We present estimates of monetary non-neutrality based on evidence from high-frequency responses of real interest rates, expected inflation, and expected output growth. Our identifying assumption is ...that unexpected changes in interest rates in a 30-minute window surrounding scheduled Federal Reserve announcements arise from news about monetary policy. In response to an interest rate hike, nominal and real interest rates increase roughly one-for-one, several years out into the term structure, while the response of expected inflation is small. At the same time, forecasts about output growth also increase—the opposite of what standard models imply about a monetary tightening. To explain these facts, we build a model in which Fed announcements affect beliefs not only about monetary policy but also about other economic fundamentals. Our model implies that these information effects play an important role in the overall causal effect of monetary policy shocks on output.
Nonlinear adventures at the zero lower bound Fernández-Villaverde, Jesús; Gordon, Grey; Guerrón-Quintana, Pablo ...
Journal of economic dynamics & control,
08/2015, Letnik:
57
Journal Article
Recenzirano
Odprti dostop
In this paper, we argue for the importance of explicitly considering nonlinearities in analyzing the behavior of the New Keynesian model with a zero lower bound (ZLB) of the nominal interest rate. To ...show this, we report how the decision rules and the equilibrium dynamics of the model are substantially affected by the nonlinear features brought about by the ZLB. We also illustrate a tension between the length of a spell at the ZLB and the drop in consumption there.
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 lecture focuses on the costs of public debt when safe interest rates are low. I develop four main arguments. First, I show that the current US situation, in which safe interest rates are ...expected to remain below growth rates for a long time, is more the historical norm than the exception. If the future is like the past, this implies that debt rollovers, that is the issuance of debt without a later increase in taxes, may well be feasible. Put bluntly, public debt may have no fiscal cost. Second, even in the absence of fiscal costs, public debt reduces capital accumulation, and may therefore have welfare costs. I show that welfare costs may be smaller than typically assumed. The reason is that the safe rate is the risk-adjusted rate of return to capital. If it is lower than the growth rate, it indicates that the risk-adjusted rate of return to capital is in fact low. The average risky rate however also plays a role. I show how both the average risky rate and the average safe rate determine welfare outcomes. Third, I look at the evidence on the average risky rate, i.e., the average marginal product of capital. While the measured rate of earnings has been and is still quite high, the evidence from asset markets suggests that the marginal product of capital may be lower, with the difference reflecting either mismeasurement of capital or rents. This matters for debt: the lower the marginal product, the lower the welfare cost of debt. Fourth, I discuss a number of arguments against high public debt, and in particular the existence of multiple equilibria where investors believe debt to be risky and, by requiring a risk premium, increase the fiscal burden and make debt effectively more risky. This is a very relevant argument, but it does not have straightforward implications for the appropriate level of debt. My purpose in the lecture is not to argue for more public debt, especially in the current political environment. It is to have a richer discussion of the costs of debt and of fiscal policy than is currently the case.
Linear-Rational Term Structure Models FILIPOVIĆ, DAMIR; LARSSON, MARTIN; TROLLE, ANDERS B.
The Journal of finance (New York),
April 2017, Letnik:
72, Številka:
2
Journal Article
Recenzirano
We introduce the class of linear-rational term structure models in which the state price density is modeled such that bond prices become linear-rational functions of the factors. This class is highly ...tractable with several distinct advantages: (i) ensures non-negative interest rates, (ii) easily accommodates unspanned factors affecting volatility and risk premiums, and (iii) admits semi-analytical solutions to swaptions. A parsimonious model specification within the linear-rational class has a very good fit to both interest rate swaps and swaptions since 1997 and captures many features of term structure, volatility, and risk premium dynamics—including when interest rates are close to the zero lower bound.
This study examines the effect of real money balances on monetary policy in a two-country new Keynesian model. To accomplish this, the nonseparable utility function between consumption and real money ...balances is considered in the model. We demonstrate how a change in the money aggregate impacts the international spillover of quantitative easing (QE). This paper shows that whether the degree of the nonseparability parameter impacts international monetary policy spillover depends on the presence of zero lower bounds (ZLB) on nominal interest rates. This paper addresses that when the home and foreign countries face the ZLB, a foreign QE shock might cause a beggar-thy-neighbor effect on the home country.
•We examine the effect of real money balances on monetary policy in a two-country model.•Nonseparable utility function between consumption and real money balances is considered.•We show how a money aggregate change impacts the international spillover of quantitative easing (QE).•Foreign QE shock might cause a beggar-thy-neighbor effect on the home country under zero lower bounds.
This study examines the relationship between oil price volatility and stock returns in the G7 economies (Canada, France, Germany, Italy, Japan, the UK and the US) using monthly data for the period ...1970 to 2014. In order to measure oil volatility we consider alternative specifications for oil prices (world, nominal and real prices). We estimate a vector autoregressive model with the following variables: interest rates, economic activity, stock returns and oil price volatility taking into account the structural break in the year 1986. We find a negative response of G7 stock markets to an increase in oil price volatility. Results also indicate that world oil price volatility is generally more significant for stock markets than the national oil price volatility.
•This study examines the relationship between oil price volatility and stock returns in the G7 economies.•We use alternative specifications for oil price volatility.•The paper takes into account the structural break in 1986 previously detected in the empirical literature.•We find a negative response of G7 stock markets to an increase in oil price volatility.•We also find that indicate that world oil price volatility is generally more significant for stock markets than the national oil price volatility.
This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. In terms of methodologies, it combines three novel features. First, ...it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses revisions in growth and inflation and the Taylor rule to gauge desired changes in a country's interest rate if it is to focus exclusively on growth, inflation, and real exchange rate stability. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rates are observed. In terms of empirical findings, we differ from the existing literature and document patterns of “2.5-lemma” or something between a trilemma and a dilemma: without capital controls, a flexible exchange rate regime offers some monetary policy autonomy when the center country tightens its monetary policy, yet it fails to do so when the center country lowers its interest rate. Capital controls help to insulate periphery countries from monetary policy shocks from the center country even when the latter lowers its interest rate.
Nominal interest rates are constrained by an effective lower bound, but the level of the lower bound is uncertain. This paper uses a simple shadow rate term structure model to study how lower bound ...uncertainty affects long‐term interest rates. A decline in lower bound uncertainty, in the sense of a mean‐preserving contraction, is associated with a drop in expected short rates. The effect on the variance of short rates, and hence the term premium, is ambiguous. A calibration to Canadian data suggests that a decline in lower bound uncertainty is associated with a modest drop in interest rates.
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