The Effect of the Zero Lower Bound, Forward Guidance and Unconventional Monetary Policy on Interest Rate Sensitivity to Economic News in Sweden

We examine the impact of unconventional monetary policy (UMP) on stock market tail risk and risks of extreme interest rate movements. We find that UMP announcements substantially reduced option-implied equity market tail risks and interest rate risks. Most of the impact derives from forward guidance rather than asset purchase announcements. Communication about the future path of policy rates reduced volatility expectations of long-term rates and the associated risk premia. The reaction of equity market tail risk, in turn, points to the risk-taking channel of monetary policy, as the commitment to low funding rates may have relaxed financial intermediaries’ risk-bearing constraints. (JEL E52, E58, G12, G13, G14)

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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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Unconventional Monetary Policy and the Great Recession - Estimating the Impact of a Compression in the Yield Spread at the Zero Lower Bound

SSRN Electronic Journal ◽

10.2139/ssrn.1691633 ◽

2010 ◽

Author(s):

Christiane Baumeister ◽

Luca Benati

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Great Recession ◽

Yield Spread ◽

Zero Lower Bound ◽

Unconventional Monetary Policy ◽

The Great Recession ◽

The Impact

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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 ◽

Policy Shocks

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.

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