scholarly journals A New Measure of Monetary Shocks: Derivation and Implications

2004 ◽  
Vol 94 (4) ◽  
pp. 1055-1084 ◽  
Author(s):  
Christina D Romer ◽  
David H Romer
Keyword(s):  
Monetary Policy ◽  
Monetary Shocks ◽  
Monetary Policy Shocks ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Future Developments ◽  
Policy Shocks

This paper develops a measure of U.S. monetary policy shocks for the period 1969–1996 that is relatively free of endogenous and anticipatory movements. Quantitative and narrative records are used to infer the Federal Reserve's intentions for the federal funds rate around FOMC meetings. This series is regressed on the Federal Reserve's internal forecasts to derive a measure free of systematic responses to information about future developments. Estimates using the new measure indicate that policy has large, relatively rapid, and statistically significant effects on both output and inflation. The effects are substantially stronger and quicker than those obtained using conventional indicators.

Financial Constraints, Monetary Policy Shocks, and the Cross-Section of Equity Returns

2019 ◽  
Vol 33 (9) ◽  
pp. 4367-4402 ◽  
Author(s):  
Sudheer Chava ◽  
Alex Hsu
Keyword(s):  
Monetary Policy ◽  
Cross Section ◽  
Equity Returns ◽  
Monetary Policy Shocks ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Oxford University ◽  
Policy Shocks ◽  
The Cross ◽  
The Impact

Abstract We analyze the impact ofa unanticipated monetary policy changes on the cross-section of U.S. equity returns. Financially constrained firms earn a significantly lower (higher) return following surprise interest rate increases (decreases) as compared to unconstrained firms. This differential return response between constrained and unconstrained firms appears after a delay of 3 to 4 days. Further, unanticipated Federal funds rate increases are associated with a larger decrease in expected cash flow news, but not discount rate news, for constrained firms relative to unconstrained firms. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Identification of monetary policy shocks: a graphical causal approach

2016 ◽  
Author(s):  
Alessio Moneta
Keyword(s):  
Monetary Policy ◽  
Graphical Models ◽  
Structural Var ◽  
Monetary Policy Shocks ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Policy Shocks ◽  
Partial Correlations ◽  
Causal Approach ◽  
Reserve Market

This paper develops a structural VAR methodology based on graphical models to identify the monetary policy shocks and to measure their macroeconomic effects. The advantage of this procedure is to work with testable overidentifying models, whose restrictions are derived by the partial correlations among residuals plus some institutional knowledge. This permits to test some restrictions on the reserve market used in several approaches existing in the literature. The main findings are that neither VAR innovations to federal funds rate nor innovations to nonborrowed reserves are good indicators of monetary policy shocks.

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

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.

scholarly journals Transmission of monetary policy shocks in small open emerging market economies

2021 ◽  
Vol 52 (4) ◽  
pp. 37-65
Author(s):  
M.Ye. Mamonov ◽  
◽  
A.A. Pestova ◽  
◽  
Keyword(s):  
Monetary Policy ◽  
Open Economy ◽  
Emerging Market ◽  
Emerging Market Economies ◽  
Monetary Shocks ◽  
Large Set ◽  
Monetary Policy Shocks ◽  
Market Economies ◽  
Policy Shocks ◽  
Transmission Of Monetary Policy

In this paper, we compare the transmission of monetary policy shocks using quarterly data for 13 emerging market economies (EMEs) with that in a benchmark advanced open economy, the United Kingdom, in the periods of inflation targeting (from 1990s onward). To estimate the transmission within a given country, we specify a monetary VAR-model and we extend it with a variable reflecting commodities terms of trade. We identify monetary policy shocks using a sign restriction scheme: a restrictive shock is determined as an unexpected rise of policy rate and reduction of inflation (CPI) and money demand (M2). We apply the Bayesian approach to estimating VARs to address the curse of dimensionality. Our results indicate that monetary policy in EMEs is not less efficient comparable to the U.K.: restrictive monetary shocks decrease inflation but also lead to a slowdown of GDP and stock market outflows. Overall, our findings add to the debate on the real effects of monetary policy surprises with a special attention to a large set of EMEs.

