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We measure the causal impact of reductions in benchmark interest rates on the renegotiation and performance of distressed loans, using 2000s subprime mortgages as a laboratory. Subprime borrowers treated with larger benchmark rate reductions benefited from increased debt-renegotiation probabilities and lower debt-service payments. Modification rates were similar among current and delinquent borrowers but higher for real estate investors, highlighting the role of financial acumen in renegotiation. Renegotiations also reduced longer-run foreclosures, but treated borrowers who lingered in delinquency offset these benefits. Findings suggest monetary easing can spur debt renegotiation but alone may not lead to longer-run curative outcomes. [ABSTRACT FROM AUTHOR]

Is there a trade-off between the short-run and long-run real effects of monetary policy "leaning against the wind"? We provide novel evidence on this question from the United States in 1920–1921. Our identification strategy exploits county-level variation in access to the Federal Reserve's discount window, and hand-collected data on banking and agriculture in Illinois. In the short term, tightened conditions at the discount window decreased bank lending and lowered crop prices and farm revenues. In the long term, however, they lowered debt-to-output levels and led to greater farmland utilization, suggesting an avoidance of debt overhang problems. [ABSTRACT FROM AUTHOR]

We show that lender of last resort (LOLR) policy exacerbates bank interconnectedness. Using novel micro-level data, we analyze LOLR's haircut gaps: the differences between the private market and central bank haircuts. LOLR policy incentivizes banks to increase pledging and holdings of higher haircut-gap bonds, especially those issued by domestic and systemically important banks. Effects only apply to banks, not to nonbanks without LOLR access. LOLR funding revives bank bond issuance associated with higher haircut gaps and increases the subsequent correlation between pledging and issuing banks' bond prices, in particular during periods of low-market returns and for domestic, systemically important banks. [ABSTRACT FROM AUTHOR]

We study the drift and cyclical components in U.S. Treasury bonds. We find that bond yields are drifting because they reflect the drift in monetary policy rates. Empirically, modeling the monetary policy drift using demographics and productivity trends, plus long-term inflation expectations, leads to cyclical deviations of bond prices from their drift that predict bond returns in- and out-of-sample. These bond cycles can be interpreted as term premia or/and temporary deviations from rational expectations in a behavioral framework. Through the lens of our model, we detect a significant role of the latter in determining the cyclical properties of yields with short maturities. [ABSTRACT FROM AUTHOR]

We develop a quantitative model with imperfections in domestic and international financial markets that generates strong effects of U.S. monetary policy on emerging markets (EMs). Financial imperfections prevent arbitrage both between local EM lending and borrowing rates, and between local-currency and dollar borrowing rates. An adverse feedback effect between financial health and external conditions amplifies the domestic "financial accelerator," leading to large cross-border spillovers of U.S. monetary policy shocks. The model implies a link between uncovered interest parity violations and local credit spreads, a prediction we show the data strongly supports. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

While the causal impact of limited attention to macroeconomic news is difficult to detect, this article proposes one solution: exploiting when foreign investors are "distracted" by risk factors in their home markets. I demonstrate that financial activity in the average foreign investor's home market decreases foreign attention paid to 21 emerging economies, measured using Google search volume for economy-specific financial terms that emanate from outside each economy's border. Exploiting this effect using an instrumental variables approach, I find that an exogenous increase in foreign attention preceding a scheduled monetary policy rate announcement raises preannouncement stock returns and announcement day turnover. [ABSTRACT FROM AUTHOR]

How does creditor health affect the pass-through of monetary policy to households? Using data on the universe of U.S. credit unions, I document that creditor asset losses increase the sensitivity of consumer credit to monetary policy. Identification exploits plausibly exogenous variation in asset losses and high-frequency identification of monetary policy shocks. Weaker lenders can respond more if they face financial frictions that easing alleviates. The estimates imply constraints on monetary policy become more costly in financial crises featuring creditor asset losses and that an additional benefit of monetary easing is that it weakens the causal, contractionary effect of asset losses. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online [ABSTRACT FROM AUTHOR]

