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on Monetary Economics |
| By: | Lena Dräger; Michal Marenčák; Giang Nghiem; Maritta Paloviita |
| Abstract: | This paper examines cross-country differences in consumer expectations about macroeconomic outcomes and mortgage borrowing conditions within a monetary union. Using harmonized microdata from the ECB Consumer Expectations Survey for eleven euro area countries, we document significant national disparities. By sequentially adding a rich set of consumer- and country-specific macro controls to pooled regressions with country fixed effects, we find that these factors account for much, but not all, of the cross-country heterogeneity in expectations. These remaining differences likely reflect unobserved country-specific factors, highlighting the need for country-tailored monetary policy communication to effectively stabilize consumer expectations. |
| Keywords: | country heterogeneity, expectations, consumer expectations survey |
| JEL: | E31 E52 D30 D84 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12725 |
| By: | Pappa, Evi; Rast, Sebastian; Vicondoa, Alejandro |
| Abstract: | We show that housing tenure status shapes the distributional effects of trend inflation. Using a trend-cycle model and principal component analysis, we identify trend inflation innovations linked to monetary and corporate tax shocks. Trend inflation redistributes resources through debt revaluation, asset price movements, and income composition. Monetary expansions raise house prices, benefiting outright owners and mortgagors. Corporate-tax-driven shocks resemble adverse supply disturbances, lowering house prices and generating gains only for mortgagors through reduced real debt burdens. Outright owners are partly insulated through financial income, while renters consistently lose as inflation erodes their labor income without offsetting valuation gains. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21365 |
| By: | Kristie M. Engemann |
| Abstract: | The Fed's monetary policy framework includes how the FOMC interprets maximum employment and price stability and the strategy to achieve those objectives. |
| Keywords: | dual mandate; maximum employment; price stability; Federal Open Market Committee (FOMC) |
| Date: | 2026–07–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00100:103504 |
| By: | Gautier, Erwan; Savignac, Frederique; Coibion, Olivier |
| Abstract: | Using a new survey of French firms spanning the full 2020–2025 inflation cycle, we document that de-anchoring and passthrough decoupled during the inflation surge: the firms whose expectations drifted furthest from target were precisely those that did not act on them, while firms that embedded expectations into wages and prices remained relatively well anchored. A growing tail of firms expected persistently high inflation — “inflation disasters†— but these were disproportionately smaller, less attentive firms extrapolating local cost pressures. As a result, the surge in expectations did not generate wage-price dynamics, limiting the scope for a self-sustaining inflation spiral. |
| Keywords: | Expectations |
| JEL: | E2 E3 E4 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21445 |
| By: | Groh, Carl-Christian; Pfäuti, Oliver; Saidi, Farzad |
| Abstract: | We study how firms' use of big data shapes the transmission of macroeconomic shocks to investment. Using employer-employee data on job characteristics to measure firm-level data intensity, we show that data-intensive firms respond more strongly to monetary policy shocks. The relationship between data intensity and investment cyclicality is non-linear: it is negative among firms in the lower four quintiles of the data intensity distribution but significantly attenuated among the most data-intensive firms. We develop a theoretical model with endogenous data acquisition to explain these findings. Data raises expected productivity and lowers uncertainty, reducing firms’ investment costs. Because capital and data acquisition are strategic complements, aggregate shocks induce adjustments in data acquisition that amplify investment responses, especially for data-rich firms. Our results imply that changes in firms' access to data — potentially driven by digital markets regulation — can meaningfully affect both the potency of monetary transmission and business cycle fluctuations. |
| Keywords: | Big data; Uncertainty; investment; Monetary policy; Business cycles |
| JEL: | D21 D81 E22 E52 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21379 |
| By: | Jan Kakes; Anna Samarina |
| Abstract: | This paper investigates the pass-through of market rates to bank deposit rates in the euro area, using bank-level data from July 2007 to March 2025. We employ local projections and an errorcorrection model to analyze the dynamics of pass-through over time, across interest rate regimes, and among countries, as well as explore its potential drivers. The results show that pass-through is significant but uneven. It is stronger for term and corporate deposits than for demand and household deposits. The effectiveness of pass-through diminishes in a lowinterest- rate environment and varies across countries. Structural features of the banking sector and bank balance sheet characteristics also shape transmission. Specifically, banks operating in more concentrated markets exhibit lower pass-through. In addition, banks with larger liquidity buffers, stronger capitalization, and greater reliance on deposit funding adjust deposit rates less. Lastly, higher customer switching frequency and higher payment account fees are associated with stronger pass-through for household demand deposits. |
| Keywords: | deposit rates; market rates; pass-through; euro area; zero lower bound; bank competition |
| JEL: | G21 G10 E43 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:865 |
| By: | Eichengreen, Barry |
| Abstract: | Although the U.S. dollar remains the dominant currency used in cross-border transactions, policymakers worldwide are increasingly uncomfortable with their financial dependence on the greenback. Their worries are heightened by developments such U.S. efforts to promote the issuance and use of dollar-linked stablecoins, which aspire to cement dollar dominance. This paper asks how countries, and Asian countries in particular, should respond to the challenge. It recommends a diversified strategy whereby governments and central banks explore the development of stablecoins linked to other currencies, link their fast-payment systems, pilot interoperable central bank digital currencies, and explore digital correspondent banking through tokenized bank deposits. |
| Keywords: | Dollar; Stablecoins; Asia |
| JEL: | F0 F30 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21372 |
| By: | Fabio Gómez-Rodríguez (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | Shocks are neither persistent nor transitory; what can be persistent or transitory are their effects. This seemingly subtle distinction has direct consequences for monetary policy: conflating the duration of an event with the duration of its effects can lead to underestimating or overestimating how long the Monetary Policy Rate should respond. This essay develops the argument and illustrates it with two examples relevant to Costa Rica: the effects of global shocks on inflation, where the nominal exchange rate acts as a reverting mechanism, and the effects of oil-price shocks, whose second-round effects sustain inflationary pressures long after the initial shock has dissipated. The paper concludes with communication and policy recommendations for the Central Bank of Costa Rica. ***Resumen: Los choques no son persistentes ni transitorios; lo que puede serlo son sus efectos. Esta distinción, aparentemente sutil, tiene consecuencias directas para la política monetaria: confundir la duración de un evento con la duración de sus efectos puede llevar a subestimar o sobreestimar cuánto tiempo debe responder la Tasa de Política Monetaria. El presente ensayo desarrolla esta idea y la ilustra con dos ejemplos relevantes para Costa Rica: los efectos de los choques globales sobre la inflación, donde el tipo de cambio nominal opera como mecanismo de reversión, y los efectos de los choques del precio del petróleo, cuyos efectos de segunda ronda prolongan las presiones inflacionarias mucho después de que el choque inicial haya desaparecido. Se concluye con recomendaciones de comunicación y de política para el Banco Central de Costa Rica. |
| Keywords: | persistent effects, transitory effects, monetary policy, global shocks, exchange-rate pass-through, efectos persistentes, efectos transitorios, política monetaria, choques globales, traspaso del tipo de cambio |
| JEL: | E31 E52 E58 F41 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:apk:epolec:2602 |
