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on Central Banking |
| By: | Haavio, Markus; Heikkinen, Joni; Jalasjoki, Pirkka; Kilponen, Juha; Paloviita, Maritta |
| Abstract: | We study the evolution of the European Central Bank's (ECB) monetary policy since July 2021, following the adoption of a new strategy and amid a period of volatile inflation. Utilizing text analysis, we assess changes in the general sentiment of the ECB's communication. Additionally, we employ topic modeling to develop an inflation focused tone index. By integrating these tone indices with real-time data from monetary policy meetings, we directly estimate the ECB's loss function. Our findings indicate a recent shift towards a more inflation-centered communication approach by the ECB. Preliminary results also suggest that the ECB's policy preferences have become more symmetric since July 2021. |
| Keywords: | asymmetric loss function, central bank communication, textual analysis, topic model, optimal monetary policy |
| JEL: | E31 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:313643 |
| By: | Ginters Buss (Latvijas Banka); Guido Traficante (European University of Rome) |
| Abstract: | This paper studies monetary policy in a New Keynesian model with incomplete information regarding the persistence of cost-push shocks. The central bank and the private sector gradually learn about the persistence of the shock as it propagates through the economy. The central bank adopts a look-through policy in response to temporary cost-push shocks; otherwise, it follows a Taylor rule. If agents initially believe the cost-push shock to be temporary, while the true shock is persistent, it takes some time for the central bank, acting initially under an incorrect assumption, to realise its mistake and switch to monetary tightening. As a result, the actual inflation is higher than in a complete information case. Data-dependent discretionary early liftoff strategies can partially mitigate the effects of the initial policy misjudgment. Contrary to the full-information conditions, the findings cast doubt on the effectiveness of look-through policies in environments of incomplete information, irrespective of the actual persistence of the cost-push shock. |
| Keywords: | monetary policy, imperfect information, cost-push shock, high inflation |
| JEL: | D83 E17 E31 E47 E52 |
| Date: | 2025–03–05 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202502 |
| By: | Giovanardi, Francesco; Kaldorf, Matthias |
| Abstract: | We study optimal monetary policy in an analytically tractable New Key-nesian DSGE-model with an emission externality. Empirically, emissions are strongly pro-cyclical and output in the flexible price equilibrium overreacts to productivity shocks, relative to the efficient allocation. At the same time, output under-reacts relative to the flexible price allocation due to sticky prices. Therefore, it is not optimal to simultaneously stabilize inflation and to close the natural output gap, even though this would be feasible. Real externalities affect the LQ-approximation to optimal monetary policy and we extend the analysis of Benigno and Woodford (2005) to inefficient flexible price equilibria. For central banks with a dual mandate, optimal monetary policy places a larger weight on output stabilization and targets a non-zero natural output gap, implying a higher optimal inflation volatility. |
| Keywords: | Optimal Monetary Policy, Carbon Emissions, Output Gap, Central Bank Loss Function, Phillips Curve |
| JEL: | E31 E58 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:313014 |
| By: | Emekaraonye, Chukwunenye Ferguson; Dick, Emmanuel Ikechukwu; Agu, Chukwuma |
| Abstract: | Using a recursive structural vector autoregressive model and quarterly data from 1986Q1 to 2019Q4, this study examines the transmission mechanism from monetary policy instruments, specifically the monetary policy rate, base money, and nominal exchange rate, to outcome variables (prices and credit to the private sector) in Nigeria. The data showed structural breaks in 2004Q2, 2009Q3 and 2014Q3, which coincided with the 2004 banking consolidation, the 2009 Sanusi-led regulatory measures and the appointment of Godwin Emefiele as the Governor of the Central Bank of Nigeria in 2014. Accordingly, policy instrument transmission tests were conducted along three scenarios 2004, 2009 and 2014 to evaluate the changes that may have been imposed on the policy transmission mechanism by the reforms. Under the 2004 consolidation scenario, the reforms strengthened only the interest rate anchor (monetary policy rate), causing it to be effective in influencing credit to the private sector (CPS). Innovations in other monetary policy instruments led to insignificant responses in the outcome variables. Even base money, which previously impacted both prices and credit to the private sector, became insignificant and ineffective after 2004. Sanusis regime did not strengthen the impact of any of the monetary policy instruments on prices and credit to the private sector. Base money, that impacted outcome variables in some periods before 2009, became insignificant thereafter. Similarly, the 2014 development and sectoral support programmes under Emefiele also did not strengthen monetary policy instruments. Overall, the study affirms the position that monetary policy reforms may not always strengthen policy instruments to regulate or influence prices and credit to the private sector, especially when the transmission is indirect. |
