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on Monetary Economics |
| By: | José García Revelo; Jean-Guillaume Sahuc; Grégory Levieuge |
| Abstract: | The European Central Bank and the Federal Reserve introduced new policy instruments and made changes to their operational frameworks to address the global financial crisis (2008) and the Covid-19 pandemic (2020). We study the macroeconomic effects of these monetary policy evolutions on both sides of the Atlantic Ocean by developing and estimating a tractable two-country dynamic stochastic general equilibrium model. We show that the euro area and the United States faced shocks of different natures, explaining some asynchronous monetary policy measures between 2008 and 2023. However, counterfactual exercises highlight that all conventional and unconventional policies implemented since 2008 have appropriately (i) supported economic growth and (ii) maintained inflation on track in both areas. The exception is the delayed reaction to the inflationary surge during 2021-2022. Furthermore, exchange rate shocks played a significant role in shaping the overall monetary conditions of the two economies. |
| Keywords: | Monetary Policy, Real Exchange Rate Dynamics, Two-Country DSGE Model, Bayesian Estimation, Counterfactual Exercises |
| JEL: | E32 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1018 |
| By: | Artta, Katja (Research Department, Central Bank of Sweden); Nessén, Marianne (Monetary Policy Department, Central Bank of Sweden); Vredin, Anders (Monetary Policy Department, Central Bank of Sweden); Savoia, Ettore (Research Department, Central Bank of Sweden) |
| Abstract: | We examine how central bank foreign exchange (FX) operations affect nominal exchange rates by exploiting two large operations by Sveriges Riksbank: foreign currency purchases during 2021–2022 and domestic Swedish krona (SEK) purchases—that is, FX forward sales— during 2023–2024. Using daily data and local projections, we identify unanticipated operation shocks to the SEK against the euro (EUR) and the U.S. dollar (USD). On average, we observe sign consistency—depreciation during FX purchases and appreciation during SEK purchases. Three main results emerge: (i) effects unfold gradually but fade quickly, becoming statistically insignificant after about ten trading days; (ii) they are regimedependent, with FX purchases inducing larger depreciations and domestic currency purchase yielding smaller, delayed appreciations; and (iii) FX purchases generate long-run (11-60 days) currency-specific effects, with a stronger SEK depreciation against the EUR relative to the USD. However, results are more uniform across currencies in the short run (1–10 days) and throughout the domestic currency purchase period. |
| Keywords: | Foreign exchange operations; Local Projections; exchange rates |
| JEL: | E58 F31 F33 |
| Date: | 2025–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0456 |
| By: | Catalin Dumitrescu |
| Abstract: | This study explores the potential impact of introducing a Central Bank Digital Currency (CBDC) on financial stability in an emerging dual-currency economy (Romania), where the domestic currency (RON) coexists with the euro. It develops an integrated analytical framework combining econometrics, machine learning, and behavioural modelling. CBDC adoption probabilities are estimated using XGBoost and logistic regression models trained on behavioural and macro-financial indicators rather than survey data. Liquidity stress simulations assess how banks would respond to deposit withdrawals resulting from CBDC adoption, while VAR, MSVAR, and SVAR models capture the macro-financial transmission of liquidity shocks into credit contraction and changes in monetary conditions. The findings indicate that CBDC uptake (co-circulating Digital RON and Digital EUR) would be moderate at issuance, amounting to around EUR 1 billion, primarily driven by digital readiness and trust in the central bank. The study concludes that a non-remunerated, capped CBDC, designed primarily as a means of payment rather than a store of value, can be introduced without compromising financial stability. In dual currency economies, differentiated holding limits for domestic and foreign digital currencies (e.g., Digital RON versus Digital Euro) are crucial to prevent uncontrolled euroisation and preserve monetary sovereignty. A prudent design with moderate caps, non remuneration, and macroprudential coordination can transform CBDC into a digital liquidity buffer and a complementary monetary policy instrument that enhances resilience and inclusion rather than destabilising the financial system. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.13384 |
| By: | Emmanuel Caiazzo (University of Naples Parthenope.); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR.) |
| Abstract: | In this paper, we model a novel trade-off between price stability and financial stability in central banking. This trade-off arises from the interaction between the monetary policy interest rate, the central bank rescue interventions, and the degree of bank illiquidity. We characterize and compare the equilibrium outcomes, in terms of monetary policy, rescue policy, and bank investment decisions, that arise under a strict inflation-targeting mandate with those that instead emerge under a dual mandate, in which the central bank is required to account for both the costs of inflation and the costs associated with financial instability. Our analysis suggests that an inflation-targeting mandate may be advisable when the economy is subject to frequent and severe inflationary shocks that would require substantial policy rate adjustments, or when liquidity risks in the banking system are neither too high nor too low. Otherwise, a mandate that explicitly requires the central bank to take financial stability into account, even at the cost of relaxing strict inflation control, may be preferable. |
| Keywords: | Central banking; Inflation targeting; Financial stability; Rescue policies |
| JEL: | G01 G21 G28 |
| Date: | 2025–11–20 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:767 |
| By: | Fiorella De Fiore; Marco Jacopo Lombardi; Giacomo Mangiante |
