Unconventional Monetary Policy Shocks in the Euro Area and the Sovereign-Bank Nexus

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.

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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 ◽

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.

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