Conventional Monetary Policy Shocks Research Articles

Monetary policy and innovation in Europe: An SVAR approach

Using quarterly data, we estimate the effects of monetary policy on innovation in the Eurozone over 2000–2021. Variations in the monetary stance may affect how firms and governments allocate resources to innovative investments. The identification of the structural shocks relies on an SVAR framework with a set of exclusion restrictions. Although characterised by the predominance of ZLB periods, conventional monetary policy shocks affect private and public R&D spending in the medium term with some initial inertia. Unconventional monetary shocks affect innovative expenditure in the short to medium term, but their impacts vanish in the longer run.

Effect of conventional and unconventional monetary policy shocks on housing prices in Canada

This paper investigates the relative importance and effect of conventional and unconventional Canadian monetary policy surprises on housing prices. Using a credible approach to identify structural monetary policy shocks in Canada and a comprehensive Bayesian VAR model to analyze their effects on financial and macroeconomic variables, we find that both conventional monetary policy and quantitative easing shocks have a significant and persistent effect on housing prices in Canada. However, the inflationary effect of a quantitative easing shock is more pronounced than that of an easing target monetary policy surprise. Specifically, the peak effect of a 25-basis point expansionary conventional monetary policy shock is a 2.30% increase in real housing prices while a comparable quantitative easing surprise leads to a peak of 4.56% increase in real housing prices. We conclude that expansionary monetary policy in various forms has had significant inflationary effects on Canadian housing prices. But quantitative easing surprises stand out as the most prominent contributory factor to the escalating Canadian real estate price. Quantitative easing impact consistently outweighs the effects of forward guidance and conventional monetary policy shocks.

The Effects of Conventional and Unconventional Monetary Policy Shocks on US REITs Moments: Evidence from VARs with Functional Shocks

AbstractWe use a vector autoregressive model with functional shocks, capturing the shift of the entire term structure of interest rates on monetary policy announcement dates, to empirically evaluate the effects of conventional and unconventional monetary policy decisions on the Real Estate Investment Trusts (REITs) markets of the United States (US). Using 5-min interval intraday data, we analyze not only the impact on REITs returns, but also its realized variance (RV), realized jumps (RJ), realized skewness (RSK), and realized kurtosis (RKU) over the daily period of September 2008 to June 2021. While the effects of conventional monetary policy shocks on the moments of REITs returns tend to conform with economic theories, the same is not necessarily the case with unconventional monetary policy shocks. In addition, though monetary policy shocks have the most persistent and strongest effects on RJ, the extreme behaviour of the REITs market is also observed through RSK and RKU. Moreover, when we look into 10 REITs sectors, there is indeed heterogeneity in terms of the strength of the effect, but not so much in terms of the sign of responses of the various moments compared to the overall market. Our results have important implications for REITs market participants, given its exponential growth as an asset class.

The effects of conventional and unconventional monetary policy on the unemployment rate in the US

PurposeThe purpose of this paper is to investigate the impact of the Federal Reserve's conventional and unconventional monetary policy shocks on the US unemployment rate.Design/methodology/approachThe authors employ a unified time-varying framework to an extensive data set from 1960 to 2019.FindingsThe authors find that both conventional and unconventional monetary policy influence the unemployment rate, but the effects of unconventional monetary policy vary greatly during the first, second and third rounds of quantitative easing (dubbed QE1, QE2 and QE3, respectively). It significantly influenced the unemployment rate in QE3. However, the effects are less persistent than the effects of conventional monetary policy shocks. The impact of unconventional monetary policy transmits to the real economy through conventional interest rates, exchange rates and asset price channels. The responses of unemployment rate are smaller during QE1 and QE2 due to the rise in inflation uncertainty and economic policy uncertainty.Originality/valueThe impact of the Fed's unconventional monetary policy shocks on the US unemployment rate during QE1, QE2 and QE3 is time-varying. It is explained by inflation uncertainty and real option channels.