| Abstract: | This paper studies the pass-through of input price shocks to firms' expectations and pricing decisions using firm-level data from the Bank of Italy's Survey on Inflation and Growth Expectations. We find a strong and asymmetric pass-through: positive input price shocks significantly raise firms' price expectations, realised prices and short-term inflation expectations, while negative shocks have little impact. The pass-through varies systematically with firm characteristics: it is higher for upstream firms and for firms facing greater uncertainty, adjusting prices more frequently, or operating with thinner profit margins. Macroeconomic conditions also matter: firms' expectations respond more strongly to business-specific signals in periods of low inflation and to aggregate signals in periods of high inflation. Finally, we show that providing firms with information about current inflation dampens the pass-through to inflation expectations, underscoring the importance of central bank communication. |
| Keywords: | pass-through, heterogeneous firm expectations, survey data, inflation |
| JEL: | D22 D84 E31 E50 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1305 |
| By: | Leef H. Dierks (Lübeck University of Applied Sciences, Germany) |
| Abstract: | Climate change, political measures to reduce greenhouse gas emissions and the transition to a carbon-neutral economy have a significant economic impact. In addition to a dampening effect on aggregate demand and supply, the internalisation of negative externalities will likely in-crease production costs and – in the case of a pass-through to consumers – ultimately the in-flation rate. To the extent that this affects the (SEACEN member) central bank’s objectives of price and financial stability, climate-fuelled economic developments might impact monetary policy – with several central banks resorting to a Green Monetary Policy. This paper identifies its common elements and argues that event though fiscal policies are first best, monetary poli-cy adapts where climate risks impair price and/or financial stability over the policy horizon. Monetary policy has a subsidiary role that operates through its mandate; where climate risks affect inflation and transmission, instruments may be adapted without replacing fiscal policy. The greatest contribution SEACEN member central banks can make to the green transfor-mation, however, is to ensure price stability. |
| Keywords: | green monetary policy, green finance, financial stability, market neutrality, tilting |
| JEL: | E31 E42 E52 E58 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:sea:wpaper:wp58 |
| By: | Richard K. Crump; Keshav Dogra; Dennis Kongoli |
| Abstract: | A 2012 Liberty Street Economics post noted that U.S. monetary policy exhibits a surprising degree of seasonal behavior: over the 1987-2008 period, the Federal Reserve was much more likely to lower interest rates (or abstain from raising rates) in the first month of each quarter than in the two subsequent months. Thirteen years later, we revisit that analysis to investigate whether the seasonal pattern in monetary policy still holds today, in the wake of a rate hiking cycle, a pandemic, a surge in inflation, and a second round of rate hikes. We find that the pattern has indeed continued; however, unlike in the earlier sample period, it can be completely explained by the timing of the FOMC calendar. |
| Keywords: | monetary policy; seasonality; federal funds rate |
| JEL: | E5 |
| Date: | 2025–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:102127 |
| By: | Sharma, Purushottam; Meena, Dinesh Chand; Anwer, Md. Ejaz |
| Abstract: | The study examines the asymmetric dynamic relationship between food price inflation and its determinants in both the short and long run, evaluates the impact of asymmetry on Indian food prices, and explores the pass-through effect from non-food to food price inflation and vice versa. The ARDL and NARDL models were used to explore the dynamics of food inflation and its drivers using monthly data from January 2011 to December 2022. The DOLS method was also used to estimate the pass-through effect between non-food and food inflation, to better understand how inflationary pressures are transmitted. The ARDL results confirm that international food prices, wage rates, agricultural GDP, and weighted average call money rate are major contributors to food inflation in the long run. The NARDL results show the significant asymmetric effects of money supply, wage rate, crude oil prices, international food prices, real effective exchange rate, and weighted average call money rate on food inflation in the long run. The findings of this study will provide valuable insights for policymakers and agricultural stakeholders in developing effective policies and strategies to manage food price inflation and ensure food affordability. |
| Keywords: | Demand and Price Analysis |
| Date: | 2024–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:ags:iaae24:344332 |
| By: | Serkan Arslanalp; Barry Eichengreen; Chima Simpson-Bell |
| Abstract: | We document some underappreciated aspects of the recent evolution of the international reserve system. These include the growing share of gold in global central bank reserves, the continuing emergence of nontraditional reserve currencies, and the stalling share of renminbi in reserves. These trends are consistent with our findings in our earlier papers. In addition we look to the future, pondering the potential implications of dollar-linked stablecoins, the expansion of the BRICS grouping of countries and their de- dollarization plans, the development of blockchain-based platforms such as Project mBridge for the direct exchange of central bank digital currencies, and questions about the dollar’s safe-haven status. |
| JEL: | F0 F33 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34478 |
| By: | Carlos Madeira |
