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on Monetary Economics |
| By: | Ozge Akinci; Martín Almuzara; Silvia Miranda-Agrippino; Ramya Nallamotu; Argia M. Sbordone; Greg Simitian; William Zeng |
| Abstract: | Our previous post identified strong global components in the slow-moving and persistent dynamics of headline consumer price index (CPI) inflation in the U.S. and abroad. We labeled these global components as the Global Inflation Trend (GIT), the Core Goods Global Inflation Trend (CG-GIT) and the Food & Energy Global Inflation Trend (FE-GIT). In this post we offer a narrative of the drivers of these global inflation trends in terms of shocks that induce a trade-off for monetary policy, versus those that do not. We show that most of the surge in the persistent component of inflation across countries is accounted for by global supply shocks—that is, shocks that induce a trade-off for central banks between their objectives of output and inflation stabilization. Global demand shocks have become more prevalent since 2022. However, had central banks tried to fully offset the inflationary pressures due to sustained demand, this would have resulted in a much more severe global economic contraction. |
| Keywords: | global inflation; persistence; Multivariate Core Trend (MCT); supply chains; demand shocks |
| JEL: | E31 E37 E52 F34 |
| Date: | 2025–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99630 |
| By: | Burr, Natalie (Bank of England) |
| Abstract: | This paper studies how monetary policy impacts inflation expectations in the United Kingdom. Using higher moments of the distribution of inflation expectations, I construct a summary measure of expectations for households, firms, professional forecasters and financial markets. In a Bayesian VAR identified using a high frequency-identified monetary policy shock series, I find that a monetary policy tightening causes significant variation in the response of inflation expectations across groups: firms’ and financial market median expectations fall, while households’ inflation expectations rise. I document that monetary policy decisions act as a stabilisation mechanism by reducing the dispersion of expectations 12–18 months following a shock. |
| Keywords: | Inflation expectations; monetary policy transmission; structural VAR |
| JEL: | C38 E31 E52 E58 |
| Date: | 2025–01–10 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1109 |
| By: | Ursel Baumann; Annalisa Ferrando; Dimitris Georgarakos; Yuriy Gorodnichenko; Timo Reinelt |
| Abstract: | Does a successful disinflation contribute to the anchoring of inflation expectations? We provide novel survey evidence on the dynamics of euro area firms’ inflation expectations during the disinflation episode since 2022. We show that firms’ short term inflation expectations declined steadily towards the inflation target as the disinflation progressed. However, we also document a thick tail in longer-term inflation expectations, substantial disagreement about the inflation outlook, and an increased sensitivity of longer-term inflation expectations to short-term inflation expectations. These findings suggest that it may take more time to bring inflation expectations fully in line with central bank objectives. |
| JEL: | E3 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33440 |
| By: | Ozge Akinci; Martín Almuzara; Silvia Miranda-Agrippino; Ramya Nallamotu; Argia M. Sbordone; Greg Simitian; William Zeng |
| Abstract: | A key feature of the post-pandemic inflation surge was the strong correlation among inflation rates across sectors in the United States. This phenomenon, however, was not confined to the U.S. economy, as similar inflationary pressures have emerged in other advanced economies. As generalized as the inflation surge was, so was its decline from the mid-2022 peak. This post explores the common features of inflation patterns in the U.S. and abroad using an extension of the Multivariate Core Trend (MCT) Inflation model, our underlying inflation tracker for the U.S. The Global MCT model purges transitory noise from international sectoral inflation data and quantifies the covariation of their persistent components—in the form of global inflation trends—along both country and sectoral dimensions. We find that global trends play a dominant role in determining the slow-moving and persistent dynamics of headline consumer price index (CPI) inflation in the U.S. and abroad, both over the pre-pandemic and post pandemic samples. |
| Keywords: | global inflation; persistence; Multivariate Core Trend (MCT); supply chains; demand shocks |
| JEL: | E31 E37 E52 F34 |
| Date: | 2025–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99629 |
| By: | Ivan, Miruna-Daniela (Bank of England); Banti, Chiara (Essex Business School, University of Essex); Kellard, Neil (Essex Business School, University of Essex) |
| Abstract: | This paper explores a novel directional liquidity-based transmission channel of monetary policy, which explains the heterogeneity in the response of commodity future prices to monetary policy. Employing an event-study analysis with a high-frequency instrumental variable estimator, we find that the trading volume of our sample of commodity futures declines following FOMC announcements. Further, we find that more traded commodities are also more exposed to monetary policy surprises, suggesting a significant role for trading activity in the transmission of monetary policy shocks to commodity markets. Lastly, we show that the direction of the target rate change matters to this transmission mechanism of monetary policy. |
| Keywords: | Monetary policy; monetary transmission; financial liquidity; commodity futures |
| JEL: | E52 G12 G14 |
| Date: | 2025–01–24 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1114 |
| By: | Yahia Amel (University of Algiers 3 : Université d' Alger 3) |
