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on Monetary Economics |
| By: | Benjamin Schwanebeck (FernUniversität in Hagen, Germany); Luzie Thiel (University of Kassel, Germany) |
| Abstract: | The financial situation of households differs substantially across countries, but the implications of this heterogeneity are still vastly understudied. We examine the implications of this asymmetry for optimal monetary policy in a currency union. We build a two-country monetary union model with heterogeneous households leading to inequality due to imperfect insurance. Money is introduced through central bank digital currency (CBDC) as a liquid asset to self-insure against idiosyncratic risk. CBDC is a new instrument which allows the central bank to target heterogeneity within a monetary union. We derive a welfare function with two additional objectives, consumption inequality within and across countries. The more heterogeneous households are, the less important inflation stabilization becomes in favor of stabilizing consumption inequality through providing money. Our research provides important policy implications as we show that it is beneficial for a monetary union to have a country-specific instrument to compensate for country differentials. |
| Keywords: | Heterogeneous Households, Imperfect Insurance, Optimal Monetary Policy, Monetary Union, Two-Country Model |
| JEL: | E52 E61 F45 |
| Date: | 2025–04–08 |
| URL: | https://d.repec.org/n?u=RePEc:mar:magkse:202512 |
| By: | Jonathan Benchimol; Sophia Kazinnik; Yossi Saadon |
| Abstract: | In this study, we examine the Federal Reserve's communication strategies during the COVID-19 pandemic, comparing them with communication during previous periods of economic stress. Using specialized dictionaries tailored to COVID-19, unconventional monetary policy (UMP), and financial stability, combined with sentiment analysis and topic modeling techniques, we identify a distinct focus in Fed communication during the pandemic on financial stability, market volatility, social welfare, and UMP, characterized by notable contextual uncertainty. Through comparative analysis, we juxtapose the Fed's communication during the COVID-19 crisis with its responses during the dot-com and global financial crises, examining content, sentiment, and timing dimensions. Our findings reveal that Fed communication and policy actions were more reactive to the COVID-19 crisis than to previous crises. Additionally, declining sentiment related to financial stability in interest rate announcements and minutes anticipated subsequent accommodative monetary policy decisions. We further document that communicating about UMP has become the "new normal" for the Fed's Federal Open Market Committee meeting minutes and Chairman's speeches since the Global Financial Crisis, reflecting an institutional adaptation in communication strategy following periods of economic distress. These findings contribute to our understanding of how central bank communication evolves during crises and how communication strategies adapt to exceptional economic circumstances. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.04830 |
| By: | Euphrasie Djougba (CRDP - Centre de Recherches en Droit Public (UPN) - UPN - Université Paris Nanterre) |
| Abstract: | The article traces the 79-year history of the Franc Zone, a monetary framework linking France to several African countries through the CFA franc. It examines the zone's colonial origins, the criticisms regarding monetary sovereignty, and recent reform efforts, particularly the 2019 agreement aimed at replacing the CFA franc with the Eco in the West African Economic and Monetary Union (WAEMU). Four scenarios for the future of this new currency are presented, ranging from a simple extension of the CFA franc to a non-single common currency for the ECOWAS region. Finally, the article emphasizes that the success of this transition will depend on strong political will and enhanced regional economic integration. |
| Abstract: | L'article retrace les 79 ans d'existence de la Zone Franc, un cadre monétaire liant la France à plusieurs pays africains via le franc CFA. Cet article en examine l'origine coloniale, les critiques liées à la souveraineté monétaire, et les réformes récentes, notamment l'accord de 2019 visant à remplacer le franc CFA par l'Eco dans la zone de l'Union Economique et Monétaire Ouest africaine. Quatre scénarios pour l'avenir de cette nouvelle monnaie sont présentés, allant d'une simple évolution du franc CFA à une monnaie commune non unique pour la CEDEAO. Enfin , il souligne que le succès de cette transition dépendra d'une volonté politique ferme et d'une intégration économique régionale renforcée. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05144331 |
| By: | Mr. Daniel Leigh; Rui Xu |
| Abstract: | This paper estimates the strength of monetary policy transmission to bank lending rates in Brazil. We identify monetary policy shocks using forecast errors from Brazi’s daily Focus survey of professional forecasters. We then estimate the pass-through to lending rates based on an instrumental variable application of local projections and find an aggregate pass-through of 70 percent after four months, reflecting full passthrough to market-based lending rates and 20 percent to government-directed credit interest rates. Analysis using bank-level data reveals varying degrees of pass-through across credit types, from 40 percent for payrollbacked loans to 80 percent for working capital loans, and stronger pass-through for larger banks. Estimated pass-through has increased since 2020 due to more responsive corporate loans |
| Keywords: | Brazil; interest rate pass-through; bank lending rates; credit types; post-pandemic; monetary policy transmission; using forecast error; pass-through estimate; rate data; Central bank policy rate; Credit; Loans; Bank credit; Consumer loans; Europe |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/152 |
| By: | Chandler Lester |
| Abstract: | No Abstract |
| JEL: | E01 E17 E31 E37 |
| Date: | 2024–02–09 |
| URL: | https://d.repec.org/n?u=RePEc:cbo:wpaper:59877 |
| By: | Holm-Hadulla, Fédéric; Leombroni, Matteo |
| Abstract: | This paper studies the role of financial intermediaries in the transmission of central bank corporate bond purchases to bond yields. Contrary to standard expectations, we find that mutual funds—typically viewed as price-elastic investors—amplify, rather than dampen, the effects of these interventions on bond spreads. Following the ECB’s corporate bond purchase announcements in 2016 and 2020, bonds predominantly held by mutual funds experienced significantly larger and more persistent declines in spreads compared to those held by price-inelastic investors such as insurance companies, even after controlling for a broad set of bond characteristics. Drawing on additional empirical evidence and an equilibrium asset pricing model, we show that the state-contingent nature of the policy reduces perceived market risk for procyclical investors like mutualfunds, thereby boosting demand and compressing risk premia. JEL Classification: E52, E58, G11, G23 |