| Abstract: | Using hand-collected data with biographical information on central bank governors and board members in over 200 countries, I obtain experience-based forecasts for GDP growth and inflation based on an adaptive learning model estimated from their lifetime macroeconomic data. I show life experience influences the monetary policy rates, even after accounting for other macroeconomics observables in the empirical Taylor rule. The role of personal experience is lower in advanced economies and for central bankers with treasury experience. Furthermore, life experience influences the tone of speeches for monetary policy, financial stability and climate concerns. Weather disasters experience reduces climate concerns and NGFS membership. |
| Keywords: | monetary policy, fiscal policy, experience effects, forecasting, learning, beliefs |
| JEL: | D83 D84 E37 E50 E60 E70 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1304 |
| By: | Mrs. Marina Conesa Martinez; Elizabeth Kasekende; Ms. Nan Li; Adam Mugume; Samuel Musoke; Cedric I Okou; Mr. Andrea F Presbitero |
| Abstract: | This paper examines the effectiveness of monetary policy transmission in developing countries using loan-level data from Uganda’s credit registry. We analyze more than 632, 000 household loans issued by all commercial banks between 2017 and 2023, a period marked by significant policy rate fluctuations. We find that household credit, which accounts for over 50 percent of new loan accounts, responds to monetary policy: rate hikes are followed by higher lending rates and reduced loan size and maturity. Controlling for credit demand with time-varying borrower-group fixed effects, we find stronger transmission among banks with lower liquidity and capital, and those holding more government securities. The effects are more pronounced for fixed-rate loans than for floating-rate loans. In general, our results support the presence of a bank lending channel in Uganda, similar to what is observed in more advanced economies. |
| Keywords: | Monetary Policy Transmission; Credit Registry; Bank Lending Channel; Bank Credit; Developing Countries |
| Date: | 2025–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/242 |
| By: | Markus Brunnermeier; Jonathan Payne |
| Abstract: | This paper examines how digital payment ledgers operated by BigTech platforms and central banks can expand uncollateralized credit. However, policymakers face a trilemma-no system can simultaneously achieve efficient credit enforcement, limit rent extraction, and preserve user privacy. Monopolistic platforms enforce repayment but compromise privacy and extract rents; public or privacy-respecting ledgers protect users but weaken enforcement; platform co-opetition or programmable public ledgers balance enforcement and rents, but only by reducing privacy. |
| Keywords: | ledgers, platform money, CBDC, currency competition, private currencies, industrial organisation of payments, platforms, big tech, trilemma |
| JEL: | E42 E51 G23 L51 O31 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1306 |
| By: | Sylvérie Herbert; Paul Hubert; Mathias Lé |
| Abstract: | This paper investigates when monetary policy announcements matter for asset price dynamics. We identify a fundamental heterogeneity in FOMC statements based on the underlying nature of information conveyed about future policy. Using a simple but novel classification, we identify meetings that convey substantial information about uncertainty surrounding future policy. These statements – one-third of the total – drive most, if not all, of the effects of monetary policy on long-term interest rates and account for a large fraction of their variation on these days. In contrast, directional statements about the policy stance – half of all meetings – have no effect on long-term rates but do affect short-term rates and stock prices. The strong effects on long-term rates stem from term premium adjustments rather than expected future short-term rates, consistent with investors’ updating their assessment of higher-order moments of future policy developments. Our classification resolves why policy announcements explain little variance in long-term rates despite driving their dynamics over time. |
| Keywords: | Monetary Policy Surprises, Term Structure, Identification, Policy Signals |
| JEL: | E43 E52 E58 G12 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1017 |
| By: | Srichander Ramaswamy (The South East Asian Central Banks (SEACEN) Research and Training Centre) |
| Abstract: | Many central banks are assessing the benefits that a wholesale central bank digital currency (wCBDC) could bring to the financial system. This assessment is being driven by the rise of tokenised assets and the need for efficient and safe settlement assets in these markets. While wCBDCs can facilitate settlements on distributed ledger technology platforms for such assets, some central banks are of the view that existing systems (like the RTGS) can achieve similar outcomes through application programming interfaces without the need to introduce a new central bank liability. Beyond settlement of tokenised assets, wCBDC is also being seen having the potential in offering many benefits to cross-border payments by reducing settlement times and transaction costs. That is because existing arrangements employing correspondent banking models introduce frictions by having multiple intermediaries that introduce counterparty risk and longer settlement times. They are also costly as they need pre-funded nostro accounts. In theory, wCBDCs can eliminate the need for correspondent banks by allowing direct settlements between central banks, but this raises questions about central banks' willingness to assume correspondent roles. Alternative arrangements using automated market makers can also facilitate foreign exchange trading using wCBDCs, but their effectiveness and cost efficiency in less liquid currency pairs remain uncertain. The exploration of wCBDCs should, therefore, consider the existing capabilities of the financial system and the potential for private sector solutions to meet market needs effectively. |
| Keywords: | Central banks, digital currency, cross-border payment, correspondent bank, tokenisation, large value payments. |
| JEL: | E42 E58 G21 G28 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:sea:wpaper:wp57 |
| By: | Wenli Cheng (Department of Economics Monash University) |