| Abstract: | This article aims to study the effectiveness and symmetry of the transmission of monetary policy in Algeria through the channels of interest rates, credit, and exchange rates in both the short and long term, using the Nonlinear Autoregressive Distributed Lag (NARDL) method. The study of asymmetric effects of monetary policy channels on both output and prices stability is of paramount value for monetary policy analysis and implementation. The results have shown that the transmission of monetary policy in Algeria exhibits an asymmetric nature, except for the effect of bank lending interest rates on real gross domestic product and inflation and that the traditional interest rate channel is the most effective in transmitting the effects of monetary policy to real gross domestic product, while positive variations in credit volume are most effective in the long term, and negative changes in the exchange rate are the most efficient in the short-term concerning the transmission to inflation. |
| Keywords: | Monetary Policy NARDL Monetary Policy Transmission Channels Inflation Gross National Produc. JEL Classification Codes : E42 E52 E58 F31, Monetary Policy, NARDL, Monetary Policy Transmission Channels, Inflation, Gross National Produc. JEL Classification Codes : E42, E52, E58, F31 |
| Date: | 2023–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:halshs-04511900 |
| By: | Swapan-Kumar Pradhan; Viktors Stebunovs; Előd Takáts; Judit Temesvary |
| Abstract: | We use bilateral cross-border bank claims by nationality to assess the effects of geopolitics on cross-border bank flows. We show that a rise in geopolitical tensions between countries — disagreements in UN voting, broad sanctions, or sentiments captured by geopolitical risk indices — significantly dampens cross-border bank lending. Elevated geopolitical tensions also amplify the international transmission of monetary policies of major central banks, especially when geopolitical tensions coincide with monetary policy tightening. Overall, our results suggest that geopolitics is roughly as important as monetary policy in driving cross-border lending. |
| Keywords: | Monetary policy; Geopolitical tensions; Cross-border claims; Diff-in-diff estimations |
| JEL: | E52 F34 F42 F51 F53 G21 |
| Date: | 2025–02–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1403 |
| By: | David Andolfatto; Fernando M. Martin |
| Abstract: | We use an analytically tractable DSGE model to study the surge in the cost of living in the wake of the COVID-19 pandemic. A calibrated version of the model is used to assess the conduct of US monetary and fiscal policy over the 2020-2024 period. The model is also used to estimate the economic and welfare consequences of alternative monetary and fiscal policies. The calibrated model suggests that while the extraordinary fiscal transfers made in 2020-21 generally improved economic welfare, they were significantly larger than needed. These welfare gains came primarily in the form of insurance, not stimulus. For the observed fiscal policy, an optimal monetary policy would not have resulted in a significantly different inflation dynamic. Although monetary policy could have prevented the inflation surge with sufficient fiscal support, such a policy would have required a permanently higher real rate of interest and a permanent recession. Finally, our model suggests that while observed monetary policy muted the inflation dynamic, it did not significantly alter the total amount of inflation experienced. Finally, the COVID-19 inflation would have been mean-reverting even without an aggressive tightening of monetary policy. |
| Keywords: | monetary policy; fiscal policy; inflation; price level; COVID-19 |
| JEL: | E40 E52 E60 E63 E65 |
| Date: | 2025–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:99576 |
| By: | Chan, Jenny (Bank of England) |
| Abstract: | Sentiments, or beliefs about aggregate demand, can be self-fulfilling in models departing slightly from the complete information benchmark in the New Keynesian framework. Through its effect on aggregate variables, the policy stance determines the degree of complementarity in firms’ production (pricing) decisions and consequently, the precision of endogenous signals that firms receive. As a result, aggregate fluctuations can be driven by both fundamental and non-fundamental shocks. The distribution of non-fundamental shocks is endogenous to policy, introducing a novel trade-off between stabilising output and inflation. Both strong inflation targeting and nominal flexibilities increase the variance of non-fundamental shocks, which are shown to be suboptimal. Moreover, the Taylor principle is no longer sufficient to rule out indeterminacy. Instead, an interest rate rule that places sufficiently low weight on inflation eliminates non-fundamental volatility and thereby the output-inflation trade-off. |
| Keywords: | New Keynesian; sunspots; animal spirits; rational expectations; optimal monetary policy; indeterminacy |
| JEL: | E31 E32 E52 E63 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1106 |
| By: | Hemingway, Benjamin (Bank of England) |
| Abstract: | The introduction of an unremunerated retail central bank digital currency (CBDC) is currently under consideration by several central banks. Motivated by the decline in transactional cash usage and the increase in online sales in the UK, this paper provides a theoretical framework to study the underlying drivers of these trends and the welfare implications of introducing an unremunerated retail CBDC. I develop a cash credit model with physical and digital retail sectors, endogenous entry of firms and directed consumer search. Calibrating to UK data between 2010 and 2022 the model suggests that there are positive welfare gains from introducing an unremunerated retail CBDC, but these have likely declined over time. |
| Keywords: | CBDC; credit; digital currency; money |
| JEL: | E41 E42 E58 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1101 |
| By: | Ayhan Kose; Jongrim Ha; Dohan Kim; Prasad, Eswar S. |
| Abstract: | Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the foreign exchange puzzle). This paper shows that incorporating forward-looking expectations into standard open economy structural vector autoregressive models resolves these puzzles. Specifically, the models are augmented with novel survey-based measures of expectations based on consumer, business, and professional forecasts. The findings show that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the foreign exchange puzzle helps solve the price puzzle. |
| Date: | 2024–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10974 |
| By: | Wächter, Maybrit; Proano, Christian; Peña, Juan Carlos |
