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.

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.

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.

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.

We construct a Divisia money measure for U.K. households and private non-financial corporations and a corresponding dual user cost index employing a consistent methodology from 1977 up to the present. Our joint construction of both the Divisia quantity index and the Divisia price dual facilitates an investigation of structural vector autoregresssion models (SVARs) over a long sample period of the type of non-recursive identifications explored by Belongia and Ireland (2016, 2018), as well as the block triangular specification advanced by Keating et al. (2019). An examination of the U.K. economy reveals that structures that consider a short-term interest rate to be the monetary policy indicator generate unremitting price puzzles. In contrast, we find sensible economic responses in various specifications that treat our Divisia measure as the indicator variable.

How do geopolitical risk shocks impact monetary policy? Based on a panel of 18 economies, we develop and estimate an augmented panel Taylor rule via constant and time-varying local projection regression models. First, the panel evidence suggests that the interest rate decreases in the short run and increases in the medium run in the event of a geopolitical risk shock. Second, the results are confirmed in the time-varying model, where the policy reaction is accommodating in the short run (1 to 2 months) to limit the negative effects on consumer sentiment. In the medium term (12 to 15 months), the central bank is more committed to combating inflation pressures.

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 experimentally test monetary policy decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation by correctly putting higher weight on inflation than on the output gap. In fact, the behavior of these subjects meets a stability criterion. The subjects smooth the interest rate as the theoretical literature suggests they should in order to enhance stability of the uncertain system they face. Our study is the first to use Taylor-type rules as a framework to identify inflation weighting, stability, and interest-rate smoothing as behavioral outcomes when subjects try to achieve an inflation target.

This paper investigates the bidirectional relation between the Brazilian Central Bank communication and the yield curve. Using latent factors, observable macroeconomic variables, and observable variables representing Central Bank communication, we estimate a model that summarizes the yield curve. We find evidence of the effects of Brazilian Central Bank communication on the movements of the yield curve and the impact of the yield curve components in Brazilian Central Bank communication. In particular, Central Bank communication can shape yield curve curvature and slope. Additionally, we find a strong relation between Central Bank communication and the curvature of the yield curve. These results show that Central Bank communication impacts market players, making it a valuable instrument for monetary policy.

An idée fixe of Great Moderation economic policy was that central banks are only effective macroeconomic managers when they are segregated from electoral politics. That idea made a swift transition from radical heterodoxy to commonsensical orthodoxy during the 1980s and proved remarkably resistant to reality during the 2008 financial crisis. After almost twenty years of ‘unconventional’ monetary policy, scholars, policymakers, and politicians are justifiably searching for more credible ways to conceptualise and use the nation-state’s monetary authority. Two recent books provide vital energy for that intellectual exercise. Éric Monnet’s Balance of Power is a bold re-conceptualisation of monetary authority as a welfare-state support in liberal democracies. In addition to dissipating the illusion that central banks are simply interest-rate-setting inflation-fighters, Monnet presents a systematic argument for integrating them into a web of deliberative institutions (including public development banks and economically empowered parliaments) to bolster the legitimacy and effectiveness of monetary policy. Relatedly, Manuella Moschella’s Unexpected Revolutionaries attacks the idea that central bankers are responsive only to technocratic doctrine and private-market behaviour, showing how monetary authorities sculpt policies to bolster their reputation with political actors. Paying close reference to private-market liquidity guarantees and quantitative easing, Moschella maps the fortunes of unconventional policy in alignment with political support for financial-market backstops and exceptional economic stimulus. Both books provoke readers to jettison the anodyne generalities of central banks’ own glossy pamphlets and think afresh about the possibilities of economic policy’s new normality.

This paper introduces a global banking system in a small open economy DSGE model and features global relative price adjustments with incomplete asset market to investigate the role of international financial imperfections. We show that credit policy could be more powerful than monetary policy to alleviate foreign financial shocks since an expansionary monetary policy and alternative policy rules are not a sufficient tool in the global financial crisis. In particular, credit policy based on international credit spread outperforms credit policy based on domestic credit spread since the former attempts to remove distortions from international financial imperfections and reduces real costs of foreign loans. Accordingly, the lower costs of external finance further boost investment and effectively stabilize the economy without substantial asset purchases.

Quantitative easing (QE) has been a favourite tool of central banks in their post-financial crisis monetary policy apparatus. Social science literature has interpreted QE as a shift away from performative governance characterising pre-crisis monetary policy. With reference to the Bank of England’s experience, I offer a reinterpretation of QE as a performative intervention in the conditions of financial markets, as an attempt to alter the state of financial markets away from dysfunctionality and towards efficiency. I claim that, following the financial crisis, the model of complete and efficient markets – a mainstay in central banking prior to the crisis – was transformed from a real-world approximation to a ‘performative object’ to be achieved. In deploying the balance sheet, central banks attempt to performatively enact complete and efficient markets. The article rejects the claim of discontinuity between pre-crisis and post-crisis monetary policy, arguing that QE is a continuation of inflation targeting though with important innovations. While pre-crisis performativity relied on central bankers’ communicative framing of market expectations, QE is performative via the ontological shaping of financial markets, driven by epistemic models. The article relies on a set of 51 interviews with central bankers and financial market participants and a corpus of documents.

We find significant evidence of model misspecification, in the form of neglected serial correlation, in the econometric model of the U.S. housing market used by Taylor (2007) in his critique of monetary policy following the 2001 recession. When we account for that serial correlation, his model fails to replicate the historical paths of housing starts and house price inflation. Further modifications allow us to capture both the housing boom and the bust. Our results suggest that the counterfactual monetary policy proposed by Taylor (2007) would not have averted the pre-financial crisis collapse in the housing market. Additional analysis implies that the burst of house price inflation during the COVID-19 pandemic was not caused by the deviations from the Taylor rule that occurred during this period.

In a series of academic publications, Edward Nelson has contended that from the 1950s until the late 1970s, UK policymakers failed to recognise the primacy of monetary policy in controlling inflation. He argues that the highwater mark of monetary policy neglect occurred in the 1970s. This thesis has been rejected by Duncan Needham who has explored several experiments with monetary policy from the late 1960s and challenged the assertion that the authorities neglected monetary policy during the 1970s. Drawing on evidence from the archives and other sources, this article documents how the UK authorities wrestled with monetary policy following the 1967 devaluation of sterling. Excessive broad money growth during the early 1970s was followed by the highest level of peacetime inflation by 1975. The article shows that despite the experiments with monetary policy, a nonmonetary view of inflation dominated the mindset of policymakers during the first half of the 1970s. In the second half of the 1970s there was a change in emphasis and monetary policy became more prominent in economic policymaking, particularly when money supply targets were introduced. Despite this, the nonmonetary view of inflation dominated the decision processes of policymakers during the 1970s.

Monetary policy in the USA affects borrowing costs for state and local governments, incentivizing municipal borrowing and spending, which in turn affects economic outcomes. Using municipal bond indices and transaction-level data, I find that responses to monetary policy are dampened relative to treasuries and heterogeneous across location and bond characteristics. In my baseline estimate, muni yields move 26 bp after a 100 bp monetary shock. To study implications for local fiscal policy, I model US localities as small open economies in a monetary union with independent fiscal agents. In a calibrated model, monetary transmission is significantly affected by municipal borrowing costs.