| Abstract: | This paper extends the classical Ricardian model from a barter system to a monetary framework which emphasizes the pivotal role of the banking system in facilitating production and exchange. It studies international trade under three different monetary systems: (1) the Euro system, where a single currency facilitates both domestic and international trade; (2) the Bancor system, which relies on a supranational currency for trade between nations; and (3) the Dollar system, where one country’s national currency serves as the international media of exchange. The model preserves the Ricardian insight that specialization based on comparative advantage enhances global wealth, and identifies distinct features arising from different monetary systems. It shows that neither the Euro nor the Bancor system inherently generates trade imbalances. In contrast, the Dollar system imposes an asymmetric demand for the national currency used to conduct global trade. Since the currency demanded must be earned through net exports, trade imbalances are an intrinsic feature of the Dollar system. |
| Keywords: | : Ricardian model, the Euro sy |
| JEL: | F10 F33 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:mos:moswps:2025-19 |
| By: | boughabi, houssam |
| Abstract: | The paper explains how inflation, monetary policy, and fiscal interventions interacted in Ghana from 2005 to 2014. A discrete-time macroeconomic model with money supply, taxation, household consumption, GDP per capita, and price adjustments as variables has been developed. The paper uses FIGARCH and GARCH models to investigate the volatility of inflation to decide if it has long-memory properties. The empirical findings show that the fractional differencing parameter $d = 0$ (Hurst exponent $H = 0.5$), which means that there is no persistent long-range dependence in inflation volatility. Hence, a standard GARCH(1, 1) model is sufficient to describe short-term volatility dynamics, and shocks to conditional variance occur immediately but subside rapidly. Besides that, the research determines a monetary-fiscal neutrality threshold, which highlights the equilibrium where income growth balances the inflationary pressures; this threshold is assessed macroeconomically into general prices and compared to actual general prices to evaluate its validity. The results indicate that inflation in Ghana during this period is mainly of short-memory nature, thus reaffirming the role of short-term monetary and fiscal operations in price stabilization, and confirming the successful validation of the macroeconomic neutrality threshold linking income growth and price stability. |
| Keywords: | Inflation volatility, statistical modelling, monetary transmission, threshold modeling, Ghanaian economy |
| JEL: | C32 E31 E37 E44 O55 |
| Date: | 2025–10–29 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126757 |
| By: | Rashad Ahmed; James A. Clouse; Fabio Natalucci; Alessandro Rebucci; Geyue Sun |
| Abstract: | The GENIUS Act, recently signed into law, establishes a dual federal and state regulatory framework for stablecoins, effectively segmenting the USD stablecoin market into GENIUS-compliant stablecoins and those that are not. This paper discusses the use cases and potential benefits of stablecoins in terms of payment system efficiency and costs, as well as their substitutability with money market mutual funds and bank deposits. It then analyzes the financial stability risks associated with both GENIUS-compliant and unregulated stablecoins using empirical analysis and historical case studies. It concludes by discussing the economic implications of the emergence of a large dollar stablecoin ecosystem. The discussion is supported by a new survey of expert opinions canvassed through Large Language Model (LLM) analysis of all U.S. podcast episodes on stablecoins from January 20 to July 17, 2025. |
| JEL: | E42 F33 G21 G23 O33 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34475 |
| By: | Martin Brown (Study Center Gerzensee and University of St. Gallen); Daniel Hoechle (University of Applied Sciences and Arts Northwestern Switzerland); Lizet Alejandra Perez Cortes (University of St. Gallen); Markus Schmid (University of St. Gallen, Swiss Finance Institute (SFI), and European Corporate Governance Institute (ECGI)) |
| Abstract: | This paper studies the transmission of monetary policy to household consumption through wealth effects in a small open economy. As a natural experiment, we exploit the 2015 Swiss franc shock, triggered by the Swiss National Bank’s unexpected removal of the euro exchange rate floor. Using granular administrative data from a retail bank, we document substantial consumption responses by households with portfolio exposures to the policy shock. We show that a 1% valuation loss on financial assets is associated with a 0.7% reduction in total spending in the quarter following the shock. This effect is driven by large-ticket spending rather than out-of-pocket spending, attenuates rapidly over time, and depends strongly on the magnitude of the valuation loss. Our results provide direct evidence of a sizeable, immediate, and short-lived wealth channel of monetary policy. They underscore the role of exchange-rate-induced asset revaluations in shaping consumption dynamics in open economies. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:szg:worpap:2506 |
| By: | Martin Geiger; Iacovos Sterghides; Marios Zachariadis |
| Abstract: | Utilizing a very large household-level dataset of inflation expectations for twelve euro-area economies, we attempt to assess the formation and accuracy of inflation expectations following major disruptions of the macroeconomy which we identify during the period from 2004:1 to 2025:02. We find that these adverse events tend to increase the degree of inaccuracy in inflation expectations. We also find that this happens because inflation expectations tend to go up in response to these shocks relative to the 12-month ahead inflation realizations, which offers direct evidence of overestimation of inflation. This is consistent with overreaction of inflation expectations in response to inflationary news and with inflation-as-a-bad behavioral patterns in response to adverse non-inflationary shocks. We infer that such behavioral biases appear to have played an important role in the formation of inflation expectations in the euro-area following adverse shocks during the past two decades. |
