We provide new evidence on U.S. monetary policy spillovers to Australia using an integrated time–frequency connectedness framework. Spillovers primarily transmit through the interest rate (policy rate) channel, followed by the asset price (with the consumer discretionary sector as the main conduit) channel and the exchange rate channel. Spillovers are highly time-varying, peaking at the onset of COVID-19 and again during the global financial crisis and the European sovereign debt crisis. Linking these spillovers to the real economy, we show that an identified U.S. tightening is followed by a tightening in Australia’s monetary policy stance and generates contractionary and disinflationary effects on Australian output and inflation, consistent with transmission via imported financial conditions and the domestic policy reaction. Finally, we show that ignoring spillovers yields a price puzzle under recursive VAR identification, while using spillover-based surprises as external instruments removes the puzzle and recovers theory-consistent responses.

This paper studies the transition to high inflation during the COVID-19 pandemic, using a behavioral version of the New Keynesian model, which replaces the conventional assumption of rational expectations with subjective and heterogeneous expectations. Different shares of agents in the economy form expectations based on alternative views regarding future economic variables: (1) a share of agents forecasts that inflation and output will rapidly revert to steady state; (2) another share forms forecasts based on a model resembling the MSV solution under rational expectations; (3) a third share of agents uses an under-specified model that captures trend-following, adaptive, or extrapolative behavior. Agents learn over time the parameters of their perceived model and they can also shift across different views based on past forecasting performance. The macroeconomic model is estimated using Bayesian methods to fit realized macroeconomic variables and data on expectations from surveys. The results document an additional channel that operates through switches in agents’ perceptions and amplifies the impact of the original inflationary shocks. In response to rising inflation after COVID, agents begin shifting from the mean reversion model to the trend-following specification (with a belief about perceived inflation persistence that is simultaneously revised upward). Consequently, the impact of inflationary shocks is magnified and the effects of monetary policy attenuated.

This paper investigates the stability of the demand for money in the United States and provides a comparison among the simple-sum monetary aggregates, the original (non-credit-card-augmented) Divisia monetary aggregates, and the credit-augmented Divisia and credit-augmented Divisia inside aggregates. We use quarterly data from the Center for Financial Stability and the Pesaran et al. (2001) bounds test procedure to investigate the long-run relation between the monetary aggregates and their respective user costs. In doing so, we use three classic money demand functions—the log–log, the semi-log, and the Selden and Latané specifications. With quarterly data over the 1967:q1 through 2025:q1 period, for which the original Divisia monetary aggregates are available, we find evidence of a stable money demand function only with the Sum M4 aggregate under all money demand specifications, but not with any of the Divisia aggregates. With quarterly data over the post-2006 period, for which the credit-augmented Divisia monetary aggregates are also available, our findings show that the demand for money is stable across all money demand specifications with all of the original Divisia aggregates and the credit-augmented Divisia aggregates (but not with all of the credit-augmented Divisia inside aggregates). We also find evidence of cointegration with the Sum M3 and Sum M4 aggregates under all three money demand specifications, but not with the Fed’s Sum M2 aggregate.

The 1970s oil shocks sparked high and persistent inflation in advanced economies, also tied to the collapse of the Bretton Woods international monetary system in 1971 that left monetary policy without a stable institutional reference framework. Only in the following decades did a new monetary regime emerge, centered on inflation targeting schemes adopted by independent central banks. Beyond this, other factors affected inflation persistence, namely wage-price spirals rooted in automatic wage adjustment mechanisms, and fiscal policies financed thanks to the regulatory requirement for the central bank to purchase unsold public debt. This article gives a concise analysis of the rationale and provides descriptive evidence of the role these institutional aspects played in the 1970s, suggesting how their evolution has reduced the likelihood of 1970s-style inflationary episodes today. A structural VAR-based counterfactual exercise confirms that absent wage and fiscal pressures inflation persistence would have been significantly lower.

We propose a novel approach to classifying inflation-targeting (IT) economies using fractionally integrated processes. Motivated by the rising prevalence and diversity of IT, we leverage variation in the persistence of inflation rates to identify four de facto strategies, or “shades” of IT. Moving from negative orders of fractional integration, indicating anti-persistent behaviour, to more persistent long-memory processes, often associated with less credible policy frameworks, we classify countries into average, strict, flexible, and uncommitted IT. This framework sheds light on differences between declarative and actual strategies across 36 advanced and emerging economies. Most countries fall into the flexible IT category, though extreme cases, including uncommitted IT, occur quite frequently. Furthermore, we link our classification to institutional features of national frameworks using ordinal probit models. The results suggest differences across categories are related to variations in the maturity and stability of IT frameworks, with weaker connections to central bank independence and transparency.

The green transition to reduce greenhouse gas emissions requires substantial investments in a narrow time window to avoid climate-related disruptions, adding two new dimensions for monetary policy and exacerbating the trade-offs that central banks face. First, climate-related physical disruptions lead to higher inflation (i.e., Climateflation). Second, the rush to green technology may result in inflation due to supply bottlenecks (i.e., Greenflation). As a consequence, central banks implement restrictive monetary policy that have a detrimental effect on the high up-front costs of renewable energy projects. This slows down the dynamics of green technologies adoption. We build a dynamic non-linear model to study these interactions under reasonable parameterizations. Both Climateflation and Greenflation are quantitatively significant, creating a dilemma for central banks between raising interest rates to counteract inflation and easing them to facilitate renewable investment. We further show that, under specific stochastic scenarios, the trade-off between inflation control and green transition can improve when structural costs for green technologies decrease or when supply-side constraints relax.

Banking supervisors rely on a set of indicators, such as the credit-to-Gross Domestic Product (GDP) gap, to evaluate the macro-financial environment and implement the countercyclical capital buffer. This paper proposes two supplementary indicators, based on forecast-based measures of the credit-to-GDP gap: forecast-augmented credit-to-GDP gaps and predicted credit-to-GDP gaps. While the former has already attracted attention from some banking supervisors, the latter represents a novel metric introduced here. These gaps are generated using singular spectrum analysis. We show that forecasting performance varies between countries and depends on credit market conditions. Furthermore, our results indicate that forecast-based credit-to-GDP gaps are effective in predicting the early stages of a credit boom.

The rise of U.S. inflation in 2021 and 2022 and its partial subsiding have sparked debates about the relative role of supply and demand factors. The initial surge surprised many macroeconomists despite the unprecedented jump in money growth in 2020–21. We find that the relationship between consumption and the theoretically based Divisia M3 measure of money (velocity) can be well modeled both in the short- and long-runs. We use the estimated long-run relationship to calculate the deviation of actual velocity from its long-run equilibrium and incorporate it into a P-Star framework. Our model of velocity significantly improves the performance of the P-Star model relative to using a one-sided HP filter to calculate trend velocity as used by other researchers. We also include a global supply pressures index in the model and find that recent movements in U.S. inflation largely owed to aggregate demand driven macroeconomic factors that are tracked by Divisia money with a smaller role played by supply factors.

Within a new Keynesian model of monetary policy with both backward- and forward-looking variables, we investigate the impact of risk aversion by assuming that the central bank is endowed with recursive preferences à la Hansen and Sargent (Hansen and Sargent, 1995). We establish that, since in this model inflation and output are forward-looking, under discretion the optimal policy is found by solving two distinct fixed-point problems: the former pertains to the central bank’s optimization exercise, the latter to the identification of the equilibrium expectations of the forward-looking variables. We show that, in the presence of forward-looking variables, the optimal policy differs from the robust policy chosen by a central bank endowed with quadratic preferences and subject to Knightian uncertainty, confuting the equivalence established by Hansen and Sargent (2008) when only backward-looking variables enter into the laws of motion regulating the dynamics of the economic system. Through our analysis we show: i) how a risk-averse central bank selects a more aggressive policy than one furnished with the standard preferences of a canonical DSGE model; ii) that the “divine coincidence” established within traditional linear-quadratic formulations between inflation and output stabilization no longer holds.

