Effects Of Monetary Policy Shocks Research Articles

Proxy Vector Autoregressions in a Data-rich Environment

I propose a Bayesian approach to identify vector autoregressive (VAR) models via proxies in a data-rich environment. The setup augments a small-scale VAR model with latent factors. It allows to trace out the responses of disaggregated series in a unified model while controlling for broad economic conditions. The posterior sampler accounts for the estimation uncertainty in these latent factors as well as the measurement precision of the proxy. In a first application to monetary policy, I extract factors from a wide range of real and financial series and find that the effects of monetary policy shocks vary along the yield curve. In a second application to oil market shocks I add disaggregated US series to a standard model of the global oil market. I find that negative news about future oil supply have adverse effects on the US economy.

Monetary policy shocks and exchange rates in Asian countries

In this paper, we empirically investigate the effects of monetary policy shocks on exchange rates in Asian countries. To do so, we use VAR models which impose sign restrictions on impulse responses to identify monetary policy shocks. We find that contractionary monetary policy shocks lead to significant exchange rate appreciation in Malaysia, the People’s Republic of China, and the Republic of Korea. However, in India, Indonesia, the Philippines and Thailand, we find either a significant depreciation or no significant effect. These results suggest that an interest rate increase (or decrease) may not necessarily shield Asian countries from exchange rate depreciation (or appreciation) pressure following a U.S. interest rate increase (or decrease).

Monetary policy shock and industrial production: industry-level evidence from the US

PurposeThis paper investigates the impact of a monetary policy shock on the production of a sample of 312 industries in manufacturing, mining and utilities in the United States using a factor-augmented vector autoregression (FAVAR) model.Design/methodology/approachThe authors use a FAVAR model that builds on Bernanke et al. (2005) and Boivin et al. (2009). The main assumption in this model is that the dynamics of a large set of macro variables are captured by some observed and unobserved common factors. The unobserved factors are extracted from a large set of macroeconomic data. The key advantage of using this model is that it allows extracting the impulse responses of a wide range of macroeconomic variables to structural shocks in the federal funds rate.FindingsThe results indicate that industries exhibit differential responses to an unanticipated monetary policy tightening. In general, manufacturing industries appear to be more sensitive compared to mining, and utility industries and durable manufacturing industries are found to be more sensitive than those within nondurable and other manufacturing industries to a monetary policy shock. While all industries respond to the policy shock, most of the responses are reversed between 12 and 22 months.Research limitations/implicationsThe implication of our results is that monetary policy can be used to impact most US industries for four years and beyond. The existence of disparate responses across industries underscores the difficulty of implementing a monetary policy that will generate the same impact across industries. As the effects of the policy are distinct, policymakers may want to attend to the unique impacts and implement industry-specific policy.Practical implicationsThe study is important in the context of the current challenges in the US economy caused by the spread of coronavirus. For example, to tackle the current pandemic, the researchers are trying to come up with cures for COVID-19. A considerable response of the chemical industry that provides materials to pharmaceutical and medicine manufacturing to the monetary policy shock implies that an expansionary monetary policy may facilitate an invention and adequate supply of the cure later on. The same policy may not effectively stimulate production in apparel or leather product industries that are being hard hit by the pandemic.Originality/valueThe study contributes to the literature in broadly two aspects. First, to the best of our knowledge, this is the first paper that investigates the impact of a monetary policy shock on a sample of 312 industries in manufacturing, mining and utilities in the US. Second, to identify structural shocks and investigate the effects of monetary policy shocks on economic activity, the authors diverge from the literature's traditional approach, i.e. the vector autoregression (VAR) method and use a FAVAR method. The FAVAR provides a comprehensive description of the impact of a monetary policy innovation on different industries.

Dynamic effects of monetary policy shocks on macroeconomic volatility in the United Kingdom

ABSTRACT We use constant and time-varying parameters vector autoregressive models that allow the estimation of the impact of monetary policy shocks on volatility of macroeconomic variables in the United Kingdom. Estimates suggest that an increase in the policy rate by 1% is associated with a rise in unemployment and inflation volatility of about 10% on average, with peaks observed during episodes of local and global crises.

