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on Monetary Economics |
| By: | Albertazzi, Ugo; Hooft, James ’t; Ter Steege, Lucas |
| Abstract: | In contrast to the conventional Fisherian view that inflation reduces real debt positions, we show that significant increases in inflation are strongly associated with financial crises. In the spirit of Jordà et al. (2020), countries with free and fixed ex-change rates can be compared to difference out the confounding reaction of monetary policy. Across a dataset of 18 advanced economies over 151 years, we show that the impact of inflation extends beyond its indirect effect via monetary policy. To further corroborate causality, we instrument inflation with oil supply shocks, finding that a 1pp rise in inflation doubles the probability of financial crisis from its sample average. We give evidence for the redistribution channel, where inflationary shocks directly cut real incomes, as a possible mechanism. In conjunction with recent literature on the dangers of rapidly tightening monetary policy, our results point to a difficult trade-off for central banks once inflation has risen. JEL Classification: E31, E44, E58, G01 |
| Keywords: | currency pegs, financial crises, inflation, monetary policy, oil supply |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253108 |
| By: | Orphanides, Athanasios |
| Abstract: | The post-pandemic inflation surge underscores that monetary policy continues to be hampered by two long-standing challenges: the pretence of knowledge and the proclivity for discretion. Focusing on the Federal Reserve, this paper demonstrates how simple policy rules, designed to be robust under imperfect knowledge, can mitigate these challenges. The Fed's post-pandemic policy error-maintaining excessive accommodation as inflation pressures mounted-could have been avoided with guidance from a simple natural growth targeting rule that had been included in the Fed's Bluebook/Tealbook starting in 2004, but was not disclosed to the public in real time. Formal adoption and disclosure of such a rule can help discipline discretion and improve both the conduct and communication of monetary policy. |
| Keywords: | Policy discretion, simple rules, natural growth targeting, inflation surge |
| JEL: | E52 E58 E61 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:325829 |
| By: | Emi Nakamura; Venance Riblier; Jón Steinsson |
| Abstract: | The Federal Reserve partially "looked through" the post-Covid rise in inflation and ultimately managed to bring about an "immaculate disinflation." The Fed's policy deviated strongly from the Taylor rule during this period. More generally, central banks with strong inflation-fighting credentials looked through post-Covid inflationary shocks yet experienced less inflation than more hawkish but less credible central banks. In light of this episode, we assess the degree to which the Taylor rule is descriptive, and the degree to which it should be viewed as prescriptive. While the Taylor rule (generally) fits well during the Greenspan period, it (generally) fits poorly in the early 1980s and after the early 2000s. Academic work has emphasized the role of the Taylor rule in preventing self-fulfilling fluctuations (guaranteeing determinacy). These concerns can be addressed with a shock-contingent commitment and are fragile to deviations from fully rational expectations. We discuss three reasons why optimal policy may not always imply a one-for-one response of interest rates to inflation (forward guidance, correlated shocks, and "long and variable lags"). The main challenge arising from such policies is not indeterminacy but erosion of inflation-fighting credibility and potential deanchoring of long-run inflation expectations. Only central banks with strongly anchored inflation expectations and large amounts of inflation-fighting credibility are likely to be able to look through inflationary shocks. |
| JEL: | E5 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34200 |
| By: | Coste, Charles-Enguerrand; Pantelopoulos, George |
| Abstract: | To ensure that means of payments are readily interchangeable at face value – i.e. fungible – for retail payments, three elements are required: (1) settlement finality; (2) interoperability; and (3) seamless convertibility of the means of payment into the “ultimate” or quasi-ultimate means of payment. This paper argues that stablecoins issued by different issuers on different blockchains can be fungible to the same extent as commercial bank deposits from different banks provided that (i) payment and settlement technologies are interoperable, (ii) payments are transacted on ledgers that offer settlement finality, and (iii) that central bank money acts as the anchor to the monetary system (assuming that the central bank money is itself underscored by a homogenous unit of account). On this basis, this paper asserts that tokenised funds and off-chain collateralised stablecoins are fungible means of payments under some conditions, and that on-chain collateralised stablecoins can be prima facie classified as fungible means of payments, so long as the identical preconditions associated with accomplishing means of payment fungibility for tokenised funds/off-chain collateralised stablecoins can be fulfilled, and on the premise that the on-chain collateral can be readily converted into higher level money. Finally, it is determined that algorithmic stablecoins are not fungible means of payments. JEL Classification: B26, E42 |
| Keywords: | central bank, electronic money token, fungibility, stablecoin |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253111 |
| By: | Oliver Ashtari-Tafti; Rodrigo Guimaraes; Gabor Pinter; Jean-Charles Wijnandts |
| Abstract: | We show that monetary policy shocks move long-term government bond yields only when market liquidity is high and arbitrageurs are well capitalized. This liquidity state dependence operates entirely through real term premia, not expectations. Using novel transaction-level data on the US Treasury market, we find that arbitrageurs trade about 40% more duration during FOMC meetings in high-liquidity periods. We propose ways of enriching standard term-structure models to rationalize our evidence that constraints on arbitrage capital suppress transmission. The results introduce new empirical moments for theories of limits to arbitrage, and underscore the role of liquidity conditions in shaping the effectiveness of conventional monetary policy. |
| Keywords: | monetary policy, New Keynesian model, natural interest rate |
| JEL: | E43 E52 E58 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1289 |
| By: | Kerola, Eeva; Laine, Olli-Matti; Paavola, Aleksi |
| Abstract: | This study examines the floating rate channel-a mechanism through which monetary policy affects firms' investment and credit demand based on their exposure to variable rate loans. Using a granular loan-level dataset from the euro area, we find that firms with variable rate loans significantly reduce their investment-related borrowing after monetary tightening, compared to firms with fixed rate loans. This effect is most pronounced among the smallest firms, consistent with the theoretical view that the floating rate channel is explained by financial constraints. Our results highlight the heterogeneity in firms' reactions to interest rate changes and underscore the importance of accounting for firm size and financial constraints in monetary policy analysis. |
| Keywords: | monetary policy, floating rate channel, euro area |
| JEL: | G21 G30 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:325483 |
| By: | Daniel Dias; Tim Schmidt-Eisenlohr |
| Abstract: | We estimate the uninsured deposit premium - the difference between the rates paid on uninsured versus insured deposits - by linking observed average deposit rates to an estimated share of uninsured deposits. Using U.S. bank data from 1991 to 2025, we show that the average uninsured deposit premium rose by nearly 400 basis points over this period. This rise reflects both falling insured deposit rates and rising uninsured deposit rates. We find a strong correlation with the monetary policy cycle: a one-percentage-point increase in the Federal Funds Rate corresponds to a rise of roughly 32 basis points in the uninsured deposit premium. We develop a bargaining model between banks, insured depositors, and uninsured depositors that explains these dynamics. |
| Keywords: | uninsured deposits, monetary policy, bank funding, deposit pricing |
| JEL: | E52 G21 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12103 |
| By: | Fabio Milani |
| Abstract: | This paper studies the transition to high inflation during the COVID-19 pandemic, using a behavioral version of the New Keynesian model, which replaces the conventional assumption of Rational Expectations with subjective and heterogeneous expectations. Different shares of agents in the economy form expectations based on alternative views regarding future economic variables: 1) a share of agents forecasts that inflation and output will rapidly revert to steady state; 2) another share forms forecasts based on a model resembling the MSV solution under rational expectations; 3) a third share of agents uses an under-specified model that captures trend-following, adaptive, or extrapolative behavior. Agents learn over time the parameters of their perceived model and they can also shift across different views based on past forecasting performance. The macroeconomic model is estimated using Bayesian methods to fit realized macroeconomic variables and data on expectations from surveys. The results document an additional channel that operates through switches in agents' perceptions and amplifies the impact of the original inflationary shocks. In response to rising inflation after COVID, agents begin shifting from the mean reversion model to the trend-following specification (with a belief about perceived inflation persistence that is simultaneously revised upward). Consequently, the impact of inflationary shocks is magnified and the effects of monetary policy attenuated. |
| Keywords: | heterogeneous expectations, post-COVID inflation, learning, inflation persistence, monetary policy effectiveness |
| JEL: | E31 E32 E52 E58 E65 E70 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12123 |
| By: | Dovern, Jonas; Glas, Alexander |
| Abstract: | This paper examines whether the rounding of survey responses in the case of probabilistic question formats is related to expectation uncertainty. Using data from a survey on macroeconomic expectations of private households in Germany, we analyze self-reported reasons for rounding probabilistic inflation expectations. Although rounding is correlated with expectation uncertainty, only 14 percent of respondents explicitly attribute rounding to uncertainty. Most households round to simplify responses or because rounded values reflect their true expectations. Regression analyses do not find significant differences in uncertainty between these groups. The findings suggest caution in interpreting rounding in such settings as a measure of uncertainty and highlight the need for further research on the cognitive mechanisms behind rounding in expectation surveys. |
| Keywords: | uncertainty, rounding, survey data, inflation expectations |
| JEL: | C18 C83 D84 E31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:325496 |
| By: | Smoleńska, Agnieszka; Weber, Anne-Marie; Opoka, Marcin |
