We examine whether monetary policy uncertainty influences the reaction of the equity, Treasury security, foreign exchange and crude oil markets, as well as medium-term interest rates, to U.S. ...macroeconomic announcements. Using intraday futures data, we show that in the presence of higher policy uncertainty the response to macroeconomic news weakens in the stock and crude oil markets and strengthens in the Treasury, interest rate and foreign exchange markets. In times of elevated monetary policy uncertainty, macroeconomic announcements impact the financial and crude oil markets to a large extent through expectations of future monetary policy.
This paper evaluates the role of redistribution in the transmission mechanism of monetary policy to consumption. Three channels affect aggregate spending when winners and losers have different ...marginal propensities to consume: an earnings heterogeneity channel from unequal income gains, a Fisher channel from unexpected inflation, and an interest rate exposure channel from real interest rate changes. Sufficient statistics from Italian and US data suggest that all three channels are likely to amplify the effects of monetary policy.
Exchange rates play a crucial role in the international economy. This study investigates the explanatory power of yield curve factors in exchange rate predictions for countries in three currency ...pairs: Japanese yen (JPY)-US dollar (USD), British pound (GBP)-USD, and Canadian dollar (CAD)-USD. The results empirically establish that each country's yield curve factors, extracted from the term structure of interest rates model, play a key role in determining future exchange rates. Specifically, an increase in the US level factor causes depreciation in the USD relative to the JPY for the full sample period (June 1994-October 2020) and in the GBP and CAD for the post-global financial crisis period. The study's model provides more useful information than the baseline uncovered interest rate parity model for explaining the variations in the three currency pairs. Additionally, the yield curve factors also explain the variation in countries' excess currency returns. This study has important theoretical implications for identifying which of the two countries' yield curve factors predominantly explain the exchange rate changes and the related policy implications. It also provides key policy insights by substantiating the association between macroeconomic variables and exchange rate changes.
We analyze a two-country economy with complete markets, featuring two national currencies as well as a global (crypto)currency. If the global currency is used in both countries, the national nominal ...interest rates must be equal and the exchange rate between the national currencies is a risk-adjusted martingale. Deviation from interest rate equality implies the risk of approaching the zero lower bound or the abandonment of the national currency. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). If the global currency is backed by interest-bearing assets, additional and tight restrictions on monetary policy arise. Thus, the classic Impossible Trinity becomes even less reconcilable.
This paper undertakes an empirical inquiry concerning the determinants of the long-term interest rate on U.S. Treasury securities. It applies the bounds testing procedure to cointegration and error ...correction models within the autoregressive distributive lag (ARDL) framework, using monthly data and estimating a wide range of Keynesian models of long-term interest rates. While previous studies have mainly relied on quarterly data, the use of monthly data substantially expands the number of observations. This in turn enables the calibration of a wide range of models to test various hypotheses. The short-term interest rate is the key determinant of the long-term interest rate, while the rate of core inflation and the pace of economic activity also influence the long-term interest rate. A rise in the ratio of the federal fiscal balance (government net lending/borrowing as a share of nominal GDP) lowers the long-term interest rate on Treasury securities. The short- and long-run effects of short-term interest rates, the rate of inflation, the pace of economic activity, and the fiscal balance ratio on the long-term interest rate are estimated. The findings reinforce Keynes's prescient insights on the determinants of government bond yields.
We adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates. We find that one shock can explain the majority of ...unpredictable movements in the slope. Impulse response functions lead us to interpret this shock as news about future total factor productivity (TFP). By showing that “slope shocks” are essentially “TFP news shocks” we provide a new explanation for the relationship between the slope and macroeconomic fundamentals. Our results also provide a new empirical benchmark for structural models at the intersection of macroeconomics and finance. (JEL E23, E43, E52, G12, G14)
Asset pricing models assume the risk-free rate to be a key factor for equity prices. Hence, there should be a strong link between monetary policy rate uncertainty and equity return volatility, both ...in theory and data. This paper uses regression-based projections for realized variance to examine the relationship between short horizon forecasts of equity variance and proxies for monetary policy rate uncertainty. By assessing various projection models for UK, US and euro area equity indices, we show that the proxies for monetary policy rate uncertainty have a significant and positive predictive power for the equity return variance. Adding monetary policy rate uncertainty variables can significantly improve forecasting models for equity variance and volatility at weekly, monthly and even quarterly horizons. The findings imply that market views of short-term interest rate developments may indeed be embedded in equity prices and their variations.
•Monetary policy uncertainty proxies help predicting variance of equity returns.•Lower monetary policy uncertainty decreases equity index volatility.•We use regression-based projection models for realized volatility and variance.•Our main ex-ante monetary policy uncertainty proxies come from interest rate options.
•Central bank communication has a stabilizing effect on individual and aggregate outcomes.•The size of the effect varies with the type of communication.•Announcing past interest rate changes has the ...largest effect.•Forward-looking announcements have less effect on individual forecasts, especially if they do not clarify the timing of future policy changes.•Communication is effective via simple and relatable backward-looking announcements.
The causal effects of central bank communication on economic expectations and their underlying mechanisms are tested in controlled laboratory experiments. We find that central bank communication has a stabilizing effect on individual and aggregate outcomes, and the size of the effect varies with the type of communication. Announcing past interest rate changes has the largest effect, reducing volatility of individual price and expenditure forecasts by one-quarter and four-fifths, respectively, and cutting a quarter of macroeconomic volatility. Forward-looking announcements have less effect on individual forecasts, especially if they do not clarify the timing of future policy changes. There is little evidence that central bank communication transmits via its influence on forecasters’ ability to predict future nominal interest rates. Rather, communication is effective via simple and relatable backward-looking announcements that exert strong influence on less-accurate forecasters.
We analyse the impact of standard and non-standard monetary policy on bank profitability. We use both proprietary and commercial data on individual euro area bank balance-sheets and market prices. ...Our results show that a monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Accommodative monetary conditions asymmetrically affect the main components of bank profitability, with a positive impact on loan loss provisions and non-interest income offsetting the negative one on net interest income. A protracted period of low monetary rates has a negative effect on profits that, however, only materialises after a long time period and is counterbalanced by improved macroeconomic conditions. Monetary policy easing surprises during the low interest rate period improve bank stock prices and CDS.
We investigate whether US government spending multipliers are higher during periods of economic slack or when interest rates are near the zero lower bound. Using new quarterly historical US data ...covering multiple large wars and deep recessions, we estimate multipliers that are below unity irrespective of the amount of slack in the economy. These results are robust to two leading identification schemes, two different estimation methodologies, and many alternative specifications. In contrast, the results are more mixed for the zero lower bound state, with a few specifications implying multipliers as high as 1.5.
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