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on Central Banking |
| By: | Ritsu Yano; Yoshiyuki Nakazono; Kento Tango |
| Abstract: | Following Miranda-Agrippino and Ricco (2021), we identify a monetary policy shock in Japan. We construct this shock to be orthogonal to the Bank of Japan’s macroeconomic forecasts, as well as a central bank’s information shock (Nakamura and Steinsson, 2018). Our findings indicate that a surprise policy tightening is contractionary, leading to a deterioration in output and decline in prices. There are no lagged effects of monetary policy on inflation. In response to a tightening shock, prices fall immediately. Furthermore, we demonstrate that a positive central bank information shock increases both output and prices. An unexpected positive outlook from the Bank of Japan raises stock prices and depreciates the Japanese yen. This evidence suggests that information effects play a crucial role in the Japanese economy, even under the effective lower bound. |
| Date: | 2024–11–28 |
| URL: | https://d.repec.org/n?u=RePEc:toh:tupdaa:57 |
| By: | Brent Bundick; Andrew Lee Smith; Luca Van der Meer |
| Abstract: | This paper provides evidence that inflation targeting delivered well-anchored inflation expectations during the post-2020 inflation surge. Using a macroeconomic model, we first illustrate how long-term nominal interest rates respond to an unexpected burst of inflation under both anchored and unanchored inflation expectations. Then, we evaluate these predictions using high-frequency financial market data from nine advanced economies. Specifically, we examine whether inflation expectations embedded in asset prices remained anchored as inflation climbed in the aftermath of the pandemic. Our results suggest that inflation expectations were just as well, or in some countries better anchored, after the pandemic. We show that this favorable outcome was broadly accompanied by perceptions of an aggressive monetary policy response to above-target inflation. |
| Keywords: | monetary policy; inflation expectations; COVID-19 |
| JEL: | E32 E52 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:99296 |
| By: | Radhika Pandey (National Institute of Public Finance and Policy); Ila Patnaik (Aditya Birla Group of Companies); Rajeswari Sengupta (Indira Gandhi Institute of Development Research) |
| Abstract: | It has been eight years since India adopted the inflation targeting (IT) framework for its monetary policy. In this paper we present a comprehensive analysis of the IT regime, addressing several critical aspects. We evaluate the performance of inflation over this period, and review the conduct of monetary policy during and after the Covid-19 pandemic. We also identify key challenges that persist particularly in context of the Impossible Trilemma and highlight issues that may require further examination in order to improve the effectiveness of the IT framework in the future. |
| Keywords: | Inflation Targeting, Reserve Bank of India, Monetary Policy Committee, CPI Inflation, Impossible Trilemma |
| JEL: | E4 E5 F3 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-022 |
| By: | Charles A.E. Goodhart (Financial Markets Group, London School of Economics and CEPR); M. Udara Peiris (Oberlin College); Dimitrios P. Tsomocos (Saïd Business School and St. Edmund Hall, University of Oxford); Xuan Wang (Vrije Universiteit Amsterdam and Tinbergen Institute) |
| Abstract: | We investigate how corporate legacy debt, through heterogeneous household portfolios, affects monetary policy’s ability to control inflation. We find that (1) corporate debt generates an income effect that counters the traditional substitution effect, reducing the effectiveness of rate changes on inflation; (2) higher corporate debt exacerbates the trade-off between output and inflation stabilization. The income is positive on aggregate demand and inflation despite declining output. Local projections using U.S. monetary policy shocks show that over six quarters the cumulative difference in output and inflation for high and low corporate debt-to-household asset ratios is 3 percent and 1.2 percent. |
| Keywords: | Household heterogeneity, Inflation, Monetary policy, Corporate debt, Giffen good |
| JEL: | E31 E32 E52 G11 |
| Date: | 2024–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20240071 |
| By: | Jean-Guillaume Sahuc; Frank Smets; Gauthier Vermandel |
| Abstract: | Climate change confronts central banks with two inflationary challenges: climateflation and greenflation. We investigate their implications for monetary policy by developing and estimating a tractable nonlinear New Keynesian Climate model featuring climate damages and mitigation policies for the global economy. We find that mitigation policies aligned with the Paris Agreement result in higher, more persistent inflation than laissez-faire policies. Central banks can attenuate this inflationary pressure by accounting for the rising natural rate of interest, at the cost of lower GDP during the transition. This short-term trade-off ensures long-term macroeconomic stability resulting from a net-zero emission world. |