| Keywords: | central bank asset purchases, corporate bonds, non-bank financial institutions |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253101 |
| By: | Carlos Segura-Rodriguez (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | This study updates the Costa Rica’s natural real interest rate (NRIT) estimate for the period between 2010’s first quarter and 2023’s third quarter. I use two different methodologies for this estimation: Holston, Laubach and Williams (2023)’s semi-structural model and a structural VAR proposed by Brzoza-Brzezina (2002). This study’s methodological contribution is to estimate an extension of Holston-Laubach-Williams framework to incorporate conditions that are inherent in an open and small economy. The main result is that the natural real interest rate has oscilated between 1, 18% and 1, 47% during the period in analysis, and has been in the interval between 1, 36% and 1, 44% after 2022. Further, I check that the real interest rate gap correlation with other economic variables, like output gap, inflation and real exchange gap, shows a sign that is expected. Finally, I conclude that the Central Bank’s monetary policy has been consistent with its objective of maintaning a low inflation. |
| Keywords: | Natural Interest Rate, Monetary Policy, Open Small Economy, Tasa de interés natural, Política monetaria, Economía abierta y pequeña |
| JEL: | E31 E52 F41 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:apk:nottec:2403 |
| By: | Dorian Carloni |
| Abstract: | Households at different points in the income distribution consume different bundles of goods and services. Changes in the prices of those goods and services differ from year to year, causing variations (on an annual basis and over longer periods) in the price of a typical consumption bundle purchased by households at different income levels. In this paper, the Congressional Budget Office estimates how the price of households' consumption bundles changed between 1984 and 2022. To do so, CBO used publicly available data from the Consumer Expenditures Survey and imputed |
| JEL: | D30 E21 E31 |
| Date: | 2025–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:cbo:wpaper:61549 |
| By: | Athanasios Geromichalos; Kuk Mo Jung; Ioannis Kospentaris; Changhyun Lee; Sukjoon Lee (Department of Economics, University of California Davis) |
| Abstract: | Central banks around the world routinely engage in asset purchases in secondary markets as part of implementing monetary policy or enhancing market liquidity, but the effects of such interventions are not yet fully understood. We develop a multi-asset general equilibrium model in which the liquidity of an asset is endogenous and depends on the terms of trade in each asset's respective secondary market, which are, in turn, driven by agents' market entry decisions and the possibility of central bank intervention. We use our model to qualitatively and quantitatively rationalize the superior liquidity of U.S. Treasuries over corporate bonds of comparable safety. Our model highlights and quantifies an unexplored link between fiscal and monetary policy: central bank interventions in the market for Treasuries increase secondary market liquidity for these securities, thus indirectly aiding the Treasury to borrow at lower rates. Our results also reveal that central bank interventions can have spillover effects on markets where the bank does not participate, offering a cautionary note to both policymakers and empirical researchers. |
| Keywords: | monetary-search models, OTC markets, liquidity, central bank asset purchases |
| JEL: | E31 E43 E52 G12 |
| Date: | 2025–08–16 |
| URL: | https://d.repec.org/n?u=RePEc:cda:wpaper:373 |
| By: | Barmes, David; Bosch, Jordi Schröder |
| Abstract: | Climate change, environmental degradation, and global energy markets are all sources of price instability, with important implications for inflation forecasting and macroeconomic policy. Central banks will have to deepen their understanding of these drivers of inflation and adapt their policymaking accordingly, recognising that achieving environmental targets is necessary to avoid persistent environmentrelated macroeconomic instability. While primary responsibility for the transition to a sustainable economy lies with fiscal, industrial, and environmental authorities, new approaches to monetary policy and improved inflation forecasting should support these efforts. Energy’s relevance to price stability is widely acknowledged, as fossil fuel prices driving inflation (‘fossilflation’) is a longstanding phenomenon, most recently triggered by Russia’s invasion of Ukraine. The inflationary effects of climate change (‘climateflation’) and environmental degradation in a modern context are comparatively novel though increasingly pronounced. Climateflation, which is global in nature yet borne disproportionately by lower income households and countries, occurs primarily through reductions in agricultural activity and damage to crop yields. As environmental disruptions intensify, they will play an increasingly significant role in driving price instability. In this context, orthodox monetary policy is counterproductive to achieving price stability, as well as governments’ economic, social and environmental objectives. Increasing interest rates fails to address the core drivers of rising energy and food prices, disproportionately hampers investment in capital-intensive green projects, and reduces government’s fiscal space. Instead, central banks should factor environmental considerations into the conduct of monetary policy and explore greater macroeconomic policy coordination with fiscal and industrial authorities. New international monetary arrangements will also be necessary to secure price stability and a just transition. |
| JEL: | F3 G3 R14 J01 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129176 |
| By: | Kleopatra Nikolaou |
