Measures Of Monetary Policy Shocks Research Articles

Monetary policy spillovers through debt currencies

Using high-frequency measures of monetary policy shocks, I show that stock returns for non-US firms with a higher foreign debt ratio systematically respond more to US monetary policy via the exchange rate channel, especially for those firms with dollar-denominated bonds. I do not find similar transmission effects from European Central Bank monetary policy shocks to firms with euro-denominated debt.

The effect of monetary policy on firm-level uncertainty

Uncertainty at the firm-level falls on FOMC announcement days with substantial variation both across firms and over time. We find that this is not related to commonly used measures of monetary policy shocks which capture surprises about the expected path of the policy rate. Rather it is driven by changes in uncertainty around the expected path of the policy rate. This effect is attenuated for firms that have higher growth opportunities (as measured by Tobin’s Q).

House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data

Existing literature documents that house prices respond to monetary policy surprises with a significant delay, taking years to reach their peak response. We present new evidence of a much faster response. We exploit information contained in listings for the residential properties for sale in the United States between 2001 and 2019 from the CoreLogic Multiple Listing Service Dataset. Using high-frequency measures of monetary policy shocks, we document that a one standard-deviation contractionary monetary policy surprise lowers housing list prices by 0.2–0.3 percent within two weeks—a magnitude on par with the effect on stock prices. House prices respond stronger to the surprises to future rates as compared to the surprise changes in the federal funds rate. Sale prices are mostly pre-determined by list prices and do not independently respond to monetary policy surprises.

Measuring Monetary Policy Shocks in India

We present new measures of monetary policy shocks for India using high-frequency data, creating a publicly available event study dataset as a byproduct. In addition to capturing surprises to the Reserve Bank of India's (RBI) policy rate, our shocks suggest that financial markets infer substantial information about the future path of the policy rate from RBI communication. We conduct a narrative analysis of official statements and corresponding media discussion on prominent RBI announcement dates to help understand how markets use RBI communication to update their expectations. Bond and stock markets react strongly to these monetary shocks, but exhibit notable heterogeneity across governor regimes. Finally, we use the monetary shocks as external instruments to identify the impact on macroeconomic variables in a structural vector autoregression. We find some evidence of the conventional transmission of monetary policy to prices but not to output.

Monetary policy news and systemic risk at the zero lower bound

AbstractThis paper employs a recent contribution to the construction of the shadow nominal interest rate during the zero lower bound episode and Greenbook forecasts to obtain a measure of monetary policy shocks over that time period. It then identifies monetary policy news shocks as a novel measure of the forward‐looking conduct of monetary policy in the U.S. Using the data from 1987—2010, it shows that neither monetary news nor surprises affected alternative measures of systemic risk over the full sample. However, monetary news shocks announcing future reductions in interest rates were effective in lowering most (but not all) systemic risk measures during the zero lower bound period, unlike monetary surprises.

Regional effects of monetary policy in the U.S.: An empirical re-assessment

This paper provides an empirical re-assessment of the regional effects of monetary policy in the U.S. We use the narrative series of Romer and Romer (2004) as a measure of monetary policy shocks and impulse response functions estimated directly from a single equation spatial model. We find that monetary policy tightening leads to a persistent decrease in regional real personal income and employment, with asymmetric effects across regions that are magnified by spatial spillovers. The magnitude of the effects depends on the period under analysis and on the direction of the monetary policy shock. We also provide evidence of the existence of the interest rate and the housing market channels, although there is weak support for the presence of the credit channels at the regional level.

The effect of monetary policy shocks on macroeconomic variables: Evidence from the Eurozone

This paper investigates how European Central Bank (ECB) monetary policy shocks impact industrial production (output) and inflation (prices). I gather a novel dataset of macroeconomic forecasts, and using a narrative approach, I construct a new measure of monetary policy shocks. Industrial production responds to an unpredictable positive monetary policy shock of 100 basis points with a decline of over 0.5%. On the contrary, inflation responds weakly with a very modest decrease of 0.05%.

Impactos regionales y sectoriales de la política monetaria en Colombia

En este artículo se realiza una estimación del impacto de la política monetaria sobre la producción en las regiones y sectores de la economía colombiana empleando un modelo de rezagos distribuidos en el que se combinan datos de producción regional y sectorial y una medida de choques de política monetaria estimada con datos del agregado de la economía. Los resultados obtenidos muestran que la política monetaria afecta en mayor medida las regiones Pacífico y Caribe y genera importantes diferencias sectoriales, que resultan ser determinantes en la transmisión regional de la política monetaria mediante el canal de tasa de interés.