| Abstract: | This paper revisits the "one-size-fits-all" challenge posed by the European Central Bank's (ECB) monetary policy within the heterogeneous economic landscape of the euro area. Using a dataset spanning from 1999Q1 to 2019Q4 for the ECB interest rate and from 2004Q4 onwards for the Wu-Xia shadow rate, we compute country-specific hypothetical Taylor rates across EU-11 countries and examine the dynamic effects of the difference between these rates and the actual ECB policy rate, the so-called Taylor Rate Gaps (TRGAPs), on GDP growth and inflation. Employing panel and country-specific local projections, our findings reveal that positive TRGAPs negatively impact economic growth, with this effect being more pronounced in periphery countries compared to core countries. The analysis highlights the limitations of a uniform monetary policy in addressing the diverse economic conditions within the euro area, suggesting the need for a more tailored approach to foster balanced and sustainable growth across the region. |
| Keywords: | Monetary Policy, Taylor Rule, Euro Area, Economic Growth, Interest Rate Gap |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bamber:311824 |
| By: | Yushi Yoshida; Takatoshi Ito; Junko Shimizu; Kiyotaka Sato; Taiyo Yoshimi; Uraku Yoshimoto |
| Abstract: | We examine the determinants and the dynamics of the exchange rate pass-through of the Japanese exporters, utilizing the official Customs declaration data. We first estimated the invoicing currency exchange rate pass-through and found that export prices invoiced in producer currency are the most rigid. Among local currency or vehicle currency use, US dollar invoicing is relatively more rigid than non-US dollar invoicing. The destination exchange rate pass-through estimates for local currency invoicing are between 35 and 40 percent, whereas those for Japanese yen or US dollar invoicing are close to complete. In addition, we find these discrepancies are even more accentuated in the longer run by analyzing the dynamics of the exchange rate pass-through. |
| JEL: | F3 F31 F32 F34 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33454 |
| By: | DiGiuseppe, Matthew (Leiden University); Garriga, Ana Carolina (University of Essex); Kern, Andreas |
| Abstract: | Why do citizens support central bank independence (CBI)? Despite important research on economic and political reasons to grant independence to central banks, we know little about what the public thinks about CBI. This is important given citizens' potential role in constraining politicians' ability to alter CBI. We hypothesize that support for CBI is influenced by citizens' limited understanding of central bank governance and their beliefs about who will gain control over monetary policy if independence is reduced. Our expectations are confirmed by a preregistered survey experiment and a pre-post-election test in the U.S. Support for CBI increases when respondents learn that the President would gain more influence if independence was reduced. This support decreases when respondents expect a co-partisan to lead the executive branch. These findings shed light on the legitimacy basis of monetary institutions in politically polarized contexts and, from a policy perspective, indicate the limits of central bank communication. |
| Date: | 2025–02–08 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:trpgz_v1 |
| By: | NAKAJIMA, Jouchi |
| Abstract: | This study revisits the impact of US monetary policy (MP) spillovers on international bond markets through an empirical analysis of Japanese government bond yields. The analysis investigates how US MP shocks affect the yield curve and the components of expected rates and term premiums. A key insight of this study, supported by the empirical findings, is that the impacts of US MP spillovers on the term premium of domestic yields are muted during the yield curve control (YCC) policy, where the targeted long-term yield is kept within a certain small range. This novel finding implies that the policy is effective in preventing longterm yields from increasing upward pressure from US MP spillovers. |
| Keywords: | Monetary policy, Term premium, Shadow rate, Yield curve control |
| JEL: | E43 E52 E58 G12 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hituec:760 |
| By: | Mark M. Spiegel |
| Abstract: | The period following the global financial crisis was marked by low interest rates and low responsiveness of bank lending to monetary policy. This led some to conclude that the bank lending channel for monetary policy to influence economic activity had weakened. This paper revisits the responsiveness of the bank lending channel using a bank-level panel of US Call Report data and updated measures of U.S. monetary policy shocks. Results indicate that the efficacy of the bank lending channel increased over our sample period. We find tepid responses in bank lending to monetary shocks from 2012H1 through 2016H2, matching the existing literature, but significantly more robust responsiveness after liftoff, represented by the latter portion of our sample from 2017H1 through 2023H2. Separating the later panel by bank size reveals that the bank lending channel is larger for small and medium-sized banks than for large banks over this later period, also consistent with studies predating the global financial crisis. Increases in responsiveness at conventional rates are even greater for small business lending. An interactive specification over our entire sample period confirms that the stronger recent bank lending responses to monetary policy shocks are associated with sufficiently high prevailing levels of the federal funds rate. |
| Keywords: | credit channel; monetary policy; interest rate channel |
| JEL: | E58 E63 G14 G18 G32 |
| Date: | 2025–02–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99557 |
| By: | Kherchi Medjden (ENSSEA - Ecole Nationale Supérieure de Statistique et d'Economie Appliquée [Tipaza]); Hanya Meziani Elmahdi (ENSSEA - Ecole Nationale Supérieure de Statistique et d'Economie Appliquée [Tipaza]) |