| Keywords: | forecast errors, behavioral bias, macroeconomic shocks. |
| JEL: | D84 E31 E70 |
| Date: | 2025–11–18 |
| URL: | https://d.repec.org/n?u=RePEc:ucy:cypeua:04-2025 |
| By: | Bing Zhu; Dorinth van Dijk; Dennis Bonam; Gavin Goy |
| Abstract: | The effectiveness of unconventional monetary policies (UMPs) and their international spillovers to global asset prices and capital flows have dominated policy discussions. This paper is the first to document the effect of UMP on global commercial real estate (CRE) markets. Even though the size of CRE as asset class is substantial, the subject has received very limited interest in research studying the effect of monetary policy. We empirically find that a domestic UMP significantly impacts US CRE pricing through credit supply. We additionally document persistent price effects on foreign non-US CRE markets. This effect largely stems from global CRE market spillovers. In fact, global CRE market spillovers are found to amplify the original domestic UMP effect on US CRE prices. We aim to enrich our empirical findings with a two-country DSGE-model that includes CRE pricing. |
| Keywords: | commercial real estate; International Spillovers; Quantitative Easing; Unconventional Monetary Policy |
| JEL: | R3 |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:arz:wpaper:eres2025_180 |
| By: | Viral V Acharya; Raghuram Rajan; Zhi Quan (Bill) Shu |
| Abstract: | Theory suggests that in the face of fire-sale externalities, banks have incentives to overinvest in order to issue cheap money-like deposit liabilities. The existence of a private market for insurance such as contingent capital can eliminate the overinvestment incentives, leading to efficient outcomes. However, it does not eliminate fire sales. A central bank that can infuse liquidity cheaply may be motivated to intervene in the face of fire sales. If so, it can crowd out the private market and, if liquidity intervention is not priced at higher-than-breakeven rates, induce overinvestment once again. We examine various forms of public intervention to identify the least distortionary ones. Our analysis helps understand the historical prevalence of private insurance in the era preceding central banks and deposit insurance, its subsequent disappearance, as well as the continuing incidence of banking crises and speculative excesses. |
| Keywords: | banking crises, financial stability policies |
| JEL: | E58 G01 G21 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1307 |
| By: | Iñaki Aldasoro; Ajit Desai |
| Abstract: | Using prompt-based experiments with ChatGPT’s reasoning model, we evaluate whether a generative artificial intelligence (AI) agent can perform high-level intraday liquidity management in a wholesale payment system. We simulate payment scenarios with liquidity shocks and competing priorities to test the agent’s ability to maintain precautionary liquidity buffers, dynamically prioritize payments under tight constraints, and optimize the trade-off between settlement speed and liquidity usage. Our results show that even without domain-specific training, the AI agent closely replicates key prudential cash-management practices, issuing calibrated recommendations that preserve liquidity while minimizing delays. These findings suggest that routine cash-management tasks could be automated using general-purpose large language models, potentially reducing operational costs and improving intraday liquidity efficiency. We conclude with a discussion of the regulatory and policy safeguards that central banks and supervisors may need to consider in an era of AI-driven payment operations. |
| Keywords: | Digital currencies and fintech; Financial institutions; Financial services; Financial system regulation and policies; Payment clearing and settlement systems |
| JEL: | A12 C7 D83 E42 E58 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-35 |
| By: | Greg Adams; Evan Dudley; Jean-Sébastien Fontaine; Sofia Tchamova; Andreas Uthemann |
| Abstract: | In 2024, the overnight funding market experienced sustained pressure and the benchmark Canadian Overnight Repo Rate Average (CORRA) rose to 7 basis points above the Bank of Canada’s target overnight rate. Settlement balances were declining, but hedge fund borrowing also grew by over $30 billion, increasing the client share of total repo volumes. With limited balance sheets and substantial market power, dealers raised clients’ rates, which increasingly influenced CORRA. Overall, this episode highlights the effect that dealers’ balance sheet constraints and bargaining power have on where CORRA settles but downplays the role of the settlement balances channel in the dealer-to-client market. |
| Keywords: | Financial markets; Interest rates; Monetary policy implementation; Market structure and pricing; Financial institutions |
| JEL: | D4 D53 E43 E44 E52 G12 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:25-14 |
| By: | Luis Herrera (BANCO DE ESPAÑA); Mara Pirovano (EUROPEAN CENTRAL BANK); Valerio Scalone (EUROPEAN CENTRAL BANK) |
| Abstract: | This paper introduces the Risk-to-Buffer approach for calibrating the countercyclical capital buffer (CCyB), with a particular emphasis on the positive neutral (PN) CCyB rate, tailored to the euro area. The proposed methodology is applied in both a dynamic stochastic general equilibrium (DSGE) framework and a macroeconomic time series setting. It estimates the amplification of adverse shocks under varying levels of cyclical systemic risk and calibrates the CCyB to counteract these amplification effects. Using data from 2009 to 2023, the analysis suggests a positive neutral CCyB rate for the euro area ranging between 1% and 1.5%. The findings indicate that output and inflation shocks, which are not directly linked to the materialization of domestic systemic risk, and high degrees of trade openness, warrant a more prominent role of the PN CCyB in the overall CCyB calibration. The exercise to illustrate the methodology is carried out for the euro area. While national calibrations require additional exercises, this approach offers a flexible and complementary framework that can support and enhance national-level analyses. |