| Abstract: | This paper examines the drivers of money market funds (MMFs) growth during monetary policy hiking cycles. Analyzing data from nine countries with notable MMF sectors post-pandemic, it examines three main drivers: yield differentials between MMFs and bank deposits, banking turmoils that affect perceptions of relative safety for traditional cash options, and structural characteristics (types) of MMFs. The findings indicate that MMFs attract capital during rising interest rates driven primarily by yield-seeking behavior. This pattern persisted following the 2023 banking turmoil, particularly in the U.S., where yield remained the dominant driver. After accounting for yield differentials, MMF growth was not unusually high compared to previous hiking cycles, suggesting limited evidence of widespread flight-to-safety flows. Moreover, when MMF yields rise, investors in the US and the euro area increasingly favor private debt MMFs, likely due to their higher yields. The study underscores the trade-off between safety and yield in investor behaviour, providing insights for policymakers on enhancing financial stability. |
| Keywords: | MMFs; monetary policy; bank deposits; MMF growth; MMF yield; drivers of money market funds; MMF sector geography; MMF spread; Money markets; Central bank policy rate; Deposit rates; Monetary tightening; Global; Europe; Asia and Pacific |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/150 |
| By: | Simon H. Kwan; Ville Voutilainen |
| Abstract: | Both the magnitude and the pace of monetary policy tightening in the euro area during 2022-23 were historically large and fast. Yet, the real economy proved to be resilient. In this paper, we analyze the pass through of the ECB’s changes in the policy rate to mortgage rates in Finland during the post-pandemic period of 2022-23, when the policy liftoff began at the negative interest rate territory, using the normal tightening cycle in 2006-08 as control. We use monthly data and three different empirical methodologies: event studies, high-frequency identification, and exposure-measure regressions. Our evidence suggests that the post-pandemic monetary policy transmission was significantly less effective than during the control period, implying that for the same amount of tightening in financial conditions, a bigger increase in the policy rate is needed. The loss in monetary transmission during the negative interest rate policy is also playing out when monetary policy changes course. Thus, while monetary policy remains effective in the negative interest rate territory, it creates headwind for policy normalization down the road. |
| Keywords: | monetary policy; mortgage rates; monetary policy normalization; Finland |
| JEL: | E42 E58 E52 G21 |
| Date: | 2025–08–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:101415 |
| By: | Huang, Guangming |
| Abstract: | Embedding seigniorage and transaction process into the RBC model, this paper proposes a new monetary economy, seigniorage channeled monetary economy, briefly SCME, in which monetary shocks can affect the real variables effectively and persistently in flexible price conditions. The mechanism of the effectiveness is the resource occupation effect of money issuance, in other words, money is a public goods and new money issuance is a form of taxation. The preliminary applications of SCME have clearly explained some notable puzzles or hotly debated issues in empirical studies, such as the price puzzle, the missing liquidity effect, the best inflation rate, the negative movement of hours under a positive technology shock, and the Friedman rule. In addition, we obtained interactive pricing, origin of money market interest rate, the best money market interest rate, and the best tax rate (in other words, the best government debt level) in this paper, and there is no forward guidance puzzle in SCME. Because resource allocation in the unique equilibrium of SCME is Pareto optimal, which is starkly different from the existing theories' sub-optimal result for the monetary and fiscal economy, a profound consequence of SCME is that it is a proof of the Invisible Hand Conjecture of Adam Smith in the economy with tax and money. |
| Keywords: | Effectiveness of Monetary Shock, Seigniorage, Transaction Side of Economy, Interactive Pricing, Nonneutrality of Inflation, Liquidity Effect, Price Puzzle, Forward Guidance Puzzle, Monetary Transmission Mechanism, Money Market Interest Rate, Friedman Rule, Reactive Monetary Policy, Neoclassical Macroeconomics, New Keynesian Economics, Invisible Hand Conjecture |
| JEL: | E1 E3 E4 E5 E6 |
| Date: | 2025–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125728 |
| By: | Michael McGrane |
| Abstract: | In this paper, I present a dynamic term structure model of interest rates that fea- tures a shifting endpoint and incorporates survey forecasts of interest rates to sharpen the model’s implied forecasts and estimate trend interest rates. I present a new esti- mate of trend interest rates from the model as well as the model’s estimates of term premiums. I conduct an out-of-sample forecast analysis with the model and find that it significantly outperforms a standard dynamic term structure model with no shifting endpoint and only slightly underperforms a random walk model. |
| JEL: | E43 E47 G12 |
| Date: | 2025–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:cbo:wpaper:60888 |
| By: | Alberto Vindas-Quesada (Department of Economic Research, Central Bank of Costa Rica); Carlos Brenes-Soto (Department of Economic Research, Central Bank of Costa Rica); Adriana Sandí-Esquivel (Economic Division, Central Bank of Costa Rica); Susan Jiménez-Montero (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | This document presents the methodology that the Central Bank of Costa Rica uses to evaluate and select the univariate models for short-horizon forecasting purposes. This methodology consists on cuantifying several properties that are deemed desirable for forecasting models, assigning scores and combining them to obtain a final score. The robustness of the model selection to the evaluation period is analyzed, given the recent inflation dynamics. The selection is sensitive to this period, leading to the recommendation of regular selection processes. Esta nota presenta la metodología que usa el Banco Central de Costa Rica para la evaluación y selección de los modelos univariados de proyección de inflación en el corto plazo. La metodología consiste en la cuantificación de varias propiedades deseables en modelos de pronóstico, la asignación de puntajes y su combinación para obtener un puntaje final. Se evalúa la robustez de la selección de los modelos a cambios en el periodo de evaluación, dados los cambios recientes en la dinámica inflacionaria. La selección del modelo es sensible a este periodo, por lo que se recomienda actualizar la selección con regularidad. |
| Keywords: | Inflation, Forecasting, Stochastic Volatility, GARCH, Evaluation, Pronóstico |
| JEL: | E31 E37 C52 C53 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:apk:nottec:2405 |
| By: | Alberto Cavallo; Gaston Garcia Zavaleta |