Many of the Federal Reserve's (the Fed's) monetary policy operations involve trading with primary dealers. We find that, for agency MBS, dealers charge 2.5 cents (per $100 face value) higher selling to the Fed than to non-Fed customers. Controlling for the same dealer, same security, and same trading time, this discriminatory pricing likely arises from dealers' market power rather than inventory costs. Further, matching trade size reduces the price differential by more than half, implying that dealers' market power greatly relates to the Fed's purchases in large amounts, whereas the Fed's limited breadth of counterparty choice also plays some role. [ABSTRACT FROM AUTHOR]

The reaction of asset prices to monetary and macroeconomic news announcements represents a rich source of information which is important to better understand the financial market impact of economic fundamentals. Given the significant connection of energy to other sectors in the economy, this study attempts to address to what extent the views that a central bank expresses in its communications get reflected in the energy stock market. The GARCH with Jump intensity approach is used to analyse the volatility of energy stock prices and to measure their reactions to anticipated and unanticipated policy news. Moreover, we assess whether central bank communications exert differential impacts on changes in energy stock prices under various time-horizons. Focusing on the European Union and the UK energy stocks, the paper finds evidence of a time-varying market responsiveness. For instance, a more hawkish stance is associated with an increase in the energy stock price jumps for the EU in the short- and medium-terms, whereas it only holds for the UK in the short-run. Although central bank policies do not target the exchange rate itself, we find that the exchange rate channel is an important part of the monetary policy transmission mechanism for the energy market. [ABSTRACT FROM AUTHOR]

This article constructs a Bayesian estimated three different types of representative agents. New Keynesian (THRANK) model includes housing rental market to explain the transmission of monetary policy to inequality, as well as explore the role that rents play in. The concept of rent rigidity following the Calvo stickiness setting is introduced in model. In addition, based on the significance of rental inflation on interest rates in the OLS regression, rental inflation is added to Taylor rule in the model. It is found that: (1) Tight monetary policy widens income inequality and asset inequality. Among the main triggers that magnify income inequality are the interest income generated by higher interest rates and the profit income generated by firms under the markup surge. (2) Rent stickiness of the households is greater than the firms. (3) Sticky rents stabilize fluctuations in rental inflation and total social inflation, when the monetary authority employs the Taylor rule which includes the rental inflation for setting interest rates, will deepen this response. [ABSTRACT FROM AUTHOR]

The purpose of this research paper is to determine factors of credit risk expressed in terms of non-performing loans in six countries of the Western Balkans (Kosovo, Albania, North Macedonia, Bosnia, and Herzegovina, Montenegro, and Serbia). The research uses different econometric techniques for the presentation of econometric models, where 4 models are used: OLS, fixed-effects model, random-effects model, and Hausman Taylor IV estimators. The results from the empirical analysis presented show that unemployment and the real interest rate have a positive impact on the growth of non-performing loans where both coefficients are statistically significant at the 1% level, while other variables (financial stability, economic growth, and inflation) show a statistically significant negative impact. These findings are important for the decision-makers of the financial systems of these countries, especially countries that have limited use of monetary policy, making decisions to create greater financial stability to reduce credit risk. [ABSTRACT FROM AUTHOR]

This article integrates monetary policy into a very simple dynamic supermultiplier model with an accommodating supply side. Results show that monetary policy guided by a mainstream Taylor rule may stabilize an economy around the steady-state path of demand-led growth following temporary demand shocks. However, monetary policy is ineffective in offsetting permanent negative demand shocks even if the lower bound for interest rates is not binding. This outcome contrasts with the prevailing view among policymakers that monetary policy can usually assure full utilization of an economy's resources in the long run. The ineffectiveness of monetary policy is particularly acute if autonomous demand grows more slowly than necessary to generate full employment. In this case, if policymakers recognize the under-utilization of resources, monetary policy leads to interest rates trending necessarily to their lower bound. The analysis also shows how monetary policy may lead to counter-productive responses to supply shocks. The article concludes with observations about how the theoretical results correspond with the history of US monetary policy in recent decades. [ABSTRACT FROM AUTHOR]