| Keywords: | financial stability, macroprudential policy, capital requirements, countercyclical capital buffer |
| JEL: | C32 E51 E58 G01 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2544 |
| By: | Paolo Varraso (DEF University of Rome "Tor Vergata") |
| Abstract: | This paper develops a quantitative heterogeneous-bank model to study how interestrate risk transmits through the financial sector. Banks optimally choose their leverage and maturity structure in the presence of limited equity issuance, default risk, and partial deposit insurance. Long-maturity assets carry a premium because they expose banks to valuation losses when interest rates rise. To preserve their franchise value, banks with low net worth relative to risky assets take on less interest-rate risk, despite the presence of risk-shifting incentives associated with deposit insurance. Applying the model to the 2022–2023 monetary tightening, I show that a rapid increase in interest rates can generate large declines in asset prices and equity values even though banks have access to shortterm assets that provide insurance against interest-rate risk. Under the lens of the model a substantial share of the losses in 2022 was predictable, whereas the losses in 2023 were largely unexpected. A shift toward long-term assets during a period of unusually low rates amplified the initial tightening, but a rebalancing toward shorter maturities dampened the transmission of later hikes. |
| Keywords: | Interest-rate risk, heterogeneous banks, aggregate uncertainty, maturity mismatch, leverage |
| JEL: | E44 G21 |
| Date: | 2025–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:616 |
| By: | Esteban Cruz-Hidalgo; Stuart Medina-Miltimore; Agustin Mario |
| Abstract: | This paper explores a development strategy for peripheral economies by advocating for a paradigm shift from traditional economic models that rely on accumulating foreign reserves. It proposes the job guarantee policy, an automatic stabilizer based on a reserve pool of employed individuals, as a cornerstone for fostering sustainable and inclusive growth. Grounded in Modern Money Theory (MMT), this study critiques the conventional approach that prioritizes external reserves and highlights the potential of MMT in offering a more autonomous development path for developing countries. A systematic review of the literature, using the PRISMA methodology, reveals significant disagreement between MMT advocates and critics, particularly regarding monetary sovereignty and the feasibility of implementing macroeconomic policies in peripheral economies. The study emphasizes that, while external constraints remain, the MMT perspective calls for flexible exchange rates (or, at least, discretionary intervention) and low interest rates as part of a broader strategy to reduce dependency on foreign currencies. The proposed approach prioritizes full employment, the mobilization of domestic resources, and structural transformation through policies like import substitution. It offers a more equitable and stable development path. Ultimately, this analysis underscores the potential of MMT-informed policies to enable sustainable development, despite challenges in implementation and political resistance. |
| Keywords: | Job Guarantee; full employment; sustainable development; flexible exchange rates; peripheral economies; Modern Money Theory; developmentalism; structuralism; Employer of Last Resort; macroeconomic policies |
| JEL: | B52 E52 E62 F63 O23 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1101 |
| By: | Olivier De Jonghe (National Bank of Belgium); Konstantīns Benkovskis (Latvijas Banka); Karolis Bielskis (Bank of Lithuania); Diana Bonfim (Banco de Portugal, Católica Lisbon School of Business & Economics); Margherita Bottero (Banca d’Italia); Tamás Briglevics (Central Bank of Hungary); Martin Cesnak (National Bank of Slovakia); Mantas Dirma (Bank of Lithuania); Marina Emiris (National Bank of Belgium); Pálma Filep-Mosberger (Central Bank of Hungary); Valentin Jouvanceau (Bank of Lithuania); Nicholas Kaiser (Central Bank of Ireland); Dmitry Khametshin (Banco de España); Viola M. Grolmusz (Central Bank of Hungary); Laura Moretti (Central Bank of Ireland); Artūrs Jānis Nikitins (Latvijas Banka); Angelo Nunnari (Banca d’Italia); Maria Rodriguez Moreno (Banco de España); Elitsa Stefanova (European Central Bank); Lajos Tamás Szabó (Central Bank of Hungary); Kārlis Vilerts (Latvijas Banka); Sujiao Emma Zhao (Banco de Portugal, Católica Lisbon School of Business & Economics) |
| Abstract: | We study heterogeneity in households’ credit across nine European countries (Belgium, Spain, Hungary, Ireland, Italy, Latvia, Lithuania, Portugal, and Slovakia) during 2022-2024 using granular credit register data. We first document substantial between- and within-country variation in mortgage and consumer lending by borrower age, loan maturity, and interest rate fixation. We then quantify the pass-through of the ECB’s recent tightening cycle to household borrowing costs and assess its heterogeneous impact across households. Pass-through is nearly complete for mortgages (around 0.9) but considerably weaker for consumer credit (around 0.4). While mortgage pass-through is relatively homogeneous across countries, consumer credit shows pronounced cross-country differences that cannot be explained by borrower or loan characteristics. Younger households face stronger mortgage pass-through but weaker consumer credit pass-through relative to older borrowers, and longer maturities are associated with stronger pass-through in both credit markets. |
| Keywords: | monetary policy transmission; household borrowing; credit registers; interest rate pass through; cross-country heterogeneity. |
| JEL: | E52 G21 D14 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202511-485 |
| By: | Nicolás Cachanosky; Emilio Ocampo; Karla Hernández; John Ramseur |