| Abstract: | This article discusses the idea of a judicial accountability gap in the obligations of EU central banks in relation to climate change policy. With the interest in incorporating climate change considerations into monetary policy on the rise, legal scholarship has focussed largely on the toolbox at the disposal and the political accountability of central bankers with respect to the sustainability transition. The judicial route has so far remained largely unexplored, the general global trend of climate litigation notwithstanding. In light of this omission, we develop a framework to address the judicial accountability gap in three steps. First, we explain the implications of the special status of climate change mitigation objectives in the EU constitutional order on members of the European System of Central Banks (ESCB). Then, we explain how these treaty obligations apply not only to the Eurosystem, which has been well explored in the literature, but also to non-euro area Member States. This point is particularly underexplored, despite its significant implications for the success of the EU’s sustainable finance agenda, which is contingent on a supportive macrofinancial regime. Finally, we discuss different judicial accountability routes to ensuring that central banks adequately incorporate the secondary mandate objectives in their policies. We examine whether establishing a “minimum standard” for meeting treaty obligations on incorporating climate change considerations into central bank policies could lead to the conceptualisation of a standard of judicial review across the EU, thereby enhancing the democratic legitimacy of central banks within the EU’s economic constitution. |
| Keywords: | accountability; central banks; climate change; economic and monetary policy; EU law; European Central Bank; European system of central banks; sustainability |
| JEL: | F3 G3 |
| Date: | 2024–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125471 |
| By: | Hyunduk Suh; Nathaniel A. Throckmorton |
| Abstract: | This paper examines how very low fertility rates in East Asia might affect inflation in the face of fiscal limits. In a calibrated overlapping-generations model, low fertility rates cause the debt-to-GDP ratio to rise, which can push the tax rate to a political ceiling and force either monetary accommodation or reduced transfers to retirees. The fiscal limit creates inflationary pressure relative to a scenario with no fiscal limit, adding to our understanding of possible inflation outcomes in aging economies. Korea faces the strongest demographic headwind and is projected to experience the earliest fiscal limit and highest inflation rates, with inflation projected to peak roughly 10 years later and 2.5pp higher with a fiscal limit than without one. Taiwan’s more favorable initial fiscal conditions help reduce inflationary pressure, and China benefits from a delayed demographic transition that leads to lower inflation, despite worse initial fiscal conditions than Taiwan. In all countries, a higher tax rate ceiling or older retirement age effectively reduce peak inflation. |
| Keywords: | low fertility; demographic transition; population aging; East Asia; overlapping generations model; fiscal sustainability; inflation projections |
| JEL: | J11 H63 E52 E63 J13 |
| Date: | 2025–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:cwm:wpaper:171 |
| By: | Kerola, Eeva; Norring, Anni |
| Abstract: | We use confidential loan-level data from the European Central Bank to investigate how changes in the countercyclical capital buffer requirement in Germany affect lending to firms. We find evidence showing that tightening the countercyclical capital buffer leads German banks to reduce the volume of corporate loans and increase the price of new loans. These effects take place immediately after the announcement, given 12 months before the change was implemented. Importantly, we find that the reduction in credit availability notably affects small and medium-sized enterprises, which experience both a significant decrease in available credit and an increase in credit costs. In contrast, large firms are not affected. |
| Keywords: | Macroprudential policy, Countercyclical capital buffer, Loan level data |
| JEL: | E58 G21 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:325482 |
| By: | Subash Bhandari; Hyeongwoo Kim |
| Abstract: | This paper investigates the transmission of structural global oil market shocks to U.S. inflation using an instrumental variable structural vector autoregression (IV-SVAR) applied to highly disaggregated Consumer Price Index (CPI) components. We consider two types of shocks: oil supply shocks, arising from OPEC production disruptions, and oil supply news shocks, reflecting expectations of future production changes. The inflationary effects are concentrated in energy-related goods, significantly driving headline CPI, while non-necessity components exhibit muted or even negative responses. Moreover, news shocks generate short-lived, front-loaded effects, whereas supply shocks produce more persistent impacts. |
| Keywords: | Oil Supply Shock; OPEC News Shock; Disaggregated CPI Components; Instrumental Variable Structural Vector Autoregression |
| JEL: | E3 F4 Q4 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2025-06 |
| By: | Klaus Abberger; Alexander Rathke; Samad Sarferaz; Pascal Seiler |
| Abstract: | We study the investment channel of monetary policy through a randomized survey experiment, exposing Swiss firms directly to shocks to the Swiss National Bank's policy rate. Our survey experiment randomizes pure policy-rate shocks - uncontaminated by information effects - and records firms' revisions to investment plans and financing choices. We find pronounced asymmetry: firms respond strongly to unanticipated rate hikes but only moderately to equivalent cuts. This asymmetry varies with firm size, sector, export intensity, and investment types. Investment financing shapes the response: reliance on internal funds and being financially unconstrained amplifies investment sensitivity. |