International spillovers of monetary policy: Lessons from Chile, Korea, and Poland

In this paper, we assess evidence on international monetary policy spillovers to domestic bank lending in Chile, Korea, and Poland, using confidential bank-level data and different measures of monetary policy shocks in relevant currency areas. These three emerging market economies are small and open, their banking systems do not have significant presence overseas, and they can be considered as price takers in the world economy. Such features allow for better identification of binding financial constraints and foreign monetary policy shocks. We find that the monetary policy shocks spill over into domestic bank lending, modifying the degree to which financial frictions tighten or relax, and this evidence is consistent with international bank lending and portfolio channels.

Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada

Using narrative evidence with a novel database of real-time data and forecasts from the Bank of Canada’s staff projections (1974–2015), we construct a new measure of monetary policy shocks and estimate the effects of monetary policy in Canada. We show it is crucial to account for the break in the conduct of monetary policy caused by the announcement of inflation targeting in 1991. A 100-basis-point increase in our new shock series leads to a 1.0 percent peak decrease in real GDP and a 0.5 percent fall in the price level, while not accounting for the break leads to a persistent decrease in GDP and a price puzzle. Albeit the change in monetary regime, the effects of monetary policy have not changed much before and after IT.

A New Measure of Monetary Policy Shocks

Central bank announcements contain both: - a stance on monetary policy - an assessment of the economic outlook When expecting strong growth, central banks usually raise interest rates to stabilize the economy. But an announcement of interest rates higher than the market anticipated may change market participants’ beliefs, leading them to conclude the economy is stronger than they thought. When policy makers and researchers assess monetary non-neutrality, they must consider the distinction between the effect of the central bank’s monetary policy stance and the effects of a shift in fundamentals. I measure this distinction by constructing a monetary policy shock series and applying it to the Federal Reserve’s monetary policy announcements. In particular, I examine the high-frequency movements of interest rates in a 30-minute window around the time of the Federal Reserve’s announcement. Because the announcement may reshape expectations about future monetary policy, I use changes in contract rates of interest rate futures settled in both the current and subsequent months. I then project these surprises onto the Federal Reserve’s information set, which is measured by its own economic forecasts preceding each announcement. The monetary policy stance shock is the portion of interest rate surprises which cannot be explained by the economic forecasts. I estimate the causal effects of monetary policy on the financial market and the macro economy using the constructed monetary policy stance shock as an instrument variable. My findings are consistent with the traditional channels of monetary policy non-neutrality. A contractionary monetary policy shock will cause: - an upward revision in private forecasts of the unemployment rate - a downward revision in private forecasts of inflation - a decline in stock prices

Monetary Policy News and Systemic Risk at the Zero Lower Bound

This paper employs a recent contribution to the construction of the shadow nominal interest rate during the zero lower bound episode of the Great Recession of 2008-2009 and the Greenbook forecasts to obtain a measure of monetary policy shocks over that time period. It then identifies monetary policy news shocks as a novel measure of the forward-looking conduct of monetary policy in the U.S. Using the data from 1987-2010 and impulse responses from the method of local projections, it shows that contractionary monetary surprise and news shocks tended to reduce systemic risk measures over the full sample. In contrast, expansionary monetary news shocks reduced systemic risk at the zero lower bound, whereas surprises had little effect. These findings suggest that the Federal Reserve's efforts at providing expansionary forward guidance at the zero lower bound were successful in stabilizing measures of systemic risk during the Great Recession.

Monetary policy in Brazil: Evidence from new measures of monetary shocks

Abstract This paper derives new measures of monetary policy shocks for Brazil. First, one set of shocks is built inspired by Romer and Romer (2004) methodology, using official and private forecasts. Central Bank staff forecasts were collected from the technical presentations of monetary policy meetings, released after the introduction of the Access of Information Law, while private forecasts come from the Focus survey. Second, a yield curve shock is constructed for the Brazilian case, based on the Barakchian and Crowe (2013) methodology. Equipped with the shocks measures, I include them on VARs (Vector Autoregressions) and analyze the effects on inflation and output. A standardized monetary policy shock is found to reduce real GDP in up to 0.5%. In all but the yield curve shock case, it is found evidence of a price puzzle in the estimated models.

The Response of Stock Market Volatility to Futures-Based Measures of Monetary Policy Shocks

In this paper, we investigate the dynamic response of stock market volatility to changes in monetary policy. Using a vector autoregressive model, our findings reveal a significant and asymmetric response of stock returns and volatility to monetary policy shocks. Although the increase in the volatility risk premium, futures-trading volume, and leverage appear to contribute to a short-term increase in volatility, the longer-term dynamics of volatility are dominated by monetary policy's effect on fundamentals. The estimation results from a bivariate VAR-GARCH model suggest that the Fed does not respond to the stock market at a high frequency, but they also suggest that market participants' uncertainty regarding the monetary stance affects stock market volatility.

