Real Effects Of Monetary Policy Research Articles

Losing traction? The real effects of monetary policy when interest rates are low

Based on a panel of 18 advanced countries starting in 1985, we find that monetary transmission to economic activity is substantially weaker when interest rates are low. The results hold when controlling for potential confounding non-linearities associated with debt levels and the business cycle as well as for the trend decline in equilibrium interest rates. These findings suggest that the observed flattening of the Phillips curve has gone hand in hand with a steepening of the IS curve as interest rates remained persistently low, making monetary policy trade-offs more challenging.

Does wealth inequality affect the transmission of monetary policy?

We provide evidence that higher wealth inequality between households is associated with stronger real effects of monetary policy. First, we use state-dependent local projections to show that the US and the UK exhibited stronger real effects of monetary policy in times of higher wealth inequality. Second, we measure wealth inequality within US states and document that economic activity responds more strongly to interest rate changes in states where wealth is distributed more unequally. Third, we show that ECB monetary policy has stronger real effects in Euro Area countries with higher wealth inequality.

Sales of durable goods and the real effects of monetary policy

Despite their prevalence in the microdata, sales (i.e., temporary price cuts) are often ignored by macroeconomists. If sales are taken into account, price rigidity is small in the data. Using the microdata underlying the Consumer Price Index (CPI), I first demonstrate that sales of durable goods have a substantial impact on the aggregate price index, and that the price index decreases gradually after these sales. To quantify the changes in the real effects of monetary policy due to sales, I propose a two-sector menu-cost model, in which sales are allowed. The model, which is able to match salient features of the microdata, predicts that the real effects of monetary policy will be significantly overestimated if sales of durable goods are not taken into consideration. Compared to my benchmark model, the model without sales and the Calvo model calibrated to the frequency of regular price changes both generate much greater real effects of monetary policy.

Losing traction? The real effects of monetary policy when interest rates are low

Are there limits to how far reductions in interest rates can boost aggregate demand? In particular, as interest rates fall to very low levels, does the effectiveness of monetary policy in boosting the economy wane? We provide evidence consistent with this hypothesis. Based on a panel of 18 advanced countries starting in 1985, we find that monetary transmission to economic activity is substantially weaker when interest rates are low. The results hold even when controlling for potential confounding non-linearities associated with debt levels and the business cycle as well as for the trend decline in equilibrium interest rates. We also find evidence that the effectiveness of monetary policy wanes the longer interest rates stay low. These findings suggest that the observed flattening of the Phillips curve has gone hand in hand with a corresponding steepening of the IS curve. Monetary policy trade-offs may have become more challenging.

Трансмиссия монетарных шоков в странах с малой открытой экономикой

In this paper, we compare the transmission of monetary policy shocks using quarterly data for 13 emerging market economies (EMEs) with that in a benchmark advanced open economy, the United Kingdom, in the periods of inflation targeting (from 1990s onward). To estimate the transmission within a given country, we specify a monetary VAR-model and we extend it with a variable reflecting commodities terms of trade. We identify monetary policy shocks using a sign restriction scheme: a restrictive shock is determined as an unexpected rise of policy rate and reduction of inflation (CPI) and money demand (M2). We apply the Bayesian approach to estimating VARs to address the curse of dimensionality. Our results indicate that monetary policy in EMEs is not less efficient comparable to the U.K.: restrictive monetary shocks decrease inflation but also lead to a slowdown of GDP and stock market outflows. Overall, our findings add to the debate on the real effects of monetary policy surprises with a special attention to a large set of EMEs.

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)

Is There a Role for House Prices in the Unconventional Monetary Policy Transmission Mechanism in Japan?

This paper comprehensively analyses the role of house prices in the unconventional monetary transmission mechanism in Japan. The quantitative effects of unconventional monetary policy shocks are examined through structural vector autoregression with the extension using time-varying parameters. The empirical results show that expansionary monetary policy shocks lead to increased household consumption, residential investment, inflation, housing loans, and house prices. Simultaneously, a positive house price shock also increases household consumption, residential investment, inflation, and housing loans. Combining these two results, an accelerator function of house prices in policy transmission is confirmed. On the other hand, the magnitude of responses to shocks varies across different monetary policy regimes. However, a significant and persistent response of house prices to the policy shock provides an extra transmission channel even if the real effects of monetary policy on output and inflation are diminished, revealing the contribution of house prices is non-trivial but pronounced.

