Unanticipated Monetary Policy Research Articles

Monetary Policy Implications on Macroeconomic Performance in the Common Monetary Area: A Panel-SVAR Framework

The CMA (Common Monetary Area) is a quadrilateral monetary arrangement encompassing South Africa, Namibia, Lesotho, and Eswatini. The four countries have undergone a gradual improvement in regional economic integration for the effective economic coordination of their policymaking. Despite the monetary coordination, the countries are still experiencing poor economic performance. This study traces how a shock or an unanticipated change in the anchor country’s central bank’s policy instrument, in this case, South Africa, affects the macroeconomic performance in the entire CMA region. Employing a Panel Structural Vector Autoregressive model (Panel-SVAR) and annual data from 1980–2021, the findings show that a positive shock in the repo rate from South Africa significantly affected important macroeconomic performance indicators. The results indicate that a shock in the anchor country’s repo rate is followed by a significant decline in RGDP_G, a decrease in inflation, a decrease in money supply, and an increase in lending rate in the entire CMA region. The study recommends that CMA monetary authorities and policymakers need to formulate policies toward cushioning the effects of unanticipated monetary policy shock from the anchor country as well as global shocks.

Uncovering Asymmetries in Monetary Policy Transmission in the Economic Community of West African States: Dynamic Heterogeneous Panel Analysis

ABSTRACT As the Economic Community of West African States (ECOWAS) gravitates toward establishing a monetary union, characterized by a common central bank and a single currency, the eco, there is need for deeper knowledge of the monetary policy transmission mechanism to ensure the effective conduct of a common monetary policy in the region. This study investigates the existence of potential asymmetries in the transmission of monetary policy impulses and the implications for monetary policy effectiveness under a unified framework. It employs the dynamic heterogeneous structural panel vector autoregressive (VAR) modeling technique developed by Pedroni (2013), which allows for heterogeneous country-specific dynamics and accommodates cross-sectional dependencies. Based on quarterly data covering the period 1994–2016, the findings reveal statistically insignificant responses of real gross domestic product (GDP) and inflation in member countries to a common monetary policy shock, though the country-specific responses exhibit some asymmetries. The panel estimates for the region also do not produce statistically significant responses to the unanticipated monetary policy shock. In addition, the results indicate that the two plausible monetary transmission channels—the bank lending channel and the exchange rate channel—are either weak or inoperable at the level of ECOWAS and that could undermine the effective conduct of a common monetary policy within the proposed monetary union. Policy should, therefore, be directed at enhancing the transmission of monetary policy impulses in the region, including through far-reaching financial sector reforms, modernization of monetary policy frameworks, and the comprehensive harmonization of institutional and operational mechanisms of monetary policy across member countries.

Reaction of the Philippine Stock Market to Domestic Monetary Policy Surprises: An Event Study Approach

This paper uses an event study analysis to assess how stock prices in the Philippines have reacted to domestic monetary-policy changes using data at a daily frequency from 2017 to 2022. A major contribution of this paper is the construction of a monetary-policy surprise measure for the Philippines, as the difference between the actual change in the monetary policy rate and the change anticipated by professional forecasters. My results are consistent with the literature, suggesting that unanticipated monetary policy changes exert a significant influence on stock prices in the Philippines. Overall, I find that an unexpected increase of 25 basis points in the monetary policy rate increases stock prices by about 1.09% on average. These results are robust to the inclusion of additional control variables in the baseline regression model, such as the implementation of restrictions to economic activity to curb the spread of the COVID-19 outbreak or revisions to macroeconomic forecasts released concomitantly with the monetary-policy rate announcement.

How Does Monetary Policy Affect Prices of Corporate Loans?

This paper studies the impact of unanticipated monetary policy news around FOMC announcements on secondary market corporate loan spreads. I find that the reaction of loan spreads to monetary policy news is weaker than that of bond spreads: following an unanticipated monetary policy tightening (easing) shock, loan spreads do not increase (decrease) as much as bond spreads do. Decomposition of the spreads into compensations for expected defaults and risk premiums shows that differential reactions of loan and bond risk premiums are the main driver of the differential spread reactions. This paper further finds that the weaker loan spread reactions to monetary policy shocks are more pronounced for riskier loans. Lastly, reactions of primary market loan spreads to monetary policy shocks are also muted. These findings highlight heterogeneous impacts of monetary policy across different types of corporate credit markets, possibly reflecting heterogeneous investor demand responses to monetary policy in those markets.