| Abstract: | This paper studies the impact on income per capita of dollarization in Ecuador using synthetic control analysis (SCA). The results support the hypothesis that dollarization can have a positive impact on economic growth. Such conclusion is very relevant for countries with high, persistent and volatile inflation considering dollarization as a currency regime. |
| Keywords: | Ecuador, dollarization, synthetic control analysis |
| JEL: | E42 E50 O43 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cem:doctra:877 |
| By: | Herzberg, Julika; Knetsch, Thomas A.; Popova, Dilyana; Schaller, Jannik; Schwind, Patrick; Weinand, Sebastian |
| Abstract: | We analyse potential mismeasurement of the Harmonised Index of Consumer Prices (HICP) at the upper level of aggregation, focusing on two sources of measurement error: the choice of index formula (representativity component) and the reliability of weights (data vintage component). The representativity component captures the fact that a Laspeyres-type index such as the HICP suffers from a systematic over-estimation of inflation due to the disregard of changes in more recent consumption patterns. The data vintage component comprises potential mismeasurement arising from the annual updating of HICP weights based on preliminary national accounts data. With national accounts vintage data, we calculate bias and inaccuracy metrics in order to analyse mismeasurement at the upper level of aggregation in the HICPs for Germany, France, Italy, Spain and the Netherlands, as well as for the country group, over the period from 2012 to 2021. For the representativity component, the data availability allows an additional analysis of the period until 2024. Measured in terms of annual HICP rates, the total upper-level aggregation bias falls short of one-tenth of a percentage point. The representativity and the data vintage component are both found to contribute to overall bias in quite similar shares. We also find that the representativity component experienced a substantial revival during the recent high inflation period. |
| Keywords: | Inflation measurement, Representativity bias, Updating of weights, High inflation period |
| JEL: | E31 C43 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:331894 |
| By: | Iñaki Aldasoro; Ajit Desai |
| Abstract: | Using prompt-based experiments with ChatGPT's reasoning model, we evaluate whether a generative artificial intelligence (AI) agent can perform high-level intraday liquidity management in a wholesale payment system. We simulate payment scenarios with liquidity shocks and competing priorities to test the agent's ability to maintain precautionary liquidity buffers, dynamically prioritize payments under tight constraints, and optimize the trade-off between settlement speed and liquidity usage. Our results show that even without domain-specific training, the AI agent closely replicates key prudential cash-management practices, issuing calibrated recommendations that preserve liquidity while minimizing delays. These findings suggest that routine cash-management tasks could be automated using general-purpose large language models, potentially reducing operational costs and improving intraday liquidity efficiency. We conclude with a discussion of the regulatory and policy safeguards that central banks and supervisors may need to consider in an era of AI-driven payment operations. |
| Keywords: | generative AI, agentic AI, LLM, payments systems, liquidity management |
| JEL: | A12 C7 D83 E42 E58 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1310 |
| By: | Rodrigo J. Raad (Cedeplar/UFMG); Juan Pablo Gama (Cedeplar/UFMG) |
| Abstract: | This paper develops a general equilibrium framework that extends the Ramsey-Friedman taxation model by explicitly incorporating heterogeneous agents, competitive markets, and a central planner responsible for fiscal policy and debt management. Within this unified structure, the model captures the interaction between decentralized market outcomes and centralized policy instruments, while the adoption of quasi-linear preferences guarantees that the planner’s allocations remain time-consistent. Building on these foundations, we introduce a virtual monetary unit that emerges endogenously in equilibrium as a transaction-clearing service. This contribution addresses the open question of how to characterize money within general equilibrium theory, advancing the discussion by proposing a digital system that preserves purchasing power across regions and productive sectors in a stable, non-inflationary manner, without generating distortions in resource allocation. |
| Keywords: | General equilibrium, Stable Digital Currency, Ramsey-Friedman Taxation Model, Time Consistency |
| JEL: | D41 D50 D51 D53 D62 E42 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cdp:texdis:td688 |
| By: | Hafsa Hina (Pakistan Institute of Development Economics) |
| Abstract: | The exchange rate is a crucial indicator of a nations performance in the external sector and influences key macroeconomic variables. In theory, exchange rates should be determined by market forces and reflect economic fundamentals; however, developing economies such as Pakistan often experience significant deviations due to structural weaknesses and policy interventions. This paper reviews the literature on the exchange rate in Pakistan, classifying and summarising the findings on nominal exchange rates, real exchange rates, real effective exchange rates, and foreign exchange market pressures. This review provides a comprehensive understanding of exchange rate policy in Pakistan and its economic implications. The paper concludes by identifying gaps in current research and suggesting areas of future study to address the complexities of exchange rate management in developing economies. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pid:wpaper:2025:3 |
| By: | Takushi Kurozumi; Yu Sugioka; Willem Van Zandweghe |