| Abstract: | We introduce a novel methodology for detecting inflation turning points that com-bines high-frequency, disaggregated price data with standard structural break techniques to provide policymakers with more timely and precise signals of inflation dynamics. The methodology consists of three key components: measuring inflation as the slope of the log price index rather than using conventional inflation rates, employing structural break techniques to detect shifts in this slope, and leveraging highly disaggregated price indexes to identify trend breaks at a granular level. We apply this approach to study two critical recent episodes: Argentina’s 2024–2025 disinflation and the inflationary impact of U.S. tariff adjustments in 2025. For Argentina, we detect a broad-based disinflationary turning point in May 2024. For the U.S., we find evidence of a turning point in February 2025, with significant sectoral inflation accelerations despite stable aggregate inflation measures. These applications demonstrate the utility of our approach for enhancing real-time inflation monitoring and policy decision-making. |
| JEL: | C22 C55 E31 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34102 |
| By: | Ahmed Mahrous; Maurantonio Caprolu; Roberto Di Pietro |
| Abstract: | Stablecoins, with a capitalization exceeding 200 billion USD as of January 2025, have shown significant growth, with annual transaction volumes exceeding 10 trillion dollars in 2023 and nearly doubling that figure in 2024. This exceptional success has attracted the attention of traditional financial institutions, with an increasing number of governments exploring the potential of Central Bank Digital Currencies (CBDCs). Although academia has recognized the importance of stablecoins, research in this area remains fragmented, incomplete, and sometimes contradictory. In this paper, we aim to address the cited gap with a structured literature analysis, correlating recent contributions to present a picture of the complex economic, technical, and regulatory aspects of stablecoins. To achieve this, we formulate the main research questions and categorize scientific contributions accordingly, identifying main results, data sources, methodologies, and open research questions. The research questions we address in this survey paper cover several topics, such as the stability of various stablecoins, novel designs and implementations, and relevant regulatory challenges. The studies employ a wide range of methodologies and data sources, which we critically analyze and synthesize. Our analysis also reveals significant research gaps, including limited studies on security and privacy, underexplored stablecoins, unexamined failure cases, unstudied governance mechanisms, and the treatment of stablecoins under financial accounting standards, among other areas. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.13883 |
| By: | Woodgate, Ryan |
| Abstract: | This paper develops a novel conflict inflation model to unify the analysis of stable and explosive inflation dynamics, addressing a central theoretical divide in the literature. After providing explicit foundations for wage and price setting behaviour, it is shown that inflation expectations interact multiplicatively with the aspiration gaps of workers and firms rather than add linearly to them as in previous models. As aspiration gaps grow and inflation rises, the conflicting claims of workers and firms accelerate rather than rise steadily. This is reflected in nonlinear wage and price inflation curves whose vertical asymptotes reflect what we call the barrier wages of workers and firms-the critical values of the real wage at which workers and firms are able to resist any further increases in their aspiration gap by matching any rate of inflation. Stable inflationary-distributional outcomes follow only when the barrier wage of workers remains below that of firms. Runaway exchange rate depreciation caused by a balance-of-payments crisis is shown to lead to the collision of barrier wages and thus hyperinflation within the model in a way that is fully consistent with some stylised facts of hyperinflation. The model thus explains how explosive inflation may take hold, what the limits to stable distributional outcomes are, and how a stable inflation regime may evolve into an unstable one, all while maintaining the parsimony of the simple linear conflict inflation models. |
| Keywords: | Inflation, distribution, stability, hyperinflation, balance of payments |
| JEL: | D33 E31 E12 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ipewps:323942 |
| By: | Laurence M. Ball; Kyung Woong Koh |
| Abstract: | Recent research finds that the shelter component of CPI inflation responds with a lag to movements in market rents—the rents that tenants pay when they move into a new dwelling. This paper seeks to improve our understanding of this fact. We start by identifying three sources of lags between market rents and CPI shelter: the rents of most tenants are set in long-term leases; rents are smoothed for continuing tenants who renew leases; and CPI shelter inflation is measured with rent changes over six months. We incorporate these lags in a model of shelter inflation and compare the model to monthly data since 2015, using the Zillow Observed Rent Index to measure market rents. We find that the model performs fairly well, suggesting that it may be useful for understanding and forecasting inflation. |
| JEL: | E31 R21 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34113 |
| By: | Lilia Maliar; Christopher Naubert |
| Abstract: | We study how the transmission of monetary policy innovations is affected by the endogenous response of the central bank to macroeconomic aggregates in a two-agent New Keynesian model. We focus on how the stance of monetary policy and the fraction of savers in the economy affect transmission. We show that the indirect effect of an innovation is negative when the indirect real rate effect exceeds the indirect income effect. The relative magnitude of the indirect real rate effect increases with the share of savers and the strength of the central bank’s response and decreases with the horizon of the innovation. |
| Keywords: | Economic models; Interest rates; Monetary policy; Monetary policy transmission |
| JEL: | C61 C62 C63 E31 E52 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-21 |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research); Vipasha Pandey (Indira Gandhi Institute of Development Research) |