Effects of unanticipated monetary policy shocks on monetary policy uncertainty

This paper examines how unanticipated monetary policy shocks impact monetary policy uncertainty. For this, we use the narrative approach and smooth local projection method. Monetary easing shocks are found to increase monetary policy uncertainty, while monetary tightening shocks have insignificant effects on the uncertainty. Given that monetary policy uncertainty has negative effects on economic activity, our findings reveal a new adverse effect of surprising monetary easing.

Monetary Policy and the Corporate Bond Market: How Important is the Fed Information Effect?

Does expansionary monetary policy drive up prices of risky assets? Or, do investors interpret monetary policy easing as a signal that economic fundamentals are weaker than they previously believed, prompting riskier asset prices to fall? We test these competing hypotheses within the U.S. corporate bond market and find evidence strongly in favor of the second explanation—known as the "Fed information effect". Following an unanticipated monetary policy tightening (easing), returns on corporate bonds with higher credit risk outperform (underperform). We conclude that monetary policy surprises are predominantly interpreted by market participants as signaling information about the state of the economy.

Assymetric effect of fiscal and monetary policies on the stock market performance in Nigeria

This study investigated the asymmetric effect of fiscal and monetary policies on stock market performance from 2000:q1-2018q3 in Nigeria. The study used Auto Regressive Distributed Lag (ARDL) Bounds Test technique of cointegration to determine the equilibrium relationship among the series. After the long run relationship has been established, Vector Error Correction Model was used to analyse the data. The results showed that only anticipated fiscal policy had a negative and significant effect on the stock market performance in the third and fourth quarters of the year. In contrast, anticipated and unanticipated monetary policy as well as unanticipated fiscal policy did not exert effect on stock market performance in Nigeria. Government in Nigeria should reduce its expenditure which has the capacity to negatively influence the performance of stock market in Nigeria.

Monetary policy shock and industrial production: industry-level evidence from the US

PurposeThis paper investigates the impact of a monetary policy shock on the production of a sample of 312 industries in manufacturing, mining and utilities in the United States using a factor-augmented vector autoregression (FAVAR) model.Design/methodology/approachThe authors use a FAVAR model that builds on Bernanke et al. (2005) and Boivin et al. (2009). The main assumption in this model is that the dynamics of a large set of macro variables are captured by some observed and unobserved common factors. The unobserved factors are extracted from a large set of macroeconomic data. The key advantage of using this model is that it allows extracting the impulse responses of a wide range of macroeconomic variables to structural shocks in the federal funds rate.FindingsThe results indicate that industries exhibit differential responses to an unanticipated monetary policy tightening. In general, manufacturing industries appear to be more sensitive compared to mining, and utility industries and durable manufacturing industries are found to be more sensitive than those within nondurable and other manufacturing industries to a monetary policy shock. While all industries respond to the policy shock, most of the responses are reversed between 12 and 22 months.Research limitations/implicationsThe implication of our results is that monetary policy can be used to impact most US industries for four years and beyond. The existence of disparate responses across industries underscores the difficulty of implementing a monetary policy that will generate the same impact across industries. As the effects of the policy are distinct, policymakers may want to attend to the unique impacts and implement industry-specific policy.Practical implicationsThe study is important in the context of the current challenges in the US economy caused by the spread of coronavirus. For example, to tackle the current pandemic, the researchers are trying to come up with cures for COVID-19. A considerable response of the chemical industry that provides materials to pharmaceutical and medicine manufacturing to the monetary policy shock implies that an expansionary monetary policy may facilitate an invention and adequate supply of the cure later on. The same policy may not effectively stimulate production in apparel or leather product industries that are being hard hit by the pandemic.Originality/valueThe study contributes to the literature in broadly two aspects. First, to the best of our knowledge, this is the first paper that investigates the impact of a monetary policy shock on a sample of 312 industries in manufacturing, mining and utilities in the US. Second, to identify structural shocks and investigate the effects of monetary policy shocks on economic activity, the authors diverge from the literature's traditional approach, i.e. the vector autoregression (VAR) method and use a FAVAR method. The FAVAR provides a comprehensive description of the impact of a monetary policy innovation on different industries.