Measuring the effects of large-scale asset purchases: The role of international financial markets and the financial accelerator

We build and estimate a two-country structural macroeconomic model with meaningful household portfolio decisions over foreign and domestic bond holdings and financial intermediation to investigate the efficacy of large-scale asset purchases (LSAP) by a central bank. Financial intermediation between financial assets and the real economy means that asset purchases do not directly lead to increased real investment. Instead, asset purchases result in an accumulation of deposits at banks without a corresponding rise in loans to the real economy. In contrast to conventional monetary policy (CMP), positive effects of asset purchases primarily work through consumption and exports via changes in real exchange rates. We find that this is in accordance with local projection analysis performed using identified LSAP and CMP shocks. Further, historical decomposition of US data reveals that unconventional monetary policies supported real economic activity when interest rates where zero (2009–2015), but not after. However, their effect on financial markets remained significant through 2019.

The impact of forward guidance and large-scale asset purchase programs on commodity markets

Abstract This paper investigates how different commodity prices are affected by unconventional monetary policies (UMP) implemented by the Federal Reserve of the United States as a response to the Global Financial Crisis. We analyze impulse responses using local projections and identify UMP shocks through high-frequency identification strategy. We show that forward guidance (FG) and large-scale asset purchase (LSAP) shocks lead to distinct responses when analyzing commodity prices. We find that asset-like commodities, such as gold and silver, respond to these UMP shocks most aggressively. While an easing FG shock leads to increases in their prices, an easing LSAP shock has the opposite effect. This differential response suggests that these asset-like commodities are being used as inflation and exchange rate hedges. In contrast, production-like and agricultural commodities respond to UMP shocks in the same way as conventional monetary policy shocks. Consistent with previous literature, we find that easing LSAP shocks, to some extent, signal a negative economic outlook. Policymakers can exploit the responses from the various commodity classes examined in this paper when evaluating the effectiveness of monetary policy in different sectors of the economy.

Monetary policy and wage inequality in South Africa

The distributive consequences of monetary policy have been researched only recently and almost entirely in advanced economies. This paper sheds light on the effect of conventional monetary policy shocks on the wage distribution in South Africa, where inequality – mostly driven by the segmented labour market – remains a large issue. Impulse response functions estimated from local projections show that the wage distribution significantly worsens in response to monetary shocks. Wages in the top half of the distribution, that benefit from unanticipated expansions, are less responsive to surprise contractions, remaining protected by skill-biased technology and strong labour unions.

Debt maturity heterogeneity and investment responses to monetary policy

We study how debt maturity heterogeneity determines firm-level investment responses to monetary policy shocks. We first document that debt maturity significantly affects the responses of firm-level investment to conventional monetary policy shocks: firms who hold more long-term debt are less responsive to monetary shocks. The magnitude of responses due to debt maturity heterogeneity is comparable to the well-documented responses due to debt level heterogeneity. Evidence from credit ratings and borrowing responses indicates that the higher future default risk embedded in long-term debt plays an essential role. We then develop a heterogeneous firm model with investment, long-term and short-term debt, and default risk to quantitatively interpret these facts. Conditional on the level of debt, firms with more long-term debt are more likely to default on their external debt and consequently face a higher marginal cost of external finance. As a result, these firms are less responsive in terms of investment to expansionary monetary shocks. The effect of monetary policy on aggregate investment, therefore, depends on the distribution of debt maturity.

International Effects of Euro Area Forward Guidance*

AbstractIn this paper, we investigate the international effects of euro rate forward guidance (FG) and compare them to spillovers from a conventional monetary policy shock (MP). We identify the forward guidance shock via a combination of zero and sign restrictions that use the relationship between expectations and observed data and additionally draw on insights from recent event studies using high‐frequency data. To address potential time variation, we use a fully flexible approach that allows to handle both drifts in residual variances and the structural coefficients. Our results show that both shocks lead to considerable international effects on output growth, inflation and equity returns. Moreover, we find that effects are stronger during the period of the global financial crisis, which is particularly true for the FG shock. This implies that monetary policy is generally not hindered in affecting the real economy by the zero lower bound. Also, shocks to expectations can have real domestic effects with international consequences.