Monetary policy shocks and delayed overshooting in farm prices and exchange rates

This study empirically investigated the effects of monetary policy shocks on farm prices and exchange rates by using vector auto-regression models with sign restrictions on impulse responses. The main empirical results are as follows. First, contractionary monetary policy shocks have significant negative effects on real farm prices, which suggests that farm prices respond more to monetary policy shocks than to the general price level. Second, the effects of monetary policy shocks on farm prices are stronger than the effects of monetary policy shocks on exchange rates. Third, farm price dynamics under monetary policy shocks show “delayed overshooting” as exchange rate dynamics do.

SVAR (Mis)Identification and the Real Effects of Monetary Policy Shocks

I argue that the seemingly disparate findings of the recent empirical literature on monetary policy transmission are all consistent with the same standard macro models. Weak sign restrictions, which suggest that contractionary monetary policy, if anything, boosts output, present as policy shocks what actually are expansionary demand and supply shocks. Classical zero restrictions are robust to such misidentification, but miss short-horizon effects. Two recent approaches—restrictions on Taylor rules and external instruments—instead work well. My findings suggest that empirical evidence is consistent with models in which the real effects of monetary policy are larger than commonly estimated. (JEL C32, E12, E32, E43, E52)

EVALUATION OF MONETARY POLICY SHOCKS IN TURKEY: A STRUCTURAL VAR APPROACH

This paper empirically investigates the effects of monetary policy shocks on the Turkish economy using a structural VAR model. Monetary policy shocks are identified based on the non-recursive structural identification scheme. Since monetary policy stance is contingent on different funding rates in the wide interest rate corridor for the selected sample period, 2011:M1-2018:M12, this paper employs “weighted average funding cost”to represent the monetary policy stance of the CBRT. The baseline identification scheme is also extended in different ways to check the robustness of the results. The empirical results can be summarized as follows. First, Turkish data are not free from price and exchange rate puzzles. More importantly, qualitative inferences are quite persistent across different identification restrictions. Second, structural impulse-responses reveal that there is a two-way simultaneous interaction between monetary policy and exchange rate. Finally, the presence of money stock in the VAR model is redundant for identifying monetary policy shocks since the VAR models with and without money stock generate almost identical results.

Revisiting the effects of monetary policy shocks: Evidence from SVAR with narrative sign restrictions

This article analyzes the effects of monetary policy shocks using a structural vector autoregression (SVAR) model that is identified using a combination of narrative sign restrictions and sign restrictions on the systematic component of monetary policy. We find that contractionary monetary policy shocks induce real GDP to drop with very high posterior probability when narrative sign restrictions are included. The posterior probability intervals of the structural parameters in the monetary policy equation based on our restrictions are smaller than those constructed by Arias et al. (2019), excluding some implausible large values. Subsample analysis shows that the “price puzzle” disappeared during the Great Moderation.

Asymmetric effects of monetary policy shocks on output growth in Nigeria: Evidence from nonlinear ARDL and Hatemi‐J causality tests

Asymmetric effects of monetary policy shocks on output growth in Nigeria: Evidence from nonlinear <scp>ARDL</scp> and <scp>Hatemi‐J</scp> causality tests

The effects of monetary policy on income and wealth inequality in the U.S. Exploring different channels

We assess the effects of monetary policy shocks on income and wealth inequality through direct inequality measures and by analyzing several transmission channels explored in recent literature. Furthermore, we analyze two additional channels: the Housing and the Fiscal channels. The methodology adopted is a Bayesian proxy SVAR using a high-frequency identification based on the external instruments approach. Our own policy shocks are constructed for this purpose. The results show that an expansionary monetary policy shock does not have a significant effect on income inequality due to the existence of opposite channels, whereas it increases wealth inequality mainly through the portfolio channel.

Uncertainty and Effectiveness of Monetary Policy: A Bayesian Markov Switching-VAR Analysis

Abstract There is a growing body of literature examining the effectiveness of the monetary policy on the macroeconomy in different contexts for developed and developing countries. However, lately, especially after the GFC, the focus of research shifted to examine the role of uncertainty in economic activity and on the monetary policy effectiveness. Both theoretical and empirical studies suggest that uncertainty does influence monetary policy effectiveness. However, until now, empirical studies are restricted to only developed countries. To this end, the present study examines the influence of uncertainty on monetary policy effectiveness for a developing country, namely India. We applied a non-linear VAR, which allows us to examine the effect of monetary policy shocks during high and low uncertainty periods. The results exhibit that uncertainty influences the effectiveness of monetary policy shocks. We find weaker effects of the monetary policy shocks during high uncertainty regime relative to low uncertainty regime.