| Abstract: | The objective of this study is to investigate the impact of unconventional monetary policy on inflation and economic growth in Algeria. To investigate this impact, we estimated a SVAR model, covering the period from 2006 to 2022 using quarterly data. The originality of this study is the use of the estimated dynamic effects of shocks (stylized facts) as a benchmark for assessing the effectiveness and pass-through of unconventional policies. Our results show that the shock induced by unconventional monetary policy is not transmitted to inflation, neither in the short run nor in the long run, even under theoretical restrictions. In addition, unconventional monetary shocks have no effect on real variables (economic growth). |
| Keywords: | SVAR unconventional monetary policy impulse responses short-run and long-run restrictions. JEL Classification Codes : E510 E520 C320, SVAR, unconventional monetary policy, impulse responses, short-run and long-run restrictions. JEL Classification Codes : E510, E520, C320 |
| Date: | 2023–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:halshs-04521309 |
| By: | Kaminska, Iryna (Bank of England); Kontoghiorghes, Alex (Bank of England); Ray, Walker (Federal Reserve Bank of Chicago, London School of Economics and CEPR) |
| Abstract: | We analyse the role of preferred habitat (PH) demand in the transmission of quantitative tightening (QT) and quantitative easing (QE) programmes. For this, we combine granular data from Bank of England QT and QE auctions with secondary market bond level transaction data. We find that when dealers traded on behalf of pension funds and insurance companies, their bidding at QE auctions was less elastic, in line with PH demand theory. In contrast, during QT auctions, there is no evidence of significant PH demand pressures. To account for the observed asymmetric demand effects during QE and QT, we build on and extend the constant elasticity demand model by Vayanos and Vila (2021), so that the PH demand elasticity can depend on available bond supply. We show that the decreased role of the PH demand channel during QT is consistent with the increased government bond issuance post the Covid-19 pandemic. |
| Keywords: | Quantitative easing; quantitative tightening; central bank auctions; monetary policy; monetary transmission mechanism; preferred habitat; gilt market |
| JEL: | E43 E52 E58 G12 |
| Date: | 2025–01–10 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1108 |
| By: | Fernando M. Martin |
| Abstract: | While inflation has fallen since mid-2022, price increases remain broad-based, with most product categories still experiencing higher inflation than before the pandemic. |
| Keywords: | inflation |
| Date: | 2025–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:99611 |
| By: | Shin-ichi Fukuda (Faculty of Economcis, The University of Tokyo); Naoto Soma (Faculty of International Social Sciences, Division of International Social Sciences) |
| Abstract: | The purpose of this study is to examine how short-term and medium-term inflation expectations evolved on a sustained basis in Japan. In the analysis, we define the "anchor of inflation expectations" as inflation expectations excluding the expected effects of the GDP gap and supply shocks. We examine the extent to which the "anchor of inflation expectations" has changed since 2010 using Japanese forecaster-level data in the "ESP Forecast." The estimated anchor of inflation expectations increased significantly after the Bank of Japan launched unprecedented monetary easing in April 2013. However, the increase was not only modest but also temporary. In contrast, the estimated anchor continued to rise after the global supply shocks became noticeable in April 2022. The estimated anchor has already exceeded 2% for short-term inflation expectations and is approaching 2% for medium-term inflation expectations. This means that the global supply shocks and the subsequent depreciation of the yen have caused a dramatic change in inflation expectations. However, the increased anchor of medium-term inflation expectations is still about the same as in 2014-2015. Given that the upward shift did not continue in 2014-2015, the Japanese economy may not be able to achieve the 2% target on a sustainable basis unless there are additional changes, such as an improvement in consumer sentiment through real wage increases. |
| URL: | https://d.repec.org/n?u=RePEc:tky:fseres:2025cf1238 |
| By: | Klaus, Hendrik |
| Abstract: | This paper explores the genesis of the German monetary framework between 1866 and 1876, with a specific focus on the 1875 Banking Act. The Banking Act constituted the final piece within the legislation that established Germany's post- unification monetary order, regulated bank note issuance across the Reich, and established the Reichsbank as Germany's first central bank. The Banking Act has rarely featured prominently in the literature, and it has often been regarded as a subordinate aspect of Germany's adoption of a gold currency. Drawing on a broad range of primary sources, this study argues that the Banking Act was in fact the most complicated and politicised element of the monetary reform. The debates on the centralisation of note issuance and banking functions are a fascinating window into how late nineteenth-century monetary management developed within the political imperatives of the time. As a case study, the historical perspective on the development of Germany's monetary framework is relevant in a broader context. It offers insight into the dynamics that have shaped political economies past and present, and it enables us to reflect critically on outcomes and alternatives for specific forms of monetary governance |
| Keywords: | Bankgesetz, Banking Act, Reichsbank, Ludwig Bamberger, Otto Michaelis, financial history, central bank history, free banking |
| JEL: | N13 N23 B15 B17 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ibfpps:311086 |
| By: | Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management); Fenou, Akouété-Tognikin (HEC Montreal, Canada Research Chair in Risk Management); Mnasri, Mohamed (HEC Montreal, Department of finance) |
