Identifying and estimating the effects of unconventional monetary policy: How to do it and what have we learned?

Monetary Policy Transmission Mechanism

Author(s):

Barbara Rossi

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Interest Rates ◽

Zero Lower Bound ◽

Monetary Policy Shocks ◽

Monetary Policies ◽

Policy Transmission ◽

Policy Shocks ◽

Recent Financial Crisis ◽

Summary The recent financial crisis led central banks to lower their interest rates in order to stimulate the economy until they hit the zero lower bound. How should one identify monetary policy shocks in unconventional times? Are unconventional monetary policies as effective as conventional ones? And has the monetary policy transmission mechanism changed in the zero lower bound era? This article aims to provide an overview of the econometric challenges of and the solutions to the identification of monetary policy shocks in unconventional times as well as a survey of their empirical effects on the economy.

Monetary Policy Spillovers across the Pacific when Interest Rates Are at the Zero Lower Bound

Asian Economic Papers ◽

10.1162/asep_a_00448 ◽

2016 ◽

Vol 15 (3) ◽

pp. 1-27 ◽

Cited By ~ 6

Author(s):

Edda Claus ◽

Iris Claus ◽

Leo Krippner

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Interest Rates ◽

The United States ◽

Asset Markets ◽

Zero Lower Bound ◽

Unconventional Monetary Policy ◽

Monetary Policy Shocks ◽

Short Term ◽

To conduct monetary policy effectively, central banks need to understand the transmission of monetary policy into financial markets. In this paper we investigate the effects of Japanese and U.S. monetary policy shocks on their own asset markets, and the spillovers into each other's markets. Because short-term nominal interest rates have been effectively zero in Japan since January 1998 and in the United States from late 2008, however, monetary policy shocks cannot be quantified by considering observable changes in short-term market interest rates. Therefore, in our analysis we use a shadow short rate―a quantitative measure of overall conventional and unconventional monetary policy that is estimated from the term structure of interest rates. Our results suggest that the operation of monetary policy at the zero lower bound of interest rates alters the transmission of shocks. In particular, we find a limited response of exchange rates during the first episode of unconventional monetary policy in Japan but a significant impact since 2006.

Spillovers of US Conventional and Unconventional Monetary Policies to Russian Financial Markets

International Journal of Economics and Finance ◽

10.5539/ijef.v10n2p14 ◽

2018 ◽

Vol 10 (2) ◽

pp. 14 ◽

Author(s):

Shigeki Ono

Keyword(s):

Monetary Policy ◽

Financial Markets ◽

Interest Rates ◽

Stock Prices ◽

Monetary Policy Shocks ◽

Federal Funds Rate ◽

Monetary Policies ◽

Endogenous Variables ◽

Policy Shocks ◽

Monetary Policy Shock

This paper investigates the spillovers of US conventional and unconventional monetary policies to Russian financial markets using VAR-X models. Impulse responses to an exogenous Federal Funds rate shock are assessed for all the endogenous variables. The empirical results show that both conventional and unconventional tightening monetary policy shocks decrease stock prices whereas an easing monetary policy shock does not increase stock prices. Moreover, the results suggest that an unconventional tightening monetary policy shock increases Russian interest rates and decreases oil prices, implying reduced liquidity in international financial markets.

Are financial markets less responsive to monetary policy shocks at the zero lower bound?

Economics Letters ◽

10.1016/j.econlet.2016.07.001 ◽

2016 ◽

Vol 145 ◽

pp. 258-261 ◽

Cited By ~ 2

Author(s):

Wenbin Wu

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Financial Markets ◽

Zero Lower Bound ◽

Monetary Policy Shocks ◽

Fixed-Wage Contracts and Monetary Non-neutrality

American Economic Journal Macroeconomics ◽

10.1257/mac.20160213 ◽

2019 ◽

Vol 11 (2) ◽

pp. 171-192 ◽

Monetary Policy Transmission Mechanism

Author(s):

Maria Björklund ◽

Mikael Carlsson ◽

Oskar Nordström Skans

Keyword(s):