Shadow banks and the risk-taking channel of monetary policy transmission in the euro area

Abstract We provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through an increase in shadow banks’ total asset growth and their risk assets ratio. Our dataset covers the period 2000Q1–2018Q3 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, the aforementioned two indicators for the shadow banking sector. Based on vector autoregressive models for the euro area as a whole, we find a portfolio reallocation effect towards riskier assets and evidence for a general expansion of assets. Both effects last for roughly six quarters in the case of conventional monetary policy shocks, whereas for unconventional monetary policy shocks the responses are significant for two quarters only. Country-specific as well as sector-specific estimations confirm these findings for most of the euro area countries and all non-bank types, but also reveal some heterogeneity in the reaction of financial institutions.

The Spillover Effects of the US Unconventional Monetary Policy: New Evidence from Asian Developing Countries

This paper aims to trace the monthly responses of equity prices, long-term interest rates, and exchange rates in Asian developing markets to the US unconventional monetary policy (UMP). The main research question is to explore whether UMP shocks exist in those markets. We also consider the differences in the mean responses of those asset prices between traditional and non-traditional monetary policy phases. To address such concerns, we employ a panel vector autoregression with exogenous variables (Panel VARX) model and estimate the model by the least-squares dummy variable (LSDV) estimator in three different periods spanning from 2004M2 to 2018M4. The first finding is that UMP shocks from the US are associated with a surge in equity prices, a decline in long-term interest rates, and an appreciation of currencies in Asian developing markets. In contrast, the conventional monetary policy shocks from the US seem to exert adverse effects on these recipient countries. These empirical results suggest that the policymakers in Asian developing countries should cautiously take into account the spillover effects from the US unconventional monetary policy once it is executed.

Unconventional monetary policy and household debt: The role of cash-flow effects

We study the transmission of conventional and unconventional monetary policy shocks via the loan market, distinguishing between adjustable- and fixed-rate mortgages (ARMs and FRMs, respectively) and focusing on the relative importance of the income channel. Under ARMs, a conventional monetary policy shock implies a temporary cash-flow effect leading to a redistribution between savers and borrowers, a feature that is weaker, but more persistent, under FRMs. Also, an easing via unconventional operations – modelled as a shift in households’ preferences that reduces the term premium on long-term loan rates – has an expansionary effect on output and inflation, although more muted than the one recorded via a conventional monetary policy shock. In the former case, we find a modest contribution of cash-flow effect to the dynamics of consumption.

Forward-Looking Monetary Policy and the Transmission of Conventional Monetary Policy Shocks

Standard structural VAR models and estimation using Romer and Romer (2004) monetary policy shocks show that, in samples after the 1980s, a contractionary conventional monetary policy shock generates smaller and sometimes perversely-signed impulse responses compared to earlier samples. Using insights from the central bank information effects literature, we show that the analyses producing these results suffer from an omitted variables problem related to forward-looking information emanating from Federal Reserve forecasts. Transmission of conventional monetary policy shocks takes on the standard signs, and is typically significant, once Fed forward-looking information is taken into account. This reconciliation does not follow from adding private sector forecasts to the estimation frameworks.

(Systemic) Risk-taking in the Euro Area Investment Fund Industry

Abundant references to threats to financial stability likely posed by (systemic) risk-taking in the euro area investment fund industry in an era of historically persistent low interest rates have not been accompanied by robust supportive empirical evidence. This is the first study that assesses the effects of euro area conventional and unconventional monetary policy shocks on coherent systemic risk measures applied to the investment fund industry. This research finds evidence of systemic risk-taking notably in the forms of both contagion and increased vulnerability. It underpins the need to recognize and measure interconnectedness and contagion in systemic risk measurement. There is heterogeneity in the results as the investment focus is important for assessing investment funds’ contribution to systemic risk. Fund types most affected by significant systemic risk-taking are bond funds, mixed funds and real estate funds. Some evidence of heightened vulnerability in equity funds is also present. Overall, growth rates in assets managed tend to move in tandem with systemic risk-taking. Increases in leverage are part of the risk-taking mechanism under conventional monetary policy shocks. The main policy implication is that persistently accommodative monetary policy geared toward preserving price stability may face a trade-off with financial stability, making it necessary to coordinate monetary and macro-prudential policies.

