Fed Monetary Policy Research Articles

ABD Merkez Bankası'nın Para Politikası Kurallarından Sapmaları ve Bunların Yayılma Etkileri

The aim of this study is to examine the impact of the FED's deviations from monetary policy rules on the Turkish economy. In other words, the spillover effect of the FED's monetary policy was examined. The dataset used in the study was divided into two parts as rule-based and discretionary periods with reference to Taylor (2012), and the interaction between the variables was examined using structural VAR models. The results show that deviations from monetary policy rules have quite significant effects on the Turkish economy in the period when the FED is closer to discretionary policy. Considering that the economies of developing countries such as Turkey are more affected by the monetary policies of the FED than the developed countries, it can be said that transparent and predictable monetary policies are an effective tool to be protected from these global effects. In addition, the diversification of the foreign trade portfolio and the strengthening of foreign exchange reserves are also extremely important in making the Turkish economy resilient to the shocks resulting from the FED's monetary policies.

The domino effect of silicon valley Bank's bankruptcy and the role of FED's monetary policy

This paper examines the spillover effects of bankruptcy by important tech industry banks—Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank—on the top 10 institutions in the MSCI Bank Index and the role that monetary policy by the US Federal Reserve (the Fed) played in this contagion, using Dynamic Conditional Correlation-Exponentional Generalized Autoregressive (DCC-EGARCH) and time-varying Granger-causality models. Our findings show that the dynamic conditional correlations among the banks were higher during the period of the SVB crisis, implying the presence of financial contagion from the bank's bankruptcy due to uncertainty triggered by its collapse. Financial contagion emerges between SVB and the top 10 banks, and the degree of contagion rises during the crisis period. Moreover, the Fed's monetary policy plays a significant role in contagion due to bank failures. The deepening of financial contagion followed the Fed's increases in the federal funds rate to combat inflation.

Interest Rates, Money, and Fed Monetary Policy in a Markov-Switching Bayesian VAR

Abstract This paper evaluates the roles of short- and long-term private and government interest rates and inside and outside money in the monetary transmission mechanism. With money and credit markets present, changes in monetary policy set off a chain of relative price and portfolio adjustments affecting output and prices. I study interest rate and money supply rules within this monetary transmission mechanism by estimating several Markov-switching Bayesian vector autoregressions (MS-BVARs) on a quarterly U.S. sample from 1960 to 2018. The best-fit MS-BVAR restricts MS to the impact and lag coefficients of the monetary policy and money demand regressions as well as to the stochastic volatilities (SVs) of the structural shocks. Estimates of this MS-BVAR yield evidence of a SV regime which coincides with NBER-dated recessions. This MS-BVAR also identifies a regime switch in the Fed’s interest rate rule and banks’ demand for outside money around the dot-com bust of 2000 and again from the 2007–2009 recession and financial crisis to the end of the sample. Counterfactual simulations show the 2007–2009 recession and financial crisis would have not been as deep and long-lasting if the fed funds rate had been as low as −8 % in 2009 and remained negative from 2010 through 2016.

Are CBRT’s Monetary Policy Statements Affected by ECB and FED Statements?

This paper aims to examine whether CBRT’s monetary policy statements are affected by ECB and FED monetary policy statements. The sentiment analysis is performed to build the balance sentiment indicators (BSI) for CBRT, ECB, and FED from 2008 January to 2020 August using by their monetary policy statements. Individual and group properties of monthly BSI’s are examined by unit root tests and the Bounds cointegration tests. The short and long-run effects of ECB and
 FED sentiments on CBRT’s sentiments are investigated by ARDL and UECM models. The analysis is applied over the full sample period and two sub-samples which they represent the periods before and after 2013 May. That date is an important for Turkey in terms of the effects of the Fed stimulus program as well as relations with the IMF. The results imply that the CBRT, ECB, and FED’s BSI’s have statistically significant cointegration relationship over the full sample period and the period
 after 2013 June. Particularly after June 2013, the CBRT’s statements are positively related with the ECB’s and FED’s statements in the long run however CBRT’s statements are negatively affected by FED’s statements in the short-run.

Stock market liquidity, funding liquidity, financial crises and quantitative easing

Using data from 2003 to 2013, we examine liquidity linkages, originating with the U.S. Federal Reserve Bank (FED) reserve creation, resulting from conventional and non-conventional monetary policy. These reserves, in turn, impact commercial bank credits/lending and U.S. stock market liquidity. We find that stock market liquidity varies across different monetary policy subperiods, where liquidity is strongly influenced by changes in bank lending and M2 money velocity. FED monetary policy that results in bank reserve increases generally stimulates bank lending and subsequently, is accompanied by stock liquidity gains. These linkages were observed during the 2007–09 recession and QE-1 subperiods, where increasing FED assets and bank credits were accompanied by stock liquidity increases. However, even though FED assets and excess bank reserves increased substantially during QE-2 and QE-3, we find no commensurate increases in bank lending/credits or M2 Velocity. We find that QE-2 and QE-3 had no effect or negative impacts on stock liquidity. These findings support our hypothesis that enhancements in stock market liquidity generally occur only when FED stimulus coincides with commensurate increases in bank lending. Additionally, we find positive effects of short-selling during periods of high market uncertainty, and positive effects from the FED being allowed to pay interest on excess reserves (IOER).

Transmission of the European Central Bank Monetary Policy Across Regional Stocks Markets

In this paper we estimate the transmission of common euro area monetary policy shocks across the euro area main stock markets. To do so, we develop global SVAR models in which the ECB monetary policy is modeled as a function of euro area aggregate variables and the US variables that define the FED monetary policy shocks. Our results suggest, in line with economic theory, that the transmission of monetary policy across Eurozone stocks markets displays heterogeneity driven by differences in the listed firms’ characteristics but also by the distance between the actual ECB stance and the obtained by applying a Taylor rule implied in the ECB policy to country-specific macroeconomic data. These results highlight the need for a corrective fiscal policy on the undesirable effects of the common monetary policy and may allow policymakers to check the effects of their fiscal policies when any.

Co-movement of exchange rates with interest rate differential, risk premium and FED policy in “fragile economies”

We use the wavelet coherency analysis in order to investigate the relationship between the exchange rate changes and its major financial determinants for selected emerging economies. Our analysis shows that the changes in exchange rate are correlated with interest rate differentials, risk premium, the FED's monetary policy implementation and its policy uncertainty. Moreover, the co-movement between the exchange rate changes and its financial determinants substantially changes across frequencies and over time. The co-movement patterns also vary to a large extent across “fragile” emerging markets. Finally, the strongest co-movement of exchange rate changes is with the risk premium in all countries.

Consequences of divergent monetary policies of the highly industrialised countries on global and local level

In contrast to the USA, negative interest rates in the Eurozone and other European countries, as a result of unprecedented expansionary monetary policy implemented by the European Central Bank since 2014, will have far-reaching negative consequences. Decisions of citizens to withdraw deposits from banks and keep them in safe deposit boxes, invest in real estate and land, and decisions of companies to hold large amounts of cash or to buy-back shares and close up, under conditions of divergent policies of central banks in highly industrialized countries, indicates the presence of risk of secular stagnation. Faster recovery of the USA economy and normalization of FED monetary policy through the cycle of increasing the key interest rate will contribute to further strengthening of the US dollar against the euro. It will significantly increase the burden of foreign debt servicing for highly indebted countries that have borrowed in US dollars. This is the case with Serbia. Continuation of ECB expansionary monetary policy would have a positive impact on real GDP growth in Serbia in 2017. Close to zero interest rates on the savings of citizens in Eurozone would negatively influence its future economic growth. Negative effects of such a policy will also be manifested in Serbia because the interest rates on savings in banks are also close to zero.

Does the value of US dollar matter with the price of oil and gold? A dynamic analysis from time–frequency space

This paper uses wavelet analysis to examine whether the value of US dollars drives the price of oil and gold. By decomposing the pairwise relationship between oil–US dollar and gold–US dollar into short-term and long-term components, risk managers who are pursuing different decision-making horizons would be able to moderate their risk exposures according to these results. Empirical findings indicate that the pairwise relations became weaker as the time frames being observed widened, suggesting that short-term correlations were much higher after early 1990s. The Fed monetary policy is the main driver to the pairwise correlations of oil–US dollar and gold–US dollar. The dynamic interdependences also indicate that crude oil market has been dominated by the US dollar while gold leads the US dollar in the short run after early 1990s. On the other hand, we find that financial crises do accelerate interdependences between oil–US dollar and gold–US dollar, which alter the original relationship between these assets. The risk variables of TED spread and variance of S&P 500 predict the closer oil–US dollar and gold–US dollar correlations during the crisis period.

An Econometric Model for Estimating the Equity Risk Premium

In this paper we estimate the relation between the equity risk premium and the fundamental macroeconomic and financial variables in the United States during the period 1964-2012 by applying the standard OLS regression and the Hodrick-Prescott filter. Consequently, based on these results and applying the ARIMA models we forecast the evolution of the equity risk premium in the United States for the period 2013-2016. According to our results the equity risk premium in the United States is going to gradual increase in the following years, an evolution determined by the FED monetary policy perspectives, but also by the narrowing of the private consumption gap.

Monetary Policy in the North, Effects in the South

We investigate empirically what may be the effects of Monetary Policy in the North-namely monetary policy normalization by the FED and quantitative easing (QE) by the ECB- on cross border portfolio flows to the South (Emerging Markets). Using a Dynamic Linear Factor Augmented VAR (FAVAR), we find that the FED monetary policy normalization may lead to a reduction in capital inflows in emerging markets between 3-7% of GDP. The sharpest reduction occurs when markets overreact to the FED normalization and the ECB follows suit, rather than following a QE path. In turn, the mildest correction in capital inflows occurs in the current situation (i.e., the FED manages to normalize monetary policy smoothly and the ECB frontloads it’s QE). Across regions, Emerging Europe is generally less affected than Latin America and Emerging Asia, the more so the larger the QE by the ECB.

What to expect when you’re electing

Purpose– The purpose of this paper is to analyze security-market returns relative to the political party of the president, the Federal Reserve’s monetary policy, the year of the president’s term, and the state of political gridlock. Contrary to prior studies, which evaluated the influences separately, the authors jointly evaluate these variables.Design/methodology/approach– The analysis supports the notion that security returns are significantly related to shifts in Fed monetary policy, political gridlock, and the year of the presidential term; however, returns are generally invariant to the president’s political party affiliation. Overall, the findings suggest that investors should focus less attention on the party of the president and instead more closely monitor Fed actions.Findings– It appears that political harmony should be welcomed by equity investors, but not debt investors. Finally, regardless of the political outcome, if the past serves as a guide, investors may have to wait until year three of the next presidential term to enjoy the fruits of the current political season.Originality/value– The academic literature is rich with studies that consider the aforementioned political effects and the influence that monetary policy have on the markets. To date, however, these factors have not been jointly considered when examining returns. This paper considers several dimensions of the political landscape – the party of the president, the presence or absence of political gridlock, and the presidential term cycle effect – in conjunction with Fed monetary policy in examining long-term security returns. By examining the relationship between security returns and both political and monetary conditions, the authors provide robust evidence regarding the relationships.

What to Expect When You're Electing

This paper analyzes security-market returns relative to the political party of the president, the Federal Reserve’s monetary policy, the year of the president’s term, and the state of political gridlock. Contrary to prior studies, which evaluated the influences separately, we jointly evaluate these variables. Our analysis supports the notion that security returns are significantly related to shifts in Fed monetary policy, political gridlock and the year of the presidential term; however, returns are generally invariant to the president’s political party affiliation. Overall, our findings suggest that investors should focus less attention on the party of the president and instead more closely monitor Fed actions. Furthermore, it appears that political harmony should be welcomed by equity investors, but not debt investors. Finally, regardless of the political outcome, if the past serves as a guide, investors may have to wait until year three of the next presidential term to enjoy the fruits of the current political season.

The impact of ECB and FED announcements on the Euro interest rates

We investigate the impact of news in the ECB and FED monetary policy announcements on daily changes in Euro interest rates. We document significant impacts of ECB announcements throughout the period but only until mid 2004 of FED announcements.

Post-Depression Economics

The essay presents the argument that the U.S. experienced a shallow economic depression in 2007-9 reminiscent of pre-war economic contractions. The economic data are analyzed to show that the downturn was more severe than any previous post-war downturn. Though technically over, the severity of the depression has led to extremely slow growth and a protracted period of high unemployment.The policies of the 2000s and the concentrated industrial structure they spawned are shown to have contributed to the severity of the downturn and to the slow recovery. The Keynesian and libertarian schools of economic thought are discussed in the context of their roles in offering prescriptions for improving economic growth. The essay critiques the academic economics profession for not predicting the downturn or providing useful prescriptions for solving economic problems.It is shown that China’s policies created a monetary and trade environment in the 2000s for the depression and that they are constraining economic growth as the U.S. exits the depression.A number of policy prescriptions are provided to improve economic growth. These best practices include constraining federal government spending, adjusting and balancing tax, competition, trade and intellectual property policies, promoting investment, education and innovation policies, and modulating Fed monetary policy.

Security markets and the information content of monetary policy turning points

Substantial evidence shows that a significant relationship exists between Federal Reserve monetary policy signals and subsequent security returns. Recent evidence, however, suggests that Fed rate changes do not signal shifts in monetary policy and therefore have no real policy significance. In this study, we investigate whether certain Fed signals, characterized as turning points in the monetary cycle, have real policy significance. Our evidence suggests that the Fed's signal that a turning point is occurring is unambiguous, predicts a substantial shift in Fed monetary policy, and provides costless and meaningful information about future security market returns.

Aftermath of the Monetarist Clash with the Federal Reserve Before and During the Volcker Era

• Fed monetary policy is based on a nominal short-term interest rate, which is an unreliable guide. The Fed interprets a low rate as indicating monetary ease, a high rate as indicating monetary tightening. A low rate, however, may in fact be consistent with contraction if the growth rate of the quantity of money has been declining, and a high rate may be consistent with expansion if the growth rate of the quantity of money has been rising. Moreover, monetary authorities who rely on an interest rate instrument are prone to delay a needed increase to combat inflation because they believe that it will produce a rise in the unemployment rate. Action is often late and excessive. Prescription: Monetary policy should be based on a credible, pre-announced, longrun stable growth rate of a monetary aggregate, preferably the monetary base or M2. • The Fed instructs the Manager of open market operations at the Federal Reserve Bank of New York to maintain money market conditions that it specifies in its directive to him, with a proviso that credit does not unduly expand. The directive leaves open to the Manager the interpretation to be placed on money market conditions and therefore makes it impossible to hold him accountable for the open market operations that he chooses to execute. Prescription: The Fed should not conduct M onetarists 40 years ago had a double objective. They sought to persuade the economics profession that (i) monetary policy, not fiscal policy, was the key to economic stability and (ii) the control of inflation required limiting money balances, not incomes policies and wage controls. Monetarists also sought to persuade the Federal Reserve to alter the way it conducted monetary policy to conform to monetarist doctrines. In the three years (1979-82) under Volcker, disinflationary monetary policy, announced as being designed to contain growth in money aggregates, brought down the U.S. inflation rate from 10 percent to 4 percent. Since then the inflation rate has remarkably declined even more. A victory for monetarism? During the Volcker era monetarists did not think so. Missing from the retrospective on the Volcker era at the special conference held at the Federal Reserve Bank of St. Louis was a consideration of the complaints against the Federal Reserve expressed by monetarists. The conference papers celebrated Volcker’s achievement and deemed the changes in monetary theory and practice since his time as virtually unqualifiedly successful. I propose to review past monetarist strictures (Shadow Open Market Committee, 1974-1982) and ask whether current Federal Reserve practice provides a satisfactory response to them. Twenty-five years after the Volcker era, has the contest between the U.S. central bank and its critics been resolved?

Are Euro Interest Rates led by FED Announcements?

This paper investigates, for the first time, the reactions of markets to the monetary policy decisions of their own Central Bank and to the decisions of the Central Banks of other countries. In particular, using daily interest rates to estimate the impact of the monetary policy announcements of a Central Bank, we analyse the effect of the FED, ECB, and BoE monetary policy announcements on their own markets, and on the others. Surprisingly, we find that while the US rates respond only to FED announcements, and the British rates respond mainly to BoE announcements and marginally to FED announcements, the response of Euro bond rates to the FED announcements is stronger than their response to ECB announcements.

Don't Worry About the Election

In this election year, it is interesting to examine historical security market returns in terms of the political party of the President, the general monetary policy stance of the Federal Reserve, and political gridlock, when different political parties control Congress and the executive branch. It is an innovation to evaluate the three variables jointly. Such a combined analysis reveals that long-term security returns are strongly related to shifts in Fed monetary policy but generally invariant to changes in the political landscape. Investors should thus focus their attention on Fed actions rather than political outcomes.

Does Monetary Policy Affect the Central Bank's Role in Bank Supervision?

This paper examines whether monetary policy responsibilities alter the central bank's role as a bank supervisor. The analysis focuses on the U.S., where the FED shares supervisory duties with two other federal agencies, namely the OCC and the FDIC. Among these three institutions, the FED is the only one responsible for monetary policy. Hence, using banks supervised by the FDIC and the OCC as a control group, the FED's supervisory behavior is compared with the other two agencies. The comparison is made using a new panel dataset that includes all insured commercial and savings banks in the U.S., and all formal regulatory actions issued against these institutions during the period 1990:I- 1998:IV. The results suggest that the FED's monetary policy duties do alter its role in bank supervision: indicators of monetary policy affect the supervisory actions of the FED, but do not affect the actions of the other two agencies. However, the scenario in which the FED uses bank supervision to reinforce the objectives of monetary policy is rejected.