Testing the Dimensionality of Policy Shocks

This paper provides a nonparametric test for deciding the dimensionality of a policy shock as manifest in the abnormal change in asset returns' stochastic covariance matrix, following the release of a macroeconomic announcement. We use high-frequency data in local windows before and after the event to estimate the covariance jump matrix, and then test its rank. We find a one-factor structure in the covariance jump matrix of the yield curve resulting from the Federal Reserve's monetary policy shocks prior to the 2007-2009 financial crisis. The dimensionality of policy shocks increased afterwards due to the use of unconventional monetary policy tools.

Are the Forecasts of Professionals Compatible with the Taylor Rule? Evidence from the Euro Area

This article examines if professional forecasters form their expectations regarding the policy rate of the European Central Bank (ECB) consistent with the Taylor rule. In doing so, we assess micro-level data including individual forecasts for the ECB main refinancing operations rate as well as inflation and gross domestic product (GDP) growth for the Euro Area. Our results indicate that professionals indeed form their expectations in line with the Taylor rule. However, this connection has diminished over time, especially after the policy rate hit the zero lower bound. In addition, we also find a relationship between forecasters’ disagreement regarding the policy rate of the ECB and disagreement on future GDP growth, which disappears when controlling for monetary policy shocks proxied by changes in the policy rate in the quarter the forecasts are made.

Effect of Monetary Policy on Investment in Russian Regions

This paper assesses the effect of monetary policy on investment in Russian regions. In the first stage of the research, we estimate the responses of regional investment to interbank market rate shocks using structural vector autoregressions. In the second stage, we estimate regression models using impulse responses as dependent variables and explanatory factors as independent variables. The regression calculations are performed using the Elastic Net regularisation technique. We find that regions with higher shares of manufacturing, agriculture and construction are more responsive to monetary policy shocks. In addition, we identified the high importance of these sectors in explaining the different effects of monetary policy on investment. The results also show that the larger is the share of the mining and quarrying sector in the gross regional product (GRP) and the greater the imports to GRP ratio, the smaller is the absolute change in investment from a monetary policy shock.

Balance Sheet Channel of Monetary Policy: Evidence from Credit Spreads of Russian Firms

In this paper, I analyse the relationship between the credit spreads of Russian bond issuers and monetary policy shocks. According to the theory of demand-side financial imperfections, in the presence of financial frictions, the higher the net worth of a firm, the lower its external finance premium. The theory of the balance sheet channel of monetary policy suggests that monetary shocks may affect the net worth of a firm through debt outflows. Together, these ideas predict that the external finance premium of more indebted companies is more sensitive to monetary policy shocks. However, my empirical findings from the credit spreads of Russian companies do not support this theory.

Revisiting the Link between House Prices and Monetary Policy

This paper revisits the link between house prices and monetary policy using a data set on house prices provided by the Bank for International Settlements. It is found that a loose monetary policy unambiguously results in a rise in real house prices, and such an increase is statistically significant for 19 of the 20 countries studied here. Empirical results also show that for some countries (Belgium, Canada, Switzerland, Denmark, the Netherlands, Sweden, and South Africa), the interest rate shock can explain a large percentage of real house price movements. The response of house prices to monetary policy shocks varies between countries, and the strength of the relationship between house prices and monetary policy can be associated with financial liberalization. On the other hand, evidence shows that interest rate shock plays an important role in explaining recent house price hikes for Australia, Spain, Ireland, the Netherlands, the US, and South Africa. In particular, during 2002–2006, on average 24% of the house price hikes in the US can be attributed to monetary policy shocks. Finally, we also find evidence that central banks react to the housing market, particularly in those countries adopting a policy of inflation targeting.

Using Entropy to Evaluate the Impact of Monetary Policy Shocks on Financial Networks

We analyze the changes in the financial network built using the Dow Jones Industrial Average components following monetary policy shocks. Monetary policy shocks are measured through unexpected changes in the federal funds rate in the United States. We determine the changes in the financial networks using singular value decomposition entropy and von Neumann entropy. The results indicate that unexpected positive shocks in monetary policy shocks lead to lower entropy. The results are robust to varying the window size used to construct financial networks, though they also depend on the type of entropy used.