Does a Monetary Union Matter for the Degree of Inflation Persistence? The Case of the West Africa Monetary Zone (WAMZ)

The literature on the dynamics of inflation appears to have shifted from the question of the root cause of shocks to inflation, to whether the monetary union has a bearing in the measure of the degree or the persistence of the effect of the shocks. To capture the specific effect of monetary policy shocks on the persistence of inflation in WAMZ, a multivariate Vector Autoregressive Moving Average GARCH (VARMA- GARCH) framework is implemented. The study employs both conventional and conditional time-varying unit root tests to understand the extent to which monetary union influences the degree of inflation persistence. We find the degree of inflation persistence to have been relatively lower since the advent of monetary union in the WAMZ. The significance of this finding is particularly evident when the time-varying property of the persistence is captured. It is also observed that a monetary policy shock has the potential to neutralise the persistence of shocks to inflation at least in the long run, particularly when the timevarying property of the inflation series is captured.

The Effects of Monetary Policy Shocks on Income Inequality Across U.S. States

Using a time series cross‐state panel data of 50 U.S. states and the District of Columbia (DC) over the period of 1959 through 2015, this article intends to assess the direct and indirect effects of contractionary monetary policy shocks on income inequality through interest rate and consumer price index (CPI) inflation channels. To address this, the authors examine two possible linear and non‐linear relationships between inflation and income inequality and between gross domestic product (GDP) and income inequality. Using various measures of income inequality, the results of the pooled model and the individual fixed effect model show that CPI inflation positively and interest rate negatively affect all measures of income inequality in linear regression. The results confirm the existence of the non‐linearity relationship between inflation and income inequality as well as the Kuznets inverted “U‐shaped” hypothesis between GDP and income inequality. The results of linear and non‐linear regressions show that the DC and the state of Ohio are better off and worse off than the state of Alabama as baseline of models, respectively. The impulse response functions (IRFs) for the individual panel vector autoregressive (PVAR) models show that income inequality could be reduced by implementing contractionary monetary policy through interest rate channel in the short run and increased persistently pursuing contractionary monetary policies via inflation channel in the long run.

The macroeconomic effects of monetary policy shocks under fiscal constrained

PurposeThis paper aims to analyze the macroeconomic effects of a monetary policy shock considering that fiscal policy is under fiscal constraints. For that, a dynamic stochastic general equilibrium (DSGE) model was developed for Brazil, which was estimated through Bayesian econometrics.Design/methodology/approachIn the basic model, the government does not have any type of fiscal restriction. The other two estimated models, however, consider that the fiscal authority implements some kind of fiscal rule. One of these rules is the Constitutional Amendment 95/2016 (EA 95/2016), which includes a limitation for government spending. The other Alternative Rule seeks to represent the characteristics of a more austere fiscal rule, as proposed by Wesselbaum (2017).FindingsIt was possible to verify in this paper that the implementation of EA 95/2016 by the Brazilian government does not produce statistically different results and that it reduces the welfare of the households in relation to the scenario without fiscal rule. Thus, the proportionate benefit of EA 95/2016 is less than the cost associated with this fiscal rule (less welfare). If the government adopts a fiscal constraint similar to the Alternative Rule, it is possible to considerably reduce the interaction between fiscal and monetary policy, thereby reducing the fiscal dominance policy over monetary policy. However, the cost in terms of welfare is much higher than the baseline scenario. Thus, the fiscal authority is subject to a trade-off among public debt stabilization and household welfare.Originality/valueThe study intends to contribute to the literature on three specific points. First, the monetary–fiscal policy interaction within a representative model of the Brazilian economy is discussed. In addition, the study considers that the government can adopt EA 95/2016 and the Alternative Rule, used in the US economy. Second, the impacts of EA 95/2016 and the Alternative Rule on household welfare will be quantified. Finally, two types of individuals (Ricardian and non-Ricardian agents) and two sectors of production (wholesalers and retailers) are considered. In this paper, the DSGE model is estimated, since the previously mentioned authors performed simulations