| Abstract: | A puzzling characteristic of post-pandemic Indian inflation is the fall, within 10 years of adopting flexible inflation targeting (IT), in core inflation to lifetime lows despite high growth and recurrent commodity price shocks. Establishing the credibility of IT is expected to take time in emerging markets (EMs) since prerequisites are thought to include independent central banks (CBs) that focus only on inflation, giving up other types of intervention. The Indian CB, however, continued foreign exchange intervention and its coordination with the government improved over the period. Even so, our evidence from multiple exercises with a disaggregated industry panel suggests firms pass-through of supply shocks reduced in the IT period. The results support the effectiveness of the communications and expectations channel in EMs compared to other channels. EM features imply prerequisites for successful IT may not be the traditional ones. Flexible inflation targeting, with procedures adapted to the context, can reduce growth sacrifice while lowering inflation. |
| Keywords: | Inflation targeting, firms' price-setting, supply shocks, expectations channel |
| JEL: | E31 E32 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2025-010 |
| By: | Carl E. Walsh; Carl Walsh |
| Abstract: | The current 5-year review of the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy provides an opportunity to assess the revisions made in 2020. I review the rationale behind the 2020 revisions and then discuss the new operational objectives: asymmetric average inflation targeting and shortfalls from maximum employment. Macroeconomic developments since 2020 led to an environment that was very different than the one anticipated when the 2020 policy framework was adopted. In this new environment, the 2020 changes created a risk that the US would suffer a repeat of the 1970s, a risk compounded by the FOMC’s slow reaction as inflation rose during 2021-2022. I illustrate the consequences of such a delay in addressing high inflation. The experience of the past five years offers some new lessons for the current review of the policy framework, as well as reinforcing the importance of some old lessons. |
| Keywords: | monetary policy, Federal Reserve, inflation, unemployment |
| JEL: | E31 E52 E58 E61 J64 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12056 |
| By: | Noda, Hideo; Fang, Fengqi |
| Abstract: | In this study, we attempt to construct an overlapping generations model designed to theoretically analyze the macroeconomic situation of sub-Saharan African countries. Our aim is to examine the conditions necessary for the effective functioning of infrastructure development financed by seigniorage and monetary control policies in some sub-Saharan African countries with stagnant macroeconomic performance. We also consider the implications of our model in terms of inflation and population aging. As a result, when the government selects the monetary growth rate that maximizes the long-term growth rate of gross domestic product (GDP), the absolute value of the monetary growth rate elasticity of the private capital--public capital ratio must be equal to the reciprocal of the private capital elasticity of GDP, which is greater than 1. Thus, seigniorage per se is not the cause of economic stagnation in some sub-Saharan African countries. If maximizing social welfare is equivalent to maximizing the long-term growth rate of GDP in terms of selecting the public investment share, then the public investment share elasticity of the private capital--public capital ratio is zero. Moreover, when the initial value of the private capital--public capital ratio is sufficiently low (high) level, inflation (deflation) occurs during the transition process to a steady state. Furthermore, population aging does not necessarily constitute a bottleneck for economic growth in sub-Saharan African countries. |
| Keywords: | Economic growth, Inflation, Infrastructure, Seigniorage, Sub-Saharan Africa |
| JEL: | E0 H5 O4 |
| Date: | 2025–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125632 |
| By: | Boris Podobnik; Dorian Wild; Dejan Kovac |
| Abstract: | We show that the amount of foreign exchange reserves (FER) in the world in a given currency is highly correlated with the GDP and military spending of that country for a set of western economies during the last 20 years. Taking into account multicollinearity, Ridge and Lasso regressions reveal that the Foreign Exchange Reserve is better explained by military spending than GDP for seven western currencies. For each year shown, military spending is statistically significant more than the monetary instrument M2. Comparing the currency of the second world economy, the Chinese renminbi, is well beyond the western FER equilibrium, but yearly analysis shows that there is a steady trend towards a new FER balance. Next, we define a complex geopolitical network model in which the probability of switching to an alternative FER currency depends both on economic and political factors. Military spending is introduced into the model as an average share of GDP observed within the data. As the GDP of a particular country grows, so does the military power of a country. The nature of the creation of new currency networks initially depends only on geopolitical allegiance. As the volume of trade with a particular country changes over a designated threshold, a country switches to the currency of that country due to increased trade. If the current steady trend continues within the same geopolitical setting as in the past twenty years, we extrapolate that the RMB and Western currencies could reach a new FER balance within 15 to 40 years, depending on the model setup. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.05856 |
| By: | Qifeng Tang; Yain-Whar Si |
| Abstract: | With the advancement of digital payment technologies, central banks worldwide have increasingly begun to explore the implementation of Central Bank Digital Currencies (CBDCs). This paper presents a comprehensive review of the latest developments in CBDC system design and implementation. By analyzing 135 research papers published between 2018 and 2025, the study provides an in-depth examination of CBDC design taxonomy and ecosystem frameworks. Grounded in the CBDC Design Pyramid, the paper refines and expands key architectural elements by thoroughly investigating innovations in ledger technologies, the selection of consensus mechanisms, and challenges associated with offline payments and digital wallet integration. Furthermore, it conceptualizes a CBDC ecosystem. A detailed comparative analysis of 26 existing CBDC systems is conducted across four dimensions: system architecture, ledger technology, access model, and application domain. The findings reveal that the most common configuration consists of a two-tier architecture, distributed ledger technology (DLT), and a token-based access model. However, no dominant trend has emerged regarding application domains. Notably, recent research shows a growing focus on leveraging CBDCs for cross-border payments to resolve inefficiencies and structural delays in current systems. Finally, the paper offers several forward-looking recommendations for future research. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.08880 |
