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160 Results

Harnessing the benefit of state-contingent forward guidance

Staff Analytical Note 2022-13 Vivian Chu, Yang Zhang
A low level of the neutral rate of interest increases the likelihood that a central bank’s policy rate will reach its effective lower bound (ELB) in future economic downturns. In a low neutral rate environment, using an extended monetary policy toolkit including forward guidance helps address the ELB challenge. Using the Bank’s Terms-of-Trade Economic Model, we assess the benefits and limitations of a state-contingent forward guidance implemented within a flexible inflation targeting framework.

Looking Through Supply Shocks versus Controlling Inflation Expectations: Understanding the Central Bank Dilemma

Staff Working Paper 2022-41 Paul Beaudry, Thomas J. Carter, Amartya Lahiri
Why might central banks want to look through supply-driven inflation sometimes and pivot away at other times? When does a change in monetary policy stance help anchor expectations? In this paper we present a simple environment that helps clarify these issues by offering an optimal policy perspective on recent central bank behaviour.

COVID and Financial Stability: Practice Ahead of Theory

Staff Discussion Paper 2022-18 Jing Yang, Hélène Desgagnés, Grzegorz Halaj, Yaz Terajima
The Covid-19 pandemic uncovered policy challenges related to the economic measures that were taken to support the economy. Two years later, we attempt to identify the broader impact of these measures and research that needs to follow.

Risk and State-Dependent Financial Frictions

Staff Working Paper 2022-37 Martin Harding, Rafael Wouters
Using a nonlinear New Keynesian model with a financial accelerator, we show that financial frictions generate large state-dependent amplification effects. Shocks propagate more strongly in periods of financial stress. We propose an endogenous regime-switching DSGE framework for efficient estimation and improved model fit.

A Horse Race of Monetary Policy Regimes: An Experimental Investigation

Staff Working Paper 2022-33 Olena Kostyshyna, Luba Petersen, Jing Yang
How should central banks design monetary policy in stable times and during recessions? We run a horse race between five monetary policy frameworks in an experimental laboratory to assess how well the different approaches can manage the public’s expectations and stabilize the economy.

Unregulated Lending, Mortgage Regulations and Monetary Policy

Staff Working Paper 2022-28 Ugochi Emenogu, Brian Peterson
This paper evaluates the effectiveness of macroprudential policies when regulations are uneven across mortgage lender types. We look at credit tightening that results from macroprudential regulations and examine how much of it is counteracted by credit shifting to unregulated lenders. We also study the impact of monetary policy tightening when some lenders are unregulated.

Settlement Balances Deconstructed

Because of the COVID-19 pandemic, public interest in the Bank’s balance sheet and, more specifically, the size of settlement balances, has grown. This paper deconstructs the concept of settlement balances and provides some context on their history, current state and possible future evolution.

More Than Words: Fed Chairs’ Communication During Congressional Testimonies

Staff Working Paper 2022-20 Michelle Alexopoulos, Xinfen Han, Oleksiy Kryvtsov, Xu Zhang
We measure soft information contained in the congressional testimonies of U.S. Federal Reserve Chairs and analyze its effect on financial markets. Increases in the Chair’s text-, voice-, or face-emotion indices during these testimonies generally raise stock prices and lower their volatility.

Household Heterogeneity and the Performance of Monetary Policy Frameworks

Staff Working Paper 2022-12 Edouard Djeutem, Mario He, Abeer Reza, Yang Zhang
Consumption inequality and a low interest rate environment are two important trends in today’s economy. But the implications they may have—and how those implications interact—within different monetary policy frameworks are not well understood. We study the ranking of alternative frameworks that take these trends into account.

The Central Bank Strikes Back! Credibility of Monetary Policy under Fiscal Influence

Staff Working Paper 2022-11 Antoine Camous, Dmitry Matveev
Central banks in many advanced economies enjoy a high degree of independence, which protects monetary policy decisions from political influence. But how should independent central banks react if pressured by fiscal policy-makers? We examine whether a central bank should design a monetary policy framework that prescribes acting conditionally on how fiscal policy behaves.
Content Type(s): Staff research, Staff working papers Topic(s): Credibility, Fiscal policy, Monetary policy JEL Code(s): E, E0, E02, E5, E52, E58, E6, E61, E62
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