Credit market conditions and impact of monetary policy in a developing economy context

This research examines the impact of monetary policy tools on macroeconomic variables through a nonlinear specification of threshold structural vector auto- regression (TVAR) using broad money and reverse repo rate as policy variables and output growth and inflation rate as macroeconomic variables. This research employs net domestic credit and interest rate spread as alternative threshold variables while segmenting the time 2001 m12-2018 m5 as easy and tight credit regimes in Pakistan. This research analyses the generalised impulse response functions for each threshold variable to specify the effects of monetary policy shocks. Current research finds that for one to two years’ time horizon; an increase in broad money has positive and long-time effect on output growth especially when interest rate spread is above its threshold value (i.e. easy credit regime). While a decrease in reverse repo rate brings a short-term positive effect on output growth whereas, an increase in reverse repo rate reduces the inflation for relatively longer time especially when economy is following an easy credit regime. This research identifies changes in broad money as an effective tool to enhance output growth and changes in reverse repo rate to control inflation rate in Pakistan.

Statistical measurement of the impact of monetary policy on price levels

The channels of monetary policy transmission highly depend on industrial structure, and there are significant differences across industries. This paper studies the industrial effects of monetary policy in China using the Vector Autoregression (VAR) model. We explore the heterogeneity of the response three pillar industries and factor intensity industries to a monetary shock. In order to capture the transmission of monetary policy, decomposing monetary policy as anticipated and unanticipated is considered. Results show evidence of the industrial effects of aggregate monetary policy shock is almost not effective. And the effectiveness of monetary policy shocks is conducted in close association with expectations and factor intensity.

Central Bank Communication: Information and Policy Shocks

The study proposes a novel way to identify the effects of monetary policy shocks taking into account time-varying signals of the central bank. I augment the standard monetary policy Bayesian Vector Autoregression (BVAR) with additional information variables from Fed statements, which allows us to study the information-free effects of monetary policy shocks and to take into account forward-looking information released by the central bank. The results show that, compared to surprises in 3-month federal funds futures, the policy shock identified in this study has a more negative effect on GDP, a more prolonged negative effect on inflation, and a greater impact effect on the excess bond premium. In the short-run it causes S&P500 to decline and the Fed to raise its interest rate. Furthermore, the results of large-scale Bayesian VAR confirm the standard transmission channels of monetary policy.

The Importance of Hiring Frictions in Business Cycles

The paper shows that there is an important direct role for hiring frictions in business cycles. This runs counter to key models in several strands of the macroeconomic literature, which imply that hiring frictions are not important per-se. In our model, conventional shocks yield non-standard and non-obvious macroeconomic outcomes in the presence of hiring frictions. Specifically, hiring frictions operate to offset, and possibly reverse, the effects of price frictions. This confluence of frictions has substantial effects. For a sub-set of the parameter space, model outcomes appear “frictionless,” though both hiring frictions and price frictions are at play. For a different sub-space, these interactions between the two frictions generate amplification in the responses of employment and unemployment to technology shocks, rather than friction-induced mitigation of responses. Despite the presence of price rigidity, positive technology shocks may still be expansionary in employment, and the effects of monetary policy shocks may still be negligible. We explain the underlying economic mechanisms and show their empirical implementation. In doing so, we argue in favor of the importance of explicitly using hiring frictions in business cycle modelling.

Financial Technologies and the Effectiveness of Monetary Policy Transmission

This study investigates whether and how financial technologies (FinTech) influence the effectiveness of monetary policy transmission. We use an interacted panel vector autoregression model to explore how the effects of monetary policy shocks change with regional-level FinTech adoption. Results indicate that FinTech adoption generally mitigates monetary policy transmission to real GDP, consumer prices, bank loans, and housing prices. A subcategorical analysis shows that the muted transmission is the most pronounced in the adoption of FinTech payment and credit, compared to that of insurance. The regulatory arbitrage and competition between FinTech and banks are the possible mechanisms leading to a mitigated monetary policy transmission.

The Effects of Monetary Policy Shocks on Mutual Fund Investing

The Effects of Monetary Policy Shocks on Mutual Fund Investing