Money, Interest Rates, and Policy Effects
Lightning Round SessionSaturday, Jan. 3, 2026 8:00 AM - 10:00 AM (EST)
- Chair: Charles Weise, Gettysburg College
Money As Medium of Exchange and Store of Value in Overlapping Generations Models
Abstract
Money’s role as a store of value emerges from its function as a medium of exchange. This model shows that money can retain value even when dominated in return by durable goods that serve as alternative wealth transfer mechanisms, offering a refinement to the traditional view in overlapping generations (OLG) models that money primarily facilitates intergenerational wealth transfer and holds value only if it is not dominated in return. Even if agents do not expect money to be valued in the future, it remains essential today due to its role in facilitating transactions and resolving the absence of a double coincidence of wants. The analysis also establishes the existence of an optimal money supply that maximizes societal welfare, providing new insights into the persistence and policy implications of moneyDo Capacity Constraints Affect the Pass-Through of Monetary Policy to Prices?
Abstract
In this paper, we use very granular Swedish data at the product and firm level to study how capacity constraints affects the transmission of monetary policy shocks to prices. In particular, we leverage on the micro data underlying both the official Swedish producer-price index and the industrial capacity-utilization index. When not accounting for capacity constraints, we find that an expansionary monetary policy shock leads to a significant, hump-shaped increase in producer prices. Notably, the average price response masks important differences between capacity constraint and unconstrained firms. We show that constrained firms increase prices more significantly following the expansionary monetary intervention compared to unconstrained firms. In addition, the timing of the price response indicates strong differences. Constrained firms adjust prices almost immediately, unconstrained firms respond much more sluggishly. Our results suggest that the ability of the central bank to influences prices via changes in interest rates crucially depends on firms’ capacity utilization. To test for the interaction between capacity constraints and market power, we use our detailed balance sheet data to construct a series on firm-level markups. The results reveal that market power indeed plays a crucial role in shaping the price response of capacity constraint firms. Differentiating between high and low markup firms, we find that only constraint firms with high markups significantly increase prices following the expansionary monetary shock. In contrast, constrained firms with limited market power do not adjust their prices significantly. The increase in prices might be a response of firms facing higher marginal costs or firms raising their markups. Our preliminary findings suggest that higher marginal costs are mainly responsible for the price increase whereas firms do not adjust markups in a systematic manner following the monetary policy shock.Euro Area Output Gaps and the Transmission of Common Monetary Policy
Abstract
The euro area output gap plays a key part in the determination of the ECB’s monetary policystance. The actual transmission of its monetary policy works through the member economies
with possibly large and significant spillovers across the euro area. I adopt a multicycle version of
the Beveridge-Nelson decomposition that allows to jointly estimate the output gaps of the four
largest euro area economies. Taking full account of the interlinkages across the euro area, I study
the dynamics and transmission of common monetary policy shocks. Distinguishing between the
direct and indirect effects (spillovers) of monetary policy, I can study how the aggregate behavior
of the euro area output gap is explained by the effects of monetary policy on its components, i.e.
the members’ output gaps.
Monetary Policy, Price of Risk and Growth
Abstract
Innovation is risky. By affecting the aggregate risk aversion of agents inthe economy, monetary policy can determine the amount of innovation that
is optimally supported. Crucially, by changing the aggregate risk aversion,
monetary policy determines the price of risk in the economy. This impacts
equilibrium R&D investments and, eventually, TFP growth. Using an asset
pricing model, we construct measures of price of consumption risk
and orthogonal shocks to this measure. We then show that unanticipated monetary
policy contractions increase the price of risk and unanticipated increases in
the price of risk decrease aggregate R&D. We quantify the contribution of
our channel to the overall R&D, TFP, and output response to monetary policy
shocks in a medium-run business cycle model with time-varying risk
aversion and non-neutral monetary policy. Using the model, we find that
the risk-taking channel accounts for an economically significant portion of
R&D, TFP, and output response to unanticipated changes in interest rates.