| By: | Joshua K. Hausman (Ford School of Public Policy and Department of Economics, University of Michigan and NBER.(E-mail: hausmanj@umich.edu)); John V. Leahy; John Mondragon (Federal Reserve Bank of San Francisco (E-mail: john.mondragon@sf.frb.org)); Johannes F. Wieland (Federal Reserve Bank of San Francisco, Department of Economics, University of California, San Diego, and NBER. (E-mail: jfwieland@ucsd.edu)) |
| Abstract: | Nominal interest rates have real effects. Residential mortgages and other real world debt contracts require a sequence of constant nominal payments. Combined with payment-to-income constraints, these nominal payments force borrowers to take on less debt when nominal interest rates rise, regardless of the behavior of the real interest rate. Survey data shows that conditional on the real rate, higher nominal mortgage interest rates reduce home buying sentiment. And increases in nominal mortgage rates reduce mortgage origination more in cities where payment-to-income constraints are more likely to bind. We explore the macroeconomic implications of payment-to-income constraints in a new Keynesian model modified to include a credit good. The payment-to-income constraint amplifies the effect of current short-term nominal interest rates on output and inflation, making the model less forward-looking than the standard new Keynesian model. |
| Keywords: | Interest rates, Mortgage, Housing, Monetary policy, Nominal |
| JEL: | E4 E50 G21 R21 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:26-e-08 |
| By: | Caballero, Ricardo; Simsek, Alp |
| 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. |
| Keywords: | Monetary policy; exchange rate; Financial conditions index; Limits to arbitrage |
| JEL: | E32 E40 E44 E52 F30 F41 G12 G15 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21290 |
| By: | Ali Ozdagli; Michael Weber |
| Abstract: | An important way monetary policy affects the economy is through household spending. When the Federal Reserve increases or lowers interest rates, the effects do not end with just the businesses most exposed to the resulting changes in household spending. |
| Date: | 2026–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:103469 |
| By: | Allan Pedersen |
| Abstract: | Europe's 2026 review of MiCA is usually framed as one choice for the euro stablecoin. The real question is the mix. A trilemma (par stability, private credit, no public backstop) lets a single token hold only two of the three; the corner that reaches for all three is structurally unstable, for reasons of coordination that no calibration fixes. But at the level of the system the three coherent designs are not rivals: they are lanes that can run in parallel, narrow money (a privately issued claim on the central bank), bank money (bank-issued tokens and tokenised deposits), and a public anchor (a digital euro and on-chain central-bank money). This note weighs each against six EU objectives, shows that the best mix turns on which objectives are prioritised, and offers a conditional sequenced portfolio, with one unconditional conclusion: close the incoherent non-bank corner. |
| Keywords: | stablecoins; e-money tokens; MiCA; narrow banking; central bank digital currency; tokenised deposits; monetary sovereignty; disintermediation |
| JEL: | E42 E58 G21 G28 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:pmt:wpaper:3 |
| By: | Atak, Alev; Kısacıkoğlu, Burçin |
| Abstract: | The Federal Reserve's public statements do not directly reflect the FOMC's internal deliberations. The committee filters the message before releasing it, and the filter behaves differently when the policy rate is constrained. We compare meeting-level monetary policy stance indices built from FOMC transcripts and post-meeting statements across 128 meetings between 2004 and 2019, and measure the gap between them. In unconstrained periods, the public message leans modestly more hawkish than the deliberation behind it, consistent with the Fed protecting its credibility while conventional policy still has room to operate. At the effective lower bound, the sign flips, and statements turn substantially more dovish than the internal discussion. The reversal is not an artifact of forward guidance or quantitative easing language, and communication takes on a more direct role when the rate instrument is constrained. Using staff economic projections as an intermediate benchmark, we show that the regime-dependent shift comes from deliberation, not from public communication. We also show that measured stance gap predicts later revisions in the Fed's statements, since the FOMC initially communicates with a bias but the statement gradually catches up to the internal view. Statement-based text measures are not transparent proxies for internal policy preferences, particularly across policy regimes. |
| Keywords: | Central bank communication |
| JEL: | D83 E52 E58 G14 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21538 |
| By: | Eijffinger, Sylvester; de Haan, Jakob |
| Abstract: | This paper provides an overview of recent research on central bank independence. First, we examine several indicators of legal independence and show that, although these indexes are mostly based on the one proposed by Cukierman et al. (1992), they reveal striking differences among some of the considered central banks. Today, central bankers face many challenges to their independence, including the growing influence of populist politicians and mounting government debt. We discuss recent studies examining the drivers of central bank independence, including political influences. There is substantial evidence that legal independence does not shield central banks from political pressure. Studies on political pressure demonstrate that populist governments are not the only ones to exert pressure on their central banks. Political pressure often causes central banks to change their policies. Most recent studies examining changes in legal central bank independence suggest a negative relationship between the two. There is a widespread belief that independent central banks should be held accountable. However, accountability is often equated with transparency. In our view, accountability should also include the ability to sanction central banks if they fail to meet the monetary policy objectives outlined in their mandates. |
| Keywords: | Central bank independence; Central bank accountability; Inflation; Inflation persistence; Monetary policy |
| JEL: | E31 E52 E58 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21331 |
| By: | McMahon, Michael; Petersen, Luba; Rholes, Ryan |
| Abstract: | Using over 17, 000 incentivized inflation forecasts, we provide causal evidence that environmental complexity and subjective complexity are distinct drivers of rounding in survey responses. Experimental variation in shock volatility and central-bank communication regimes shows that both channels raise forecast uncertainty and the propensity to round, with subjective complexity the dominant force — explaining 58–86% of rounding depending on horizon and specification. Survey of Consumer Expectations microdata corroborate these findings: rounding declines with survey tenure, rises with inflation volatility, and inflates measured inflation expectations by nearly 7 percentage points among inexperienced respondents. |
| Keywords: | Expectation formation; Uncertainty |
| JEL: | C91 D84 E52 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21374 |
| By: | Kilian, Lutz; Plante, Michael D.; Richter, Alexander W.; Zhou, Xiaoqing |
| Abstract: | This paper shows how to assess the inflationary impact of the rise in the price of oil caused by the 2026 Iran War. We first generate projections of the quarterly price of oil from a calibrated DSGE model of the global economy under a range of scenarios and then incorporate these projections into a monthly VAR model of the impact of U.S. gasoline price shocks on inflation and inflation expectations. Our analysis speaks to the magnitude and persistence of the impact of higher oil prices on headline and core PCE inflation and on household inflation expectations. |
| JEL: | C54 E31 E37 Q43 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21373 |
| By: | Christopher Johns; Aaron Mehrotra; Fabrizio Zampolli |
| Abstract: | Using high-frequency euro area monetary policy shocks and panel local projections for the period 2001-2020, this paper examines how macroeconomic variables respond based on the level and the maturity structure of public debt. The results show that public debt plays a significant role in influencing monetary policy transmission. Higher public debt is associated with a weaker response of prices and inflation expectations to tighter monetary policy, while output declines at least as much as in low-debt economies. The maturity structure of debt also matters in a non-linear way: debt at intermediate maturities is associated with weaker effects, whereas debt at very short and long maturities is associated with stronger effects. Fiscal responses indicate a lack of contemporaneous fiscal backing, as primary balances tend to deteriorate following monetary tightening. Finally, for non-euro area European economies, the paper introduces a novel dataset on public debt maturity profiles and shows that spillovers from euro area monetary policy depend on the maturity structure in the receiving economy. |