The response of stock market volatility to futures-based measures of monetary policy shocks

In this paper, we investigate the dynamic response of stock market volatility to changes in monetary policy. Using a vector autoregressive model, our findings reveal a significant response of stock returns and volatility to monetary policy shocks. While the increase in the volatility risk premium, futures-trading volume and leverage appear to contribute to a short-term increase in volatility, the longer-term dynamics of volatility are dominated by monetary policy’s effect on fundamentals. The estimation results from a bivariate VAR-GARCH model suggest that the Fed does not respond to the stock market at a high frequency but that market participants’ uncertainty regarding the monetary stance affects stock market volatility.

Using Romer and Romer's new measure of monetary policy shocks to identify the AD and AS shocks

This article re-examines the series of (exogenous) Federal Funds Rate (FFR) shocks created by Romer and Romer (2004) for the period 1969:01–1996:12. We hypothesize that if Romer and Romer have constructed a reasonable set of monetary policy shocks, then including them in a small Vector Autoregression (VAR) should help to identify other structural shocks that affected the United States economy during their sample period. Using a sample period of 1971:01–1996:12 we are easily able to identify both an Aggregate Demand (AD) shock and an Aggregate Supply (AS) shock without imposing any sign or long-run restrictions. We present historical decompositions that allow us to compare the relative importance of these shocks with that of the exogenous monetary policy shocks in explaining output fluctuations during the 1973–1975, 1980–1984 and 1990–1991 business cycle episodes.

The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks

It is common practice to estimate the response of asset prices to monetary policy actions using market-based measures of monetary policy shocks, such as the federal funds futures rate. I show that because interest rates and market-based measures of monetary policy shocks respond simultaneously to all news and not simply news about monetary policy actions, market-based measures of monetary policy shocks yield biased estimates of the response of interest rates to monetary policy actions. I propose a methodology that corrects for this “joint-response bias.” The results indicate that the response of Treasury yields to monetary policy actions is considerably weaker than previously estimated. In particular, there is no statistically significant response of longer-term Treasury yields before February 2000 and no statistically significant response of any Treasury rate after.

The reaction of stock returns to unexpected increases in the federal funds rate target

This paper analyzes the impact of an unexpected increase in the federal funds rate target on stock returns. The main innovation is the use of a measure of monetary policy shocks based on the ACH-VAR (autoregressive conditional hazard VAR) model for the federal funds rate target. This model allows the analysis of two sources of an unexpected increase in the Fed target. This unexpected increase in the Fed target can be due to an unexpected increase in the federal funds rate target when it is expected to remain constant, or it can be due to an expected decrease in the federal funds rate target that fails to occur. These two events in the ACH-VAR model give rise to completely different information on the expected future federal funds rate. We examine the responses of stock returns for both S&P 500 stock returns and stock returns of portfolio sizes. We find that stock returns are more responsive to unanticipated increases in the federal funds rate than they are to unrealized expectations of a decrease in the federal funds rate. Our results also indicate that the firms with larger capitalization respond less to the two unanticipated monetary policy shocks.

Are the Effects of Monetary Policy Shocks Big or Small?

This paper studies the estimated effects of monetary policy shocks from standard VAR’s, which are small, and those from the approach of Romer and Romer (2004), which are large. The differences appear to be driven by three factors: a) the contractionary impetus associated with each shock, b) the period of non-borrowed reserves targeting and c) lag length selection. Accounting for these factors, the real effects of monetary policy shocks are consistent across approaches and are most likely medium: a one-hundred basis point innovation to the Federal Funds Rate lowers production by 2-3% and raises the unemployment rate by approximately 0.50% points. In addition, alternative measures of monetary policy shocks from estimated Taylor rules also yield medium-sized real effects and indicate that the historical contribution of monetary policy shocks to real fluctuations has been non-trivial, particularly during the 1970s.

Macroeconomic Effects of Central Bank Communication: Evidence from the Fed

This paper employs exogenous measures of monetary policy shocks directly derived from financial market information to investigate how the economy responds to the surprise component of monetary policy decisions as opposed to central bank announcements about future movements in the policy rate. We find that the U.S. economy strongly reacts to the news shock, the difference between what the central bank announces regarding the future direction of monetary policy and what the market expects it to announce. The responses of output and prices to the unexpected component of policy decisions regarding the federal funds target rate are weak and have implausible signs.