In this paper we investigate the impact of the balance-of-payments constraint on output, income distribution and policy space in a small economy open to both commercial and financial flows. We do so by extending a Sraffian supermultiplier growth model to consider current and capital accounts and endogenous money. Expansionary fiscal policies increase output and its long run growth rate but have a negative impact on the balance-of-payments. Based on these results, we derive the value of government spending that maximises output while maintaining external equilibrium. Monetary policy also influences the balance-of-payments by attracting foreign financial flows through higher interest rates. This relationship is non-monotonic, since these flows can finance the external deficit resulting from a high output level but can also lead to a greater interest burden. This trade off allows us to find the level of the interest rate that maximises external space. It also implies that, with limits, raising interest rates might allow for higher real wages. Lastly, we examine the effects of the currency denomination of debt. We find that, in case of a depreciation, debt in domestic currency allows for a less contractionary adjustment than foreign currency-denominated debt but does not lead to higher economic growth. [ABSTRACT FROM AUTHOR]

• We investigate the linear and nonlinear effects of the pandemic period on the dynamics of the Brazilian Phillips curve. • Despite the socio-economic benefits to vulnerable social groups, cash transfers to low-income families increased inflation. • The backward-looking component decreased while the forward-looking component increased, suggesting a shift in the firms' price-setting behavior. • There was a reduction in the flatness of the Phillips curve, as the output gap coefficient more than doubled during the pandemic. • Sectorial increases in demand, decrease in aggregate supply, money supply growth, and loose monetary policy explain these findings. This paper investigates the linear and nonlinear effects of the pandemic period on the dynamics of the Brazilian inflation through the estimation of a hybrid Phillips curve. Despite the undisputed socio-economic benefits, cash transfers paid by the government to low-income families increased inflation, with an estimated coefficient similar in magnitude to the output gap. The backward-looking component decreased while the forward-looking component increased sharply, suggesting a shift in the price-setting behavior toward anticipating fluctuations in the business cycle. There was also a significant reduction in the flatness of the Phillips curve, as the output gap coefficient more than doubled during this period. These findings might be explained by the unprecedented combination of sectorial increases in demand, a decrease in aggregate supply, anticipated money supply growth, and loose monetary policy. They unveil an undesired side effect of cash transfers on inflation that adversely affected the purchase power of the program beneficiaries. [ABSTRACT FROM AUTHOR]

We investigate the evolution of the impact of monetary policy (MP) shocks in Peru in 1996Q1-2018Q2 using a set of time-varying parameter VAR models with stochastic volatility (TVP-VAR-SV), as proposed by Chan and Eisenstat (2018). The main results are: (i) the volatility of MP shocks falls during the Inflation Targeting (IT) regime; (ii) a contractionary MP shock decreases both GDP growth and inflation within a five quarters time span; (iii) the interest rate reacts faster to aggregate supply shocks than to both aggregate demand shocks and exchange rate shocks; (iv) under the pre-IT regime, MP shocks explain 20%, 10%, and 85% of the uncertainty in GDP growth, inflation, and the interest rate, respectively; and under the IT regime, all these percentages shrink to 1%–2%. The sensitivity analysis confirms the robustness of the main results. In general, the results show that MP has contributed to diminishing macroeconomic volatility in Peru. • Evolving impacts of monetary policy shocks on macroeconomic fluctuations in Peru. • Use of a set of TVP-VAR-SV models with Bayesian estimation. • Presence of two regimes: Pre-IT and Post-IT. • Volatility of MP shocks falls from 4% to 0.3% on average during the IT regime. • Interest rate reacts faster to AS shocks than to AD shocks and exchange rate shocks. [ABSTRACT FROM AUTHOR]

• The ratio between Italian public debt and GDP is the second largest in the Monetary Union. • The ratio remained within acceptable limits until the beginning of 1980s, but kept raising faster after the new policy of debt financing. • This paper aims to understand if the overall debt increase is related to dynamics of interest or that of social expenditure, as argued by many scholars. • The causal relationships were analysed by testing Granger-causality on long time series of data starting from 1960. • Welfare Granger-caused the debt just until the early 1980s, after which debt (or, rather, debt reduction policies) influenced the reduction of welfare expenditures. • The empirical results generally confirm that interest payment was the main driver of debt increase before the European monetary union was established. The Italian public debt is one of the largest in the European Monetary Union and its ratio debt/GDP is the second highest among the Monetary Union countries. A legitimate question is: why Italy has got the most important debt in the euro area? Until the beginning of 1980s the debt to GDP ratio remained within acceptable limits. The Italian debt trend shows a sharp increase in the beginning of 1980s in connection with a new policy of debt financing agreed between the Bank of Italy Governor and the Ministry of Finance in 1981 (the so called "divorce") and fully implemented in the following 2-3 years. This paper aims to understand if the overall debt increase is related to the dynamics of interest or that of social expenditure, as argued by many scholars. The causal relationships were analysed by testing Granger-causality on long time series of data starting from 1960. A sample including series coming from National Accounts is utilised in estimating our models. The empirical results generally confirm that interest payment was the main driver of debt increase before the European monetary union was established, even assuming that interest policy responded to exchange rates and inflation. [ABSTRACT FROM AUTHOR]