| Abstract: | We analyze the effects of inflation on the US insurance industry. The analysis is based initially on a VAR (Vector AutoRegressive) model. The shock of the COVID-19 pandemic had a significant positive short-term impact on inflation, probably explained by the recent contractionary of the Fed monetary policy against inflation. We then analyze the characteristics of the U.S. inflation rate series observed over the 1973-2023 period in order to capture and model the effect of inflation on the insurance industry. Two important conclusions emerge from this analysis: The US inflation rate series is characterized by non-linear dynamics (asymmetry) and a random trend. The results obtained led us to select the two-regime Markov model to analyze the impact of inflation on the various fundamental indicators of insurance company performance in the US. We show that performance indicators are differently affected by inflation in the Life and P&C insurance sectors according to the inflation regime considered. |
| Keywords: | Inflation; US insurance industry; Markov model; COVID-19 pandemic; Life insurance; P&C insurance; AM Best; American Council of Life Insurers |
| JEL: | B22 E30 E40 G22 G52 |
| Date: | 2025–02–17 |
| URL: | https://d.repec.org/n?u=RePEc:ris:crcrmw:2025_001 |
| By: | Silva Paranhos, Livia (Bank of England) |
| Abstract: | How do monetary policy shocks affect firm investment? This paper provides new evidence on US non-financial firms and a novel non-parametric framework based on random forests. The key advantage of the methodology is that it does not impose any assumptions on how the effect of shocks varies across firms thereby allowing for general forms of heterogeneity in the transmission of shocks. My estimates suggest that there exists a threshold in the level of firm risk above which monetary policy is much less effective. Additionally, there is no evidence that the effect of policy varies with firm risk for the 75% of firms in the sample with higher risk. The proposed methodology is a generalisation of local projections and nests several common local projection specifications, including linear and nonlinear. |
| Keywords: | Local projection; impulse response estimation; nonlinearity; heterogeneity; firm investment |
| JEL: | C14 C23 E22 E52 |
| Date: | 2024–12–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1100 |
| By: | Khuderchuluun Batsukh; Nicolas Groshenny; Naveed Javed |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tep:teppwp:wp25-02 |
| By: | Yu-Ting Chiang; Mick Dueholm; Ezra Karger |
| Abstract: | Surprise inflation can hit illiquid households harder because they can’t easily offset real losses in short-term assets with real gains in long-term liabilities. |
| Keywords: | inflation; household illiquidity |
| Date: | 2025–02–13 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:99553 |
| By: | Salib, Michael (Bank of England); Ghazaleh, Mesha (Bank of England) |
| Abstract: | The Bank’s monetary policy objectives are among the most significant statutory objectives bestowed by Parliament on any UK public authority. The objectives make the Bank responsible for maintaining price stability and, subject to that, for supporting the government’s economic policy, including its objectives for growth and employment. When granted in 1998, the objectives were a watershed moment in the three centuries‑old history of an institution that had long‑resisted having its role prescribed or, as Bank officials at the time saw it, constrained by, law. Yet the Bank quickly embraced the benefits of having greater clarity in its legal mandate, and the objectives have proved remarkably resilient in directing the Bank’s monetary response over the past 25 years. This paper offers an in‑depth historical and legal account of the Bank’s statutory monetary policy objectives; it explores the relevant statutory provisions in the Bank of England Act 1998 and the debates that surrounded their drafting, as well as their application and interpretation in practice. |
| Keywords: | Monetary policy; objectives; price stability |
| JEL: | E52 E58 E63 K23 |
| Date: | 2025–01–17 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1110 |
| By: | Bracke, Philippe (Bank of England); Everitt, Matthew (Bank of England); Fazio, Martina (Bank of England); Varadi, Alexandra (Bank of England) |
| Abstract: | This study examines how UK mortgagors adjusted their spending and saving habits in response to the post-2021 monetary tightening, highlighting the interplay between collateral‑driven borrowing and the cash-flow channel of monetary policy. Unlike in markets with long-term fixed-rate mortgages, UK mortgagors face heightened exposure to interes rate shifts due to periodic refinancing requirements. By combining transaction-level data from a financial app with loan-level records, we create a detailed and representative view of UK mortgagors’ monthly balance sheets from 2021 to 2023. This allows us to explore how mortgage modifications – particularly equity extraction and term extensions – shapes household responses to rising borrowing costs. Our findings reveal stark heterogeneity: households leveraging equity extraction, enabled by nominal house price appreciation, offset higher mortgage payments and maintain or increase discretionary spending while reducing unsecured debts. Conversely, households unable or unwilling to adjust loans face significant spending cuts in response to higher rates. These results suggest that collateral-driven debt, amplified by rising property values and mortgage term extensions, can partially compensate for the cash-flow channel in driving consumption and financial behaviour during tightening cycles. This highlights the dual role of loan modifications: while mitigating immediate consumption declines, they may affect monetary policy transmission for some groups and contribute to more persistent borrowing. |
| Keywords: | Monetary policy; household behaviour; consumption; high-frequency data; difference-in-differences; panel data |
| JEL: | D14 E21 G51 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1105 |
| By: | Garriga, Ana Carolina |
| Abstract: | How has central bank independence (CBI) changed over time and across countries? This paper introduces the most comprehensive dataset on de jure CBI, including country-year observations covering 192 countries between 1970 and 2023. The dataset identifies statutory reforms affecting CBI, their direction, and codes four dimensions of CBI (personnel independence, central bank’s objectives, policy formulation, and limits on lending). It includes two CBI indices and a regional diffusion variable. The broader coverage of this dataset has important implications. First, although this dataset coding decisions are generally consistent with previous research, countries included only in this dataset tend to have lower CBI and differ in other dimensions with those previously coded. This suggests that systematically missing data in other data sources may have effects on inferences. Second, extended temporal coverage allows analyzing the evolution of central bank governance for more than a decade since the Global Financial Crisis. Finally, the data show that although there is a global tendency towards more CBI, there is significant variance across and within regions, including numerous reforms reducing CBI in the past two decades. This data contribution is important for research beyond the study of monetary institutions and their effects. |