| Keywords: | monetary policy transmission, government debt, debt maturity, policy spillovers |
| JEL: | E31 E52 E62 E63 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1365 |
| By: | Friedrich, Christian; Zhao, Laura |
| Abstract: | In this paper, we examine the patterns and determinants of cross-border cryptocurrency flows. While our analysis focuses primarily on Bitcoin flows, the cryptocurrency with the largest market capitalization, we show that our key results also extend to four major stablecoins. After documenting global patterns of cross-border Bitcoin flows and contrasting them with those of traditional capital flows, we employ a cross-country panel approach to identify the key drivers of cross-border crypto flows for up to 162 countries. Our results provide evidence for the presence of multiple coexisting motives. The most significant motives comprise strategies to adjust to unfavorable macro and financial developments, as well as the need to conduct international payment and remittance transfers. Moreover, by conducting a case study of cross-border Bitcoin flows after the COVID-19 shock, we find that these motives were particularly relevant at a time when economic conditions were weak and the need for remittances appeared high. Gaining a better understanding of the motives behind cross-border cryptocurrency transactions is crucial for informing the public debate on cryptocurrencies and their potential use cases. |
| Keywords: | Bitcoin |
| JEL: | E4 F3 F32 F38 F51 G15 G23 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21528 |
| By: | Aeimit Lakdawala (Wake Forest University); Jinyoung Seo (Wake Forest University); Myungkyu Shim (Yonsei) |
| Abstract: | How precisely should central banks communicate about the future policy rate path? We study this question in an incomplete information model where the central bank chooses the precision of its communication. The key feature is an endogenous cost of precision: clearer communication makes financial markets respond more strongly to policy path news. A simple overlapping generations framework links this financial market volatility to volatility in the real economy that central banks care about. The benefit of precision is that it helps agents make more informed decisions, and we show how the central bank optimally balances the two. High-frequency monetary policy announcement data provide evidence consistent with the model’s amplification mechanism. |
| Keywords: | central bank communication; forward guidance; communication precision; monetary policy uncertainty; financial market volatility |
| JEL: | E58 E52 E44 D83 E43 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:023050 |
| By: | De Grauwe, Paul; Ji, Yuemei |
| Abstract: | Our perceptions and our forecasts are often systematically biased. These biases affect economic activity. In this paper we model some aspects of these biases. To do so we use a behavioural macroeconomic model. In this model agents have cognitive limitations, preventing them from having rational expectations. Instead, they use simple forecasting rules (heuristics). Rationality is introduced by assuming that these agents learn from their mistakes and are willing to switch to different rules if these are found out to perform better. We apply this model to analyze how systematic optimistic and pessimistic forecasts of the output gap affect the economy and the transmission of monetary policies. A key insight provided by this analysis is that an increased polarization between optimistic and pessimistic forecasts has the effect of creating agnosticism about the true value of the equilibrium output gap. This also leads to a dominance of purely extrapolative forecasting by economic agents who “fail to see the light†, which in turn enhances the volatility of the business cycle and of inflation. It also reinforces the need for the central bank to stabilize output movements, beyond the need for inflation stabilization. |
| Keywords: | Monetary policy; Behavioral macroeconomics; Biased beliefs |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21366 |
| By: | Sharan, Arunima; Martinez Martinez, Juan Pablo; Feyertag, Joe; Kundu, Sujata; Kohli, Renu |
| Abstract: | The growing frequency and intensity of heat stress, excess rainfall, floods and storms may be reshaping the structure of food inflation. These trends challenge a long-standing assumption about inflation targeting: that supply shocks are temporary, idiosyncratic and short-lived. In India and other climate-vulnerable economies, central banks may find themselves managing a structural inflation environment with tools designed for a cyclical one. This policy brief examines the mechanisms through which physical climate impacts transmit into rises in food prices at the subnational level in India, and then into headline and core inflation. The authors provide an empirical foundation for changes to forecasting frameworks, communication and the inflation-targeting architecture that the Reserve Bank of India (RBI) is already beginning to consider. |
| JEL: | F3 G3 R14 J01 |
| Date: | 2026–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:138855 |
| By: | Hugo De Vere; Ipek Ozil; Srini Ramaswamy; Seth Searls |
| Abstract: | Term premium, a central concept in analysis of interest rates and monetary policy, is generally viewed largely as compensation for bearing interest-rate risk. However, Treasury asset swap spreads strongly indicate the existence of a distinct premium—a term funding premium—associated with merely providing term financing. This funding premium shows promise as a real-time indicator of Treasury market stress. |
| Date: | 2026–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:103435 |
| By: | Altavilla, Carlo; Boucinha, Miguel; Burlon, Lorenzo; Adalid, Ramon; Fortes, Roberta; Maruhn, Franziska |
| Abstract: | This paper studies the effects of stablecoin adoption — crypto-assets designed to maintain a stable value relative to a reference asset — on bank intermediation and the transmission of monetary policy. Using evidence from the rapid expansion of stablecoins combined with confidential granular data on euro area banks and their individual borrowers, we document three main findings. First, stablecoin adoption induces a deposit-substitution mechanism, whereby funds shift from retail bank deposits to digital assets. This reallocation increases banks’ reliance on wholesale funding and can ultimately constrain their intermediation capacity. Second, we show that stablecoins affect the pass-through of policy rates to bank funding costs and lending conditions, potentially strengthening bank-based monetary policy transmission while making it less predictable. These effects are nonlinear and depend critically on the scale of stablecoin adoption, their design features, use cases, and regulatory treatment. Third, we document a potential risk associated with the growing prevalence of foreign-currency-denominated stablecoins. Their diffusion is likely to increase banks’ reliance on foreign-currency wholesale funding. We show that banks with greater exposure to this source of funding exhibit a weaker loan-supply response to domestic monetary policy shocks, indicating a weakening of monetary policy transmission and a potential erosion of monetary sovereignty. |
| Keywords: | Stablecoins |
| JEL: | E52 E44 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21321 |
| By: | Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot; Schmidt, Sebastian; Schumann, Ben Alexander |
| Abstract: | We confront the notion that flexible exchange rates insulate countries from external disturbances with new evidence for the euro area (EA) and 20 of its neighbors. Using high-frequency data, we first establish that countries with flexible exchange rates (“floats†) let their currencies depreciate in response to EA monetary policy shocks, while “pegs†raise interest rates. Yet at business cycle frequency, these depreciations do not translate into insulation: floats contract just as much as pegs—not only in response to monetary policy shocks but also to other shocks originating in the EA. This result appears puzzling in light of received wisdom, but we show that it can be rationalized within a state-of-the-art HANK model and flesh out the underlying transmission channels. |
| Keywords: | Insulation; External shock |
| JEL: | F41 F42 E31 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21468 |
| 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. |
| Keywords: | Monetary policy tightening; Interbank market; securities losses; banking groups; Foreign banks |
| JEL: | G21 E43 E52 E58 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21254 |
