Changes In The Regional Responsiveness To Federal Reserve Policy Shocks And The Declining Importance Of Interest Rate Sensitive Industry Sectors

This paper extends the existing research on regional economic responses to federal-reserve policy shocks along two dimensions.  First, we focus on the evolution over time of a particular region’s responsiveness to federal funds shocks.  This differs from prior work that analyzed differences across regions in their responsiveness to a federal funds shock over a single sample period.  For the state of Delaware, we track how the declining importance of manufacturing and construction alters the region’s income response to both federal funds rate and oil price shocks.  Delaware was selected for analysis because of the large decline since the 1970’s in the share of its Gross State Product coming from construction and manufacturing. This paper’s second extension of the literature is its use of sequential updating of the data set.  Prior research utilized quarterly data sets starting in the late 1950’s and ending in the early 1990’s.  We construct a parsimonious structural VAR model and first estimate the model over the 1958Q1 to 1992 Q4 period. Over this period our results are consistent with earlier findings.  Next, we roll the sample period forward one year at a time, keeping the time period’s length constant, up through 2004 Q2 and re-estimate the model after each resetting of the sample period.  Overall, our findings are consistent with the view that declines in the importance of interest rate sensitive sectors will lead to declines in the responsiveness of a region’s income growth to federal funds rate shocks, but the magnitude of the observed decline in income sensitivity is considerably smaller than what one would forecast based upon the earlier cross-sectional based research.  The impact of oil price shocks, however, was contrary to ‘conventional wisdom’ expectations.  Despite the declining share of manufacturing in GSP for Delaware over the rolling sample periods, there was a modest increase in the sensitivity of Delaware real personal income to oil price shocks as the sample period rolled forward.

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The impacts of interest rate changes on US Midwest farmland values

Agricultural Finance Review ◽

10.1108/afr-11-2020-0163 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Albulena Basha ◽

Wendong Zhang ◽

Chad Hart

Keyword(s):

Interest Rate ◽

Great Plains ◽

Federal Reserve ◽

State Level ◽

Land Values ◽

Federal Funds ◽

Federal Funds Rate ◽

Content Type ◽

Distributed Lag ◽

Farmland Values

PurposeThis paper quantifies the effects of recent Federal Reserve interest rate changes, specifically recent hikes and cuts in the federal funds rate since 2015, on Midwest farmland values.Design/methodology/approachThe authors apply three autoregressive distributed lag (ARDL) models to a panel data of state-level farmland values from 1963 to 2018 to estimate the dynamic effects of interest rate changes on the US farmland market. We focus on the I-states, Lakes states and Great Plains states. The models in the study capture both short-term and long-term impacts of policy changes on land values.FindingsThe authors find that changes in the federal funds rate have long-lasting impacts on farmland values, as it takes at least a decade for the full effects of an interest rate change to be capitalized in farmland values. The results show that the three recent federal funds rate cuts in 2019 were not sufficient to offset the downward pressures from the 2015–2018 interest rate hikes, but the 2020 cut is. The combined effect of the Federal Reserve's recent interest rate moves on farmland values will be positive for some time starting in 2022.Originality/valueThis paper provides the first empirical quantification of the immediate and long-run impacts of recent Federal Reserve interest rate moves on farmland values. The authors demonstrate the long-lasting repercussions of Federal Reserve's policy choices in the farmland market.

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Identifying asymmetric responses of sectoral equities to oil price shocks in a NARDL model

Studies in Nonlinear Dynamics & Econometrics ◽

10.1515/snde-2019-0066 ◽

2020 ◽

Vol 0 (0) ◽

Author(s):

Abderrazak Dhaoui ◽

Julien Chevallier ◽

Feng Ma

Keyword(s):

Interest Rate ◽

Financial Market ◽

Oil Prices ◽

Oil Price ◽

Policy Implications ◽

Oil Price Shocks ◽

Price Shocks ◽

Asymmetric Responses ◽

The Impact ◽

Nardl Model

AbstractThis study examines the asymmetric responses of sector stock indices returns to positive and negative fluctuations in oil prices using the NARDL model. Our empirical findings support indirect transmissions of oil price fluctuation to the financial market through industrial production and short-term interest rate. Furthermore, both direct and indirect impacts of oil price shocks on stock returns are sector dependent. These results are with substantial policy implications either for investors or for policymakers. They mainly help government authorities to reduce the instability in financial markets caused by the major oil price shocks. The analysis of the impact of oil price shocks on stock markets also helps the financial market participants to adjust their decisions and revise their coverage of energy policy that is substantially affected by the turbulence and uncertainty in the crude oil market. Finally, based on the forecast of the oil price shocks effects, the central bank should adjust the interest rate in order to face up to the inflation rate induced by oil prices since oil prices act as an inflationary factor.

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

Studies in Nonlinear Dynamics & Econometrics ◽

10.1515/snde-2015-0084 ◽

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.