In the last few years, the Federal Reserve, the European Central Bank and the Bank of Canada have all initiated policy reviews to reassess monetary policy tools and ideas that were no longer working in a changing global economy. In this paper, I argue that the debates that shaped these reviews can best be understood as 'knowledge controversies' in which some of the foundational metrics that monetary policies rely on themselves became the subject of debate. This unsettling of existing economic metrics poses not just technical but also political problems for central banks. These debates have eroded their efforts to depoliticise key issues, revealing the fragility of their technical fixes as metrics themselves can become the source of political disagreement both within the central banks themselves and in the wider public. As we enter an era of even more intense inflation-driven debates about central banking expertise and authority, these reviews provide insights into the epistemic dilemmas that central banks confront, suggesting that they will be dealing with knowledge controversies for some time to come. [ABSTRACT FROM AUTHOR]

Social media is transforming how politicians communicate with the public, empowering elected officials to immediately reach target audiences. Scholars of the U.S. presidency in particular credit former President Donald Trump with revolutionizing the White House bully pulpit through his use of Twitter. Trump's bullying of the Federal Reserve and Fed Chair Jerome Powell for ever lower interest rates stands out amidst his often norm‐defying social media campaigns. Such attacks broke from recent practice: Trump's immediate predecessors largely refrained from telling the central bank what to do. What drove Trump's pressure campaign against the Fed? In this note, we identify and tally Trump's attacks, explore dynamics shaping his appeals, and demonstrate that financial headwinds—more so than economic or political barometers—reliably incited Trump to pressure the Fed. [ABSTRACT FROM AUTHOR]

This article examines empirical patterns of interest rate spreads between yields on long-term corporate bonds and the Federal Funds Rate (FFR) in the United States over the period from 1960 through 2023. Since the early 1980s, discernible patterns of interest spreads have emerged, revealing marked deviations in corporate bond yields from the FFR. We focus on financial market forces particularly arising from financial intermediaries in analyzing these patterns. To this end, the article develops a theoretical framework based on the concept of liquidity preference in Keynes's 1937 papers and the works of Hyman Minsky and Victoria Chick. We also conduct cointegration analyses for corporate bond yields, the FFR, and financial intermediaries' leverage ratios. Overall, our empirical results indicate that the relationship between the FFR and corporate bond yields—particularly with respect to their long-run relationship and interest rate markups—has markedly changed since the 1980s and is significantly affected by financial intermediaries' asset/capital leverage ratios. As a policy implication, regulatory reforms aimed at enhancing the Federal Reserve Bank's capacity to steer long-term rates and contain intermediaries' balance sheet leverage, particularly those centered on risky asset trading to increase gains from price differentials, are required JEL Classification: B26, E11, E43, E52 [ABSTRACT FROM AUTHOR]

Purpose: The article aims to establish whether the degree of aversion to inflation and the responsiveness to deviations from potential output have changed over time. Design/methodology/approach: This paper assesses time variation in monetary policy rules by applying a time-varying parameter generalised methods of moments (TVP-GMM) framework. Findings: Using monthly data until December 2022 for five inflation targeting countries (the UK, Canada, Australia, New Zealand, Sweden) and five countries with alternative monetary regimes (the US, Japan, Denmark, the Euro Area, Switzerland), we find that monetary policy has become more averse to inflation and more responsive to the output gap in both sets of countries over time. In particular, there has been a clear shift in inflation targeting countries towards a more hawkish stance on inflation since the adoption of this regime and a greater response to both inflation and the output gap in most countries after the global financial crisis, which indicates a stronger reliance on monetary rules to stabilise the economy in recent years. It also appears that inflation targeting countries pay greater attention to the exchange rate pass-through channel when setting interest rates. Finally, monetary surprises do not seem to be an important determinant of the evolution over time of the Taylor rule parameters, which suggests a high degree of monetary policy transparency in the countries under examination. Originality/value: It provides new evidence on changes over time in monetary policy rules. [ABSTRACT FROM AUTHOR]