| By: | Harald Badinger (WIFO); Christian Glocker (WIFO); Stefan Schiman-Vukan |
| Abstract: | Using a structural VAR with a relatively agnostic identification based on narrative sign restrictions, this paper, in line with recent empirical evidence, documents an increase in the labor share following restrictive monetary policy in the euro area. We then complement the empirical analysis with a theoretical investigation that provides mechanisms linking monetary policy and the labor share – a connection that has so far been regarded as lacking an explanation. Specifically, we show that the observed responses of the labor share, real wages, and productivity to a monetary policy shock can be reconciled within an otherwise standard New Keynesian framework once capital accumulation is introduced and both nominal and real frictions – in particular, labor adjustment costs – are incorporated. |
| Keywords: | Monetary policy, Labor share, Euro area, Structural VAR, New-Keynesian model, Labor market frictions |
| Date: | 2026–05–27 |
| URL: | https://d.repec.org/n?u=RePEc:wfo:wpaper:y:2026:i:729 |
| By: | Chenard, Antonin; Eichengreen, Barry; Monnet, Eric; Morvillier, Florian |
| Abstract: | We analyze an aspect of the international monetary system that has been the subject of little research: the distinction between foreign exchange reserves held as deposits and held as securities. We assemble new data for 109 countries in the period 1950-2022 based on previously unutilized statistics from central bank annual reports. We show that there has been movement since the late 1990s toward holding a larger share of reserves in the form of securities. Securities now account for almost two-thirds of total foreign exchange reserves, up from one-third a quarter century ago. This shift is concentrated in the decade between the emerging market crises of the late 1990s and the 2008 global financial crisis. It is associated with the accumulation of excess reserves, what central bank reserve managers refer to as the †investment tranche†of their reserve portfolios. |
| Keywords: | International monetary system; Foreign exchange reserves |
| JEL: | F30 F31 F33 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21488 |
| By: | Ascari, Guido; Colciago, Andrea; Membretti, Marco |
| Abstract: | Under monetary tightenings, employment at small, high-churn firms contracts more than at large incumbents, raising the employment share of large firms. A mixed-frequency BVAR on U.S. data (1982–2018) shows that tightenings reduce firm entry and new-entrant hiring, severing inflows into small firms, while higher exit destroys small-firm employment. Large incumbents are comparatively insulated, rarely exiting and exhibiting weak sensitivity to entry conditions. This mechanism raises employment concentration, defining an employment concentration channel of monetary policy. An estimated structural model with heterogeneous firms, endogenous entry and exit, and equilibrium unemployment matches this effect, showing that the concentration channel is quantitatively important in accounting for the empirical output-inflation trade-off. |
| Keywords: | Monetary policy; employment concentration; Unemployment; Heterogeneous firms; Bvar |
| JEL: | E52 E32 C13 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21391 |
| By: | Samuel Stockman |
| Abstract: | Between the pandemic and the war in Iran, inflation has become a central issue facing the US economy that is compounding a broader affordability crisis. However, the sector-specific nature of these recent inflationary episodes means that movements in the price level are not evenly distributed and statistics such as consumer price indexes aggregate away meaningful information. These index movements present inflation as an aggregate process when it can be better understood as a structural feature of the economy facilitated by its production networks. This article builds on a new literature using input-output price models to simulate the relative price movements that result from sector-specific price shocks to demonstrate that inflationary processes entail relative price shifts as both their cause and their consequence. It is argued that these relative price movements begin in systemically significant upstream industries and propagate through production networks to produce differential price outcomes that are not captured by price indexes. The conclusions of this article refine the classification of the systemically significant industries found in Weber et. al (2024a) by clarifying the differential relative price movements from a set of systemically significant industries. The implication of these findings is that monetary policy cannot adequately address the causes of recent inflationary episodes and instead policies that target the structural features of the economy are necessary. |
| Keywords: | Inflation; Production Networks; Input-Output Analysis; Relative Prices; Price Stability |
| JEL: | E31 E52 E62 C67 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1118 |
| By: | Drechsel, Thomas; Tenreyro, Silvana; McLeay, Michael; Turri, Enrico Duilio |
| Abstract: | We show that the optimal monetary policy and exchange rate framework depend critically on the economy’s commodity exposure. We develop a flexible but tractable model economy with commodity exports and imports, in which international financial conditions may vary with the commodity cycle. Stabilizing domestic prices is optimal for commodity exporters, in line with standard open-economy policy prescriptions. But for economies that use commodities as inputs in production, optimal policy largely ‘looks through’ the direct and indirect effects of commodity shocks on domestic prices; this contrasts with some earlier findings and policy practice (which only ‘looks through’ the direct effect). Exchange-rate pegs perform better for commodity importers because they stabilize wages and employment, though it is not a robustly optimal policy. In emerging and developing economies, where financial conditions are more tied to the commodity cycle, trade-offs are starker and implementing the optimal policy may be challenging, since it requires enough credibility to keep inflation expectations anchored amidst greater volatility in some nominal variables. |
| Keywords: | Monetary policy; Exchange rates; Inflation targeting; Commodity prices; Small open economy |
| JEL: | E31 E52 E58 F41 Q02 Q30 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21518 |
| By: | Kenechukwu E. Anadu; Patrick E. McCabe; JP Perez-Sangimino; Nathan Swem |
| Abstract: | New money-like products, such as tokenized money market funds (MMFs), money market exchange-traded funds (MMETFs), and stablecoins, could be transformative for finance. These products may offer significant benefits, but like other money-like assets, they also have certain vulnerabilities. We introduce a framework to analyze the vulnerabilities of new products by comparing their features to those that contribute to vulnerabilities in MMFs. Specifically, we examine the extent to which each product engages in liquidity transformation, is subject to threshold effects, serves as a money-like asset, poses contagion risks, and has reactive investors. Our framework is useful for assessing the potential effects of novel cash-like products on the overall resilience of the financial system and how such an assessment may change as these products’ uses evolve. |
| Keywords: | money market funds; stablecoins; tokenized money; financial stability; liquidity transformation |
| JEL: | E5 G23 G1 |
| Date: | 2026–06–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbqu:103460 |
| By: | Hördahl, Peter; Kısacıkoğlu, Burçin; Xia, Fan Dora |
| Abstract: | Bond yields react to macroeconomic surprises, but the magnitude of this responsiveness depends on macroeconomic forecast disagreement and monetary policy uncertainty. Using intraday responses of US Treasury futures to surprises in macroeconomic data releases, we find that greater forecast disagreement about an economic indicator prior to its release dampens the yield curve response, while higher monetary policy uncertainty amplifies it. An exception is inflation surprises: prior to the post-COVID inflation surge, bond yield reactions to inflation surprises were not amplified by short-rate uncertainty. We use a model with Bayesian learning to rationalize these findings. Specifically, large forecast disagreement indicates a weak link between the macroeconomic variable and future monetary policy, reducing the information value of macro news to forecast monetary policy. In contrast, during periods of high monetary policy uncertainty, macro news becomes more informative. Before the post-COVID inflation surge, investors may have perceived that the Federal Reserve placed little emphasis on its price stability mandate, which could have muted the yield curve response to inflation news even when short rate uncertainty was high. The proposed model generates distinct, empirically testable effects of disagreement and monetary policy uncertainty on yield responses which, when extended to allow time-varying signal precision, accounts for the post-COVID shift in inflation sensitivity within a single unified framework. |
