Impact Of Unconventional Monetary Policy Research Articles

The Response of Tail Risk Perceptions to Unconventional Monetary Policy

We examine the impact of unconventional monetary policy (UMP) on stock market tail risk and risks of extreme interest rate movements. We find that UMP announcements substantially reduced option-implied equity market tail risks and interest rate risks. Most of the impact derives from forward guidance rather than asset purchase announcements. Communication about the future path of policy rates reduced volatility expectations of long-term rates and the associated risk premia. The reaction of equity market tail risk, in turn, points to the risk-taking channel of monetary policy, as the commitment to low funding rates may have relaxed financial intermediaries’ risk-bearing constraints. (JEL E52, E58, G12, G13, G14)

The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program

This paper investigates the impact of unconventional monetary policy on firm financial constraints. It focuses on the Federal Reserve’s maturity extension program (MEP), intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP’s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms that are larger and older, and hence less likely to be financially constrained. There is also evidence of “reach for yield” behavior among some institutional investors, as the demand for riskier corporate debt also rose during the MEP. Our results suggest that unconventional monetary policy might have helped to relax financial constraints for some types of firms in part by inducing gap-filling behavior and affecting the pricing of risk in the bond market.

The impact of unconventional monetary policy on the tail risks of stock markets between U.S. and Japan

Facing the economic downturn, the central bank of U.S. and Japan adopts the unconventional monetary policy to stimulate their economy. This paper studies the quantitative easing policy effectiveness via the tail risks of stock markets in the U.S., Japan and the other 74 countries. Although the stock markets of U.S. and Japan reveals the announcement-day effects of the QE policy, this study finds an asymmetric tail risk of return distribution on the QE policy effect. The post-period right-tail and left-tail risks of the stock markets are significantly smaller and larger than that of the pre-period of the QE programs, respectively. This implies that the tail risks of stock returns have dissimilar interdependence with the QE programs. Furthermore, the geographical dependence is the major factor that determines the contagion of stock market, and the fragility of foreign stock market caused by the US QE policy is larger than that of the Japan.

The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program

This paper investigates the impact of unconventional monetary policy on firm financing constraints. It focuses on the Federal Reserve?s maturity extension program (MEP), which was intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP?s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms with stronger balance sheets. There is also evidence of ?reach for yield? behavior among some institutional investors, as the demand for riskier debt also rose during the MEP. Our results suggest that unconventional monetary policy may have helped to relax financing constraints and stimulate economic activity in part by affecting the pricing of risk in the bond market.

The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program

The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program

The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program

The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program

The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program

The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program

Unconventional Monetary Policy and Uncertainty

Using a structural factor-augmented vector autoregression (FAVAR) model and a large database of daily time series, we examine the impact of unconventional monetary policy on multiple proxies of economic and financial uncertainty. Our findings indicate that expansionary unconventional monetary policy shocks lead to large reductions in uncertainty across markets. More specifically, a surprise unconventional monetary easing lowers equity market, policy, housing and mortgage market, exchange rate, and Treasury market uncertainty. Research results further suggest that these reductions in uncertainty differ in magnitude across asset classes and largest for equity markets. Lastly, we find that the effects of these monetary shocks on uncertainty attenuate quickly and dissipate after about 150 days.

Does unconventional monetary policy affect inequality? Evidence from Japan

Inequality has been largely ignored in the literature and practice of monetary policy, but is gaining more attention recently. Here, we exclusively focus on the impact of unconventional monetary policy (UMP) on inequality. We look at how the recent UMP in Japan affected inequality, using household survey data. Our vector auto regression (VAR) results show that UMP widened income inequality after 2008Q3 as the Bank of Japan (BoJ) resumed its zero-interest rate policy and reinstated UMP. This is largely due to the portfolio channel. To the best of our knowledge, this is the first study to empirically analyse the distributional impact of UMP. Japan’s extensive experience with UMP may hold important policy implications for other countries.

The Impact of Unconventional Monetary Policy on Real Estate Markets

We use a structural factor-augmented VAR and a novel daily dataset to assess the effects of unconventional monetary policy on housing and real estate markets. Findings indicate that expansionary unconventional monetary shocks lower key housing market interest rates; raise returns on homebuilder and REIT stocks; reduce insurance costs for subprime mortgage-backed and commercial real estate debt; and increase housing sentiment. While the unconventional policy effects are sizable, they differ across US geographies and are most efficacious for distressed housing markets. Finally, unconventional monetary shocks attenuate quickly, suggesting that successive rounds of easing may be necessary during times of economic weakness.