Macroeconomic Effects of Central Bank Communication: Evidence from the Fed

2010 ◽  
pp. 5-22
Author(s):  
Carlo Rosa ◽  
Tim Breitenstein
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Policy Decisions ◽  
Monetary Policy Shocks ◽  
Federal Funds ◽  
Central Bank Communication ◽  
News Shock ◽  
Policy Shocks ◽  
The Difference ◽  
Future Direction

This paper employs exogenous measures of monetary policy shocks directly derived from financial market information to investigate how the economy responds to the surprise component of monetary policy decisions as opposed to central bank announcements about future movements in the policy rate. We find that the U.S. economy strongly reacts to the news shock, the difference between what the central bank announces regarding the future direction of monetary policy and what the market expects it to announce. The responses of output and prices to the unexpected component of policy decisions regarding the federal funds target rate are weak and have implausible signs.

On the effects of monetary policy in Russia: The role of the space of spanned shocks and the policy regime shifts

2018 ◽  
pp. 33-55 ◽  
Author(s):  
A. A. Pestova
Keyword(s):  
Monetary Policy ◽  
Policy Instruments ◽  
Recursive Identification ◽  
Monetary Shocks ◽  
Monetary Policy Shocks ◽  
Vector Autoregressions ◽  
Policy Regime ◽  
Relative Contribution ◽  
Policy Shocks ◽  
Effect Of Monetary Policy

This paper investigates the influence of monetary policy shocks in Russia on the basic macroeconomic and financial indicators. To identify the shocks of monetary policy, the Bayesian approach to the estimation of vector autoregressions (VARs) is applied, followed by extraction of the unexplained dynamics of monetary policy instruments (shocks) using both recursive identification and sign restrictions approach. The estimates show that the monetary policy shocks, apparently, cannot be attributed to the key drivers of cyclical movements in Russia, as they explain only less than 10% of the output variation and from 5 to10% of the prices variation. When applying recursive identification, no restraining effect of monetary policy on prices is found. Respective impact on output is negative and statistically significant in all identification procedures employed; however, the relative contribution of monetary shocks to output is not large. In addition, no significant effect of monetary policy tightening on the stabilization of the ruble exchange rate was found.

scholarly journals Forecast accuracy of a BVAR under alternative specifications of the zero lower bound

2017 ◽  
Vol 21 (2) ◽  
Author(s):  
Tim Oliver Berg
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Lower Bound ◽  
Forecast Accuracy ◽  
Zero Lower Bound ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Policy Shocks ◽  
Density Forecasts ◽  
Effect Of Monetary Policy

AbstractThis paper discusses how the forecast accuracy of a Bayesian vector autoregression (BVAR) is affected by introducing the zero lower bound on the federal funds rate. As a benchmark I adopt a common BVAR specification, including 18 variables, estimated shrinkage, and no nonlinearity. Then I entertain alternative specifications of the zero lower bound. I account for the possibility that the effect of monetary policy on the economy is different in this regime, replace the federal funds rate by its shadow rate, consider a logarithmic transformation, feed in monetary policy shocks, or utilize conditional forecasts allowing for all shocks implemented through a rejection sampler. The latter two are also coupled with interest rate expectations from future contracts. It is shown that the predictive densities of all these specifications are greatly different, suggesting that this modeling choice is not innocuous. The comparison is based on the accuracy of point and density forecasts of major US macroeconomic series during the period 2009:1 to 2014:4. The introduction of the zero lower bound is not beneficial per se, but it depends on how it is done and which series is forecasted. With caution, I recommend the shadow rate specification and the rejection sampler combined with interest rate expectations to deal with the nonlinearity in the policy rate. Since the policy rate will remain low for some time, these findings could prove useful for practical forecasters.

scholarly journals Sectoral Effects of Monetary Policy: Evidence from Pakistan

2006 ◽  
Vol 45 (4II) ◽  
pp. 1103-1115 ◽  
Author(s):  
Tasneem Alam ◽  
Muhammad Waheed
Keyword(s):  
Monetary Policy ◽  
Transmission Mechanism ◽  
Monetary Shocks ◽  
Monetary Policy Shocks ◽  
Monetary Policies ◽  
Policy Makers ◽  
Regional Effects ◽  
Real Effects ◽  
Policy Shocks ◽  
Short Run

