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on Central Banking |
| By: | Barbara Rossi |
| Abstract: | How should one identify monetary policy shocks in unconventional times? Are unconventional monetary policies as e§ective as conventional ones? And has the transmission mechanism of monetary policy changed in the zerolower bound era? The recent Önancial crisis led Central banks to lower their interest rates in order to stimulate the economy, and interest rates in many advanced economies hit the zero lower bound. As a consequence, the traditional approach to the identiÖcation and the estimation of monetary policy faces new econometric challenges in unconventional times. This article aims at providing a broad overview of the recent literature on the identiÖcation of unconventional monetary policy shocks and the estimation of their e§ects on both Önancial as well as macroeconomic variables. Given that the prospects of slow recoveries and long periods of very low interest rates are becoming the norm, many economists believe that we are likely to face unconventional monetary policy measures often in the future. Hence, these are potentially very important issues in practice. |
| Keywords: | Shock identification, VARs, zero lower bound, unconventional monetary policy, monetary policy, external instruments, forward guidance. |
| JEL: | E4 E52 E21 H31 I3 D1 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1641&r=all |
| By: | Timo Henckel (Australian National University & Centre for Applied Macroeconomic Analysis); Gordon D. Menzies (University of Technology Sydney & Centre for Applied Macroeconomic Analysis); Peter Moffat (University of East Anglia); Daniel J. Zizzo (University of Queensland & Centre for Applied Macroeconomic Analysis) |
| Abstract: | We use the behavior of inflation among Eurozone countries to provide information about the degree of credibility of the European Central Bank (ECB) since 2008. We define credibility along three dimensions-official target credibility, cohesion credibility and anchoring credibility - and show in a new econometric framework that the latter has deteriorated in recent history; that is, price setters are less likely to rely on the ECB target when forming inflation expectations. |
| Keywords: | credibility; infl?ation; expectations; anchoring; monetary union; inferential expectations |
| JEL: | C51 D84 E31 E52 |
| Date: | 2019–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:56&r=all |
| By: | Atsushi Inoue; Barbara Rossi |
| Abstract: | We propose a new approach to analuze economic shocks. Our new procedure identifies economic shocks as exogenous shifts in a function; hence, we call the "functional shocks". We show how to identify such shocks and how to trace their effects in the economy via VARs using a procedure that we call "VARs with finctional shocks". Using our new procedire, we address the crucial question of studying the effects or monetary policy by identifying monetary policy shocks as shifts in the shole term structure of government bond yields in a narrow window of time around monetary policy announcements. Our identification sheds new light on the effects of monetary policy shocks, both in conventional and unconventional periods, and shows that traditional identification procedires may miss important effects. We find that, overall, unconventional monetary policy has similar effects to conventional expansionary monetary policy, leading to an increase in both output growth and inflation; the response is hump-shaped; peaking around oneyear to one year and a half after the shock. The new procedire has the advantage of identifying monetary policy shocks during both conventional and unconventional monetary policy periods in a unified manner and can be applied more generally to other economic shocks. |
| Keywords: | Shock identification, VARs, zero-lower bound, unconventional monetary policy, forward guidance. |
| JEL: | E4 E52 E21 H31 I3 D1 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1638&r=all |
| By: | Paul Hubert (Observatoire français des conjonctures économiques) |
| Abstract: | When the central bank and private agents do not share the same information, private agents may not be able to appreciate whether monetary policy responds to changes in the macroeconomic outlook or to changes in policy preferences. In this context, this paper investigates whether the publication of the central bank macroeconomic information set modifies private agents’ interpretation of policy decisions. We find that the sign and magnitude of the effects of monetary policy depend on the publication of policymakers’ macroeconomic views. Contractionary monetary policy has negative effects on inflation expectations and stock prices only if associated with inflationary news |
| Keywords: | Monetary policy; Information processing; signal extraction; Market based inflation expectations; Central bank projections; Real time forecasts |
| JEL: | E52 E58 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/1uc7rtm3rg99bp3v12n7vb9vva&r=all |
| By: | Itamar Drechsler; Alexi Savov; Philipp Schnabl |