The Impact of QE on Rollover Risk and Corporate Bond Maturity

This paper examines the impact of unconventional monetary policies (UMPs), including Quantitative Easing (QE), Operation Twist (OT), and Forward Guidance (FG), on corporate credit markets. These policies were expected to reduce credit spreads by decreasing credit risk premium and/or liquidity premium, and to further lengthen borrowing maturity. During the crisis, Quantitative Easing (QE) 1 reduced these risk premia as expected. However, after the crisis, QE 2 and Operation Twist announcements increased fears of a weaker economy and, consequently, widened credit spreads. In contrast, Forward Guidance reduced credit risk premia without increasing fear premia. I also find that QE had a minimal effect on corporate bond maturities, which most likely reflected the considerable increase of new Treasury issuance and the declining fraction of preferred-habitat investors. The largest impact on corporate bond maturities came from UMPs that significantly flattened the yield curve.

The Impact of Unconventional Monetary Policy on the Italian Economy During the Sovereign Debt Crisis

We assess the impact on the Italian economy of the main unconventional monetary policies adopted by the ECB in 2011-2012 (SMP, 3-year LTROs and OMTs) by following a two-step approach. We evaluate their effects on money market interest rates, government bond yields and credit availability and then map them onto macroeconomic implications using the Bank of Italy quarterly model of the Italian economy. We find that the SMP and the OMTs have been effective in counteracting increases in government bond yields and that the LTROs have had a beneficial impact on credit supply and money market conditions. From a macroeconomic perspective, we find that the unconventional policies have had a large positive effect on the Italian economy, mainly through the credit channel, with a cumulative impact on GDP growth of 2.7 percentage points over the period 2012-2013. To conclude, while the policies did not prevent the Italian economy from falling into recession, they did avoid a more intense credit crunch and a larger output fall than those actually observed.

Unconventional Monetary Policy in an Open Economy

The impact of unconventional monetary policies on exchange rates and its spillovers to other economies is not yet fully understood. In this paper I develop a two-country DSGE model with interbank markets and endogenous default probabilities to analyze the cross-border impacts of unconventional monetary policy. I examine the impact of two unconventional measures commonly used: central bank liquidity injections and asset swaps. I find that liquidity injections lead to a short run appreciation of domestic currency, but a mild long run depreciation. In contrast, asset swaps cause a short run depreciation of domestic currency, but a long run appreciation. Lastly, when both countries coordinate on the implementation of unconventional policies, the model yields the following results: Non-coordinated liquidity injections lead to higher increases with respect to output and inflation variation, but have negative spillovers on the other economy in terms of lower growth. By contrast, coordinating asset swaps leads to higher increases in output and lower fluctuation in inflation in both countries. The results of this paper suggest that coordination in unconventional monetary policy may not always yield an optimal outcome, and macroeconomic outcomes in both countries depend crucially on the choice of instrument.

The impact of unconventional monetary policy on the market for collateral: The case of the French bond market

We consider the channel consisting in transferring the credit risk associated with refinancing operations between financial institutions to market participants. In particular, we analyze liquidity and volatility premia on the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. In our time-varying transition probability Markov-switching (TVTP-MS) model, we highlight the existence of two regimes. In one of them, which we refer to as the conventional regime, monetary policy neutrality is verified; in the other, which we dub the unconventional regime, monetary policy operations lead to volatility and liquidity premia on the collateral market. The existence of these conventional and unconventional regimes highlights some asymmetries in the conduct of monetary policy.

The Impact of Unconventional Monetary Policy on the Market for Collateral: The Case of the French Bond Market

We consider the channel consisting in transferring the credit risk associated with refinancing operations between financial institutions to market participants. In particular, we analyze liquidity and volatility premia on the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. In our time-varying transition probability Markov-switching (TVTP-MS) model, we highlight the existence of two regimes. In one of them, which we refer to as the conventional regime, monetary policy neutrality is verified; in the other, which we dub the unconventional regime, monetary policy operations lead to volatility and liquidity premia on the collateral market. The existence of these conventional and unconventional regimes highlights some asymmetries in the conduct of monetary policy.

Monetary Policy in Turbulent Times: Impact of Unconventional Monetary Policies

The global financial and economic crisis warranted authorities to pursue extraordinary policy measures including fiscal stimulus and excessive monetary accommodation. Particularly, central banks in many countries resorted to conventional monetary policies exhausting the entire monetary arsenal, and they also adopted unconventional monetary policies including quantitative easing. These policies have resulted in positive impacts by way of restoring financial markets, ensuring stability in financial systems, mitigating the adverse impact of economic recession and also supporting the recovery process. However, the undue expansion in balance sheets of central banks and resultant increases in monetary bases due to the adoption of extraordinary policy measures pose several risks in different dimensions. Particularly, the continuation of such policies influences the key mandate of central banks, i.e. achieving and maintaining price stability. This study points to possible pressures on price levels due to the adoption and also the continuation of unconventional monetary policies, particularly in advanced countries. In addition, this study examines possible break down in the key channel of monetary transmission mechanism, i.e. interest rate channel during the crisis. In such context, this study suggests unwinding balance sheet expansions without delays as economies have begun to revive, credit and broad money aggregates recorded positive growth rates and price levels have commenced to pick-up. However, exit strategies need to follow a timely and gradual process. Hence, this study draws important implications for central bankers and financial market players, both in advanced and emerging countries.