This paper structurally investigates the changes in the Fed's communication strategy since the mid-1990s through the lens of anticipated and unanticipated disturbances to a Taylor rule. The ...anticipated disturbances are identified using Treasury bond yield data in estimating a dynamic stochastic general equilibrium (DSGE) model with a term structure of interest rates. Our estimation results show that the Fed's decisions were unanticipated for market participants until 1999, but thereafter a larger portion of its future policy actions tended to be communicated in advance. We also find that the relative contribution of the anticipated monetary policy disturbances to macroeconomic fluctuations became larger after 1999. The bond yield data is indispensable to these results, since it contains crucial information on an expected future path of the federal funds rate.
The paper formulates the modeling of unconventional monetary policy and critically evaluates its effectiveness to address the Global Financial Crisis. We begin with certain principles guiding general ...scientific modeling and focus on Milton Friedman's 1968 Presidential Address that delineates the strengths and limitations of monetary policy to pursue certain goals. The modeling of monetary policy with its novelty of quantitative easing to target unusually high unemployment is evaluated by a Markov switching econometric model using monthly data for the period 2002–2015. We conclude by relating the lessons learned from unconventional monetary policy during the Global Financial Crisis to the recent bold initiatives of the Fed to mitigate the economic and financial impact of the Covid-19 pandemic on U.S. households and businesses.
In standard macroeconomic models, equilibrium stability and uniqueness require monetary policy to actively target inflation and fiscal policy to ensure long‐run debt sustainability. We show ...analytically that these requirements change, and depend on the cyclicality of fiscal policy, when government debt is risky. In that case, budget deficits raise interest rates and crowd out consumption. Consequently, countercyclical fiscal policies reduce the parameter space supporting stable and unique equilibria and are feasible only if complemented with more aggressive debt consolidation and/or active monetary policy. Stability is more easily achieved, however, under procyclical fiscal policies.
Applying a smooth transition vector autoregression model with survey expectation data, we investigate the nonlinear effects of exchange rate shocks on inflation across monetary policy credibility ...states in Korea. We find that the impact of the exchange rate shocks is statistically larger in the low credibility regime, particularly in the short run. Our findings suggest that monetary policy credibility plays a significant role in maintaining for price stability in Korea.
•We investigate the nonlinear exchange rate pass-through (ERPT) across the monetary policy (MP) credibility states for Korea.•We use MP credibility, measured as the disagreement among professional forecasters, as a transition variable.•We find that the impact of the exchange rate shocks is statistically larger in the low credibility regime.•The results suggest MP credibility plays a significant role in maintaining for price stability in Korea.
We examine the impact of the first phase of the Bank of England's quantitative easing (QE) programme during March 2009—January 2010 on the UK government bond (gilt) market, using high-frequency, ...disaggregated data on individual gilts. We find that: QE announcements took varying amounts of time to get incorporated into market prices and had significant effects on the shape of the term structure; the Bank's reverse auctions were initially associated with additional yield reductions; and, allowing for fiscal news and the changing macroeconomic outlook, QE appears to have had persistent effects on gilt yields.
•We avail of a new housing and financial sector model of the Irish economy to characterise the determinants of Irish house prices over the period 1995–2019.•The suite of models are used to examine ...the contribution of developments in both monetary policy and financial stability as well as the performance of the real economy and supply-side of the Irish residential sector.•Our results have interesting implications for the growing literature examining the intersection of monetary policy and financial stability on house prices.
While many western economies experienced substantial fluctuations in house prices since the turning of the century, the Irish residential market stands out as a particular case. Irish house prices experienced profound increases in the period leading up to the global financial crisis (GFC); thereafter the concomitant downturn in both the real Irish economy and financial sector precipitated a dramatic decline in prices between 2007 and 2012. However, since 2012 prices have increased in a sustained and persistent manner. A number of possible reasons are commonly cited for the recovery. In this paper we avail of a new housing and financial sector model, which are part of a broader macro-econometric model, COSMO, of the Irish economy to characterise the determinants of Irish house prices over the period 1995–2019 and in particular to examine the reasons for the post 2012 recovery. The suite of models are used to examine the contribution of developments in both monetary policy and financial stability as well as the performance of the real economy. The role played by the sluggish response of the supply-side of the Irish residential sector is also assessed. The supply-side of the Irish market was especially impacted by the GFC and has struggled to respond to the surge in housing demand which has accompanied the general economic recovery since 2012. Our results have interesting implications for the growing literature examining the intersection of monetary policy and financial stability on house prices.
Monetary policy is more effective when financial intermediaries have a higher equity share in their total assets. When the leverage ratio is one standard deviation below average, the marginal effect ...of a monetary policy shock on realized S&P 500 returns is 89% larger in an event window study. In a VAR exercise, the impulse responses of real variables to a given monetary policy shock also have larger magnitudes when financial intermediaries have a lower leverage. The financial intermediary leverage is counter-cyclical, explaining why monetary policy is less effective during recessions as found in the literature.
Macroprudential policy and bank risk Altunbas, Yener; Binici, Mahir; Gambacorta, Leonardo
Journal of international money and finance,
03/2018, Letnik:
81
Journal Article
Recenzirano
Odprti dostop
•Macroprudential tools have a significant impact on bank risk.•The responses differ among banks, depending on size, capital level and funding model.•Macroprudential policies are most effective during ...tightening cycles.
This paper investigates the effects of macroprudential policies on bank risk through a large panel of banks operating in 61 advanced and emerging market economies. There are three main findings. First, there is evidence suggesting that macroprudential tools have a significant impact on bank risk. Second, the responses to changes in macroprudential tools differ among banks, depending on their specific balance sheet characteristics. In particular, banks that are small, weakly capitalised and with a higher share of wholesale funding react more strongly to changes in macroprudential tools. Third, controlling for bank-specific characteristics, macroprudential policies are more effective in a tightening than in an easing episode.
This paper uses 13,766 firm-year observations between 2003 and 2013 from China to investigate the effects of monetary policy on corporate investment and the mitigating effects of cash holding. We ...find that tightening monetary policy reduces corporate investment while cash holdings mitigate such adverse effects. The cash mitigating role is especially significant for financially constrained firms, non-state-owned enterprises (non-SOEs) and those firms located in a less developed financial market. Cash holding also improves investment efficiency when monetary policy is tightening and tightening monetary policy enhances the ‘cash-cash flow’ sensitivity. Our empirical evidence calls for a critical evaluation on the monetary policies implemented in China which are less effective for state-owned enterprises. It also calls for a necessity for local government to further develop regional financial markets to protect vulnerable businesses, such as non-SOEs and financially constrained firms, from external shocks in order to maintain their sustainable growth and competitive advantages.
•We investigate the effects of monetary policy on corporate investment in China.•Cash holding mitigates the adverse effects of monetary tightening on investment.•Local financial development mitigates the adverse effects of monetary tightening.•Investment by SOEs is less sensitive to monetary tightening than non-SOEs.•Monetary tightening enhances ‘cash-cash flow’ sensitivity.
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