| Keywords: | Climate change, inflation, monetary policy, E-DSGE model, Bayesian estimation, stochastic growth |
| JEL: | E32 E52 Q50 Q54 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-1 |
| By: | Michael D. Bauer; Eric Offner; Glenn D. Rudebusch |
| Abstract: | Policymakers and researchers worry that the low-carbon transition may be inadvertently delayed by higher global interest rates. To examine whether green investment is especially sensitive to interest rate increases, we consider the effect of unanticipated monetary policy changes on the equity prices of green and brown European firms. We find that brown firms, measured in terms of carbon emission levels or intensities, are more negatively affected than green firms by tighter monetary policy. This heterogeneity is robust to different monetary policy surprises, emission measures, econometric methods, and sample periods, and it is not explained by other firm characteristics. This evidence suggests that higher interest rates may not skew investment away from a sustainable transition. |
| Keywords: | Monetary transmission; carbon premium; ESG; climate finance |
| JEL: | E52 G14 Q54 Q58 |
| Date: | 2024–12–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99301 |
| By: | Knut Are Aastveit (Norges Bank); Jamie Cross (Melbourne Business School); Francesco Furlanetto (Norges Bank); Herman K van Dijk (Erasmus University Rotterdam, Tinbergen Institute, Norges Bank) |
| Abstract: | The Fed's policy rule shifts during different phases of the business cycle, particularly in relation to monetary easing and tightening phases. This finding is established through a dynamic mixture model, which estimates regime-dependent Taylor-type rules using US quarterly data from 1960 to 2021. This approach supports partitioning the data into two regimes corresponding to business cycle phases, closely linked to monetary easing and tightening. The estimated policy rule coefficients differ in two key ways between the regimes: the degree of gradualism is significantly higher during normal times than during recessions, when rates are typically cut; and the output gap coefficient is higher in the recessionary regime than in the normal regime. Notably, the estimate of the inflation coefficient satisfies the Taylor principle in both regimes. These results are further strengthened when using real-time data. |
| Keywords: | Monetary policy, Taylor rules, mixed distributions, regime-switching |
| Date: | 2024–12–12 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20240074 |
| By: | Shunsuke Haba (Bank of Japan); Yuichiro Ito (Bank of Japan); Shogo Nakano (Bank of Japan); Takahiro Yamanaka (Bank of Japan) |
| Abstract: | The "hysteresis effect, " in which short-term economic shocks can influence long-term economic trends, has been widely recognized. This paper presents empirical analyses of the long-term impact of monetary policy on the supply side (productivity and potential GDP, etc.) of the Japanese economy. First, we identify monetary policy shocks using various methods and examine their long-term impact on potential GDP over the past 25 years through the local projection method. The results suggest that monetary easing may have had a positive impact on potential GDP through capital accumulation, but no statistically significant relationship is confirmed. Next, we examine the impact of monetary policy on productivity, using firm-level data. The results indicate that while monetary easing could enhance productivity within individual firms, it may also act to suppress productivity growth by causing distortions in resource allocation among firms. However, in the long-term, the analysis reveals no evidence of a statistically significant relationship. Thus, from the empirical analyses using currently available data, no clear conclusions about the impact of monetary easing on the supply side of the economy have been reached, either positive or negative. There are various mechanisms at work in the long-term impact of monetary policy, and these effects may vary, depending on economic conditions. Ongoing examination from a broad perspective remains essential to deepen our understanding of the long-term impact of monetary policy. |
| Keywords: | Monetary Policy, Hysteresis Effect, Productivity, Reallocation |
| JEL: | C32 C33 E22 E24 E52 O47 |
| Date: | 2024–12–27 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e19 |
| By: | Christopher J. Erceg; Jesper Lindé; Mathias Trabandt |