Monetary Policy ◽

Transmission Mechanism ◽

Seasonal Patterns ◽

Micro Data ◽

Monetary Policy Shocks ◽

Policy Transmission ◽

Wage Contracts ◽

Policy Shocks ◽

Fixed Wage ◽

We study the importance of wage rigidities for the monetary policy transmission mechanism. Using uniquely rich micro data on Swedish wage negotiations, we isolate periods when the labor market is covered by fixed-wage contracts. Importantly, negotiations are coordinated in time but their seasonal patterns are far from deterministic. Using a two-regime VAR model, we document that monetary policy shocks have a larger impact on production during fixed-wage episodes as compared to the average response. The results do not seem to be driven by the periodic structure, nor the seasonality, of the renegotiation episodes. (JEL E23, E24, E52, J31, J41)

Asset Markets and Monetary Policy Shocks at the Zero Lower Bound

SSRN Electronic Journal ◽

10.2139/ssrn.2442110 ◽

2014 ◽

Cited By ~ 11

Author(s):

Edda Claus ◽

Iris Claus ◽

Leo Krippner

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Asset Markets ◽

Zero Lower Bound ◽

Monetary Policy Shocks ◽

Monetary Policy Transmission Mechanism

Sukuk and monetary policy transmission in Indonesia: the role of asset price and exchange rate channels

Journal of Islamic Accounting and Business Research ◽

10.1108/jiabr-09-2019-0177 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Suriani Suriani ◽

M. Shabri Abd. Majid ◽

Raja Masbar ◽

Nazaruddin A. Wahid ◽

Abdul Ghafar Ismail

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Interest Rates ◽

Asset Price ◽

Transmission Mechanism ◽

Monetary Policy Transmission ◽

Content Type ◽

Policy Transmission ◽

Purpose The purpose of this study is to empirically analyze the role of sukuk in the monetary policy transmission mechanism through the asset price and exchange rate channels in the Indonesian economy. Design/methodology/approach Using the monthly data from January 2003 to November 2017, this study uses a multivariate vector error correction model causality framework. To examine the role of sukuk in the monetary policy transmission mechanism through the asset price channel, this study uses the variables of consumption, inflation, interest rates, economic growth and the composite stock price index. Meanwhile, to examine the role of sukuk in the monetary policy transmission mechanism through the exchange rate channel, this study used variables of inflation, interest rates, economic growth, foreign investment and exchange rate. Findings This study documented that sukuk has no causal relationship with inflation through asset price and exchange rate channels. Nevertheless, sukuk has a bidirectional causal relationship with economic growth through asset price and exchange rate channels. Sukuk is also documented to have a causal relationship with monetary policy variables of interest rate and stock prices through asset price and exchange rate channels. Finally, a unidirectional causality is recorded running from the exchange rate to sukuk in the exchange rate channel. Research limitations/implications The finding of independence of the sukuk market from interest rates provides evidence that the trading of the sukuk in Indonesia has been in harmony with the Islamic tenets. Practical implications The relevant Indonesian authorities need to enhance both domestic and global sukuk markets as part of efforts to promote the sustainability of Islamic capital market development in Indonesia. Originality/value To the best of the authors’ knowledge, this study is among the first attempts to empirically investigate the role of sukuk in monetary policy transmission through asset price and exchange rate channels in the context of the Indonesian economy.

Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates

The American Economic Review ◽

10.1257/aer.104.10.3154 ◽

2014 ◽

Vol 104 (10) ◽

pp. 3154-3185 ◽

Cited By ~ 208

Author(s):

Eric T. Swanson ◽

John C. Williams

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Lower Bound ◽

Private Sector ◽

Interest Rates ◽

Zero Lower Bound ◽

Short Term ◽

Macroeconomic Models ◽

Monetary And Fiscal Policy ◽

Effectiveness Of Monetary Policy

According to standard macroeconomic models, the zero lower bound greatly reduces the effectiveness of monetary policy and increases the efficacy of fiscal policy. However, private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current short-term rate. Put differently, longer-term yields matter. We show how to measure the zero bound's effects on yields of any maturity. Indeed, 1- and 2-year Treasury yields were surprisingly unconstrained throughout 2008 to 2010, suggesting that monetary and fiscal policy were about as effective as usual during this period. Only beginning in late 2011 did these yields become more constrained. (JEL E43, E52, E62)