| Abstract: | Between 2003 and 2006, the Federal Reserve raised rates by 4.25%. Yet it was precisely during this period that the housing boom accelerated, fueled by rapid growth in mortgage lending. There is deep disagreement about how, or even if, monetary policy impacted the boom. Using heterogeneity in banks' exposures to the deposits channel of monetary policy, we show that Fed tightening induced a large reduction in banks' deposit funding, leading them to contract new on-balance-sheet lending for home purchases by 26%. However, an unprecedented expansion in privately-securitized loans, led by nonbanks, largely offset this contraction. Since privately-securitized loans are neither GSE-insured nor deposit-funded, they are run-prone, which made the mortgage market fragile. Consistent with our theory, the re-emergence of privately-securitized mortgages has closely tracked the recent increase in rates. |
| JEL: | E43 E52 G21 G23 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25649&r=all |
| By: | De Fiore, Fiorella; Tristani, Oreste |
| Abstract: | We study the optimal combination of interest rate policy and unconventional monetary policy in a model where agency costs generate a spread between deposit and lending rates. We show that credit policy can be a powerful substitute for interest rate policy. In the face of shocks that negatively affect bank monitoring efficiency, unconventional measures insulate the real economy from further deterioration in financial conditions and it may be optimal for the central bank not to cut rates to zero. Thus, credit policy lowers the likelihood of hitting the zero bound constraint. Reductions in the policy rates without non-standard measures are sub-optimal as they force savers to inefficiently change their intertemporal consumption patterns. |
| Keywords: | asymmetric information; Optimal monetary policy; unconventional policies; zero-lower bound |
| JEL: | E44 E52 E61 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13585&r=all |
| By: | M. Ayhan Kose (World Bank, Development Prospects Group; Brookings Institution; CEPR, and CAMA); Hideaki Matsuoka (World Bank, Development Prospects Group); Ugo Panizza (Graduate Institute, Geneva; CEPR); Dana Vorisek (World Bank, Development Prospects Group) |
| Abstract: | This paper presents a comprehensive examination of the determination and evolution of inflation expectations, with a focus on emerging market and developing economies (EMDEs). The results suggest that long-term inflation expectations in EMDEs are not as well anchored as those in advanced economies, despite notable improvements over the past two decades. Indeed, in EMDEs, long-term inflation expectations are more sensitive to both domestic and global inflation shocks. However, EMDEs tend to be more successful in anchoring inflation expectations in the presence of an inflation targeting regime, high central bank transparency, strong trade integration, and a low level of public debt. |
| Keywords: | inflation, inflation expectations, monetary policy, emerging markets, developing economies. |
| JEL: | E31 E37 E40 E50 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1904&r=all |
| By: | Atsushi Inoue; Barbara Rossi |
| Abstract: | What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy shocks as changes int he whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substancial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents'expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis; (iv) changes in expected real interest rates play an important role in the transmission of monetary policy shocks. |
| Keywords: | Exchange rates, Zero-lower bound, unconventional monetary policy, forward guidance. |
| JEL: | F31 F37 C22 C53 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1639&r=all |
| By: | Chattopadhyay, Siddhartha |
| Abstract: | Sufficiently persistent rise in nominal interest increases inflation rate in short-run. This short-run comovement of nominal interest rate and inflation rate is known as Neo-Fisherianism. This paper proposes a policy based on Neo-Fisherianism to escape Zero Lower Bound (ZLB) using a textbook forward looking New Keynesian model. I have shown that proposed policy with properly chosen inflation target and persistence can stimulate economy and escape ZLB by raising nominal interest rate. I have also shown that the proposed policy is robust to varying degrees of price stickiness. |
| Keywords: | New Keynesian Model, Neo-Fisherianism, Zero Lower Bound |
| JEL: | E31 E4 E43 E5 E52 E6 E63 |
| Date: | 2019–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92669&r=all |
| By: | Eric M. Leeper; Campbell B. Leith; Ding Liu |
| Abstract: | The textbook optimal policy response to an increase in government debt is simple—monetary policy should actively target inflation, and fiscal policy should smooth taxes while ensuring debt sustainability. Such policy prescriptions presuppose an ability to commit. Without that ability, the temptation to use inflation surprises to offset monopoly and tax distortions, as well as to reduce the real value of government debt, creates a state-dependent inflationary bias problem. High debt levels and short-term debt exacerbate the inflation bias. But this produces a debt stabilization bias because the policy maker wishes to deviate from the tax smoothing policies typically pursued under commitment, by returning government debt to steady-state. As a result, the response to shocks in New Keynesian models can be radically different, particularly when government debt levels are high. |
| JEL: | E62 E63 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25658&r=all |