Financial institutions

FEDS Paper: Government Debt, Limited Foresight, and Longer-term Interest Rates

05/03/2024 Federal Reserve Central banks

Christopher Gust and Arsenios SkaperdasWe study the relationship between government debt and interest rates in an environment where financial market participants have limited foresight about the future path of government debt. We show that limited foresight substantially attenuates estimates of the effect of government debt on longer-term yields relative to the benchmark of rational expectations often used in empirical analysis.

Monetary policy strategies to navigate post-pandemic inflation: an assessment using the ECB’s New Area-Wide Model

04/26/2024 European Central Bank Central banks

We evaluate how the euro area economy would have performed since mid-2021 under alternative monetary policy strategies. We use the ECB’s workhorse estimated DSGE model and contrast actual policy conduct against alternative strategies which differ in their ”lower-for-longer” commitment as well as policymaker preferences regarding inflation and output volatility.

Macro and micro of external finance premium and monetary policy transmission

04/26/2024 European Central Bank Central banks

We establish basic facts about the external finance premium. Tens of millions of individual loan contracts extended to euro area firms allow studying the determinants of the external finance premium at the country, bank, firm, and contract levels of disaggregation. At the country level, the variance in the premium is closely linked to sovereign spreads, which are important in understanding financial amplification mechanisms. However, country-level differences only explain half of the total variance.

Monetary policy strategies to navigate post-pandemic inflation: an assessment using the ECB’s New Area-Wide Model

04/26/2024 European Central Bank Central banks

We evaluate how the euro area economy would have performed since mid-2021 under alternative monetary policy strategies. We use the ECB’s workhorse estimated DSGE model and contrast actual policy conduct against alternative strategies which differ in their ”lower-for-longer” commitment as well as policymaker preferences regarding inflation and output volatility.

Macro and micro of external finance premium and monetary policy transmission

04/26/2024 European Central Bank Central banks

We establish basic facts about the external finance premium. Tens of millions of individual loan contracts extended to euro area firms allow studying the determinants of the external finance premium at the country, bank, firm, and contract levels of disaggregation. At the country level, the variance in the premium is closely linked to sovereign spreads, which are important in understanding financial amplification mechanisms. However, country-level differences only explain half of the total variance.

The role of technical factors in euro area inflation-linked swap rates

04/25/2024 European Central Bank Central banks

When long-term inflation-linked swap (ILS) rates for the euro area peaked in summer 2023, some observers expressed concerns that ILS rates reflected not only inflation compensation, but also non-fundamental “technical” factors. Such factors potentially reduced the usefulness of ILS rates in terms of gauging inflation expectations and risks. This box contributes to that discussion using a novel econometric approach, suggesting that there is, on average, little scope for technical factors to affect ILS rates.

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