Filippo Natoli, 02 August 2022

How temperature dynamics affect the economy is key to understanding the impact of climate change on monetary policy. This column presents new evidence that local temperature fluctuations had aggregate effects on the US in the last 50 years. Results show that US-wide temperature shocks, constructed by weighting unexpected county-level temperature variations, reduced both GDP and consumer prices, inducing an expansionary monetary policy reaction and a revision of the Federal Reserve’s economic forecasts.

Gene Ambrocio, Andrea Ferrero, Esa Jokivuolle, Kim Ristolainen, 21 July 2022

A key question for any inflation-targeting framework is what the inflation target should be. This column reports findings from a survey of leading economists from around the world on the inflation target and related monetary policy issues. Overall, there was a strong preference for the status quo, with participants seeming to perceive high costs in terms of credibility from changing the current inflation target. However, participants concerned about the zero lower bound on the nominal interest rate were more likely to favour raising the target.

Donato Masciandaro, Riccardo Russo, 18 July 2022

Central banks in developed countries have launched cautious investigations into whether, how, and to what extent they should intervene in climate policy. This column shows that central banks would face trade-offs if they were to start tackling climate change, as the instruments overlap with those already used in their monetary and macroprudential mandates. Using a using a principal–agent setting, the authors argue that central banks’ effectiveness in addressing climate change will depend on capture risk and  calibration risk.

Lena Boneva, Gianluigi Ferrucci, Francesco Paolo Mongelli, 18 June 2022

Central banks are increasingly being called upon to engage in climate change issues, not only in their financial stability capacity but also with monetary policy measures. This second column in a two-part series reviews some measures that central banks could consider to internalise climate change objectives into their monetary policy frameworks. These range from protective actions to more proactive measures aimed at mitigating climate change and supporting green finance and the transition to a low-carbon economy. It also discusses the constraints and trade-offs central banks face.

Lena Boneva, Gianluigi Ferrucci, Francesco Paolo Mongelli, 17 June 2022

While the implications of climate change for financial stability and prudential supervision are widely recognised, those for monetary policy have received less attention until recently. This column, the first in a two-part series, reviews the key mechanisms through which climate change influences monetary policy. Climate change impacts the objective, conduct, and transmission of monetary policy and could bear implications for the design of the monetary policy framework. To ensure price stability, central banks have a clear interest, in some cases an obligation, to incorporate climate change considerations into their policymaking.

Borağan Aruoba, Thomas Drechsel, 17 May 2022

The recent surge in inflation has put central banks back into the spotlight. This column proposes a novel method to determine exogenous changes in monetary policy. Using information in the language of documents that economists at the Federal Reserve Board prepare for Federal Open Market Committee meetings, it predicts changes in the target interest rate and obtains a measure of monetary policy shocks as the residual. The dynamic responses of macroeconomic variables to the identified shock measure are consistent with the theoretical consensus, and the estimated shocks are not contaminated by the ‘Fed information effect’.

Francesco D'Acunto, Ulrike Malmendier, Michael Weber, 07 May 2022

Inflation has surged to historic levels around the globe. Designing the correct policy responses requires a deep understanding of how consumers form and update their inflation expectations, and how expectations influence economic behaviour. This column summarises key findings in the literature on inflation expectations, particularly how they deviate from the full-information rational expectations paradigm. Household inflation expectations are typically biased upwards, systematically skewed, and correlated with social/demographic characteristics. Studying these heterogeneities and their impact on aggregate outcomes is a key challenge for policymakers going forward. 

Rashad Ahmed, Claudio Borio, Piti Disyatat, Boris Hofmann, 04 April 2022

Nominal interest rates in many advanced economies have been low for more than a decade. This column presents evidence that monetary transmission to economic activity is substantially weaker when nominal interest rates fall to very low levels, and that the strength of transmission tends to wane the longer interest rates stay low. This suggests that the observed flattening of the Phillips curve has gone hand in hand with a corresponding steepening of the IS curve. If so, monetary policy trade-offs have become more challenging. 

Paul De Grauwe, Yuemei Ji, 02 April 2022

Trust impacts many aspects of economic life and plays some role in standard macroeconomic models. This column analyses the importance of trust in a more systematic way using a behavioural macroeconomic model. The authors find that large negative supply shocks lead to a bifurcation between good and bad trajectories of output, inflation, and trust. Initial conditions matter in determining which trajectory will be chosen. The model helps to understand and predict the experience of the 1970s with the supply shocks and the recent Covid supply shock.

Gauti Eggertsson, Alessandro Lin, Josef Platzer, Luca Riva, 14 March 2022

The Fed recently introduced an average inflation targeting framework, in which past inflation shortfalls shape current policy. This column assesses this policy relative to alternatives in the context of the Covid-19 recession and recovery. The authors calibrate a simple New Keynesian model at the zero lower bound to replicate the Fed’s policy, finding that the new framework substantially reduced the US output contraction by about 40%. Alternative policies would have reduced the contraction by even more. The results suggest that the Fed places some weight on output stabilisation alongside inflation.