Treasury Supply Shocks: Propagation Through Debt Expansion and Maturity Adjustment
Abstract
The historically high debt-to-GDP ratio in the United States has raised concerns about future financial market stability and fiscal sustainability, as Treasury debt issuance and management carry significant macro-financial implications. This paper employs a high-frequency identification strategy to quantify the effects of Treasury supply shocks on financial markets and macroeconomic outcomes. We use Treasury futures intraday price movements around Treasury auction announcements to identify two distinct shocks: (i) debt expansion shocks, which reflect unexpected increases in the overall level of issuance, and (ii) maturity adjustment shocks, which capture unexpected shifts in the maturity structure of debt supply.We find that debt expansion shocks raise yields across the curve, primarily by raising term premia and lowering the convenience yield, indicating reduced liquidity value of Treasuries. At the macroeconomic level, these shocks have the same crowding-out effects as expansionary fiscal policy shocks, as they reduce industrial production, consumption, and private investment. In contrast, maturity extension shocks steepen the yield curve by lowering short-term yields while increasing long-term yields. Long-term yields are rising due to a slight increase in term premia, indicating that investors are taking on more duration risk. At the same time, lower rollover risk reduces fiscal uncertainty, which boosts economic activity.
The macro-financial impact of both shocks is state-dependent. During periods of rapid debt accumulation, supply shocks have a greater impact on yields and real activity, suggesting increased sensitivity to fiscal signals. Furthermore, we investigate interactions between debt management and monetary policy, specifically testing whether Treasury issuance partially offsets the Federal Reserve's quantitative easing by raising term premia.
Causal Effects of Interest Rate Expectations on Firm Decisions and Their Macroeconomic Implications
Abstract
We study firms' borrowing behavior in response to a change in their interest rate expectations induced by a survey experiment. We find that firms revise their expectations downward after being informed about the European Central Bank's policy rate. By linking the survey to credit register data, we study firms' borrowing behavior after the information treatment. We find that treated firms both expand their loan amounts and shift their loan structure toward longer-term, fixed-rate credit and secure lower interest rates. The effects vary by firm leverage and size. Using balance sheet data, we show that treated firms also invest more following the RCT. We are currently working on a quantitative model to study the welfare effects of firms' expectation errors.What Are Empirical Monetary Policy Shocks? Estimating the Term Structure of Policy News
Abstract
Empirical monetary policy shocks (EMPS) mix information about both current and future policy. Policy news shocks at different horizons have different macroeconomic effects, so quantifying this mix is essential to use EMPS to evaluate theory. To disentangle these shocks, we develop an IV method to estimate the term structure of monetary policy news, which captures how an EMPS affects policy residuals at each future horizon. Applying our method to popular monetary policy shocks, we learn that they do not represent textbook surprises Instead, they mix information about policy at many horizons, and this mix varies depending on how the EMPS is identified. We can use the estimated term structures to construct synthetic shocks with arbitrary term structures and assess their macroeconomic effects. Synthetic surprise interest rate hikes are contractionary with little effect on prices, while long-term forward guidance is deflationary.Central Bank Balance Sheet Size, Net Interest Income, and Policy Rate Amplification
Abstract
This paper builds a quantitative New-Keynesian model with a central bank balance sheet, fiscal policy, and a representative financial intermediary facing uncertainty to show how interest rate policy has an additional counter-cyclical fiscal impact via central bank income when reserves are abundant as opposed to scarce. A counterfactual analysis between the US economies with small and large central bank balance sheets of 2005 and 2018 shows that in response to demand, supply, and government spending shocks, the real effects of identical interest rate changes are amplified in the abundant reserves economy. In response to a 1% preference shock, cumulative fluctuations are 4.5% lower in the output gap and 3.4% lower in inflation in the abundant reserves economy.Global Banks’ Macroeconomic Expectations and Credit Supply
Abstract
We investigate how global banks' macroeconomic expectations for borrower countries influence their credit supply. Utilizing granular data on varying expectations among banks lending to the same firm at the same time, combined with an instrumental variable approach, we find that more optimistic GDP growth expectations for a borrower country are strongly linked to increased credit supply. Specifically, a one standard deviation increase in a lender's GDP growth expectation for a borrower country corresponds to an increase of approximately \$75.35 million in the bank's lending to that country. In contrast, global banks' short-term inflation expectations do not show a significant impact on their credit supply.JEL Classifications
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit