Effects Of Unconventional Monetary Policy Research Articles

International spillovers of unconventional monetary policy: A meta-analysis

AbstractThe impacts of the unconventional monetary policy measures adopted by central banks after the 2007 financial crisis have been the focus of an increasing number of empirical studies. While some studies have focused on the impacts on the domestic economy, others have examined the international spillover effects of the policies adopted by the major central banks. The latter studies have, however, reported heterogeneous results. In this paper, we develop a meta-analysis of the empirical literature that examines the spillover effects of unconventional monetary policy on international capital flows. We find that, while the global average effect is not statistically different from zero, there are specific effects that vary significantly according to the development level of the destination country, the nature of the capital flow, the Central Bank that adopts the UMP, and the type and year of implementation of the UMP measure.

Industry Impacts of US Unconventional Monetary Policy

Abstract Conventional monetary policy has been shown to create differential impacts on industry output. This paper looks at unconventional monetary policy to see its differential impacts on industries in the United States. Identification is achieved with zero and sign restrictions within a structural global vector autoregressive framework. The effects of unconventional monetary policy on output have substantial heterogeneity across industries. Furthermore, the effects on output and monetary policy transmission mechanisms are qualitatively similar to that of conventional monetary policy previously reported in the literature. These findings suggest a substitutability between conventional and unconventional monetary policies. Importantly, policymakers can use unconventional monetary policy and be reassured that impacts on specific industries are similar to those using conventional monetary policy.

Beneath the surface: The asymmetric effects of unconventional monetary policy on corporate investment

This paper explores the asymmetric effects of unconventional monetary policy on corporate investment in the aftermath of the Great Recession. Using a comprehensive dataset of US listed firms, our research unveils a compelling insight: firms with higher investment irreversibility and market power are less responsive to fluctuations in corporate bond yields following an unconventional monetary policy announcement. These results emphasize the critical importance of taking into consideration firm-specific characteristics when formulating monetary policy, providing valuable insights for central banks aiming to enhance the effectiveness of their policies.

Effects of Unconventional Monetary Policy at the Zero Lower Bound

Effects of Unconventional Monetary Policy at the Zero Lower Bound

The macroeconomic effects of unconventional monetary policy: Comparing euro area and US models with shadow rates

The macroeconomic effects of unconventional monetary policy: Comparing euro area and US models with shadow rates

Foreseen risks

Large crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value fluctuates over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities.

Review on Monetary Policy after the Great Recession: The role of interest rates, by Arkadiusz Sieron, London: Routledge 2021

In his worth-reading book, Monetary Policy after the Great Recession: the role of interest rates, Arkadiusz Sieron looks at the limits of monetary policy and, in particular, the effectiveness of unconventional monetary policy. Sieron takes a close look at the unconventional monetary policy measures used after the Great Recession. He begins his book with an analysis of the so-called transmission channels of monetary policy. In the mainstream, there are several theories of how monetary policy affects or transmits to real variables such as employment and economic growth.

Unconventional monetary policy and debt sustainability in Japan

We adapt to the Japanese case a model of stochastic debt sustainability within a monetary policymaking framework. The model incorporates the effects of unconventional monetary policy and its potential unwinding on sovereign debt dynamics. A scenario tree represents stochastic and correlated macroeconomic and fiscal variables, and a coherent risk measure allows to draw probabilistic inferences on sustainability. We calibrate the model to the Quantitative and Qualitative Easing (QQE) that Bank of Japan launched in 2013. Using a retrospective analysis, we find a large favourable effect of the QQE on sovereign debt dynamics. Forward-looking simulations under different exit strategies show that the termination and unwinding of the QQE could raise debt sustainability concerns. A sharp tightening of global financial conditions could have a similar negative impact on debt dynamics, requiring a fiscal adjustment to keep debt sustainable.

The Effectiveness of Unconventional Monetary Policy (UMP) on Financial Markets in Indonesia and Malaysia during the Covid-19 Pandemic

Abstract: This paper discusses the effectiveness of unconventional monetary policy (UMP) on financial markets, includes the exchange rate and stock return index in Indonesia and Malaysia during the Covid-19 pandemic. Using announcements issued by the central banks of Indonesia and Malaysia as a benchmark for changes of yield curve in response to UMP, the effectiveness of UMP on exchange rates and stock return index is estimated using the sign and zero restriction VAR. As a result, UMP is effective on exchange rates in Indonesia and Malaysia, but it is not effective on stock return index in those two countries.

Industry effects of unconventional monetary policy, within and across countries

While conventional monetary policy causes differential impacts on industry output, how unconventional monetary policy affects industries across countries is as of yet unknown. This paper characterizes the effects of unconventional monetary policy on domestic industry output and spillover effects on foreign industry output between the US, the UK, and Japan. I set up a Bayesian global vector autoregressive model and identify monetary policy shocks using a sign restrictions identification. I find that the effects on output have substantial heterogeneity both within a country and across countries, however, the pattern of the industry-level output responses within a country and across countries are similar to each other. Regression analysis indicates that industries with lower working capital and larger firm size are associated with a large industry output response to unconventional policy, indicating the relevance of the interest rate channel and portfolio balance channel. Overall, unconventional policy can be used as another tool in the policymakers’ toolbox with similar industry impacts as conventional policy but with somewhat different transmission mechanisms.

Housing and the changing impact of monetary policy

Housing is the leading indicator of the business cycle. The impact of monetary policy on housing has thus unsurprisingly been the subject of numerous studies. Some have also investigated whether the impact of monetary policy has changed since the mid-1980s. These papers to date have relied on vector-autoregressions (VARs). To avoid some of the specification issues of VARs, we employ the local projection method. We find a clear effect of monetary shocks on housing variables over the entire sample. However, we also find that over the great moderation of 1983–2008, there is no significant impact of policy shocks on either home prices or investment. Moreover, as the difference between the estimated impact of monetary policy on GDP before and during the great moderation was not as large as the same difference for residential investment, we infer that changes to housing finance, rather than simply more stable monetary policy, deserve some credit for the lesser impact of Fed shocks. Finally, we find that during the zero lower bound years spanning 2009–2020, unconventional monetary policy (UMP) appears to have had a palpable impact on the housing sector. This result is consistent with previous findings on the effectiveness of UMP.

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.

Testing the Effectiveness of Unconventional Monetary Policy in Japan and the United States

The effective lower bound (ELB) on a short term interest rate may not constrain a central bank's capacity to achieve its objectives if unconventional monetary policy (UMP) is powerful enough. We formalize this 'irrelevance hypothesis' using a dynamic stochastic general equilibrium model with UMP and test it empirically for the United States and Japan using a structural vector autoregressive model that includes variables subject to occasionally binding constraints. The hypothesis is strongly rejected for both countries. However, a comparison of the impulse responses to a monetary policy shock across regimes shows that UMP has had strong delayed effects in each country.

The macroeconomic effects of unconventional monetary policies in a commodity‐exporting economy: Evidence from Mongolia

AbstractThis paper examines the macroeconomic effects of unconventional monetary policies in Mongolia, a developing and commodity‐exporting economy. Within a Bayesian structural vector autoregression framework, central bank balance sheet, policy rate, demand, and supply shocks are identified using a combination of sign and zero restrictions. An expansionary balance sheet shock stimulates bank lending and M2, decreases interest rate spread, leads to a depreciation of the domestic currency, and increases output and consumer prices. The estimated output and consumer price effects are qualitatively similar to the effects of conventional monetary policy, while the impacts on the exchange rate and foreign exchange reserves are different. We also find favourable evidence for the delayed overshooting response of the exchange rate to the balance sheet shock and reveal that financial friction amplifies the effects of demand and supply shocks on the Mongolian economy.

Corporate debt and unconventional monetary policy: The risk-taking channel with bond and loan contracts

We investigate the effects of unconventional monetary policies on corporate debt through the risk-taking channel using corporate bond and syndicated loan contracts from 2000 to 2016 in Japan. In this period, the policy rate remained fixed near the zero bound. Using the daily changes in the yield curve on monetary policy meeting days, we identify one call rate shock and two unconventional monetary policy shocks that do not affect short-term rates. We find that QE shocks, which move all medium-to-long-term rates, increase the maturity of debt contracts, especially for syndicated loans. In addition, such QE shocks decrease the size of corporate bonds with short maturity. On the other hand, QQE shocks, which raise medium-term rates and lower long-term rates, decrease the size of loans and corporate bonds with longer maturity. These effects imply the existence of the risk-taking channel of unconventional monetary policy: it stimulates investment in longer-maturity assets and decreases investment in assets with lower yields. Our findings show that unconventional policies affect debt contracts even in an extremely low interest rate environment.