Heterogeneous Consumers, Segmented Asset Markets and the Real Effects of Monetary Policy

Abstract This article proposes a novel mechanism by which changes in the distribution of money holdings have real aggregate effects. I develop a flexible-price model of segmented asset markets in which monetary policy influences the aggregate demand elasticity via heterogenous money holdings. Because varieties of consumption bundles are purchased sequentially, newly injected money disseminates slowly throughout the economy via second-round effects. The model predicts a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, and pro-cyclical wages after monetary shocks. Among other correlations of financial variables, it also reproduces the empirical, negative relationship between changes in the money supply and markups.

Endogenous Uncertainty and Monetary Policy

We empirically investigate how uncertainty endogenously interacts with real activity and monetary policy, and analyze the role of endogeneity in shaping the efficacy of monetary policy using a shock restricted structural vector-auto-regression model. Using the model, we show that both real and financial uncertainty endogenously react to business cycle fluctuations and to monetary policy actions. Then we provide two novel policy implications of endogenous uncertainty. First, a tighter monetary policy reduces financial uncertainty, but heightens real uncertainty. Second, endogeneity channels in uncertainty amplify the real effects of monetary policy.

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Measuring Euro Area Monetary Policy

We study the information flow from the ECB on policy dates since its inception, using tick data. We show that three factors capture about all of the variation in the yield curve but that these are different factors with different variance shares in the window that contains the policy decision announcement and the window that contains the press conference. We also show that the QE-related policy factor has been dominant in the recent period and that Forward Guidance and QE effects have been very persistent on the longer-end of the yield curve. We further show that broad and banking stock indices' responses to monetary policy surprises depended on the perceived nature of the surprises. We find no evidence of asymmetric responses of financial markets to positive and negative surprises, in contrast to the literature on asymmetric real effects of monetary policy. Lastly, we show how to implement our methodology for any policy-related news release, such as policymaker speeches. To carry out the analysis, we construct the Euro Area Monetary Policy Event-Study Database (EA-MPD). This database, which contains intraday asset price changes around the policy decision announcement as well as around the press conference, is a contribution on its own right and we expect it to be the standard in monetary policy research for the euro area.

Endogenous Growth and Real Effects of Monetary Policy: R&D and Physical Capital Complementarities

AbstractWe study the real long‐run effects of the structural stance of monetary policy and of inflation, in the context of a monetary growth model where R&D is complemented with physical capital accumulation. We look into the effects on a set of real macroeconomic variables that have been of interest to policymakers—the economic growth rate, real interest rate, physical investment rate, capital‐to‐labor ratio, R&D intensity, and velocity of money. These variables have been previously analyzed from the perspective of different, separated, strands of the theoretical and empirical literature. Additionally, we analyze the long‐run relationship between inflation and both the effectiveness of real industrial‐policy shocks and the market structure, assessed namely by average firm size. We present novel cross‐country evidence on the empirical relationship between the latter and long‐run inflation.

Heterogeneous Consumers, Segmented Asset Markets, and the Real Effects of Monetary Policy

This paper proposes a novel mechanism by which changes in the distribution of money holdings have real effects. Specifically, I develop a flexible-price model of segmented asset markets that generates real aggregate effects of monetary policy through the dependence of optimal markups on the heterogeneity of money holdings. Because varieties of consumption bundles are purchased sequentially, newly injected money disseminates slowly throughout the economy via second-round effects. The model predicts a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, and procyclical wages after monetary shocks. Among other correlations of financial variables, it also reproduces the empirical, negative relationship between changes in the money supply and markups.

Shocks vs Menu Costs: Patterns of Price Rigidity in an Estimated Multi-Sector Menu-Cost Model

Relying on a menu-cost model augmented with a time-dependent (Calvo) component, we investigate the structural sources of cross-sectoral heterogeneity in patterns of price setting. We use a large micro dataset of French consumer prices to estimate the model at the product level for 227 products. The Calvo component is found to be large in most sectors. Heterogeneity in structural parameters is also substantial. The combination of these two features leads to much larger real effects of monetary policy. The effect of monetary shock on output is more than 4 times larger than the one derived from a standard single-sector menu-cost model estimated using average moments.

The Effectiveness of Monetary Policy: Evidence from China

The purpose of this paper is to provide China’s empirical evidence on the real effectsof monetary policy from 1998:12 to 2012:08 by means of structural change analysis.The study shows that the structural changes of money supply at 2003:05, the end of 2008 and early of 2009 impact real output and prices efficiently, but the situations are opposite at 2000:12, 2001:06 and 2003:12. After investigating the interestrate transmission channel of monetary policy, this article draw a conclusion that the conflicting interest rate policy contrary to the overall objective of China’s central bank often makes easy or tight monetary policy work inefficiently.Therefore, it matters profoundly to ensure that the interest rate policy matches the main objectives of monetary policy

Monetary Shocks in Models with Inattentive Producers.