| Abstract: | A salient feature of the post-COVID inflation surge is that economic activity has remained resilient despite unfavorable supply-side developments. We develop a macroeconomic model with nonlinear price and wage Phillips curves, endogenous intrinsic indexation and an unobserved components representation of a cost-push shock that is consistent with these observations. In our model, a persistent large adverse supply shock can lead to a persistent inflation surge while output expands if the central bank follows an inflation forecast-based policy rule and thus abstains from hiking policy rates for some time as it (erroneously) expects inflationary pressures to dissipate quickly. A standard linearized formulation of our model cannot account for these observations under identical assumptions. Our nonlinear framework implies that the standard prescription of "looking through" supply shocks is a good policy for small shocks when inflation is near the central bank's target, but that such a policy may be quite risky when economic activity is strong and large shocks drive inflation well above target. Moreover, our model implies that the economic costs of "going the last mile" – i.e. a tight stance aimed at returning inflation quickly to target – can be substantial. |
| Keywords: | Inflation Dynamics; New Keynesian Model; Inflation Risk; Monetary Policy; Linearized Model; Nonlinear Model; State-Dependent Pricing |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/260 |
| By: | Gabriel Rodriguez (Departamento de Economía de la Pontificia Universidad Católica del Perú); Paola Alvarado Silva (Departamento de Economía de la Pontificia Universidad Católica del Perú); Moisés Cáceres Quispe (Departamento de Economía de la Pontificia Universidad Católica del Perú) |
| Abstract: | This paper utilizes regime-switching VAR models with stochastic volatility (RS-VAR-SV) to analyze the impact and evolution of monetary policy shocks and their contribution to the dynamics of GDP growth, inflation, and the interest rate in Peru for the period from 1994Q3 to 2019Q4. The main findings are: (i) the best-fifting models incorporate only SV; (ii) there are two distinct regimes coinciding with the implementation of the inflation targeting (IT) scheme; (iii) the volatility of GDP growth and inflation began to decrease in the early 1990s, while interest rate volatility declined following IT implementation; and (iv) pre-IT, monetary policy shocks accounted for 15%, 30%, and 90% of the forecast error variance decomposition for in ation, GDP growth, and the interest rate in the long term, respectively. Following IT adoption, monetary policy ceased to be a source of uncertainty for the economy. These results are robust to changes in priors, domestic and external variables, the number of regimes, and the ordering and number of variables of the model. Palabras claves: Regime-Switching VAR, Stochastic Volatility, Marginal Likelihood, Bayesian Models, Monetary Policy, Peru. JEL Classification-JE: C11, C32, C52, E51, E52 |
| Keywords: | Regime-Switching VAR, Stochastic Volatility, Marginal Likelihood, Bayesian Models, Monetary Policy, Peru. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pcp:pucwps:wp00537 |
| By: | Karen Davtyan (Departament d'Economia Aplicada, Universitat Autònoma de Barcelona (UAB)); Omar Elkaraksy (Departament d'Economia Aplicada, Universitat Autònoma de Barcelona (UAB)) |
| Abstract: | We evaluate the financial effects of monetary policy over the transition period from a fixed to a floating exchange rate regime in Egypt. The baseline evaluation is implemented through an event study methodology (high frequency identification) by estimating the effects of monetary policy announcements on financial indicators. The results reveal that a currency devaluation leads to a significant increase in stock prices. A change in the monetary policy interest rate significantly affects treasury yields. It takes more time for treasury yields with longer maturities to reflect the effects of monetary policy announcements. The results are mainly driven by the period when the exchange rate regime was closer to a floating system. The results also highlight the importance of politically and economically stable environment for the efficient transmission of monetary policy. |
| Keywords: | monetary policy, financial markets, exchange rate regime, developing economy, Egypt |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:uab:wprdea:wpdea2407 |
| By: | Huixin Bi; Andrew Foerster; Nora Traum |
| Abstract: | Central bank asseUsing a two-country monetary-union framework with financial frictions, we study sovereign default and liquidity risks and quantify the efficacy of asset purchases. Default risk increases with government indebtedness and shifts in the fiscal limit perceived by investors. Liquidity risks increase when the default probability affects credit market tightness. The framework indicates that shifts in fiscal limits, more than rising government debt, played a crucial role for Italy around 2012. While both default and liquidity risks can dampen economic and financial conditions, the model suggests that the magnifying effect from liquidity risks can be more consequential. In this context, asset purchases can stabilize economic conditions especially under scenarios of elevated financial stress.t purchases can effectively stabilize economic conditions, especially in scenarios of elevated financial stress. |
