•The paper studies global output spillovers from conventional US monetary policy.•The paper employs a mixed cross-section global VAR model with sign restrictions.•Spillovers are generally large, ...often larger than the domestic effects in the US.•Various receiving-country characteristics affect the magnitude of spillovers.
This paper assesses the global spillovers from identified US monetary policy shocks in a global VAR model. US monetary policy generates sizable output spillovers to the rest of the world, which are larger than the domestic effects in the US for many economies. The magnitude of spillovers depends on the receiving country's trade and financial integration, de jure financial openness, exchange rate regime, financial market development, labour market rigidities, industry structure, and participation in global value chains. The role of these country characteristics for the spillovers often differs across advanced and non-advanced economies and also involves non-linearities. Furthermore, economies that experience larger spillovers from conventional US monetary policy also displayed larger downward revisions of their growth forecasts in spring 2013 when the Federal Reserve upset markets by discussing tapering off quantitative easing. The results of this paper suggest that policymakers could mitigate their economies' vulnerability to US monetary policy by fostering trade integration as well as domestic financial market development, increasing the flexibility of exchange rates, and reducing frictions in labour markets. Other policies – such as inhibiting financial integration, industrialisation and participation in global value chains – might mitigate spillovers from US monetary policy, but are likely to reduce long-run growth.
This study uses event-study methodology to estimate the impact of the COVID-19 pandemic on the transmission of monetary policy to financial markets, based on a sample of 37 countries with severe ...pandemics. Financial markets include government bond, stock, exchange rate and credit default swap markets. The results suggest that the emergence of pandemic has weakened the transmission of monetary policy to financial markets to a more significant degree. During our sample period following the outbreak of pandemic, neither conventional nor unconventional monetary policies have significant effects on all four of the financial markets. Of course, the unconventional monetary policies are slightly more effective as they can affect the stock and exchange rate markets to some extent. Therefore, in the post-pandemic period, if the monetary policy is used to stimulate financial markets, stronger policy adjustments, or other macro policies such as fiscal policies, may be needed to achieve the desired effect
•Impact of COVID-19 on monetary policy transmission to financial markets.•Emergence of pandemic has weakened monetary policy transmission.•Unconventional monetary policies are more effective during the pandemic.•A stronger monetary policy is needed in the post-pandemic period.
We embed an extension of the canonical epidemiology model in a New Keynesian model and analyze the role of monetary policy as a virus spreads and triggers a sizable recession. In our framework, ...consumption is less sensitive to real interest changes in a pandemic than in normal times because individuals have to balance the benefits of taking advantage of intertemporal substitution opportunities with the risk of becoming sick. Accommodative monetary policies such as forward guidance result in large increases in inflation but have only limited effects on real economic activity as long as the risk of infection is large. The optimal design of monetary policy hinges on how other tools used to limit virus spread, such as lockdowns, are deployed. If the lockdown policy is conducted optimally, monetary policy should focus on keeping inflation on target. However, if the lockdown policy is not optimal, the central bank faces a trade-off between its objective of stabilizing inflation and the necessity to minimize the inefficiencies associated with virus spread.
The UK has experienced a dramatic increase in earnings and income inequality over the past four decades. We use detailed micro level information to construct quarterly historical measures of ...inequality from 1969 to 2012. We investigate whether monetary policy shocks played a role in explaining this increase in inequality. We find that contractionary monetary policy shocks lead to an increase in earnings, income and consumption inequality and contribute to their fluctuation. The response of income and consumption at different quantiles suggests that contractionary policy has a larger negative effect on low income households and those that consume the least when compared to those at the top of the distribution. Our evidence also suggests that the policy of quantitative easing may have contributed to the increase in inequality over the Great Recession.
Blame for the recent financial crisis and subsequent recession has commonly been assigned to everyone from Wall Street firms to individual homeowners. It has been widely argued that the crisis and ...recession were caused by “greed” and the failure of mainstream economics. In Getting It Wrong, leading economist William Barnett argues instead that there was too little use of the relevant economics, especially from the literature on economic measurement. Barnett contends that as financial instruments became more complex, the simple-sum monetary aggregation formulas used by central banks, including the U.S. Federal Reserve, became obsolete. Instead, a major increase in public availability of best-practice data was needed. Households, firms, and governments, lacking the requisite information, incorrectly assessed systemic risk and significantly increased their leverage and risk-taking activities. Better financial data, Barnett argues, could have signaled the misperceptions and prevented the erroneous systemic-risk assessments. When extensive, best-practice information is not available from the central bank, increased regulation can constrain the adverse consequences of ill-informed decisions. Instead, there was deregulation. The result, Barnett argues, was a worst-case toxic mix: increasing complexity of financial instruments, inadequate and poor-quality data, and declining regulation. Following his accessible narrative of the deep causes of the crisis and the long history of private and public errors, Barnett provides technical appendixes, containing the mathematical analysis supporting his arguments.
This paper employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. We show that ...such a model offers an excellent description of the data compared to the benchmark model and can be used to summarize the macroeconomic effects of unconventional monetary policy. Our estimates imply that the efforts by the Federal Reserve to stimulate the economy since July 2009 succeeded in making the unemployment rate in December 2013 1% lower, which is 0.13% more compared to the historical behavior of the Fed.
This paper provides new evidence of the effect of conventional monetary policy shocks on income inequality. We construct a measure of unanticipated changes in policy rates—changes in short-term ...interest rates that are orthogonal to unexpected changes in growth and inflation news—for a panel of 32 advanced and emerging market countries over the period 1990–2013. Our main finding is that contractionary monetary policy shocks increase income inequality, on average. The effect is asymmetric—tightening of policy raises inequality more than easing lowers it—and depends on the state of the business cycle. We find some evidence that the effect increases with the share of labor income and is mitigated by redistribution policies. Finally, while an unexpected increase in policy rates increases inequality, changes in policy rates driven by an increase in growth and inflation are associated with lower inequality.
This article analyses the effects of the Federal Reserve's quantitative easing (QE) on global portfolio flows, differentiating across recipient region of the flows, type of flow and QE rounds. ...Furthermore, the analysis differentiates between the impact of QE expansionary announcements and the actual market operations. The analysis shows that QE1 resulted in (slight) rebalancing towards the US, while QE2 and QE3 resulted in rebalancing towards non-US assets. This suggests that QE increased the procyclicality of flows outside the US, in particular into emerging market equities. The results also suggest a link between US macro-financial conditions and the transmission of QE to portfolio flows.
We examine the determinants of net private capital inflows to emerging market economies (EMEs) since 2002. Our main findings are: First, growth and interest rate differentials between EMEs and ...advanced economies and global risk appetite are statistically and economically important determinants of net private capital inflows. Second, there have been significant changes in the behavior of net inflows from the period before the recent global financial crisis to the post-crisis period, especially for portfolio inflows, partly explained by the greater sensitivity of such flows to interest rate differentials since the crisis. Third, capital controls introduced in recent years do appear to have discouraged both total and portfolio net inflows. Finally, we find positive effects of unconventional U.S. monetary policy on EME inflows, especially portfolio inflows. Even so, U.S. unconventional policy is one among several important factors influencing flows.
•We study the determinants of private capital flows to emerging markets.•Growth and interest rate differentials and global risk appetite are key factors.•Net inflows became more sensitive to interest differentials after the 2008 crisis.•Capital controls introduced in recent years discouraged both net and gross inflows.•We find positive effects of Fed LSAPs on net and, especially, gross inflows.
PDF