| Keywords: | Macroeconomic news; Forecast dispersion; Policy uncertainty; Bond yields; Bayesian learning |
| JEL: | E43 E44 G14 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21501 |
| By: | Susan Jiménez-Montero (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | The document characterizes the Central Bank of Costa Rica’s approach to short-term inflation forecasting within the context of an inflation-targeting regime, highlighting its importance as a key input for medium term projections that inform the monetary policy decision-making process. This essay describes (i) the rationale for forecasting under inflation targeting, (ii) the transmission mechanism and the relevant horizon, (iii) the set of methodologies employed—univariate models, Bayesian techniques, factor models (FAVAR), and item-level CPI models—and (iv) the integration and validation process that transforms statistical results into a coherent economic forecast, which feeds into the macroeconomic model and policy recommendations, as well as institutional outputs such as the Monthly Economic Developments Report (IMCE) and the Monetary Policy Report (IPM). Finally, it emphasizes the dynamic nature of the forecasting system, including the exploration of machine learning techniques as a complement to traditional econometric approaches. ***Resumen: Este documento caracteriza el proceso que se implementa en el Banco Central de Costa Rica (BCCR) para la elaboración de pronósticos de inflación de corto plazo en el contexto de un régimen de metas de inflación. Se destaca su importancia como insumo fundamental para generar pronósticos de mediano plazo que informan la toma de decisiones de política monetaria. Este ensayo describe (i) la racionalidad del pronóstico bajo metas de inflación, (ii) el mecanismo de transmisión y el horizonte relevante, (iii) la batería de metodologías empleadas—modelos univariados, técnicas bayesianas, modelos de factores (FAVAR) y modelos por artículo del IPC—y (iv) el proceso de integración y validación que transforma resultados estadísticos en un pronóstico económico coherente, que alimenta el modelo macroeconómico y la recomendación de política, así como productos institucionales como el Informe Mensual de Coyuntura Económica (IMCE) y el Informe de Política Monetaria (IPM). Finalmente, se resalta el carácter dinámico del sistema de pronóstico, y la exploración de nuevos modelos y técnicas como por ejemplo de machine-learning como complemento a los enfoques econométricos tradicionales. |
| Keywords: | inflation targeting, monetary policy, inflation forecasting, expected inflation, forecasting models, persistent effects, metas de inflación, pronóstico de corto plazo, inflación esperada, gobernanza, política monetaria |
| JEL: | E52 E37 C53 C32 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:apk:epolec:2603 |
| By: | Jonathan D. Rose; David C. Wheelock |
| Abstract: | The tradition of Federal Reserve independence is encoded in statute in important ways but is also rooted in norms and practices. To articulate this tradition, we discuss how those norms and practices emerged historically from compromises over the concentration of power, actions taken by political leaders and Fed officials to define the boundaries of the Fed’s independence, and in reaction to evolving monetary theories and practices. We argue that understanding these historic roots provides essential context for evaluating challenges to the Fed's independence today and in the future. |
| Keywords: | Federal Reserve; central bank independence; monetary policy |
| JEL: | N12 E58 |
| Date: | 2026–07–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:103485 |
| By: | Alice Albonico; Guido Ascari; Qazi Haque; Kostas Mavromatis; Andra Smadu |
| Abstract: | We develop and estimate an open economy DSGE model for the euro area where global energy prices and the exchange rate jointly determine domestic inflation, because imported energy, priced in foreign currency, enters both consumption and production. Energy and exchange-rate disturbances account for the bulk of short-run volatility in headline euro area inflation, with energy price shocks driving most of the post-pandemic surge. Because energy and non-energy goods are poor substitutes, an adverse energy price shock raises import values, deteriorating the trade balance and depreciating the real exchange rate through the net-foreign-asset and UIP channels. The exchange-rate channel strengthens monetary transmission and improves the short-run inflation-output trade-off relative to a non-energy economy. Optimal policy can exploit this channel rather than looking through energy price shocks. The case for looking through such shocks becomes stronger when the central bank assigns a greater weight to output gap stabilization and prices become stickier. |
| Keywords: | Monetary policy, Inflation, Energy, Bayesian estimation. |
| JEL: | E52 E31 E32 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:577 |
| By: | Donald Kohn (The author holds the Robert V. Roosa Chair in International Economics and is a senior fellow at the Brookings Institution.) |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:26-e-09 |
| By: | Bignon, Vincent; Mojon, Benoit; Ortiz Serrano, Miguel |
| Abstract: | The severity of financial crises is exacerbated by the lack of international liquidity or the absence of a global lender of last resort. This was evident during the Long Depression (1873–1896), the Great Depression (1929–1936), and, as we show in this paper, during the 1805–1806 crisis that followed the Battle of Trafalgar. The latter took Atlantic trade routes away from Spain and cut off Europe’s access to Latin American silver, the key high-powered money of the time. This silver shortage led the Banque de France to cut lending by nearly 50\% within three months, deliberately tightening credit to hoard specie and restore the value of its bank notes. In turn, no less than 20 Parisian banks failed, credit collapsed and European financial and money markets experienced acute stress, reflected in rising silver prices, pressure on the metallic reserves of other central banks such as the Banco de San Carlos in Madrid, and disruptions in bills of exchange markets across Europe, from Cádiz to Hamburg. The 1805–1806 crisis highlights how a safe asset's status requires both its resilient supply and the credibility of its issuer. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21466 |
| By: | Kengo NUTAHARA; Daichi SHIRAI |
| Abstract: | We investigate the role of money illusion in business cycle fluctuations by modeling households as misperceiving the inflation rates used to convert nominal variables into real variables. These two forms of misperception operate through distinct channels, affecting labor supply and intertemporal demand, respectively. We estimate a medium-scale DSGE model with money illusion using Japanese macroeconomic data for 1995Q1–2019Q4, measuring the monetary policy stance with a shadow rate. Bayesian estimation shows that the model with money illusion outperforms the rational expectations model, and both current and future inflation misperceptions are well supported by the data. Counterfactual exercises and variance decompositions show that the two forms of inflation misperceptions affect shock propagation through distinct channels. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:26-008e |
| By: | Milne, Alistair; Niepelt, Dirk; Skeie, David |
| Abstract: | We assess retail central bank digital currency (CBDC) against the objective of the uniformity of money. The central questions that arise are whether CBDC could help support the uniformity of money across public and private monies in day-to-day payments; how it interacts with the unit of account and monetary sovereignty; and how its design choices impact its contribution. |
| Keywords: | Uniformity; Money; Central Bank Digital Money CBDC |
| JEL: | E42 E51 E58 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21448 |
| By: | Ambrocio, Gene; Ferrero, Andrea; Jokivuolle, Esa; McClung, Nigel; Ristolainen, Kim |
| Abstract: | We study the tradeoff between a lower frequency of zero lower bound (ZLB) episodes and a loss of credibility for a central bank in relation to an increase of its inflation target. First, we present novel evidence on the relevance of both sides of the tradeoff for changing the inflation target from a survey of economists. Second, we analyze the ZLB-credibility tradeoff in a New Keynesian model featuring an occasionally-binding constraint on the nominal interest rate and a share of agents who form their expectations adaptively, which is negatively related to the degree of credibility of the central bank. For a given level of the inflation target, the ZLB frequency is higher for lower levels of credibility. A target raise aiming to reduce the ZLB frequency may backfire if a simultaneous loss of credibility occurs. |
| Keywords: | Expert survey |
| JEL: | C38 E31 E52 E58 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21368 |
| By: | Grigoli, Francesco; Sandri, Damiano; Gorodnichenko, Yuriy; Coibion, Olivier |
| Abstract: | This paper studies how households perceive the transmission of monetary policy and how these perceptions affect their decisions. Using a large-scale survey of over 25, 000 U.S. households combined with randomized information treatments, we measure how households expect changes in the federal funds rate to affect economic conditions and their own behavior. Households report that higher interest rates lead them to reduce their spending, particularly on durable goods. However, the mechanisms underlying this response differ markedly from those in standard macroeconomic models. Respondents expect monetary tightening to raise borrowing costs and inflation. In turn, consumption function estimates identified using information treatments reveal that households respond to higher expected inflation by reducing consumption. Household inflation expectations also emerge as a central driver of portfolio reallocations following monetary policy changes. |
| Keywords: | Monetary policy transmission; Household expectations; Inflation expectations; Consumption; Household portfolio choice |
| JEL: | E3 E4 E5 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21408 |
| By: | Eichengreen, Barry; Mehl, Arnaud; Vansteenkiste, Isabel |
| Abstract: | This paper assesses whether recent global developments have created an opportunity for the euro to expand its international role. Progress in the euro’s internationalization has been mixed — falling short of optimists’ hopes of dethroning the dollar while exceeding skeptics’ predictions of failure. Though the euro has not surpassed the combined global share of its legacy currencies, it has outperformed earlier challengers to the dollar, such as the Deutsche mark and Japanese yen at their peak internationalization in the 1990s, and it remains significantly ahead of the renminbi today. Recent developments in the U.S — concerns over its economic stability, growth prospects, and reliability as a global partner — have intensified scrutiny of the dollar’s safe haven status, potentially creating an opportunity for the euro to gain ground globally. To capitalize on this opening, Europe must strengthen its economic foundations, conclude new trade agreements and enhance its cross-border payment infrastructure with key trading partners, so as to bolster trade invoicing in euro. Fostering pan-European markets for equities, corporate bonds, and securitizations would boost liquidity and scale, enhancing the euro’s appeal as a global financing and investment currency. And establishing a unified euro-denominated safe asset to finance public goods such as defense, while bolstering Europe’s geopolitical credibility, would be critical to achieving these goals. |
| Keywords: | International monetary system; Geoeconomics |
| JEL: | F30 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21265 |
| By: | Carlos Giraldo (Fondo Latinoamericano de Reservas - FLAR); Iader Giraldo-Salazar (Fondo Latinoamericano de Reservas - FLAR); Jose E. Gomez-Gonzalez (Department of Finance, Information Systems, and Economics, City University of New York – Lehman College); Jorge M Uribe (Universitat Oberta de Catalunya) |
| Abstract: | This paper examines whether bank ownership shapes the international transmission of monetary policy through the bank lending channel. Specifically, it investigates whether foreign subsidiaries respond differently from domestic banks to U.S. monetary policy shocks. Using a large bank-level dataset covering 2, 039 institutions across 116 countries over the period 2001–2020, we combine detailed balance sheet information with an exogenous measure of U.S. monetary policy shocks. Our results indicate that foreign-owned banks seem to adjust their lending more strongly in response to U.S. monetary policy shocks than domestic banks. However, this effect is highly heterogeneous across banks and therefore not statistically significant. These findings hold regardless of whether lending persistence is explicitly modeled or not. Overall, the evidence downplays the role of internal capital markets in driving the international credit channel of monetary policy over yearly horizons. More broadly, results point suggest that foreign ownership appears to play a secondary role relative to broader balance sheet characteristics and exposure to global financial conditions |
| Keywords: | International bank lending channel; Monetary policy spillovers; Foreign bank ownership; Global financial cycle; Bank lending; Cross-border banking |
| JEL: | F34 G21 E52 F42 |
| Date: | 2026–06–04 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:023051 |
| By: | Betz, Felix; Bofinger, Peter; Dix, Jonas; Streit, Leonie |
| Abstract: | One of the central challenges in identifying the causal effects of monetary policy is the inherent endogeneity of its conduct. This paper introduces a novel identification strategy that leverages LLMs to detect monetary policy shocks from newspaper coverage following European Central Bank (ECB) policy decisions. Based on a dataset of 7, 620 articles from eleven major European newspapers, we classify each policy decision as unexpectedly restrictive, unexpectedly expansionary, or as expected. The resulting narrative-based surprise series captures immediate post-announcement perceptions and shows a close alignment with established High Frequency Identification (HFI) measures with notable exceptions during times of financial turmoil. We subsequently analyze the potential influence of the information effect on our series and find that the majority of identified surprises are unlikely to be driven by information effects. |
| Keywords: | Monetary policy shocks; Natural language processing; Large Language Models |
| JEL: | E52 E58 C88 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21390 |
| By: | Dixon, Huw (Cardiff Business School); Kosma, Theodora (Bank of Greece); Petroulas, Pavlos (Bank of Greece) |
| Abstract: | We utilize a unique micro price data set for Greece that underpins the Greek CPI. It spans more than two decades, during which Greece suffered two large economic shock. We find that during these times there were significant changes in the pricing behavior of Greek firms. We find that macro-economic developments such as annual inflation and output growth are important factors in determining the frequency and size of price changes. This leads to an intertemporal inflation dynamic linking current inflation to future price behavior and inflation. Utilizing the empirical estimates from the data during the first large shock, we combine a Taylor rule and Euler equation with the inflation dynamic resulting from the asymmetric impact of inflation on the frequency of price increases and the frequency of price decreases. The results of the simulations capture the ‘out of sample’ Greek inflation developments well during the second shock. Finally, we show that during large shocks mispricing increases, which may lead to an overreaction of frequency developments. |
| Keywords: | inflation dynamics; frequencies; prices; microdata |
| JEL: | E31 E37 C26 C41 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cdf:wpaper:2026/5 |
| By: | Reis, Ricardo |
| Abstract: | This short note explains the challenges with shrinking the Fed’s balance sheet. It argues that policies to reduce the balance sheet are synonymous with policies that reduce the demand for bank reserves. At the same time, controlling money market volatility while keeping the balance sheet as small as possible requires that the central bank commits to an elastic supply of reserves. Objections to having a standing repurchase facility open to banks that appeal to stigma ultimately refer to supervisory failures that can and should be corrected. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21417 |
| By: | Jona Whipple |
| Abstract: | The history of the creation of U.S. central banks includes political battles, financial crises, 77 years without a central bank—and one founding father’s enduring vision. |
| Keywords: | central banking; economic history; financial history; financial panics; financial crises |
| Date: | 2026–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00100:103481 |
| By: | Adam, Klaus; Weber, Henning |
| Abstract: | The introduction of a firm or product life cycle into New Keynesian frameworks fundamentally alters the design of optimal monetary policy. Economic welfare and the Phillips curve then depend on the gap between inflation and a time-varying inflation target that arises endogenously from turnover. The inflation target is positive on average and shifts in response to productivity disturbances. As a result, steady-state price stability is no longer desirable and the dynamics make it optimal for monetary policy to “look through†certain productivity disturbances. The latter requires keeping nominal rates unchanged even though both output and inflation move. This complicates the empirical distinction between supply, demand, and policy shocks. Our results highlight that accounting for supply side turnover delivers a rich set of policy-relevant results for inflation targeting and shock identification. |
| JEL: | E31 E32 E52 E61 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21422 |
| By: | Moritz Uhl (WIFO) |
| Abstract: | Reoccurring instability keeps forcing central banks repeatedly to intervene in financial markets, since the 2007-2008 crisis most notably with massive asset purchases, whose popularisation was spearheaded by the Bank of Japan. This paper exploits the world's first implementation of quantitative easing in the vicinity of zero interest rates in Japan from 1999 through 2006 to evaluate their distributional impact by means of the synthetic control method. Comparing the actual and counterfactual development demonstrates that unconventional monetary policy increased the top 10 percent to bottom 50 percent income ratio by more than 28 percent. This exercise also detects a rise of more than 7 percent for the Gini coefficient which is beneath the corresponding value of 12.5 percent for the share of the top income decile. These results, together with evidence from capital and labour income trends as well as data on household ownership of financial assets, suggest that inequality widened via heightening asset prices converting into gains for richer income groups. Conditional upon structural features of an economy a negative distributional side effect of central banking's new tools may turn out to be of severe magnitude. |
| Keywords: | Japan, Income inequality, Unconventional monetary policy, Quantitative easing, Synthetic control method |
| Date: | 2025–01–08 |
| URL: | https://d.repec.org/n?u=RePEc:wfo:wpaper:y:2025:i:692 |
| By: | Diego M. Hager; Samuel Reynard |
| Abstract: | We present a microfounded information mechanism that causes monetary policy transmission lags to be endogenously variable, even when firms are rational and face no exogenous costs of changing prices. Firms must form two distinct expectations, namely, a forecast of future demand and a nowcast of the current unobserved state, because information arrives at different frequencies. We model this setting as a partial-equilibrium, continuous-time optimal stopping problem in which firms receive a continuous noisy signal and a discrete precise signal. Because exercising the timing option to reprice has a sunk opportunity cost, an endogenous inaction region emerges; firms rationally delay adjustment until the discrete signal provides sufficient actionable information. The resulting dynamics reproduce observed Swiss price-adjustment patterns and the highly variable transmission lags of monetary policy. Thus, the framework provides a rational-agent microfoundation for lag heterogeneity. |
| Keywords: | Information frictions, State-dependent pricing, Monetary policy lags |
| JEL: | E31 E52 D84 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-08 |
| By: | Adam, Klaus; Alexandrov, Andrey; Weber, Henning |
| Abstract: | The misallocation costs associated with different aggregate inflation rates can be estimated from micro price data via a set of sufficient statistics. We show that this works for a broad class of price-setting models and in the presence of unobserved product-level heterogeneity in pricing frictions and flexible prices. Applying the sufficient statistics approach to the micro price data underlying the U.K. consumer price index, we find large misallocation costs: aggregate productivity falls by about 1% if aggregate inflation is 8 percentage points above or below its optimal rate of 1.8%. Our findings provide important lessons for the calibration of sticky-price models: standard calibration targets can be uninformative about the sufficient statistics characterizing misallocation costs. To correctly capture these costs, models should be directly calibrated to the sufficient statistics that we uncover. |
| JEL: | E31 E58 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21423 |
| By: | William A. Barnett (Department of Economics, University of Kansas, Lawrence, KS 66045, USA and Center for Financial Stability, New York City, NY, USA); Van H. Nguyen (Department of Economics, Lawrence University of Wisconsin, Appleton, WI 54911, USA) |
| Abstract: | This paper revisits the issue of money measurement in the context of a New Keynesian framework with sticky prices and monopolistic competition, where money matters. We adopt the framework for a small open economy with home bias in consumption from Faia and Monacelli (2008) and follow Belongia and Ireland (2014) in their closed economy New Keynesian model by adding commercial banks in the financial sector. We construct various measures of money supply, including the traditional simple-sum and the Divisia index, originated by Barnett (1980). Through simulation of equilibrium dynamics with various shocks and variation of parameters, we find that the Divisia index tracks the movement of money most closely to the aggregation theoretic benchmark, followed by the monetary base, while simple sum often fails to match the correct trend. In a classical model with perfect competition and perfect markets with no rigidities, the tracking advantage of Divisia is derivable, as in Barnett (1980). But in the New Keynesian model, the aggregation theoretic proof is compromised and best investigated empirically. We further analyze the impact of openness on the volatility of macroeconomic variables. We find that as the small economy becomes more open, domestic inflation and nominal interest rates are more volatile, while terms of trade and exchange rates become more stable. In this regard, the Divisia index and the monetary base, without payment of interest on reserves, follow the correct trend, while the simple-sum, again, does not. |
| Keywords: | Measurement of money supply; Divisia monetary aggregates; open-economy macroeconomics; monetary policy; New Keynesian model; small open economy |
| JEL: | E31 E32 E41 E47 E51 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:kan:wpaper:202615 |
| By: | Samuel Fahim |
| Abstract: | This paper studies whether fast-settlement payment layers can replace secure baselayer blockchains in a search-theoretic monetary model. The Chain provides secure but costly and probabilistic settlement, while the Network provides instant, cost-free payments but exposes users to cyberattacks and requires sellers to incur adoption costs. In the Chain-only benchmark, buyers choose settlement intensity after bargaining. Because they do not internalize the full trade surplus, settlement intensity is inefficiently low, reducing trade efficiency and weakening the monetary value of tokens. Introducing the Network generates multiple payment equilibria. Under exogenous cyberattack risk, Chain and Network payments may coexist: the Network provides fast settlement and fallback liquidity when Chain settlement fails, while the Chain remains valuable for its security and universal acceptance. If cyberattack risk is sufficiently low, pure Network payments can arise, although pure Chain payments may also persist because Network acceptance is costly for sellers. When cyberattack risk is endogenous, broader Network adoption increases exposed balances and strengthens hackers’ incentives. This security externality weakens the Network’s value as fallback liquidity and eliminates the pure Network-payment equilibrium. The Chain, therefore, survives as a secure settlement anchor. The welfare analysis shows that Network adoption is not always welfare improving: its payment-efficiency gains must outweigh seller adoption costs and, under endogenous attacks, the resource costs of hacking. Fast-settlement layers can improve payment efficiency, but they do not generically replace secure base-layer settlement. |
| Keywords: | Cryptocurrency payments; Blockchain settlement; Layer-2 payment networks; cyberattack risk; Payment-layer competition; New Monetarist literature; Search-theoretic monetary model. |
| JEL: | E42 E40 D83 C78 O33 D62 |
| Date: | 2026–07–02 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0101 |
| By: | Merendino, Alfonso; Monacelli, Tommaso |
