| Abstract: | Following the recent passage of legislation in the U.S., payment stablecoins seem to be on the brink of wider-scale adoption and explosive growth in market capitalization. In this post, we contend that the driving factor is not their proximity to digital cash instruments, but rather how they are transferred—via global, open-access, peer-to-peer systems, or “permissionless blockchains, ” for short. |
| Keywords: | blockchains; stablecoins; tokenization; financial infrastructure; payments |
| JEL: | G23 E41 E42 |
| Date: | 2025–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:102184 |
| By: | Pin-Te Lin; Yu-Lieh Huang |
| Abstract: | This study examines the inflation-hedging benefits across various asset classes—stocks, housing, bonds, and bills—over the long term, from 1870 to 2020, in the US markets. Specifically, it compares and contrasts the hedging benefits of each asset class against both expected and unexpected inflation. Historical explorations of the inflation-hedging properties across asset classes can have implications for portfolio management. |
| Keywords: | Expected inflation; Inflation Hedging; Unexpected inflation |
| JEL: | R3 |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:arz:wpaper:eres2025_235 |
| By: | Alain Coen; Philippe Guardiola |
| Abstract: | The main objective of this article is to investigate the impact of monetary policies led by the Bank of England, the ECB and the Fed on the dynamics of British commercial real estate markets between 2000 and 2023, using vector autoregression and structural vector autoregression (SVAR) models. With our modelling, we also shed new light on the role played by the stock market and REITs as transmission channels. Our results report that monetary policies have a highly significant impact on eight British commercial real estate sectors, with different implications. As an illustration of financialization, REITs seem to be a transmission channel for all asset classes. However, Brexit appears to mark a major turning point as the BoE and BCE monetary policies effects drop sharply after 2016. |
| Keywords: | commercial real estate; Monetary policies; REIT; SVAR |
| JEL: | R3 |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:arz:wpaper:eres2025_56 |
| By: | Domenech Palacios, Mar |
| Abstract: | I examine how households adjust the quality of their purchases in response to adverse economic shocks. Using household scanner data from Germany, I document heterogeneous responses across income levels. Higher-income households tend to reduce the quality of the goods they purchase, whereas lower-income households, who typically consume lower-quality goods, show a limited propensity to trade down, likely due to a limited ability to do so. To assess the equilibrium effects of an aggregate shift in demand toward lower-quality varieties, I implement a shift-share research design. This approach leverages two key components: (i) pre-determined spending shares on middle-quality varieties across the product space for a wide range of sociodemographic groups prior to the great financial crisis, and (ii) variation in population growth across these groups during the crisis. I find that a 1% aggregate demand shift toward lower-quality varieties following a recession raises the relative price of low-quality varieties by about 0.45% on average. JEL Classification: E21, E31, E32, E60 |
| Keywords: | business cycle, inflation, prices, quality, trading down |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253156 |