| By: | Donna Faye Bajaro (Asian Development Bank); Jaqueson Galimberti (Asian Development Bank); Irfan Qureshi (Asian Development Bank) |
| Abstract: | Subdued economic activity and low tax revenues, especially during crises, drive borrowing and increase public debt. During these periods, to ease the debt burden, central banks may face pressure to deviate from policy targets. Under fiscal dominance, debt sustainability relies on low interest rates and high inflation rather than consolidation. This paper empirically tests the presence of fiscal dominance using forward-looking Taylor rules and data from 52 economies over 3 decades. The results detect fiscal dominance, with stronger effects in de jure inflation-targeting emerging economies with low central bank independence, especially those without debt rules and with high debt-to-gross domestic product ratios. Emerging economies with high foreign currency-denominated debt are further affected by exchange rate debt valuation effects, and fiscal dominance leads their central banks to follow exchange rate stabilization policies. Since 2022–2023, interest rate responses to fiscal imbalances have strengthened, posing challenges for future policy. |
| Keywords: | fiscal dominance;monetary policy;Taylor rule;consensus forecasts |
| JEL: | E31 E52 E58 E63 |
| Date: | 2025–08–20 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:021496 |
| 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 excessive 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. 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, their subsequent disappearance, as well as the continuing incidence of banking crises and speculative excesses. |
| JEL: | E40 E41 E50 E58 G01 G2 G21 G23 G28 N20 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34099 |
| By: | Greg Kaplan |
| Abstract: | I describe nine implications of the interconnectedness of fiscal and monetary policy that surface in Heterogeneous Agent New Keynesian (HANK) models. Not all are unique to HANK models. (i) Long run fiscal changes force monetary adjustments. (ii) Sustainable permanent deficits are feasible. (iii) Monetary policy leaves fiscal footprints, even with passive fiscal policy. (iv) Fewer controversies around active fiscal policy. (v) Equilibria are unique under a wider class of fiscal and monetary rules. (vi) With short-term debt, raising nominal rates without a fiscal contraction raises inflation. (vii) Unfunded fiscal stimulus is more inflationary. (viii) Even fully funded fiscal stimulus is inflationary. (ix) Fiscal transfers can substitute for monetary policy in the aggregate. |
| JEL: | E2 E3 E4 E5 E6 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34117 |
| By: | Satadru Das; Chetan Ghate; Subhadeep Halder; Debojyoti Mazumder; Sreerupa Sengupta; Satyarth Singh |
| Abstract: | A predominant share of employment in EMDEs is in the informal sector. In 2019-2020, approximately 72% of total employment was in the informal sector in India, with casual employment comprising 22% and self-employment comprising 50%. How does informality in labor markets affect inflation stabilization and monetary policy setting? To address this, we build a medium-scale NK-DSGE model with segmented labor markets and search and matching frictions. We calibrate the model to India. As in the data, we divide informal employment into self-employment and casual employment. We show that more formality improves the transmission of monetary policy. We show that a contractionary monetary policy shock leads to a decline in both formal and informal employment (self and casual), suggesting that monetary policy's impact on output and inflation works through informal labor markets as well. Our paper highlights the mechanism behind the transmission of monetary policy in the presence of heterogeneous labor markets. |
| Keywords: | business cycles, informal labor markets, monetary policy, inflation targeting, NK-DSGE models |
| JEL: | E52 E24 E26 E32 E63 E61 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-47 |
| By: | Yogeshwar Bharat (Shiv Nadar University); Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Gautham Udupa (Centre For Advanced Financial Research And Learning) |
| Abstract: | Core inflation measure is widely tracked as a measure of trend inflation, but it does not forecast headline inflation well. In this paper, we use disaggregated, state-level inflation data from India to construct a `cleaned' core inflation measure. We do this by stripping out the passthrough of past food inflation from the raw core inflation measure. We estimate the passthrough using local projection with global supply-side instruments in order to achieve better identification. We further find that our `cleaned' core inflation measure generates better forecasts of the headline inflation after a six-month horizon, compared to the raw core measure. |
| Keywords: | Inflation forecasting, Core inflation, Headline inflation, State-level inflation |
| JEL: | E31 E37 E52 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2025-021 |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research) |
| Abstract: | The literature expects it to take a long to establish inflation targeting (IT) in emerging markets, but the Indian experience suggests that suitable adaption of IT to domestic structure and shocks as well as circumstances can fast-track the process while reducing growth sacrifice. The paper provides evidence and possible further refinements. Key features that worked well were flexible implementation, unlike the pre-pandemic over-strictness; counter-cyclical smoothing of shocks with real rates near equilibrium; good fiscal-monetary coordination with independence in rate-setting; use of complementary prudential regulation and liquidity management; establishing adequate independence from global cycles. The IT framework needs to preserve these features. Use of better inflation data, more transparency and accountability in inflation forecasts and in liquidity management would improve outcomes. |
| Keywords: | inflation targeting, Indian experience, structure, shocks, flexibility, real rates, indpendence |
| JEL: | E52 E63 E65 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2025-018 |
| 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 the transmission of U.S. monetary policy shocks to bank lending in 12 Latin American countries between 2000 and 2020. Using data from 118 banks, we find evidence of an international bank lending channel, even in countries with low direct exposure to U.S. banks. Crucially, the strength and direction of this transmission depend on the degree of financial dollarization. While U.S. tightening is, on average, associated with rising credit, in more dollarized economies it leads to slower loan growth. These findings underscore the vulnerability of dollarized banking systems and point to the need for strengthened local macroprudential and supervisory frameworks. |