| Keywords: | Monetary and fiscal policy interaction; unconventional monetary policy; Regime-Switching Models |
| JEL: | E58 E63 F45 |
| Date: | 2024–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:99294 |
| By: | Atsuki Hirata (Bank of Japan); Yuichiro Ito (Bank of Japan); Yoshiyasu Kasai (Bank of Japan) |
| Abstract: | This paper uses financial data from individual banks to quantitatively analyze how the Bank of Japan's "Fund-Provisioning Measure to Stimulate Bank Lending, " decided for introduction in October 2012, affected banks' outstanding loans. We estimated the causal impact of the measure using propensity score matching to address the selection bias stemming from the voluntary basis of participation in this program. The results indicate a statistically significant difference in the outstanding loans between the participating and non-participating banks, suggesting that the Fund-Provisioning Measure to Stimulate Bank Lending helped increase lending. |
| Keywords: | Unconventional monetary policy; Lending facility; Bank lending; Propensity score matching |
| JEL: | E50 E51 E52 E58 G21 C23 |
| Date: | 2024–12–27 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e24 |
| By: | Kaiji Chen; Mr. Yunhui Zhao |
| Abstract: | We construct a daily Chinese Housing Market Sentiment Index by applying GPT-4o to Chinese news articles. Our method outperforms traditional models in several validation tests, including a test based on a suite of machine learning models. Applying this index to household-level data, we find that after monetary easing, an important group of homebuyers (who have a college degree and are aged between 30 and 50) in cities with more optimistic housing sentiment have lower responses in non-housing consumption, whereas for homebuyers in other age-education groups, such a pattern does not exist. This suggests that current monetary easing might be more effective in boosting non-housing consumption than in the past for China due to weaker crowding-out effects from pessimistic housing sentiment. The paper also highlights the need for complementary structural reforms to enhance monetary policy transmission in China, a lesson relevant for other similar countries. Methodologically, it offers a tool for monitoring housing sentiment and lays out some principles for applying generative AI models, adaptable to other studies globally. |
| Keywords: | Chinese Housing Market Sentiment; Generative AI; Monetary Policy Transmission; Consumption; Crowding-Out |
| Date: | 2024–12–23 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/264 |
| By: | Walter Engert; Oleksandr Shcherbakov; André Stenzel |
| Abstract: | We simulate the impact of a central bank digital currency (CBDC) on consumer adoption, merchant acceptance and use of different payment methods. Modest frictions that deter consumer adoption of a CBDC inhibit its market penetration. Minor pricing responses by financial institutions and payment service providers further reduce the impact of a CBDC. |
| Keywords: | Bank notes; Digital currencies and fintech; Econometric and statistical methods; Financial services |
| JEL: | C51 D12 E42 L14 L52 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-27 |
| By: | Patrick Aldridge; Jabir Sandhu; Sofia Tchamova |
| Abstract: | We find that foreign central banks own a large share of Government of Canada (GoC) bonds and tend to hold their positions for longer than other types of asset managers. This buy-and-hold behaviour could offer benefits. For example, foreign central banks may be less likely than other asset managers to sell bonds and add to strains on market liquidity in periods of turmoil. However, foreign central banks’ buy-and-hold behaviour combined with their minimal lending of GoC bonds in securities-financing markets, as observed in our available data, can potentially lower liquidity because fewer GoC bonds are available for others to transact in secondary markets. Indeed, we find that higher levels of foreign central banks’ GoC bond holdings are related to lower liquidity. |
| Keywords: | Exchange rates; Financial institutions; Financial markets, Financial stability; Foreign reserves management; International financial markets; Market structure and pricing |
| JEL: | E5 E58 F3 F30 F31 G0 G01 G1 G11 G12 G15 G2 G23 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-26 |
| By: | Andreas Hornstein; Francisco J. Ruge-Murcia; Alexander L. Wolman |
| Abstract: | Monthly U.S. inflation from 1995 through 2019 is well explained by statistics summarizing the monthly distribution of relative price changes. We document this relationship and use it to evaluate the behavior of inflation during and after the COVID-19 pandemic. In earlier periods when inflation was not stable, the relationship between inflation and the distribution of relative price changes shifts, much like the Phillips curve. We use that shifting relationship to derive a measure of underlying inflation that complements existing measures used by central banks. |
| Keywords: | inflation; monetary policy |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99276 |
| By: | Yadavindu Ajit (Indira Gandhi Institute of Development Research); Taniya Ghosh (Indira Gandhi Institute of Development Research) |
| Abstract: | This study examines the effects of inflation targeting on inflation levels, its volatility, and its persistence in emerging market economies. To better estimate the dynamic treatment effects of inflation targeting the study uses a larger set of data, including 59 emerging market economies, an extended sample spanning 1985-2019, and a methodology that takes into account the staggered adoption of inflation targeting by these economies. Traditional models used in the literature failed to account for staggered adoption, resulting in biased estimates. Inflation targeting has been shown to significantly reduce inflation levels in emerging markets, especially when hyperinflationary economies are excluded. Results indicate significant reductions in inflation three to four years after adoption. In comparison, the findings for inflation volatility and persistence are more nuanced. Standard models indicate initial volatility reductions, but models that account for staggered adoption show no significant long-term impact. Moreover, inflation targeting has no significant impact on inflation persistence, even in more stable environments. These findings highlight the effectiveness of using models that account for staggered policy adoption when evaluating long-term policy impacts, and they suggest that, while inflation targeting is a viable tool for reducing inflation in emerging markets, its broader effects on inflation volatility and persistence have been limited. |
| Keywords: | Dynamic treatment effect, Emerging market economies, Inflation, Inflation persistence, Inflation targeting, Inflation volatility |
| JEL: | C21 C22 E52 E31 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-024 |
| By: | Munseob Lee; Claudia Macaluso; Felipe Schwartzman |
| Abstract: | Our paper addresses the heterogeneous effects of monetary policy on households of different races. The cyclical volatility of real income differs significantly for households of different races and income levels, reflecting differential exposure to fluctuations in employment and consumer prices. All Black households are disproportionately affected by employment fluctuations, whereas price volatility is only particularly pronounced for Black households with income above the national median. The latter face 40 percent higher price volatility than both poorer households of the same race and white households of similar income. To evaluate the effects of policy, we propose a New Keynesian framework with heterogeneous exposure to employment and price volatility. We find that an accommodative monetary stance generates asymmetric outcomes within race groups. Low-income households experience unemployment stabilization benefits, while high-income ones incur real income volatility costs. Differences are especially large among Black households. Reducing the volatility of unemployment by 1 percentage point engenders a 1.17 percentage point reduction in overall income volatility for poorer Black households, but an increase of 0.6 percentage points in income volatility for richer Black households. |
| Keywords: | inflation; monetary policy; Employment and labor markets; economic inequality |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99275 |
| By: | Guido Ascari; Anna Florio; Alessandro Gobbi |
| Abstract: | Employing two different effective measures of future tax expectations in a local projection analysis on post-war U.S. data reveals that the effects of an anticipated government spending shock depend solely on expectations about future taxes. In contrast, tax foresight does not affect the transmission of unanticipated shocks. When agents expect taxes to rise (fall), the economy response to an anticipated government spending shock aligns with a monetary (fiscal) regime. Hence, tax foresight is a sufficient statistic to identify the effects of anticipated government spending shocks. We argue that this is consistent with recent literature on monetary and fiscal policy interaction. |
| Keywords: | Monetary policy interactions; fiscal policy interactions; Government spending; Fiscal foresight; |
| JEL: | E52 E62 E63 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:821 |
| By: | Wendy E. Dunn; Raakin Kabir; Ellen E. Meade; Nitish R. Sinha |
| Abstract: | In an era increasingly shaped by artificial intelligence (AI), the public’s understanding of economic policy may be filtered through the lens of generative AI models (also called large language models or LLMs). Generative AI models offer the promise of quickly ingesting and interpreting large amounts of textual information. |
| Date: | 2024–12–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-12-06-1 |