The South African Reserve Bank (SARB) uses interest rates to control inflation. The Computable General Equilibrium (CGE) model can contribute to inflation targeting objective and also determine the effects on banks and the economy. We improved the accuracy of the results from previous work on the banking sector CGE model by estimating the elasticities of the reduced form equations of the model instead of arbitrarily choosing them. Our results conform with the established view that lower policy rates lead to an increase in inflation and a reduction in banks' profits. However, because of the adverse supply shocks arising from the effects of the COVID‐19 pandemic, the increase in the GDP is crowded out. The CGE model is a useful tool for the SARB for monetary policy implications on financial stability, informing and providing analysis on its repo rate decision, and determining the consequent effects on the economy. [ABSTRACT FROM AUTHOR]

Central banks in financially subordinated countries face structural limits derived from the position of the currencies that they issue in the international monetary hierarchy. These constraints become particularly acute during crises when financially subordinated countries face capital outflows triggered by both foreign and domestic residents. In crises, peripheral central bank intervention is characterized by the selling of international reserves. Issuing national currency can add fuel to the outflow fire, as shown by the response to the pandemic of the Central Bank of the Argentine Republic (BCRA). The BCRA implemented several countercyclical measures, including financing fiscal policies, lowering interest rates, increasing the liquidity of the financial system, targeted policies to boost lending, and FX market intervention. These were quantitatively significant and relatively successful at the beginning. However, from August, a growing exchange rate pressure and an acceleration of inflation forced the BCRA to change its strategy to face the outflow and withdraw national currency from circulation. The BCRA implemented exchange controls, reduced the financing to the Treasury, issued remunerated liabilities, and increased interest rates without being able to avoid a greater devaluation of the currency or reduce inflation. [ABSTRACT FROM AUTHOR]

We propose a model of post‐Great Financial Crisis (GFC) money markets and monetary policy implementation. In our framework, capital regulation may deter banks from intermediating liquidity derived from holding reserves to shadow banks. Consequently, money markets can be segmented, and the scarcity of Treasury bills available to shadow banks is the main driver of short‐term spreads. In this regime, open market operations have an inverse effect on net liquidity provision when swapping ample reserves for scarce T‐bills or repos. Our model quantitatively accounts for post‐2010 time series for repo rates, T‐bill yields, and the Fed's reverse repo facility usage. [ABSTRACT FROM AUTHOR]

This study aims to examine the consequences of dollarization on the effectiveness of monetary policy in Türkiye, a nation with a long history of high and sustained dollarization. Türkiye has seen considerable levels of dollarization for almost 40 years. The study uses data from the third quarters of 1998 through 2022. This study investigates the intricate and nonlinear connections between dollarization, monetary policy, and other economic variables. It does so by using machine learning (ML) models. The findings show that dollarization has a modest impact on economic expansion and that there may be a favorable relationship between dollarization and financial deepening. The study also reveals how dollarization interacts with other control variables to affect inflation rates. Despite the fact that the ML technique cannot prove causation, this research offers insightful information on the intricate dynamics of dollarization and its implications for the success of monetary policy. For policymakers attempting to comprehend and manage dollarization's possible influence on economic stability in Türkiye and other nations, these findings have major significance. [ABSTRACT FROM AUTHOR]

In this study, we discuss central bank communication sentiments assessed using different dictionaries. Policy communication by monetary authorities is considered an essential additional policy tool. Various text-mining techniques could evaluate its sentiment. Dictionary methods are a prominent example here because they offer simplicity and are a starting point for applying more elaborate methods. We decided to test four lexicons: generic, economic and financial and two domain-specific lexicons to conclude on their applicability to assess the sentiments of monetary releases and provide recommendations for their further application. This study surveys four lexicons qualitatively and conducts a few exercises: lexicon content comparison, performance tests for highly positive and negative messages, and statistical tests of dictionary alignment and correlation. The sample covers small open economies implementing inflation targeting. The study concludes that all investigated dictionaries could be used for detecting central bank intentions: they do not return contradictory results. The choice among them for a particular study depends on the study's setup and goals—as presented in our recommendations [ABSTRACT FROM AUTHOR]