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Why The Quantity Of Money Still Matters

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v3i2.2742 ◽

2011 ◽

Vol 3 (2) ◽

Author(s):

Michael Cosgrove ◽

Daniel Marsh

Keyword(s):

Interest Rates ◽

Federal Reserve ◽

Price Level ◽

Theory Model ◽

Conventional Wisdom ◽

Real Output ◽

Font Size ◽

Short Term ◽

Federal Funds ◽

Federal Funds Rate

The operating procedure of Federal Reserve policy focuses almost exclusively on interest rates, in particular short term rates such as the federal funds rate. Conventional wisdom today interprets a low federal funds rate as an indicator of an expansionary monetary policy, and a high federal funds rate as indicative of a contractionary policy. Our thesis is that this conventional wisdom is flawed. We develop a quantity theory model to illustrate how changes in the real money supply can impact both the price level and real output. We present data showing that when the Fed slows the rate of growth of the monetary base to approximately the growth rate of GDP, that this slowdown also impacts real variables. However, according to comments, the Federal Reserve pays little attention to the quantity of money. Finally we asked: Since the Federal Reserve pays little attention to the quantity of money, what variables does the FOMC likely consider in deciding to alter the federal funds rate? The answer, perhaps not surprisingly, appears to be variables readily measured and easily related to by the general public – prices and capacity.

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Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond

The Journal of Economic Perspectives ◽

10.1257/jep.32.4.121 ◽

2018 ◽

Vol 32 (4) ◽

pp. 121-146 ◽

Cited By ~ 28

Author(s):

Kenneth N. Kuttner

Keyword(s):

Interest Rate ◽

Federal Reserve ◽

Balance Sheet ◽

Federal Funds ◽

Federal Funds Rate ◽

Monetary Policies ◽

The Great Recession ◽

Mortgage Backed Securities ◽

Policy Statements ◽

Government Sponsored Enterprises

In November 2008, the Federal Reserve faced a deteriorating economy and a financial crisis. The federal funds rate had already been reduced to virtually zero. Thus, the Federal Reserve turned to unconventional monetary policies. Through “quantitative easing,” the Fed announced plans to buy mortgage-backed securities and debt issued by government-sponsored enterprises. Subsequent purchases would eventually lead to a five-fold expansion in the Fed’s balance sheet, from $900 billion to $4.5 trillion, and leave the Fed holding over 20 percent of all mortgage-backed securities and marketable Treasury debt. In addition, Fed policy statements in December 2008 began to include explicit references to the likely path of the federal funds interest rate, a policy that came to be known as “forward guidance.” The Fed ceased its direct asset purchases in late 2014. Starting in October 2017, it has allowed the balance sheet to shrink gradually as existing assets mature. From December 2015 through June 2018, the Fed has raised the federal funds interest rate seven times. Thus, the time is ripe to step back and ask whether the Fed’s unconventional policies had the intended expansionary effects—and by extension, whether the Fed should use them in the future.

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OIL PRICE SHOCKS AND MACROECONOMIC PERFORMANCE OF THE NIGERIAN ECONOMY: A STRUCTURAL VAR APPROACH

Facta Universitatis Series Economics and Organization ◽

10.22190/fueo200801022a ◽

2020 ◽

Author(s):

Raymond Osi Alenoghena

Keyword(s):

Economic Growth ◽

Exchange Rate ◽

Interest Rate ◽

Industrial Production ◽

Output Growth ◽

Structural Var ◽

Oil Price ◽

Oil Price Shocks ◽

Macroeconomic Performance ◽

Price Shocks

This study examines the effect of oil price shocks on the macroeconomic performance of the Nigerian economy covering the period from 1980 to 2018. The effect of oil price shocks is investigated on macroeconomic variables like output growth, inflation, interest rate, exchange rate and industrial production index using the structural vector autoregression (SVAR) approach. The results of the investigation reveal that oil price shocks have significantly and negatively affected economic growth and industrial output. Furthermore, while the results show that oil price shocks have a significant positive effect on inflation, the effect is also positive on interest rate and exchange rate, but it is not significant. The results of impulse response function show a negative effect on output growth, it is positive on inflation, but mild and indeterminate on industrial production, interest rate and exchange rate. Based on findings in this study, the Renaissance theory and the Dutch Disease theories of economic growth apply to the Nigerian economy. The policy recommendations include the isolation of the country’s real sector from the vagaries of oil price volatility and the pursue of economic diversification to reduce the over-dependence on oil.

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Should the U.S. Federal Reserve increase the federal funds rate in 2016? An assessment based on the neutral interest rate

Investigación Económica ◽

10.1016/j.inveco.2016.07.002 ◽

2016 ◽

Vol 75 (296) ◽

pp. 5-42 ◽

Cited By ~ 2

Author(s):

Armando Sánchez Vargas

Keyword(s):

Interest Rate ◽

Federal Reserve ◽

Federal Funds ◽

Federal Funds Rate ◽

The U.S

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Monetary policy and the effect of the transfer of oil prices to inflation

Voprosy Ekonomiki ◽

10.32609/0042-8736-2020-8-41-50 ◽

2020 ◽

pp. 41-50

Author(s):

Ph. S. Kartaev ◽

I. D. Medvedev

Keyword(s):

Monetary Policy ◽

Inflation Targeting ◽

Dynamic Models ◽

Oil Prices ◽

Oil Price ◽

Oil Price Shocks ◽

Negative Effects ◽

Price Shocks ◽

Policy Regime ◽

The Impact

The paper examines the impact of oil price shocks on inflation, as well as the impact of the choice of the monetary policy regime on the strength of this influence. We used dynamic models on panel data for the countries of the world for the period from 2000 to 2017. It is shown that mainly the impact of changes in oil prices on inflation is carried out through the channel of exchange rate. The paper demonstrates the influence of the transition to inflation targeting on the nature of the relationship between oil price shocks and inflation. This effect is asymmetrical: during periods of rising oil prices, inflation targeting reduces the effect of the transfer of oil prices, limiting negative effects of shock. During periods of decline in oil prices, this monetary policy regime, in contrast, contributes to a stronger transfer, helping to reduce inflation.

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