| Abstract: | Using U.S. and EA data, we document that (i) the pass-through of energy prices to inflation is state-dependent — stronger when supply chain uncertainty is elevated — and (ii) in such states, energy prices become more informative about broader supply chain conditions. We develop a theory in which firms use two inputs — energy and a specialized component — both shipped through a capacity-constrained network. Under congestion, energy can still be sourced in local liquid markets at a premium, while the specialized input faces stochastic transportation shocks. Because energy is a liquid, globally traded input whose price reflects congestion, firms treat it as a noisy signal of unobserved delays and update their beliefs via Bayesian learning. This belief channel raises perceived marginal costs and generates an uncertainty-driven component of marginal cost that amplifies and propagates energy shocks. Both the static and the dynamic pass-through from energy prices to output prices scale with supply chain uncertainty. Embedding this mechanism in a New Keynesian model, we show that higher supply chain uncertainty increases the sensitivity and persistence of inflation to transitory energy shocks, and relate these findings to the 2021–23 inflation episode. Our findings call for a reconsideration of the so-called "look-through" approach of monetary policy to supply shocks. |
| JEL: | E31 D83 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21537 |
| By: | Allan Pedersen |
| Abstract: | Are stablecoins a new kind of money, or a new kind of bank? Europe's Markets in Crypto-Assets Regulation (MiCA) has never quite decided. It treats a fiat-backed stablecoin (an e-money token) as a digital wrapper around existing money, yet loads the issuer with much of a bank's prudential machinery. The result is coherent in one case and unstable in another, depending on who issues it. A bank-issued token sits inside the public safety net, and the arrangement holds. A non-bank issuer faces the same bank-grade rules but no safety net: an instrument that promises to be worth one euro, invests in assets that can lose value, and has nothing to fall back on in a panic. Those three features cannot all hold at once. Reading the 2026 review consultation as a live document, the note finds three EU institutions pulling this corner three ways, and argues the review should choose one coherent design, not fine-tune an incoherent middle. |
| Keywords: | stablecoins; e-money tokens; MiCA; regulatory perimeter; private money; lender of last resort; monetary sovereignty; digital euro |
| JEL: | E42 E58 G21 G28 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:pmt:wpaper:2 |
| By: | Abad, Jorge; Bigio, Saki; García, Salomón; Marbet, Joël; Nuño, Galo |
| Abstract: | How does heterogeneity in banks' interest-rate risk exposure shape monetary policy transmission? We develop a quantitative macroeconomic model of heterogeneous banks to answer this question. We establish an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter for transmission only when bank solvency concerns become relevant. Calibrating the model to the euro area, we show that idiosyncratic default risk pushes a substantial share of banks toward the solvency threshold, making heterogeneity quantitatively important. When policy rates rise, fixed-rate banks suffer net interest margin compression — funding costs increase while legacy loan income stays unchanged — eroding capital and triggering sharper deleveraging. The lending elasticity to monetary policy is one-third larger in fixed-rate economies. The effects extend to financial stability: tightening raises bank failure rates in fixed-rate systems while lowering them in variable-rate systems. The results provide a rationale for macroprudential and monetary policy coordination and for monetary policy gradualism. |
| JEL: | G21 E51 E43 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21519 |
| By: | Collard, Fabrice; Assenza, Tiziana; Guney, Dogukan; Wangner, Philipp |
| Abstract: | Do central banks decide systematically how much to communicate when explaining their policy decisions? Using all U.S. Federal Open Market Committee policy statements since 1994, we measure communication effort through the change in Shannon entropy and estimate a forward-looking communication rule. We find that communication is systematic: the Federal Reserve communicates more when inflation is expected to exceed target and output is expected to fall below potential. This finding is robust across a variety of sensitivity exercises. We then develop a New Keynesian model with imperfect information showing that systematic communication acts as a second policy instrument, stabilizing expectations and complementing interest-rate policy, especially at the zero lower bound. |
| Keywords: | Central Bank Communication; Monetary Policy; Systematic Rules |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:131951 |
| By: | Lenzu, Simone |
| Abstract: | I develop a framework analyzing how artificial intelligence (AI) reshapes monetary policy through three interrelated channels: cyclical transmission, structural transition, and financial stability. In the short run, AI can alter inflation dynamics by changing how supply and demand disturbances map into prices — through shifts in production technologies, pricing behavior, cost pass-through, and expectations — even when conventional measures of economic slack are unchanged. Over longer horizons, AI may shift the natural benchmarks around which policy is calibrated, including potential output and the natural rate of interest. For financial stability, AI may improve credit allocation and risk assessment, but can also heighten systemic vulnerabilities through inflated expectation-driven asset valuations and model monocultures. A particular risk arises at the intersection of these channels: if AI initially depresses realized efficiency through adoption frictions while simultaneously fueling elevated asset valuations, the economy may face cost-push inflation and financial fragility at once — an AI-specific stagflation risk that the interest rate instrument alone is ill-suited to address. I argue that AI does not call for a redefinition of central banks' objectives, but it does require a recalibration of existing frameworks: its diffusion blurs the distinction between cyclical fluctuations and structural shifts, raising the value of cost-side diagnostics and robust policy strategies over exclusive reliance on reduced-form inflation-gap relationships. |
| JEL: | O33 E52 E58 E31 E32 E44 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21248 |
| By: | Wickens, Michael R. |
| Abstract: | The theoretical literature on monetary policy favours the use of rules over discretion and most macroeconomic models include an interest rate rule. Since John Taylor's seminal paper published in 1993 the Taylor rule has been the preferred specification of the rule. It is based on evidence for the period 1987-1992 where it explains the Fed funds rate well. The issue addressed in this paper is whether the Fed ever actually followed the original Taylor rule and, in particular, the Taylor Principle of raising the real Fed funds rate to control inflation. And if, as we found, it neither followed the original rule nor adhered to the Taylor principle, what were the main factors that determined the administered Fed funds rate and why might the Fed have chosen to use its discretion rather than follow the original rule and the Taylor Principle? Using time-vary coefficient estimates of a number of versions of the Taylor rule, it is shown that in all of these versions the contribution of inflation in the determination of the Fed funds rate has steadily declined - especially after the financial crisis - thereby breaching the Taylor principle. It seems, therefore, that the Fed has used discretion rather than following the original Taylor rule. The main reason for this seems to be the Fed's dual mandate. Nonetheless, apart from 2021-2022 the Fed has maintained inflation close to its 2 per cent target. We also find that the concern over whether fiscal dominance would result in high interest rates undermining debt solvency is not born out by the evidence. |
| Keywords: | Discretion; Debt sustainability |
| JEL: | E12 E52 E62 C32 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21473 |
| By: | Bauer, Michael; Känzig, Diego; Rudebusch, Glenn |
| Abstract: | Putting a price on carbon emissions helps mitigate climate change but may also raise overall price inflation. Using high-frequency event studies based on regulatory news in the European carbon market, we show that carbon price surprises generate significant increases not only in energy futures prices, but also in inflation swap prices and breakeven inflation rates. These measures of market-based inflation expectations respond positively at both short and long horizons, with significant effects up to ten years out. Such long-lived inflationary consequences of climate policy are relevant for central banks. However, despite the sustained increases in market-based inflation expectations, forward-looking nominal interest rates show no meaningful response to the carbon policy shocks, suggesting that investors do not anticipate that the European Central Bank will lean against the inflationary effects of higher carbon prices. |
| JEL: | E31 E52 H23 Q54 Q58 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21355 |