| Keywords: | International bank lending channel; Financial dollarization; U.S. monetary policy shocks |
| Date: | 2025–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:021498 |
| By: | Luis I. Jacome; Nicolas E. Magud; Samuel Pienknagura; Martín Uribe |
| Abstract: | This paper shows the key, yet overlooked, role played by the legacy of a high inflation history on the strength of the monetary policy response to inflationary shocks. To rationalize this, we propose a New Keynesian model that diverges from the existing workhorse model by adding path-dependence (to a forward-looking model) and potentially imperfect central bank credibility. We show that achieving low inflation (hitting the target) requires more aggressive monetary policy reactions, and is costlier from an output point of view, when individuals’ past inflationary experiences shape their inflation expectation formation. In turn, we provide empirical evidence of the need for these two theoretical additions. Countries that experienced a high level of inflation before adopting the IT regime tend to respond more aggressively to deviations of inflation expectations from the central bank’s target. We also point to the existence of a credibility puzzle, whereby the strength of a central bank’s monetary policy response to deviations from the inflation target remains broadly unchanged even as central banks gain credibility over time. Put differently, a country’s inflationary past casts a long and persistent shadow on central banks. |
| JEL: | E43 E52 E58 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34107 |
| By: | Kevin McNamara; Rhea Pritham Marpu |
| Abstract: | The global financial system stands at an inflection point. Stablecoins represent the most significant evolution in banking since the abandonment of the gold standard, positioned to enable "Banking 2.0" by seamlessly integrating cryptocurrency innovation with traditional finance infrastructure. This transformation rivals artificial intelligence as the next major disruptor in the financial sector. Modern fiat currencies derive value entirely from institutional trust rather than physical backing, creating vulnerabilities that stablecoins address through enhanced stability, reduced fraud risk, and unified global transactions that transcend national boundaries. Recent developments demonstrate accelerating institutional adoption: landmark U.S. legislation including the GENIUS Act of 2025, strategic industry pivots from major players like JPMorgan's crypto-backed loan initiatives, and PayPal's comprehensive "Pay with Crypto" service. Widespread stablecoin implementation addresses critical macroeconomic imbalances, particularly the inflation-productivity gap plaguing modern monetary systems, through more robust and diversified backing mechanisms. Furthermore, stablecoins facilitate deregulation and efficiency gains, paving the way for a more interconnected international financial system. This whitepaper comprehensively explores how stablecoins are poised to reshape banking, supported by real-world examples, current market data, and analysis of their transformative potential. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.11395 |
| By: | Marie-Hélène Felt; Anna Chernesky; Angelika Welte |
| Abstract: | The Methods-of-Payment (MOP) Survey tracks consumer use of cash and other methods of payment. We present core findings from the 2024 MOP Survey, highlighting results from both the survey questionnaire and subsequent three-day shopping diary. Although cash holdings have increased in nominal terms, we find that cash usage remains unchanged since 2020. Mobile and other alternative payment methods continue to grow in importance. The 2024 MOP Survey also collects new data on how consumers perceive bank note quality. |
| Keywords: | Bank notes; Digital currencies and fintech; Financial services |
| JEL: | D83 E41 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:25-12 |
| By: | Christian Conrad; Zeno Enders; Gernot Müller |
| Abstract: | Under inflation forecast targeting, central banks such as the ECB adjust policy to keep expected inflation on target. We evaluate the ECB’s inflation forecasts: they are unbiased and efficient but contain little information at forecast horizons beyond three quarters. In a New Keynesian model with transmission lags, inflation forecast targeting is indeed effective in stabilizing inflation—provided there is no forward-looking behavior—though the information content of forecasts is unrealistically high. In the presence of forward-looking behavior, the information content declines because monetary policy becomes more effective in meeting the target, but inflation is best stabilized by targeting current inflation. |
| Keywords: | inflation targeting, inflation forecast targeting, monetary policy, inflation forecast, information content, target horizon, ECB |
| JEL: | C53 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12006 |
| By: | Gustavo Silva Araujo; José Ignacio Ándres Bergallo; Flávio de Freitas Val |
| Abstract: | This study revisits the question "Do inflation-linked bonds contain information about future inflation?" posed by Vicente and Guillen (2013), by addressing two critical issues related to the breakeven inflation rate (BEIR) that were not considered by the authors: the inflation lag embedded in inflation-indexed securities and the seasonality inherent in inflation indices. The analysis evaluates three methods for calculating the BEIR for the purpose of forecasting inflation: the one used by Vicente and Guillen (2013), which we refer to as Naïve BEIR; an alternative measure derived from government bonds but incorporating corrections for inflation lag and seasonality (Bond Market BEIR, BM-BEIR); and a BEIR based on the Futures Market (Futures Market BEIR, FM-BEIR), which also includes these adjustments. The results show that BM-BEIR significantly outperforms Naive BEIR for short-term horizons (3 and 6 months), closely tracking actual inflation. Moreover, both BM-BEIR and FM-BEIR match the predictive accuracy of survey expectations, while offering the advantage of frequent updates - highlighting their utility for short-term inflation forecasting and decision-making. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:625 |