Petri Mäki-Fränti, Aino Silvo, Adam Gulan, Juha Kilponen, 11 February 2022

New monetary policy instruments introduced by the ECB following the 2008-2013 financial and debt crisis have raised concerns that central banks’ securities purchase programmes disproportionately benefited wealthy households. Using Finnish data, this column finds that while the impact on economic growth has been significant, on average the changes in income and wealth disparities have been small. Nevertheless, the results suggest the precise channels through which monetary policy affects inequality may differ across countries.

Jongrim Ha, M. Ayhan Kose, Hideaki Matsuoka, Ugo Panizza, Dana Vorisek, 08 February 2022

In 2021, inflation in emerging market and developing economies reached its highest level since 2011, prompting many to increase their policy rates. This column argues that these economies need to employ credible, carefully calibrated, and well communicated monetary policies to contain inflationary pressures. Such policies tend to be more successful in anchoring inflation expectations in the presence of an inflation-targeting regime, high central bank transparency, and lower levels of debt.

Claudio Borio, Piti Disyatat, Dora Xia, Egon Zakrajšek, 25 January 2022

High and low inflation are two very different animals. This column argues that after remaining low and stable for a prolonged period, what we measure as inflation is in fact largely an average of idiosyncratic (relative) price changes and not inflation in the theoretical sense of a generalised increase in prices. What’s more, these idiosyncratic price changes tend to be transitory or stable, so that there is a certain tendency for measured inflation to remain range-bound at a low level. The evidence also indicates that, in such an environment, monetary policy operates through a remarkably narrow set of prices. These findings suggest that, under those conditions, it may be difficult and undesirable to follow very tightly defined inflation targets. Having done the hard job of bringing inflation down, central banks can enjoy the fruits of their labours, although at the same time they need to make sure that those fruits are not ephemeral.

Yuriy Gorodnichenko, Dmitriy Sergeyev, 11 January 2022

Inflation expectations affect the decisions of households, firms, and policymakers. Expectations of negative inflation can be particularly harmful and lead to deflationary spirals when nominal interest rates are near zero. This column uses survey evidence to show that households and firms almost never expect deflation, even when it is a clear possibility. This apparent zero lower bound on inflation expectations has important implications for macroeconomic dynamics and the effectiveness of monetary policy. Unconventional policies, such as forward guidance, which aim to increase inflation expectations may be less effective when expectations are stuck at the zero lower bound. 

Peter Andre, Ingar Haaland, Chris Roth, Johannes Wohlfart, 23 December 2021

Inflation has recently surged in both the US and the EU. This column uses responses from surveys of a representative sample of the US population as well as academic economists and US firm managers to show that households and managers are more likely than experts to think that the current surge in inflation will be persistent. Since the narratives individuals use to explain movements in inflation appear central to whether inflation expectations remain anchored, communication strategies by policymakers could put emphasis on specific narratives that highlight that inflationary pressures are unlikely to persist.

Lucrezia Reichlin, Klaus Adam, Warwick J. McKibbin, Michael McMahon, Ricardo Reis, Giovanni Ricco, Beatrice Weder di Mauro, 03 December 2021

Michael Ehrmann, Alena Wabitsch, 29 November 2021

Monetary policy issues are discussed on social media by experts and also increasingly by non-experts, presenting a challenge to central banks using social media to communicate with their target audiences. This column analyses ECB-related tweets and finds that more subjective views and tweets expressed in stronger language are more likely to get retweeted, thereby shaping the tone of the virtual discussions. Both experts and non-experts are responsive to ECB communication – in most cases, information is simply relayed on Twitter, but there are also instances of controversial discussions being triggered. 

Ewa Stanisławska, Maritta Paloviita, 26 November 2021

The responsiveness of longer-term inflation expectations to shorter-term economic developments plays an important role in inflation dynamics. Using the new ECB Consumer Expectations Survey conducted in the middle of the Covid-19 pandemic, this column explores how consumers adjust their medium-term inflation views in response to changes in short-term inflation expectations and inflation perceptions. Covid-19 contributed to an increase in consumer inflation expectations, but greater trust in the ECB is associated with more muted responsiveness of inflation expectations.

Marco Buti, 23 November 2021

The policy response to Covid-19 in Europe avoided mistakes made a decade earlier. But what should the fiscal and monetary policy framework be after the pandemic? Marco Buti, author of a new CEPR policy insight on this topic and the book The Man Inside about how Europe coped with recent crises, talks to Tim Phillips.

Download the CEPR policy insight: 

Buti, M and Messori, M, Euro area policy mix: From horizontal to vertical coordination, CEPR Policy Insight No 113.

Register for the launch of the book The Man Inside: A European Journey through Two Crises, Wednesday 24 November 2021, 16:00 GMT

Margherita Bottero, Camelia Minoiu, José-Luis Peydró, Andrea Polo, Andrea Presbitero, Enrico Sette, 16 November 2021

Negative interest rates are a major innovation in monetary policy. This column uses data on bank-firm lending relationships and firms’ employment and investment decisions to show that after the introduction of negative interest rate policy by the ECB: (1) more exposed banks show a relatively higher increase in the supply of corporate loans; (2) this expansion of credit by more exposed banks is concentrated among low-capital banks, which rebalance their assets by increasing their share of loans to smaller and ex ante riskier firms; and (3) the increase in credit supply by more liquid banks is associated with sizeable firm-level real effects.

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