The dynamic effects of monetary policy innovations in Ethiopia

PurposeThe purpose of this paper is to investigate the effects of unanticipated monetary policy innovations on output and price for Ethiopia from 1991:Q1 to 2016:Q1.Design/methodology/approachShort run and long run identification schemes on structural vector autoregressive model are employed in this study.FindingsThe impulse response function results generated show that while a positive shock in interest rate causes a reduction in output and price puzzle, a positive shock to broad money supply has a positive and significant effect on output and price. A positive shock in real effective exchange rate has also an expansionary, though insignificant, effect on impact on both output and price. These results are especially true for the short run identification scheme. As to the results from the variance decomposition, the study shows that the highest variation in output and price is caused by broad money supply shock in the short run.Originality/valueIt adds to the scarce empirical literature on the effects of monetary policy innovations on the Ethiopian economy.

Monetary Policy Shocks and Manufacturing Output in Nigeria (1981-2018)

This study empirically investigates the impact of monetary policy shock on the manufacturing output in Nigeria using time series data covering the period between 1981 and 2018. Co-integration test was used to establish the long run relationship among the variables and Structural Vector Auto-Regressive model was employed to test for the shocks. It was found that shock to broad money supply would bring about positive and significant impact on the manufacturing output while the impact of shock to interest rate was found to be negative and insignificant. This study however concludes that shock to broad money is the main monetary policy instrument which can bring about positive change to manufacturing output in Nigeria. This paper then suggests that government and policy makers should primarily focus on this variable in their implementation of unanticipated monetary policy.

Understanding the Effects of Unanticipated Future Monetary Policy Shocks

본 연구는 민간 경제주체들에게 관측되지 않는 미래 통화정책 충격의 거시경제적 효과를 동태적확률균형모형을 추정하여 분석한다. 미국의 1967년 1분기부터 2008년 1분기까지의 데이터를 이용하여 분석한 결과 이와 같은 민간주체 정보집합의 가정은 모형의 데이터적합도를 향상시켜주는 것으로 나타났다. 이러한 민간주체 정보집합이 가지는 거시경제적 함의를 분석하기 위하여 반사실적 실험을 실시한 결과 만약 민간 경제주체들이 미래의 통화 정책 충격을 미리 관측할 수 있었다면 분석기간 동안 거시경제 변동성이 훨씬 감소했을 것이라는 결과를 얻었다. 마지막으로 이와 같은 미래 통화정책 충격의 관측 불가능성이 미국전문가 설문조사(Survey of Professional Forecasters) 상의 미래 경제상황에 대한 불일치(Disagreement)를 설명하는 중요한 원인이 된다는 것을 보였다.

Financial Constraints, Monetary Policy Shocks, and the Cross-Section of Equity Returns

Abstract We analyze the impact ofa unanticipated monetary policy changes on the cross-section of U.S. equity returns. Financially constrained firms earn a significantly lower (higher) return following surprise interest rate increases (decreases) as compared to unconstrained firms. This differential return response between constrained and unconstrained firms appears after a delay of 3 to 4 days. Further, unanticipated Federal funds rate increases are associated with a larger decrease in expected cash flow news, but not discount rate news, for constrained firms relative to unconstrained firms. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models

This paper extends the current literature which questions the stability of the monetary transmission mechanism, by proposing a factor-augmented vector autoregressive (VAR) model with time-varying coefficients and stochastic volatility. The VAR coefficients and error covariances may change gradually in every period or be subject to abrupt breaks. The model is applied to 143 post-World War II quarterly variables fully describing the US economy. I show that both endogenous and exogenous shocks to the US economy resulted in the high inflation volatility during the 1970s and early 1980s. The time-varying factor augmented VAR produces impulse responses of inflation which significantly reduce the price puzzle. Impulse responses of other indicators of the economy show that the most notable changes in the transmission of unanticipated monetary policy shocks occurred for GDP, investment, exchange rates and money.

Monetary Policy Shocks and Effectiveness of Channels of Transmission in Nigeria: A Dynamic Stochastic General Equilibrium Approach

This study examines the effect of anticipated and unanticipated monetary policy shocks on the effectiveness of monetary policy transmission mechanism in Nigeria by estimating a sticky-price dynamic stochastic general equilibrium (DSGE) model using Bayesian estimation approach. Four major transmission channels (exchange rate, interest rate, credit and expectation) are considered due to the economic and financial conditions of Nigeria. The study employs quarterly data from 1986:1 to 2013:4 and data are sourced from World Development Indicator (online version). Results show that unanticipated monetary policy shock has short-run impact on monetary policy transmission channels, while anticipated monetary policy shock has long-run impact on the monetary policy transmission channels. The study, therefore, concluded that efforts should be directed at reducing the unanticipated monetary policy by announcing government policy at the beginning of the year so as to reduce people’s expectation.