| Keywords: | Central bank independence; Central banks; Data; Delegation; Global Financial Crisis; Great Moderation; Reforms |
| JEL: | E02 E5 E58 Y10 |
| Date: | 2025–01–21 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123578 |
| By: | Jean-Paul L’Huillier; Gregory Phelan |
| Abstract: | Empirical estimates find that the relationship between inflation and the output gap is close to nonexistent—a so-called flat Phillips curve. We show that standard pricing frictions cannot simultaneously produce a flat Phillips curve and meaningful inflation from plausible supply shocks. This is because imposing a flat Phillips curve immediately implies that the price level is also rigid with respect to supply shocks. In quantitative versions of the New Keynesian model, price markup shocks need to be several orders of magnitude bigger than other shocks in order to fit the data, leading to unreasonable assessments of the magnitude of the increase in costs during inflationary episodes. Hence, we propose a strategic microfoundation of price stickiness in which prices are sticky with respect to demand shocks but flexible with respect to supply shocks (Working Paper no. 23-03). |
| Date: | 2023–04–20 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:wpaper:23-03 |
| By: | Ganev, Georgy |
| Abstract: | In the lively public policy debate in Bulgaria on the country joining the Eurozone, a claim is being made that real convergence of at least 90% is a crucial precondition for joining and therefore Bulgaria should wait until the early 2040s, because only then it is expected to achieve such convergence. The claim is supported with theoretical arguments, empirical evidence and forecasts. Here they are examined in some detail in the context of Bulgaria’s unique position as a country in the EU with a Currency board regime anchored in the euro. It is concluded that economic theory does not pose a requirement for any level of real convergence for an economic area to join a monetary union. In theory, problems due to a less-rich country joining a more affluent monetary union may, but also may not, cause problems such as excess inflation or amplified business cycle. It is also concluded that neither the claim that there exists a convergence threshold of 90% of real income per capita, nor the claim that Bulgaria will necessarily need at least two decades to reach it can withstand even most elementary checks for empirical robustness. Both the theoretical and the empirical claims that Bulgaria should wait for a 90% real convergence until at least the early 2040s before joining the Eurozone are found to have no real economic foundation. |
| Keywords: | Bulgaria; optimal currency area; monetary union; real convergence; currency board |
| JEL: | E52 E58 E63 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123599 |
| By: | Francisco E. Ilabaca; Greta Meggiorini |
| Abstract: | This paper evaluates the implications of introducing bounded rationality into a New Keynesian model with trend inflation. |
| Keywords: | determinacy, indeterminacy, bayesian-estimation, inflation-targeting, departures-from-rational-expectations |
| Date: | 2023–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:wpaper:23-09 |
| By: | Majchrowska, Aleksandra; Roszkowska, Sylwia |
| Abstract: | We examine how demographic changes impact the transmission of minimum wage increases to inflation. The minimum wage growth can raise the prices of goods and services and accelerate inflationary processes. At the same time, a shrinking workforce and changes in its structure could lead to changes in the impact of minimum wage increases on the economy. We use the minimum wage augmented Phillips curve framework extended with the demographic variables. We employ the sample of 21 European Union countries in 2003-2023 and panel data techniques. Our study proves that the strength of the minimum wage pass-through effects on inflation depends on demographic factors. Aging of the workforce and shrinking workforce size weakens the impact of minimum wage increase on inflation. Contrary, a lower proportion of the less educated working-age population strengthens the minimum wage pass-through effects on inflation. Our results have important implications for macroeconomic, minimum wage, and education policies. |
| Keywords: | population ageing, shrinking workforce, minimum wage, inflation |
| JEL: | J11 J31 J38 |
| Date: | 2025–01–21 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123506 |
| By: | Pablo Aguilar Perez |
| Abstract: | This paper examines the effects of monetary policy on the profitability of life insurers during the prolonged low-interest-rate period, leveraging a novel dataset of 31 leading French insurers from 2009 to 2018. We classify insurers into three business models—bancassurers, traditional S.A insurers, and mutual insurers—and provide new evidence on the mechanisms driving performance differences. Bancassurers demonstrate consistently higher profitability levels and expanding market shares over the period. This advantage is driven by their ability to mitigate the "income channel" effect of low rates by rapidly reducing guaranteed yields offered to policyholders more effectively than their peers, thereby sustaining profitability and gaining market share throughout the low-yield environment. We also examine how insurers’ portfolio strategies shape profitability in this context. Specifically, we explore the "hunt-for-yield" effect by analyzing the impact of higher equity allocations compared to bonds, the shift toward greater reliance on unit-linked policies, and the role of capital adequacy structures. Our findings reveal substantial heterogeneity in how different types of insurers adapt to monetary policy, illustrating the diverse effects of prolonged monetary easing on non-bank financial intermediaries. |