| By: | Jose Pablo Barquero-Romero (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | This study follows the monetary approach to estimate the pass-through of the Monetary Policy Rate (MPR) of the Central Bank of Costa Rica to market interest rates, liquidity markets and the yield curve. Cointegration, error correction vector and autoregressive vector models are used. Unlike previous studies on this topic, this research uses weekly data on negotiated active interest rates according to economic activity, and negotiated deposit rates, classified by deposit term. The results show that the pass-through of the MPR to active and passive interest rates is heterogeneous and incomplete; in addition, the speed of the pass-through is greater than that shown in previous studies. In general, it is confirmed that the pass-through is faster to passive rates than to active rates. It is found that, for consumer rates, the pass-through is not statistically significant, while towards passive rates the transfer is stronger and faster in the terms of greater demand. Este estudio sigue el enfoque monetario para estimar el traspaso de la Tasa de Política Monetaria (TPM) del Banco Central de Costa Rica a las tasas de interés del sistema financiero, los mercados de liquidez y la curva de rendimiento. Se utilizan modelos de cointegración, de vectores de corrección de errores y vectores autorregresivos. A diferencia de estudios previos sobre este tema, en esta investigación se utilizan datos semanales de las tasas de interés activas negociadas según actividad económica, y de las tasas pasivas negociadas, clasificadas por plazo del depósito. Los resultados muestran que el traspaso de la TPM hacia las tasas de interés activas y pasivas es heterogéneo e incompleto; además, se evidencia una mejora en la velocidad de la transmisión si se le compara con estudios anteriores. En general, se confirma que el traspaso es más rápido hacia las tasas pasivas que a las tasas activas. Se encuentra que, para las tasas de consumo el traspaso no es estadísticamente significativo; en tanto que hacia las tasas pasivas el traspaso es más fuerte y rápido en los plazos con mayor demanda. |
| Keywords: | Monetary policy transmission mechanisms, Active interest rates, Passive interest rates, Liquidity market, Yield curve, Mecanismos de transmisión de la política monetaria, Tasas de interés activas, Tasas de interés pasivas, Mercado de liquidez, Curva de rendimientos |
| JEL: | E43 C52 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:apk:nottec:2406 |
| By: | Ozili, Peterson K |
| Abstract: | The study investigates the effect of country policy and institutional frameworks (CPIFs) on global inflation while controlling for the rate of unemployment and economic growth rate from 2005 to 2023. The country policy and institutional frameworks examined are the economic management policies, social inclusion/equity policies, structural policies, and public sector management and institutions. The findings reveal that public sector management and institutions as well as social inclusion and social equity policy have a significant effect on global inflation. The results imply that the presence of strong public sector management and institutions lead to a significant decrease in the inflation rate while social inclusion and social equity policies lead to an increase in the inflation rate. The implication of the findings is that public sector management and institutions as well as social inclusion and social equity policies are crucial for the persistence of global inflation. |
| Keywords: | inflation, unemployment, economic growth, GDP growth, institutions |
| JEL: | E31 E32 J64 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125564 |
| By: | Sánchez Serrano, Antonio |
| Abstract: | Andersen and Sánchez Serrano (2024) define a methodology for building a map of the euro area financial system using data from the quarterly sectoral accounts of the euro area (complemented with data from other sources). This map can be useful for macroprudential authorities in regularly monitoring interconnections, contagion channels and systemic risk dynamics. We develop three extensions to the map that should increase its relevance: (i) the use of euro area Distributional Wealth Accounts to consider households according to their wealth; (ii) a breakdown of the other financial institutions sector into other financial intermediaries, financial auxiliaries, and captive financial institutions and money lenders; and (iii) using international investment position data to compute exposures to the rest of the world by country. In addition to the series codes on the ECB Data Portal to retrieve the relevant data, we illustrate the potential analytical application of each of the three extensions. In a nutshell, our analysis of the euro area household sector according to wealth shows that the aggregate figures conceal significant heterogeneity. Using data from the quarterly sectoral accounts, we are able to gain a clearer overview of other financial institutions, identifying the links with banks through securitisation vehicles and with non-financial corporations through captive financial institutions. Finally, although we cannot match exactly all the financial instruments in the balance sheet, data on the institutional investment position shows, among others, a continuous increase in the portfolio investments of euro area residents in the United States since 2013. JEL Classification: F30, G20, G50 |
| Keywords: | flow of funds, household finance, interconnections, international finance, non-bank financial intermediation |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:srk:srkops:202527 |
| By: | Mr. Tobias Adrian; Christopher J. Erceg; Marcin Kolasa; Mr. Jesper L Linde; Pawel Zabczyk |
| Abstract: | Quantitative easing (QE) has been criticized for helping fuel the post-COVID inflation boom and causing large central bank losses. In this paper, we argue that QE should be evaluated mainly on its ability to achieve core macro-objectives as well for its effects on the consolidated fiscal position of the government and central bank, although central bank losses can matter to the extent that they may weaken central bank credibility. Using a DSGE model with segmented asset markets, we show how QE can provide a sizeable boost to output and inflation in a deep liquidity trap and can reduce public debt substantially. This contrasts to the rise in public debt that occurs under fiscal expansion and makes QE an attractive tool in a high debt environment. There is more reason for caution in using QE in a “shallow" liquidity trap in which the notional interest rate is only slightly negative: QE runs more risk of causing the economy to overheat, especially if forward guidance has a strong element of commitment, and is more likely to generate sizeable central bank losses. Some refinements in strategy, including the use of escape clauses, can help mitigate overheating risks. |
| Keywords: | Monetary Policy; Effective Lower Bound; Quantitative Easing; Central Bank Balance Sheet; Government Debt; New Keynesian Model |
| Date: | 2025–08–08 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/158 |