The Interaction of the Nocebo Effect and Financial Vulnerability: A Theoretical and Empirical Reassessment of the Monetary Policy Transmission Mechanism

Introduction. This study examines how persistent public pessimism (the nocebo effect) and financial vulnerability jointly weaken the monetary policy transmission mechanism in the post-crisis environment that emerged after the 2008 global financial crisis and the COVID-19 shock, using a comparative perspective for Japan, Finland, Russia, and Turkey. To address this question, we integrate an expectations-based New Keynesian framework with stock-flow-consistent (SFC) balance-sheet logic so that the expectations channel and the balance-sheet channel can be analyzed within a single framework. We model the nocebo effect as a time-varying pessimistic bias in expectations.
Methods and materials. Empirically, we construct a country-specific textual nocebo index based on central bank communications, official reports, and major economic and financial news, and we estimate its interaction with financial vulnerability indicators using TVP-VAR (time-varying parameter vector autoregression) models and local projections.
Results. The results show that when both the nocebo index and vulnerability indicators are simultaneously high, the responses of output and inflation to monetary policy shocks are substantially dampened and, in some episodes, become statistically indistinguishable from zero, indicating systematic breakdowns in the standard interest-rate, credit, and exchange-rate channels of transmission.
Discussion and Conclusion. These findings imply that ensuring economic and financial security requires joint monitoring of financial vulnerability indicators and behavioral measures of expectations when setting monetary policy parameters. In this context, central bank communication should be treated as a policy instrument comparable to interest-rate decisions and balance-sheet policies, because it can reduce public pessimism and thereby partially lift the «curtain of expectations».