| Date: | 2024–04–11 |
| URL: | https://d.repec.org/n?u=RePEc:aer:wpaper:db533685-8639-4e1e-9f2b-01f377dda41b |
| By: | Javier Bianchi; Louphou Coulibaly |
| Abstract: | What is the optimal monetary policy response to tariffs? This paper explores this question within an open-economy New Keynesian model and shows that the optimal monetary policy response is expansionary, with inflation rising above and beyond the direct effects of tariffs. This result holds regardless of whether tariffs apply to consumption goods or intermediate inputs, whether the shock is temporary or permanent, and whether tariffs address other distortions. |
| Keywords: | Tariffs; Inflation; Optimal monetary policy |
| JEL: | F41 E24 E44 E52 F13 |
| Date: | 2025–03–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmwp:99705 |
| By: | Okello, Jimmy Apaa |
| Abstract: | The increased use of mobile money for cross-border transfers can lower the costs of cross-border remittances. The reduction in costs in turn can spur additional increases in remittances as it frees up the incomes of the senders. This study first estimated the remittance elasticity to cost by applying the pooled mean group method to quarterly panel data of three country sources of remittances to Uganda for the period 2013Q1- 2022Q4. The results showed that remittances are highly elastic to costs. This implies that a reduction in costs can spur larger remittances than is currently observed. The study then created two regimes (one with lower and another with higher growth of remittances) in which we assess the impact of remittances on monetary policy effectiveness. We use the local projection model on quarterly data for the period 2002Q3-2023Q1. The results showed that the responses of output gap, inflation, and policy rates to shock in monetary policy are broadly similar in magnitude and direction across both regimes. However, the policy rate and inflation responded sluggishly in the regime with higher growth of remittances, which suggests that in this regime, monetary policy is not as potent as it would be in the regime with lower remittance growth. Thus, in a regime with higher remittance growth, the case for an independent monetary policy is weakened. Thus, in this regime, for a central bank to credibly commit to an inflation target, it must adopt a fixed exchange rate system (or variants therein). |
| Date: | 2024–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:aer:wpaper:03497339-fe62-48ef-b7a2-252d7a9b49fe |
| By: | Andrade, Philippe (Federal Reserve Bank of Boston); Gautier, Erwan (Banque de France - Centre de Recherche); Mengus, Eric (HEC Paris); Moench, Emanuel (Frankfurt School of Finance & Management; Centre for Economic Policy Research (CEPR)); Schmidt, Tobias (Deutsche Bundesbank - Research Center) |
| Abstract: | We study beliefs about fiscal dominance in a survey of German households. We first use a randomized controlled trial to identify how fiscal news impact individual debt-to-GDP and inflation expectations. We document that the link between debt and inflation crucially depends on individuals’ views about the fiscal space. News leading individuals to expect higher debt-to-GDP ratios make them more likely to revise upward their inflation expectations. These average effects are due to individuals who think that fiscal resources are more stretched than others. In contrast, individuals who think there is fiscal space do not associate debt with inflation. We then rationalize these results in a New Keynesian model where agents have heterogeneous beliefs about the fiscal space. We show that the heterogeneity of beliefs implies a policy tradeoff for the central bank. Agents who expect fiscal dominance in the future exert upward pressure on inflation. An active central bank may chose to partially tolerate this higher inflation due to the real costs of completely stabilizing prices. |
| Keywords: | fiscal and monetary policy; heterogeneous beliefs; ran- domized control trial; survey data; Inflation expectations |
| JEL: | C83 D84 E31 E63 |
| Date: | 2025–01–14 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1535 |
| By: | Falk Laser (ABC economics, Berlin); Alexander Mihailov (Department of Economics, University of Reading); Jan Weidner (Federal Ministry for Economic Affairs and Energy, Berlin) |
| Abstract: | This paper fills a gap in the data by country -- and the corresponding comparative analysis of patterns and trends over the past quarter century -- in the composition of foreign exchange (FX) reserves and monetary gold in total international reserves, typically held by central banks. The monetary mystique since the 1980s and the related unwillingness of central banks to disclose the composition of their official reserves until about the turn of the millennium have made such an area of study a terra incognita to the wider profession. Our ambition with this paper is to cast light, also providing the data online, on the relative importance and reshufflings of the US Dollar, the Euro, the Japanese Yen, the British Pound, the Australian Dollar, the Canadian Dollar, the Chinese Yuan or Renminbi and monetary gold as international reserves in the recent times of crises, wars and geopolitical reconfigurations. We find that the US Dollar retains its dominance inherited from the Bretton Woods system, but the Euro and perhaps the Yuan may increase their reserve shares in the decade ahead, with a return to gold in official reserves already obvious since at least the Global Financial Crisis. Our rich and diverse dataset, and the insights from it we highlight, is the most up-to-date and comprehensive overview of the field, covering 7 major currencies and 64 countries in terms of FX shares, and a subset of 50 for which we also provide the gold shares, in an unbalanced panel since the late 1990s. |
| Keywords: | currency denomination of foreign exchange reserves, central banks, gold shares in total international reserves, visualizations by country and region, stylized facts and key insights |
| JEL: | F31 F32 F33 F41 F62 N40 |
| Date: | 2025–03–24 |
| URL: | https://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2025-01 |
| By: | Falk Bräuning; Hillary Stein |
| Abstract: | This brief studies how regulation involving bank capital requirements affects the behavior of bank-affiliated primary dealers in the Treasury market. Specifically, it looks at the potential effects of changes to the supplementary leverage ratio (SLR) requirement, which determines how much capital a bank must hold in relation to its overall exposure, including exposure in its trading assets such as Treasuries. The SLR is a measure of a bank’s ability to absorb losses during periods of financial stress; the Federal Reserve sets a minimum requirement for the SLR to help protect the stability of the banking system by preventing excessive leverage. Our analysis presents evidence that relaxing the SLR constraint—that is, lowering the required SLR—can cause an increase in dealers’ Treasury trading activity, especially among dealers affiliated with more constrained (lower-SLR) banks. This finding implies that the SLR requirement is indeed binding for some banks—that it constrains their Treasury positions to levels they would not otherwise choose. |
| Keywords: | supplementary leverage ratio; Treasury market liquidity; Bank capital regulation |
| JEL: | G10 G12 G18 G21 |
| Date: | 2025–03–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbcq:99642 |
| By: | Schmidt, Tobias |
| Abstract: | This paper examines the pivotal role of journalists in shaping economic narratives, focusing on inflation coverage in Germany in 2022. While the media's influence on disseminating economic narratives is widely acknowledged, little research has focused on journalists, the agents responsible for content production. Using a mixed-method approach combining survey data with media content analysis, this study investigates how economic journalists explain inflation causes and persistence compared to professional economists. The results from surveys conducted during peak inflation (10.4%) show that journalists hold less optimistic views on inflation persistence than experts and that they are more likely to attribute inflation to specific protagonists, particularly the European Central Bank (ECB) and corporate profit-seeking. The ECB's role emerges as an especially contentious issue among journalists, revealing significant disagreement within the profession. Analysis of media coverage reveals notable alignment between journalists' perceptions and actual content, especially regarding the emphasis placed on the ECB's role-despite experts considering monetary policy a relatively minor factor. While this might suggest that journalists' personal narratives influence media coverage, the study's design precludes causal claims. The findings underscore the need for further research into how journalists' personal narratives impact public discourse on economic matters. |
| Keywords: | media, narratives, journalism, inflation |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:docmaw:313658 |