| Keywords: | monetary policy, investment, firm heterogeneity, survey experiment, external finance, randomized control trial |
| JEL: | E22 E52 C93 G32 D22 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12099 |
| By: | Claeys, Irene; Barmes, David; Suresh Kumar, Ram Smaran |
| Abstract: | The Bank of England created the Asset Purchase Facility (APF) after the global financial crisis of 2007–08 to implement its quantitative easing (QE) programme. However, the Bank’s recent tightening of monetary policy has caused the APF to incur substantial losses, at great cost to the public finances. This policy brief examines the policy options available to minimise this fiscal burden and create savings that could be directed elsewhere – including towards green investment projects that are vital to creating jobs and facilitating the UK’s net zero transition. |
| JEL: | E6 F3 G3 |
| Date: | 2024–09–18 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129340 |
| By: | Hannah Magdalena Seidl |
| Abstract: | I study the transmission mechanism of Quantitative Easing (QE) in the form of large-scale asset purchases in the mortgage market to aggregate consumption. To this end, I develop a New Keynesian model that features heterogeneous households, a microfounded housing market, and frictional intermediation. This model helps explain the empirical evidence suggesting that QE increases aggregate consumption by raising house prices. I find that higher house prices account for around half of QE’s stimulative effects, with higher labor income contributing the remaining half. |
| Keywords: | Quantitative easing, heterogeneous agents, incomplete markets, sticky wages, housing, asset prices |
| JEL: | E12 E21 E44 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2141 |
| By: | Aakash Kalyani; Serdar Ozkan |
| Abstract: | We develop a novel measure of firm-level marginal labor cost and investigate its pass-through to inflation. To construct this measure, we apply textual analysis to earnings calls to identify discussions of labor-related topics such as higher costs, shortages, and hiring. Leveraging the theoretical principle that cost-minimizing firms equate marginal costs across variable inputs, we project changes in firms intermediate input revenue shares onto the intensity of labor-related discussions to quantify their contributions to marginal labor costs. This approach provides an economically-motivated way to reduce the multidimensional qualitative textual information into a single quantitative measure. An aggregate index from this measure tracks closely with conventional aggregate slack variables and outperforms them in forecasting inflation. When aggregated at the industry level, we find a significant but heterogeneous pass-through of marginal labor costs to PPI inflation, with the pass-through highest for service sector and near-zero for manufacturing. Consistent with the latter fact, firm-level data reveal that investment in automation mitigates the effects of higher labor cost pressures in manufacturing. |
| Keywords: | wage inflation; automation; textual data; machine learning |
| JEL: | E24 J24 J31 J64 |
| Date: | 2025–07–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:101743 |
| By: | Ms. Emine Boz; Anja Brüggen; Camila Casas; Georgios Georgiadis; Ms. Gita Gopinath; Arnaud Mehl |
| Abstract: | This paper presents the most comprehensive and up-to-date panel dataset on global trade invoicing currency and examines recent pattern shifts with a focus on geopolitical alignment. Using data for 132 countries from 1990 to 2023—including new coverage of the Chinese renminbi—we document five key findings. First, the US dollar remains dominant, with global invoicing shares broadly stable. Second, renminbi use has grown steadily and expanded beyond Asia, though it remains modest. Third, countries not geopolitically aligned with the US continue to rely on the dollar, though this reliance has declined in a few key economies. Fourth, since 2021, the correlation between the use of a given invoicing currency and the geopolitical distance to its issuer has become more negative, reflecting growing polarization. Fifth, there is no robust evidence consistent with effective policy initiatives to reduce dollar reliance in oil exports. These findings highlight the resilience of dominant currencies and suggest emerging fragmentation in invoicing patterns along geopolitical lines. |
| Keywords: | Trade invoicing currency; dominant-currency paradigm; geopolitical alignment |
| Date: | 2025–09–12 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/178 |
| By: | Dorosh, Paul; Pradesha, Angga |
| Abstract: | The large inflow of foreign capital to fund PNG investments in natural gas pipeline and processing infrastructure resulted in a surge in inflation beginning in 2011. Costs of production of tradable goods such as coffee and palm oil rose more (in kina terms) than their output prices, reducing the profitability of these sectors. These price distortions have continued to the present day, as restrictions on access to foreign exchange (mainly through delays in the release of funds) as demand for foreign exchange exceeds supply made available to the public. This policy note reviews PNG’s exchange rate policies and uses an economy-wide simulation model1 to quantify the impacts of these distortions. We conclude with a discussion of policy implications, highlighting the effects of a possible devaluation / depreciation of the kina. |
| Keywords: | capital; exchange rate; policies; prices; valuation; Papua New Guinea; Oceania |
| Date: | 2025–08–26 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:prnote:176217 |