We explore the international transmission of monetary policy and central bank information shocks originating from the United States and the euro area. Employing a panel vector autoregression, we use macroeconomic and financial variables across several major economies to address both static and dynamic spillovers. To identify structural shocks, we introduce a novel approach that combines external instruments with heteroskedasticity-based identification and sign restrictions. Our results suggest significant spillovers from European Central Bank and Federal Reserve policies to each other’s economies, global aggregates, and other countries. These effects are more pronounced for central bank information shocks than for pure monetary policy shocks, and the dominance of the US in the global economy is reflected in our findings.

This study develops a two-country New Keynesian model incorporating deep habits in consumption to analyze macroeconomic dynamics under the optimal coordinated monetary policy. The central bank adjusts interest rates more aggressively in response to structural shocks in an open economy than in a closed economy. Deep habits strengthen the central bank’s incentive to adjust terms of trade through interest rates due to habit formation and counter-cyclical markup behavior, creating price inelasticity in demand. Deep habits also lead to deviations from the law of one price, reflected in goods-specific real exchange rates, which the degree of home bias influences. Finally, this study compares international policy coordination to noncoordination to analyze welfare gains, showing that they depend on key structural factors like price rigidity, deep habits, and home bias. Policy coordination stabilizes domestic output and inflation by internalizing externalities in terms of trade and consumption.

This paper explores the role of the cost channel in a behavioral New Keynesian model where households and firms have different degrees of cognitive discounting. Our findings are summarized as follows. First, we demonstrate how the degree of cognitive discounting significantly affects the determinacy condition through the cost channel model. Second, a high degree of cognitive discounting attenuates the response of inflation to a monetary tightening shock, and the cost channel amplifies this effect. Third, the degree of cognitive discounting significantly impacts the effect of the cost channel on the design of optimal monetary policy.

This paper studies the role of central bank communication for the monetary policy transmission mechanism using text analysis techniques. In doing so, we derive sentiment measures from European Central Bank (ECB)’s press conferences indicating a dovish or hawkish tone referring to interest rates, inflation, and unemployment. We provide strong evidence for predictability of our sentiments on interbank interest rates, even after controlling for actual policy rate changes. We also find that our sentiment indicators offer predictive power for professionals’ expectations, the disagreement among them, and their uncertainty regarding future inflation as well as future interest rates. Policy communication shocks identified through sign restrictions based on our sentiment measure also have significant effects on real outcomes. Overall, our findings highlight the importance of the tone of central bank communication for the transmission mechanism of monetary policy, but also indicate the necessity of refinements of the communication policies implemented by the ECB to better anchor inflation expectations at the target level and to reduce uncertainty regarding the future path of monetary policy.

The article investigates whether the Bank of Japan followed the so-called rules of the game under the classical gold standard. The article, by estimating a vector autoregressive model of monthly timeseries data for October 1897 to July 1914, finds that the Japanese central bank systematically raised the discount rate in response to a fall in the ratio of monetary gold to banknotes, a worsening of the trade balance, or a depreciation of the Japanese yen against the British pound. In contrast, the discount rate hardly responded to the Bank of England's Bank Rate, suggesting Japan's limited financial integration with Europe. The article argues that the Bank of Japan used the trade balance and the yen–sterling rate as the signals of a proximate or prospective movement in monetary gold. The findings, therefore, strongly suggest that the Bank of Japan sought to preserve gold convertibility as the primary objective of monetary policy. The Japanese central bank's rules-of-the-game-like behaviour challenges the semi-consensual view in the literature that violations of the rules were frequent and pervasive under the classical gold standard.

Incorporating environmental aspects in monetary and macroprudential policies poses a series of questions in terms of central banks’ effectiveness, independence, neutrality, and legitimacy. Most analyses of this matter rely on a purely economic approach, underestimating the trade-offs it entails and thus being biased in favor of central banks’ interventions. We develop a political-economy setting based on a Walsh contract, which can be interpreted as a memorandum that the government and central bank can implement. Through it, the former legitimizes, or pushes for, the intervention of the latter under the aegis of an elected authority. This setting eliminates the bias, unveiling the trade-offs that could result: accounting for and tackling climate risks could lead central banks to miss their policy targets, not necessarily making “brown” firms greener, and result in welfare distortions. Yet, thanks to this memorandum, the possibility of a green transition favored by the central bank is made possible. We conclude that central banks should keep a cautious stance when deciding to enter the climate arena, and that different evaluations of these risks can be interpreted as a reason why central banks around the world have adopted different degrees of climate interventionism.

This paper is concerned with multi-object, multi-unit auctions with a budget constrained auctioneer who has noisy value estimates for each object. We propose a new allocation mechanism, the endogenous reference price auction, with two key features. First, bids are normalized across objects using “reference prices.” Second, reference prices are set endogenously using information extracted from the bids submitted. We report on an experiment showing that a simple endogenous process mitigates value inaccuracies and improves three performance measures: the seller’s profit, allocative efficiency and total surplus. These results have important implications for large auctions used in practice.

Central banks are increasingly communicating their economic outlook in an effort to manage the public and financial market participants’ expectations. We provide original causal evidence that the information communicated and the assumptions underlying a central bank’s projection can matter for expectation formation and aggregate stability. Using a between-subject design, we systematically vary the central bank’s projected forecasts in an experimental macroeconomy where subjects are incentivized to forecast the output gap and inflation. Without projections, subjects exhibit a wide range of heuristics, with the modal heuristic involving a significant backward-looking component. Ex-Ante Rational dual projections of the output gap and inflation significantly reduce the number of subjects’ using backward-looking heuristics and nudge expectations in the direction of the rational expectations equilibrium. Ex-Ante Rational interest rate projections are cognitively challenging to employ and have limited effects on the distribution of heuristics. Adaptive dual projections generate unintended inflation volatility by inducing boundedly-rational forecasters to employ the projection and model-consistent forecasters to utilize the projection as a proxy for aggregate expectations. All projections reduce output gap disagreement but increase inflation disagreement. Central bank credibility is significantly diminished when the central bank makes larger forecast errors when communicating a relatively more complex projection. Our findings suggest that inflation-targeting central banks should strategically ignore agents’ irrationalities when constructing their projections and communicate easy-to-process information.

We study the effects of professionals’ survey-based inflation expectations on inflation for a large number of 36 economies, using dynamic cross-country panel estimation of New-Keynesian Phillips curves. We find that inflation expectations have a significantly positive effect on inflation. We also find that the effect of inflation expectations on inflation is significantly larger when inflation is higher. This suggests that second-round effects via the effects of higher inflation expectations on inflation are more relevant in a high-inflation environment.

We provide empirical evidence that the impact of quantitative easing (QE) programs on investment is weaker for countries with high-credit market regulations. We then extend a simple DSGE model with segmented financial markets to include credit regulation and examine its impact on the transmission of conventional and unconventional monetary policies. In our model, the government requires banks to hold a fraction of their assets in government debt. We show that the presence of such regulation can invert monetary transmission under QE policy: An expansionary QE program raises term premiums on corporate bonds and causes a contraction instead of an expansion in the economy. Such a perversion is absent under conventional policy. Further, in contrast to Carlstrom et al. (2017), we show that a simple Taylor rule welfare dominates a term premium peg under financial shocks, while the peg does better in the case of non-financial shocks.

The paper builds a parsimonious US business cycle SVARMA model, establishing identification conditions for independent monetary shocks. The SVARMA model, utilizing Divisia M3 and Divisia M4, is compared to the simple sum M2. The monetary rule with Divisia M3 yields theoretically consistent results marked by the absence of the usual price and liquidity puzzles. As the Federal Reserve (Fed) took a more hawkish approach to curb inflation, significant increases in US interest rates and declines in monetary aggregates were largely influenced by the Fed’s reaction function, which incorporates the Divisia M3 monetary rule. Findings emphasize the monetary impact on the business cycle, highlighting the significance of Divisia monetary aggregates. Historical and variance decompositions reveal diverse, dynamic effects of monetary shocks on macroeconomic variables. The SVARMA model with Divisia M3 and M4 demonstrates superior performance over simple sum M2 in capturing the time path of monetary shocks.