| Keywords: | Low interest rate environment, Insurance profitability, Monetary policy, Financial stability |
| JEL: | G22 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-8 |
| By: | William Chen; Gregory Phelan |
| Abstract: | Digital currencies provide a potential form of liquidity competing with bank deposits. We introduce digital currency into a macro model with a financial sector in which financial frictions generate endogenous systemic risk and instability. In the model, digital currency is fully integrated into the financial system and depresses bank deposit spreads, particularly during crises, which limits banks’ ability to recapitalize following losses. The probability of the banking sector being in crisis states can grow significantly with the introduction of digital currency. While banking-sector stability suffers, household welfare can improve significantly. Financial frictions may limit the potential benefits of digital currencies (Working Paper no. 23-01). |
| Date: | 2023–03–22 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:wpaper:23-01 |
| By: | Bunn, Philip (Bank of England); Anayi, Lena (Bank of England); Bloom, Nicholas (Stanford University); Mizen, Paul (King’s College London); Thwaites, Gregory (University of Nottingham); Yotzov, Ivan (Bank of England) |
| Abstract: | Macro data suggest a convex relationship between inflation and economic slack, but identifying causality in this setting is challenging. Using data from large panel surveys of UK and US firms we show that the response of prices to demand shocks is also convex at the firm level. We obtain similar results using three different empirical exercises examining: the impact of Covid demand shocks, the response to sales shocks, and hypothetical shocks from a survey question. This convexity is strongest in firms and industries with higher inflation, disappears in horizons beyond two years, and is also present in response to cost shocks. We rationalise these findings in a menu cost model with positive trend inflation and decreasing returns at the firm level, which replicates firm and aggregate Phillips curve convexity. The non‑linearity emerges from trend inflation pushing firms closer to their price increase thresholds. |
| Keywords: | Inflation; survey data; firms; Phillips curve |
| JEL: | C83 D22 D84 E31 |
| Date: | 2025–01–10 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1107 |
| By: | Czech, Robert (Bank of England); Monroe, Win (Imperial College Business School) |
| Abstract: | In this paper, we empirically study the role of information in safe asset liquidity crises, using the 2022 UK LDI crisis as a laboratory. Contrary to traditional adverse selection models, which predict higher liquidity costs due to the presence of informed traders, we find that dealers initially reduce liquidity costs for informed investors, and subsequently raise costs and reduce liquidity for the broader market. We interpret this as evidence of dealers seeking to learn from informed investors and then restricting liquidity as they process this information. We also document that dealers exploit their informational advantage in anonymous interdealer markets and that similar dynamics are present in other crises. These patterns reverse when central bank interventions restore market liquidity, thereby mitigating the effects of dealers’ information chasing and their liquidity reallocation. |
| Keywords: | D82; E44; G12; G14; G15; G21 |
| JEL: | D82 E44 G12 G14 G15 G21 |
| Date: | 2025–01–24 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1113 |
| By: | Forbes, Kristin; Jongrim Ha; Ayhan Kose |
| Abstract: | This paper analyzes cycles in policy interest rates in 24 advanced economies over 1970–2024, combining a new application of business cycle methodology with rich time-series decompositions of the shocks driving rate movements. “Rate cycles” have gradually evolved over time, with less frequent cyclical turning points, more moderate tightening phases, and a larger role for global shocks. Against this backdrop, the 2020–24 rate cycle has been unprecedented in many dimensions: it features the fastest pivot from active easing to a tightening phase, followed by the most globally synchronized tightening, and an unusually long period of holding rates constant. It also exhibits the largest role for global shocks—with global demand shocks still dominant, but an increased role for global supply shocks in explaining interest rate movements. Inflation and the growth in output and employment have, on average, largely returned to historical norms for this stage in a tightening phase. Any recalibration of interest rates going forward should be gradual, however, and account for the interactions between increasingly important global factors and domestic circumstances, combined with uncertainty as to whether rate cycles have reverted to pre-2008 patterns. |
| Date: | 2024–08–20 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10876 |
| By: | Joyce, Michael (Bank of England); Lengyel, Andras (Bank of England) |
| Abstract: | We analyse the market reaction of yields to UK government debt auction announcements to quantify the potential impact of quantitative tightening (QT) by the Bank of England. Our results suggest that the yield reaction to debt issuance surprises comes through both duration risk and local supply channels, and depends critically on the level of market stress. Based on these estimates, a fully unanticipated announcement that mimics the Bank’s first annual QT programme would raise 10-year yields by 20 basis points under low market stress, with the impact from passive unwind broadly equivalent to that from active sales. |
| Keywords: | Yield curve; government debt auctions; quantitative easing; quantitative tightening |
| JEL: | E43 E52 E58 G12 G14 G18 |
| Date: | 2024–11–15 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1097 |
| By: | KOUAKOU, Thiédjé Gaudens-Omer |