On the economic impact of aggregate liquidity shocks: The case of the UK

We conduct an empirical investigation into the economic implications of aggregate liquidity shocks, through the lens of monetary aggregates, in harmony with conventional monetary policy shocks in an estimated time-varying parameter VAR model. Our results suggest that the transmission of aggregate liquidity shocks changes substantially throughout time with the magnitude of these shocks increasing during recessions. We provide statistically significant evidence in favour of asymmetric contributions of these shocks to macroeconomic fluctuations during the implementation of Quantitative Easing relative to the Great Recession. During this period, aggregate liquidity shocks explain, on average, 32% and 47% of the variance in real GDP and inflation at business cycle frequency, respectively.

Unconventional U.S. Monetary Policy: New Tools, Same Channels?

In this paper, we compare the transmission of a conventional monetary policy shock with that of an unexpected decrease in the term spread, which mirrors quantitative easing. Employing a time-varying vector autoregression with stochastic volatility, our results are two-fold: First, the spread shock works mainly through a boost to consumer wealth growth, while a conventional monetary policy shock affects real output growth via a broad credit/bank lending channel. Second, both shocks exhibit a distinct pattern over our sample period. More specifically, we find small output effects of a conventional monetary policy shock during the period of the global financial crisis and stronger effects in its aftermath. This might imply that when the central bank has left the policy rate unaltered for an extended period of time, a policy surprise might boost output particularly strongly. By contrast, the spread shock has affected output growth most strongly during the period of the global financial crisis and less so thereafter. This might point to diminishing effects of large-scale asset purchase programs.

Credit Supply and Demand in Unconventional Times

Do borrowers demand less credit from banks with weak balance sheet positions? To answer this question we use novel bank-specific survey data matched with confidential balance sheet information on a large set of euro area banks. We find that, following a conventional monetary policy shock, bank balance sheet strength influences not only credit supply but also credit demand. The resilience of lenders plays an important role for firms when selecting whom to borrow from. We also assess the impact on credit origination of unconventional monetary policies using survey responses on the exposure of individual banks to quantitative easing and negative interest rate policies. We find that both policies do stimulate loan supply even after fully controlling for bank-specific demand, borrower quality, and balance sheet strength.

Measuring the Effects of Conventional and Unconventional Monetary Policy in the Euro Area

I estimate the effects of conventional and unconventional monetary policy in the euro area by using a factor-augmented vector autoregression.I complement the standard monetary policy analysis using the short rate with models where the shadow rates by Kortela (2016) and Wu and Xia (2017) are used as proxies for unconventional monetary policy. I quantify the effects of unanticipated monetary policy shocks using impulse response functions, forecast-error variance decompositions, and counterfactual simulations. The results indicate that unconventional monetary policy shocks have similar, expansionary effects on the economy as conventional monetary policy shocks.

Shadow Banks and the Risk-Taking Channel of Monetary Policy Transmission in the Euro Area

In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through an increase in shadow banks' total asset growth and their risk assets ratio. Our dataset covers the period 2000Q1-2018Q3 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, the aforementioned two indicators for the shadow banking sector. Based on vector autoregressive models for the euro area as a whole, we find that a portfolio reallocation effect towards riskier assets is more pronounced for conventional monetary policy shocks. For unconventional monetary policy shocks we partly detect stronger evidence for a general expansion of financial assets. Country-specific as well as sector-specific estimations confirm these findings for most of the euro area countries and all shadow bank types, but also reveal some heterogeneity in the shadow banks' reaction.

The effects of monetary policy shocks on inequality

This paper provides new evidence of the effect of conventional monetary policy shocks on income inequality. We construct a measure of unanticipated changes in policy rates—changes in short-term interest rates that are orthogonal to unexpected changes in growth and inflation news—for a panel of 32 advanced and emerging market countries over the period 1990–2013. Our main finding is that contractionary monetary policy shocks increase income inequality, on average. The effect is asymmetric—tightening of policy raises inequality more than easing lowers it—and depends on the state of the business cycle. We find some evidence that the effect increases with the share of labor income and is mitigated by redistribution policies. Finally, while an unexpected increase in policy rates increases inequality, changes in policy rates driven by an increase in growth and inflation are associated with lower inequality.