Does monetary policy have economically significant effects on the real output? Historically, economists have tended to hold markedly different views with regard to this question. In recent times, however, there seems to be increasing consensus among monetary economists and policy-makers that monetary policy does have real effects, at least in the short run.1 Consequently, focus of monetary policy analysis has recently shifted from the big question of whether money matters, to emphasising other aspects of monetary policy and its relations to real economic activity. One aspect that has received considerable attention of late is the sectoral or regional effects of monetary policy shocks. Recent studies on the subject make it quite clear that different sectors or regions of the economy respond differently to monetary shocks. This observation has profound implications for the macroeconomic management as the central bank will have to weigh the varying consequences of its actions on different sectors or regions of the economy. For instance, the tightening of monetary policy might be considered mild from the aggregate perspective, yet it can be viewed as excessive for certain sectors. If this is true then monetary policy should have strong distributional effects within the economy. Accordingly, information on which sectors react first and are more adversely affected by monetary tightening provides valuable information to monetary authorities in designing appropriate monetary policies. Additionally, the results can contribute to our understanding of the underlying nature of transmission mechanism. And for that reason, many economists have called for a disaggregated analysis of monetary transmission mechanism [e.g., Domac (1999), Dedola and Lippi (2005), Ganley and Salmon (1997), Carlino and DeFina (1998)].

scholarly journals Monetary Policy, Real Activity, and Credit Spreads: Evidence from Bayesian Proxy SVARs

2019 ◽  
Vol 11 (1) ◽  
pp. 157-192 ◽  
Author(s):  
Dario Caldara ◽  
Edward Herbst
Keyword(s):  
Monetary Policy ◽  
Credit Spreads ◽  
Monetary Shocks ◽  
Structural Vector Autoregression ◽  
Monetary Policy Shocks ◽  
Real Activity ◽  
Financial Conditions ◽  
Corporate Credit ◽  
Policy Shocks ◽  
Jel C32

In this paper, we develop a Bayesian framework to estimate a proxy structural vector autoregression to identify monetary policy shocks. We find that during the Great Moderation period, monetary policy shocks induce a persistent decline in real activity and tightening in financial conditions. Central to this result is a systematic component of monetary policy characterized by a direct and economically significant reaction to changes in corporate credit spreads. The failure to account for this endogenous reaction induces an attenuation in the response of all variables to monetary shocks, a result that also applies to the narrative identification of Romer and Romer (2004). (JEL C32, E23, E32, E44, E52, E58)

scholarly journals Financial markets in CEE countries and their role in transmission of euro area monetary policy shocks

2015 ◽  
Vol 10 (2) ◽  
Author(s):  
Agata Wierzbowska
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Financial Markets ◽  
Simulation Analysis ◽  
Monetary Shocks ◽  
Financial Assets ◽  
Eastern European ◽  
Monetary Policy Shocks ◽  
Policy Shocks ◽  
Exchange Rate Markets

This paper uses the VAR methodology to analyse stock, bond, and exchange rate markets in six Central and Eastern European (CEE) countries. First, we study the influence of shocks occurring in each market on domestic economic conditions. Next, a counterfactual simulation analysis is carried out to discern the role of financial markets in the transmission of European Central Bank (ECB) monetary policy shocks into CEE economies. The results have implications for both present monetary policy-making and future euro adoptions, as well as for investors concerned with financial assets of CEE countries. While examining the estimated responses of domestic output and inflation to changes in stock, bond, and exchange rate prices, we draw conclusions on the relatively lower importance of the bond market and higher importance of stock and exchange rate markets in the economies. The study of transmission channels also points to stock markets as the main channel of transmission, especially in the case of transmission to the output. Transmission of monetary shocks to inflation takes place mainly through stock and exchange rate markets. There is also strong indication on considerable diversity across CEE countries taking place.

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