| Abstract: | This paper analyzes the effect of Basel III adapted to WAEMU on the behavior of banks in the zone (intermediation and market activities). After having developed a model for optimizing the return on bank equity, under various constraints (balance sheet constraints, Basel III regulatory constraints), we resort to linear programming via the Danzig simplex algorithm and to a structure of reasonable rates to obtain the optimal values of the various bank balance sheet items. The results, obtained by comparing these theoretical values with the values observed before Basel III (before January 1, 2018), show an increase in the supply of loans, obtained not only from deposits and bank refinancing but also via resources from the financial markets. We can also observe the intuitive result of an increase of bank reserves in line with the constraint that Basel III imposes on banks to increase their liquidity. In short, Basel III tends to strengthen bank financing in the zone, while improving the soundness of banks through the constitution of larger reserves. |
| Keywords: | prudential regulation, calibration, credit supply, linear programming |
| JEL: | C44 E50 E58 |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123515 |
| By: | Ruth A. Judson |
| Abstract: | The incidence of currency counterfeiting and the possible total stock of counterfeits in circulation are popular topics of speculation and discussion in the press and are of substantial practical interest to the Federal Reserve, the U.S. Treasury and the United States Secret Service (USSS), who are jointly responsible for U.S. banknote design, including security features, and production. This paper assembles data from Federal Reserve and USSS sources and presents a range of estimates for the number of counterfeits in circulation in the United States. In addition, the paper presents figures on counterfeit passing activity by denomination, location, and counterfeit type. The paper has two main conclusions: first, the stock of counterfeits in the United States as a whole is at most about $30 million, or about 1 in 40, 000 notes and is likely about $15 million, or on the order of 1 every 80, 000 genuine notes in both piece and value terms. This estimate marks a significant decline from the estimate of 1 in 10, 000 notes presented in Treasury (2006) using similar methods and data sources, and the decline is likely at least partially due to increased circulation of higher-security banknotes as well as increased public education about U.S. dollar banknote security features. Second, when counterfeit notes of reasonable quality are considered, losses to the U.S. public from only the high-quality counterfeits of the most commonly used notes, the $20 and smaller denominations, are minuscule. However, there is a range of estimates overall for counterfeits in circulation, and these estimates vary by denomination. |
| Keywords: | Banknotes; Counterfeiting; Estimation; Money |
| JEL: | C89 |
| Date: | 2025–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1404 |
| By: | Masashige Hamano (Faculty of Political Science and Economics, Waseda University); Yuki Murakami (Graduate School of Economics, Waseda University) |
| Abstract: | We employ a small open economy model with debt-deflation, where agents form expectations regarding sudden stops—typically characterized by a combination of current account reversals and sharp output declines. To this end, we construct a rational expectations regime switching DSGE model with occasionally binding collateral constraints. In environments with frequent sudden stops, agents anticipate future occurrences more strongly. Heightened expectations of losing access to international financial markets prompt collateral-constrained households to increase precautionary savings. These additional savings help sustain consumption and support collateral prices during turbulent periods, counteracting capital flight. However, as sudden stops become more frequent, the welfare loss due to pecuniary externalities intensifies, necessitating stronger macroprudential capital control measures. We provide empirical evidence from emerging economies that aligns with our theoretical findings. |
| Keywords: | Small open economy, capital flows, regime switching |
| JEL: | F41 F44 E44 G01 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2422 |
| By: | Hacioğlu-Hoke, Sinem (Federal Reserve Board and Centre for Economic Policy Research); Ostry, Daniel (Bank of England); Rey, Hélène (London Business School and Centre for Economic Policy Research); Rousset Planat, Adrien (London Business School); Stavrakeva, Vania (London Business School and Centre for Economic Policy Research); Tang, Jenny (Federal Reserve Bank of Boston) |
| Abstract: | We analyse the behaviour of all financial and non‑financial firms active in the UK FX derivatives market – the largest global centre for currency trading – using transaction‑level data. Based on firm‑level net currency derivatives exposures, we find that UK and EU pension funds, investment funds, insurers, and non‑financial corporations use FX derivatives primarily for hedging purposes, with dealer banks accommodating these clients’ hedging needs. In contrast, hedge funds predominantly utilise FX derivatives to speculate, with their trading activity consistent with carry trade, momentum, and macroeconomic news investment strategies. Lastly, the paper documents many novel facts that should motivate theoretical models. |
| Keywords: | FX derivatives; exchange rates; non-bank financial institutions; banks; non‑financial corporations; hedging; speculation; macro news |
| JEL: | F30 F31 G15 G20 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1103 |
| By: | Maître, Arnaud T.; Pugachyov, Nikolay; Weigert, Florian |
| Abstract: | This paper investigates how investors' abnormal attention affects the cross-section of cryptocurrency returns in the period from 2018 to 2022. We capture abnormal attention using the (log) number of Twitter posts on individual cryptocurrencies on the current day minus a 30-day average. Our results reveal that abnormal attention is positively associated with contemporaneous and one-day ahead crypto performance. Among the different Twitter tweets, return predictability arises due to Ticker-tweets from investors, but not due to tweets from the cryptocurrency channel. These Official-tweets, however, are able to forecast technological innovations on the blockchain. |
| Keywords: | Bitcoin, cryptocurrencies, Twitter attention, textual sentiment |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfrwps:311833 |