| Abstract: | Research in labor economics has documented evidence of labor market monopsony. Nevertheless, macroeconomic studies routinely consider households' wage-setting under monopolistic competition. We introduce firms' wage-setting under monopsonistic competition in an otherwise standard sticky-price model. This substantially alters the implications for wage dynamics, welfare, and policy. Compared to its counterpart model with monopolistic wage-setting, our model indicates that the wage Phillips curve includes the wage markdown as its main driver and has a steeper slope generated by strategic substitutability in wage-setting, and that the second-order approximation to households' utility functions is of the same form but with a smaller welfare weight on wage growth variability. Consequently, a welfare-maximizing policy features stabilizing inflation rather than wage growth. |
| Keywords: | labor market monopsony; wage markdown; strategic substitutability; staggered wage-setting; timeless-perspective policy; inflation stabilization |
| JEL: | E24 E52 J42 |
| Date: | 2025–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:102125 |
| By: | Maria Arakelyan; Tatiana Evdokimova |
| Abstract: | This paper contributes to the relatively limited literature on the impact of political uncertainty on international capital flows to emerging market economies. We incorporate elections as a proxy for political uncertainty into a standard push-pull framework for analyzing capital flows. Using quarterly data for a panel of 38 emerging market economies from 1990 to 2020, we show that periods surrounding elections are associated with a decline in gross private capital inflows. This adverse impact is larger and more persistent when uncertainty extends beyond the election period, for example in the context of uncertain policy priorities following incumbent’s loss. By contrast, higher levels of overall political stability appear to mitigate these adverse effects. We also find evidence that stronger institutions, as reflected in indicators such as regulatory quality and rule of law, help to mitigate the adverse effects of political uncertainty on capital flows. The results remain robust across a range of alternative specifications, including controls for standard economic drivers of capital flows, election characteristics, and model assumptions. |
| Keywords: | Capital flows; political cycles; uncertainty; emerging markets; push and pull factors |
| Date: | 2025–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/243 |
| By: | Hoffmann, Clemens; Kastens, Lina; vPortugal-Perez, Alberto; von Cramon-Taubadel, Stephan |
| Abstract: | We look for evidence that countries increasingly insulate their domestic markets for staple grains from global markets when international prices increase. Previous studies have demonstrated that the transmission of international to domestic prices for these products is less than perfect, which reduces the ability of the global trading system to buffer shocks. However, past studies generally assume that relationships between international and domestic prices are constant, and hence that a country’s degree of insulation does not vary over time. To relax this assumption, we use a smooth-transition model, a modified version of the error correction model (ECM). We estimate elasticities of transmission from international to domestic wholesale and retail prices for a comprehensive set of countries for wheat, yellow and white maize, and rice. We find that price transmission from international to domestic prices weakens in many countries and on average when international prices peak, in other words that the insulation of domestic from international prices increases during high-price episodes (such as in 2007/08 and 2022). We also find that this increased insulation cannot be attributed exclusively to changes in border measures such as export restrictions or import tariffs. This suggests that countries are also using measures such as price controls or the release of stocks to insulate their domestic markets for staple grains. |
| Keywords: | Demand and Price Analysis, International Relations/Trade |
| Date: | 2024–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:ags:iaae24:344313 |
| By: | Wändi Bruine de Bruin; Keshav Dogra; Sebastian Heise; Edward S. Knotek; Brent Meyer; Robert W. Rich; Raphael Schoenle; Giorgio Topa; Wilbert Van der Klaauw |
| Abstract: | There has been a lot of interest in firms’ pricing decisions in the past few years—both during the inflation surge of 2021-23 and in the more recent rounds of tariff increases. In this post, we let firms speak for themselves about what factors they consider when adjusting prices in response to various shocks. The analysis is based on an ongoing research project, joint with the Atlanta and Cleveland Federal Reserve Banks, on how businesses set prices and the extent of passthrough of cost increases. In particular, we leverage the qualitative portion of the study based on open-ended interviews with senior decision-makers on how they approach pricing decisions in their firms. Rather than a uniform approach, a very nuanced picture emerges of businesses trying to balance competing objectives while keeping an eye on demand conditions for their products as well as on their direct competitors’ behavior in the market. |
| Keywords: | Price setting; cost pass-through; interview |
| JEL: | D22 |
| Date: | 2025–11–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:102159 |
| By: | Matteo Aquilina; Ulf Lewrick; Federico Ravenna; Lorenzo Schönleber |
| Abstract: | Tokenised money market funds (TMMFs) are a fast-growing collateral asset and savings instrument in the crypto ecosystem. Like stablecoins, TMMFs circulate on public permissionless blockchains but offer returns at money market rates and regulatory protections as securities. TMMFs currently cater strongly to decentralised finance protocols and rely on "allow-listing" of blockchain wallets to constrain peer-to-peer trading of their tokens to ensure regulatory compliance. However, such allow lists only constrain direct holding of TMMFs. TMMFs give rise to risks that mirror, and potentially amplify, those found in conventional money market funds, such as liquidity mismatches, as well as the operational and anti-money laundering / countering the financing of terrorism-related risks associated with stablecoins. |
| Date: | 2025–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:115 |