Modelling the Effects of Unconventional Monetary Policy in a Heterogeneous Monetary Union

This paper focuses on the effects of the ECB’s unconventional monetary policy on the member countries of the euro area. The analysis is based on a Global VAR model, which allows to take into account mutual influences of processes in the countries of the currency union. Identification of unconventional monetary policy shock is conducted using a shadow interest rate which reflects changes in economic agents’ expectations following the announcement of unconventional monetary policy measures. The model is estimated using data for the euro area from 2007 to 2018 and covers all of the key instances of implementation of unconventional measures by the ECB. The results show that expansionary policy leads to a significant rise in output and prices in the euro area. Additionally, the effects of unconventional monetary policy are heterogeneous across countries: the response to unconventional monetary policy shock is insignificant in countries that are strongly affected by the crisis, and the effectiveness of the measures varies across countries with different levels of banking sector capitalisation. It was also found that the efficiency of unconventional monetary policy measures against deflation depends upon spillovers of the interaction between core and periphery countries in the monetary union.

Heterogeneous Effects of Unconventional Monetary Policy on the Bond Yields across the Euro Area

AbstractThis paper investigates the impact of the European Central Bank's unconventional monetary policies (UMP) between 2008 and 2019 on European government bond yields. It adopts a novel econometric approach that combines a data‐rich factor analysis and Vector autoregression (VAR) with heteroskedastic‐based identification. The results identify a significant and substantial impact for all countries and maturities, but stronger and persistent impact for the periphery. When we decompose the impact into separate components, we find that UMP decreases the market component for all countries. It decreases the risk‐mutualization component for the periphery permanently at the cost of a small increase for the core countries, which provides evidence for risk‐mutualization in the EMU.

International spillover effects of unconventional monetary policies of major central banks

This study examines the effects of unconventional monetary policies (UMPs) by the major central banks, namely the Bank of England (BOE), Bank of Japan (BOJ), European Central Bank (ECB) and the Federal Reserve (Fed), on the international financial markets, taking global spillovers and monetary policy interaction into account. To this end, we applied the Global Vector Autoregressive (GVAR) model to 35 countries/economies and one region for the period from March 2009 to July 2019. In addition, we accommodated the smooth transition to the GVAR to consider possible structural changes in the effects of UMPs and monetary policy interaction. Our results indicate the importance of capturing structural changes, showing the remarkable difference between the beginning and end of the sample. For example, we found clear evidence of monetary policy coordination after the global financial crisis and less evidence of policy interaction in the recent period. Also, our results suggest that generally, the UMPs of the major central banks had stronger effects on both domestic and international bond markets in the earlier period. In contrast, the global equity markets responded more positively to the UMPs in the recent period, although there was no noticeable difference in the responses of domestic equity markets throughout the sample.

Unconventional monetary policy and inflation expectations in the Euro area

With the nominal short-term interest rates approaching the zero-lower bound, the ECB adopted a range of unconventional monetary policies (UMP) to push inflation back to its target, but inflation has remained far below two percentage points. While conventional monetary policy tools are ineffective, inflation expectations become a key channel for the transmission of monetary policy. Nevertheless, there is still no clear consensus about the effectiveness of UMP on inflation expectations. By constructing a novel measure for UMP, our study examines the effects of the ECB's UMP on inflation expectations in the Euro area during 2009–2018. We find that an unanticipated UMP shock raises inflation expectations in the short-term. However, as higher inflation expectations do not boost GDP nor realized inflation, they decrease after a few months, which suggests that the expectation channel is not fully functioning even if the ECB manages to stabilize inflation expectations temporarily.

How does unconventional monetary policy affect the global financial markets?

This paper examines the spillover effects of unconventional monetary policies (UMPs) by the Bank of Japan (BOJ) and the Federal Reserve (Fed) on the domestic and global financial markets, taking a possible regime change into account. Applying a smooth-transition global VAR model to ten countries and the Euro zone for the sample period between 2002–2015, we find that the BOJ’s expansionary UMPs have significantly increased the equity prices and depreciated the exchange rates, regardless of the regimes. Also, our results indicate that the BOJ’s UMPs have become more effective for the government and corporate bond prices in more recent years. In addition, we find that the Fed’s expansionary UMPs have had significant positive effects on their domestic financial markets throughout the sample period. Finally, our results suggest that the BOJ’s UMPs have rather limited effects on global financial markets and that the effects of the Fed’s UMPs are considerably larger.