Monetary Policy Surprises, Credit Costs, and Economic Activity

American Economic Journal Macroeconomics ◽

10.1257/mac.20130329 ◽

2015 ◽

Vol 7 (1) ◽

pp. 44-76 ◽

Cited By ~ 210

Author(s):

Mark Gertler ◽

Peter Karadi

Keyword(s):

Monetary Policy ◽

High Frequency ◽

Monetary Policy Shocks ◽

Var Analysis ◽

Financial Variables ◽

Forward Guidance ◽

Policy Transmission ◽

Policy Shocks ◽

Term Premia ◽

Transmission Of Monetary Policy

We provide evidence on the transmission of monetary policy shocks in a setting with both economic and financial variables. We first show that shocks identified using high frequency surprises around policy announcements as external instruments produce responses in output and inflation that are typical in monetary VAR analysis. We also find, however, that the resulting “modest” movements in short rates lead to “large” movements in credit costs, which are due mainly to the reaction of both term premia and credit spreads. Finally, we show that forward guidance is important to the overall strength of policy transmission. (JEL E31, E32, E43, E44, E52, G01)

US unconventional monetary policy and Islamic equity indices

International Journal of Islamic and Middle Eastern Finance and Management ◽

10.1108/imefm-11-2017-0299 ◽

2018 ◽

Vol 11 (4) ◽

pp. 575-590 ◽

Author(s):

Sayyed Mahdi Ziaei

Keyword(s):

Monetary Policy ◽

Interest Rates ◽

Large Scale ◽

Empirical Work ◽

Unconventional Monetary Policy ◽

Monetary Policy Shocks ◽

Content Type ◽

Term Spread ◽

Us Economy ◽

Purpose This paper aims to constitute to the first empirical work that investigated the effects of US unconventional monetary policy shocks on Islamic equities. Design/methodology/approach The authors used the spread between sovereign (term spread) and corporate (corporate spread) yields as proxies of unconventional monetary policy in times that FED implemented different rounds of large-scale asset purchasing programs. Findings This paper demonstrates that monetary policy shocks have significant effects on Islamic equities. The analysis showed substantial evidence that the corporate spread innovation was reflected as a positive signal in Islamic equity markets and has a larger impact on Islamic low leverage equities than term spread. Originality/value The objective of this paper is to shed some insight into the effects of US unconventional monetary policy on low leverage financial assets. It is hypothesized that during this period, specifically from November 2008, unconventional monetary policy and zero bound interest rates have been implemented in the US economy. However, the strength of effects of this range of policies on Islamic financial products is unidentified.

Identifying conventional and unconventional monetary policy shocks: a latent threshold approach

The B E Journal of Macroeconomics ◽

10.1515/bejm-2015-0074 ◽

2016 ◽

Vol 16 (1) ◽

Cited By ~ 6

Author(s):

Takeshi Kimura ◽

Jouchi Nakajima

Keyword(s):

Monetary Policy ◽

Interest Rates ◽

Regime Switching ◽

Structural Var ◽

Var Model ◽

Recursive Identification ◽

Time Varying ◽

Unconventional Monetary Policy ◽

Monetary Policy Shocks ◽

AbstractThis paper proposes a new estimation framework for identifying monetary policy shocks in both conventional and unconventional policy regimes using a structural VAR model. Exploiting a latent threshold modeling strategy that induces time-varying shrinkage of the parameters, we explore a recursive identification switching with a time-varying overidentification for the interest rate zero lower bound. We empirically analyze Japan’s monetary policy to illustrate the proposed approach for modeling regime-switching between conventional and unconventional monetary policy periods, and find that the proposed model is preferred over a nested standard time-varying parameter VAR model. The estimation results show that increasing bank reserves lowers long-term interest rates in the unconventional policy periods, and that the impulse responses of inflation and the output gap to a bank reserve shock appear to be positive but highly uncertain.