We study models where prices respond slowly to shocks because firms are rationally inattentive. Producers must pay a cost to observe the determinants of the current profit maximizing price, and hence observe them infrequently. To generate large real effects of monetary shocks in such a model the time between observations must be long and/or highly volatile. Previous work on rational inattentiveness has allowed for observation intervals that are either constant-but-long (e.g. Caballero, 1989 or Reis, 2006) or volatile-but-short (e.g. Reis's, 2006 example where observation costs are negligible), but not both. In these models, the real effects of monetary policy are small for realistic values of the duration between observations. We show that non-negligible observation costs produce both of these effects: intervals between observations are infrequent and volatile. This generates large real effects of monetary policy for realistic values of the average time between observations.

Small and Large Price Changes and the Propagation of Monetary Shocks

We document the presence of both small and large price changes in individual price records from the CPI in France and the US. After correcting for measurement error and cross-section heterogeneity, the size-distribution of price changes has a positive excess kurtosis. We propose an analytical menu cost model that encompasses several classic models, as Taylor (1980), Calvo (1983), Reis (2006), Golosov and Lucas (2007) and accounts for observed cross-sectional patterns. We show that the ratio of kurtosis to the frequency of price changes is a sufficient statistics for the real effects of monetary policy in a large class of models.

Lumpy Investment and Monetary Policy: A Comparative Analysis in a DSGE New-Keynesian Framework

This paper analyses the theoretical and policy implications of assuming firm-specific lumpy investment behaviour by firms and compares such implications to those occurring when adopting different investment specifications in a new-Keynesian framework. We develop numerical simulations of the lumpy investment model by Sveen and Weinke (2007) and of other five specifications embedding either firm-specific capital or rental market of capital. The assessment is based on impulse responses and moments of economic variables following a productivity and a monetary shock. We preliminarily show that the degree of price stickiness and investment rigidity due to the lumpiness assumption complement each other in allowing for significant effects of monetary policy. Then, the comparison shows that models with firm-specific capital generate more volatility along the business cycle following a monetary shock while dampen the responses to a productivity shock. In such a way, they predict bigger real effects of monetary policy and better replicate empirical data. Within the firm-specific case, a degree of investment lumpiness compatible with the empirical evidence at the micro level makes economic variables more responsive to monetary and productivity shocks compared with the case in which firm-specific capital is associated to convex adjustment cost. Lastly, we show that in such setting a central bank’s policy reaction function targeted to interest rate smoothing adds volatility to aggregate variables, compared with a standard Taylor rule.

Investment-Saving Imbalances with Endogenous Capital Stock

The current consensus in macroeconomics, or New Neoclassical Synthesis (NNS), is based on dynamically stochastic general equilibrium (DSGE) modeling with a RBC core to which nominal rigidities are added by way of imperfect competition. The strategy is to minimize the frictions that are required to reproduce both persistent real effects of monetary policy and interaction of interest and prices in a rigorous framework with intertemporal optimization, forward-looking behavior and continuously clearing markets. Unfortunately this equilibrium framework do not allow to discuss the effects and the relations between financial markets and real economy, which were the core of the economic crisis of 2008. This paper presents a dynamic model with endogenous capital stock whereby it is possible to assess, and hopefully clarify, some basic issues concerning the macroeconomics of saving-investment imbalances.

Monetary policy through the ‘credit-cost channel’: Italy and Germany pre- and post-EMU

We present an empirical analysis of the ‘Credit-Cost Channel’ (CCC) of monetary policy transmission. This channel combines bank credit supply and interest rates on loans as a cost to firms. The thrust of the CCC is that it makes both aggregate demand and aggregate supply dependent on monetary policy. As a consequence (1) credit market conditions (e.g. risk spreads) are important sources and indicators of macroeconomic shocks, (2) the real effects of monetary policy are larger and persistent. We have applied the Cointegrated Vector Autoregression (CVAR) econometric methodology to Italy and Germany in the ‘hard’ EMS period and in the European Monetary Union (EMU) period. The short-run and long-run effects of the CCC are detectable for both countries in both periods. Simulation of the estimated model also confirms that inflation-targeting by way of inter-bank rate control stabilizes inflation through structural shifts of the stochastic equilibrium paths of both inflation and the output.