The effects of conventional and unconventional monetary policy on exchange rates

What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy periods in the US by using a novel identification procedure that defines monetary policy shocks as changes in the whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substantial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents' expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis; (iv) changes in expected real interest rates play an important role in the transmission of monetary policy shocks.

Asymmetric effects of monetary policy in the U.S and Brazil

We empirically test the effects of anticipated and unanticipated monetary policy shocks on the growth rate of real industrial production and explicitly test for different types of asymmetries in monetary policy implementation for two major international economies, the U.S. and Brazil. We depart from the conventional method of VAR analysis to estimate unanticipated monetary shocks, and instead, we use a combination of alternative methodologies. We first identify the Taylor rule that best describes the reaction of both central banks and then we test both forward looking linear and nonlinear models. We conclude that a Logistic Smooth Transition Autoregressive (LSTAR) forward looking model of the Taylor rule best describes the US FED Funds rate while a linear Taylor rule with the inclusion of a dummy variable best describes the reaction of the Central Bank of Brazil (BCB). We then use in-sample forecast errors in order to derive and identify the unexpected monetary policy shocks for both countries. In line with Cover (1992), we use these shocks to explore any asymmetries in the conduct of monetary policy on the growth rate of the real industrial production. We also find asymmetries between anticipated and unanticipated monetary shocks as well as between effects of positive and negative shocks.

Monetary Policy and Investment Dynamics: Evidence from Disaggregate Data

AbstractWe use data on the components of private fixed investment (PFI) to estimate industry‐level responses of real investment and capital prices to unanticipated monetary policy. The response functions derive from a restricted large‐scale vector autoregression. Results point to significant cross‐sector heterogeneity in PFI prices and quantities, which we interpret as evidence of asymmetry in the transmission mechanism. For assets belonging to the equipment category of fixed investment, we find that quantities rather than prices absorb most of the fallout from a policy innovation. By contrast, price effects tend to be higher and output effects lower for nonresidential structures.

Asymmetric Effect of Monetary Policy in Emerging Countries: The Case of Egypt

The aim of this study is to explore the asymmetric effect of the unanticipated monetary policy shocks on inflation and real production. This is done by utilizing the non-linear autoregressive distributed lag (ARDL) model. Nonlinear ARDL allows us to check for the asymmetric effect of the policy in terms of the size of the shocks: large or small, and the stance of the shocks: loose or tight. Additionally, Wald test is employed to confirm the underlying relationship. The results provided a sufficient evidence for the idea of the asymmetric effect of monetary policy in Egypt. Firstly, regarding the size of the policy, only small shocks have a considerable effect on both inflation and real production. Secondly, regarding the direction of the policy, only positive shocks have a considerable influence on both variables. Wald test confirmed the abovementioned results. Therefore, based on these results, the monetary policy in Egypt is only effective under some circumstances and thus other economic policies such as fiscal policy might be more effective in these cases.

Measuring the Effects of Conventional and Unconventional Monetary Policy in the Euro Area

I estimate the effects of conventional and unconventional monetary policy in the euro area by using a factor-augmented vector autoregression.I complement the standard monetary policy analysis using the short rate with models where the shadow rates by Kortela (2016) and Wu and Xia (2017) are used as proxies for unconventional monetary policy. I quantify the effects of unanticipated monetary policy shocks using impulse response functions, forecast-error variance decompositions, and counterfactual simulations. The results indicate that unconventional monetary policy shocks have similar, expansionary effects on the economy as conventional monetary policy shocks.

Monetary Policy and Investment Dynamics: Evidence from Disaggregate Data

We use disaggregated data on the components of private fixed investment (PFI) to estimate industry-level responses of real investment and capital prices to unanticipated monetary policy. The response functions derive from a restricted large-scale VAR estimated over 1959-2007. Our results point to significant cross-sector heterogeneity in the behavior of PFI prices and quantities, which we interpret as evidence of widespread asymmetry in the monetary transmission mechanism. For capital assets belonging to the equipment category of fixed investment, we find that quantities rather than prices usually absorb most of the fallout from a policy innovation. By contrast, price effects tend to be higher and output effects lower for nonresidential structures.