Unconventional Monetary Policy Shocks Research Articles

Monetary shocks and house prices in Europe

PurposeThe aim of this study is to analyse the effect of conventional and unconventional monetary policy shocks on housing price dynamics in Europe (2000–2020). We propose a pan-European comparative analysis at a city market level, contrary to the previous literature.Design/methodology/approachWe build a quarterly market dataset for 13 European cities (Paris, Lyon, Marseille, Berlin, Munich, Frankfurt, Amsterdam, Madrid, Barcelona, Seville, London, Birmingham and Manchester). We proceed in two steps. First, we develop a structural VAR (vector autoregression) model. Second, we conduct a forecast error variance decomposition analysis.FindingsWe show that a contractionary policy rate has a negative influence on house prices with relevant differences. A balance sheet shock displays a heterogeneous effect on housing prices. Globally, we observe that a conventional monetary policy shock explains a larger share of total housing price variance than an unconventional monetary policy shock. Finally, our results report that conventional and unconventional monetary policy shocks have a greater impact in more liberalized credit markets.Originality/valueWe develop a pan-European analysis of house prices at a market level for a sample of 13 European cities. A parsimonious structural VAR model is used to study the dynamics of conventional and unconventional monetary policies on house prices in major European markets: Paris, Lyon, Marseille, Berlin, Munich, Frankfurt, Amsterdam, Madrid, Barcelona, Seville, London, Birmingham and Manchester. Our results highlighting the relative importance of conventional and unconventional monetary shocks, identify the existence of heterogeneous effects of monetary policies in European city markets.

Stock market responses to unconventional monetary policy shocks

We assess the impact of forward guidance and large-scale asset purchases (LSAPs) on stock market returns, finding that LSAP shocks during unconventional periods affect stock returns in a manner similar to federal funds rate (FFR) shocks during conventional periods.

Effect of conventional and unconventional monetary policy shocks on housing prices in Canada

This paper investigates the relative importance and effect of conventional and unconventional Canadian monetary policy surprises on housing prices. Using a credible approach to identify structural monetary policy shocks in Canada and a comprehensive Bayesian VAR model to analyze their effects on financial and macroeconomic variables, we find that both conventional monetary policy and quantitative easing shocks have a significant and persistent effect on housing prices in Canada. However, the inflationary effect of a quantitative easing shock is more pronounced than that of an easing target monetary policy surprise. Specifically, the peak effect of a 25-basis point expansionary conventional monetary policy shock is a 2.30% increase in real housing prices while a comparable quantitative easing surprise leads to a peak of 4.56% increase in real housing prices. We conclude that expansionary monetary policy in various forms has had significant inflationary effects on Canadian housing prices. But quantitative easing surprises stand out as the most prominent contributory factor to the escalating Canadian real estate price. Quantitative easing impact consistently outweighs the effects of forward guidance and conventional monetary policy shocks.

The Effects of Conventional and Unconventional Monetary Policy Shocks on US REITs Moments: Evidence from VARs with Functional Shocks

AbstractWe use a vector autoregressive model with functional shocks, capturing the shift of the entire term structure of interest rates on monetary policy announcement dates, to empirically evaluate the effects of conventional and unconventional monetary policy decisions on the Real Estate Investment Trusts (REITs) markets of the United States (US). Using 5-min interval intraday data, we analyze not only the impact on REITs returns, but also its realized variance (RV), realized jumps (RJ), realized skewness (RSK), and realized kurtosis (RKU) over the daily period of September 2008 to June 2021. While the effects of conventional monetary policy shocks on the moments of REITs returns tend to conform with economic theories, the same is not necessarily the case with unconventional monetary policy shocks. In addition, though monetary policy shocks have the most persistent and strongest effects on RJ, the extreme behaviour of the REITs market is also observed through RSK and RKU. Moreover, when we look into 10 REITs sectors, there is indeed heterogeneity in terms of the strength of the effect, but not so much in terms of the sign of responses of the various moments compared to the overall market. Our results have important implications for REITs market participants, given its exponential growth as an asset class.

Sovereign spread divergence owing to inflation and redenomination risk countered by unconventional monetary policy in the Eurozone

Using a panel vector error correction (VECM) model, we assess sovereign spread divergence in the Eurozone. Recent literature defines redenomination risk as a member state's unilateral exit from the Eurozone, estimated by the quanto Credit default swaps (CDS) spread (qCDS). We show that sovereign spread divergence is driven not only by the qCDS but also by inflation and US dollar liquidity shocks. We also find evidence that the balance sheet structure better describes the European Central Bank's (ECB) unconventional monetary policy (UMP) shocks than the shadow rate. Such policy shocks had a greater impact in the early 2020s than between the global financial crisis and the COVID-19 pandemic (2008Q1–2019Q4). Thus, this paper makes a new contribution to the debate on the ECB's instruments to maintain price stability objectives and avoid divergence of sovereign bond yields while emphasizing cross-central bank swap lines.

Using stock prices to help identify unconventional monetary policy shocks for external instrument SVAR

This paper analyzes the dynamic responses of key U.S. macroeconomic variables to the Fed’s unconventional monetary policy in a newly developed instrumental variable structural VAR framework. A prominent concern is that the high-frequency identified policy surprises may contain news about the economic fundamentals (i.e., “Fed information effect”) in addition to reactions to monetary policy actions. We contribute to the literature by using stock price movements in a heteroskedasticity identification approach, leveraging changes in the relative dominance of economic shocks during different macroeconomic announcements to identify policy surprises that are free of the information effect. Our findings suggest that slope policies implemented by the Fed successfully aided economic recovery by lowering unemployment and credit costs. Importantly, we show that the Fed information effect is not strong enough to substantially bias the estimated policy effect, supporting the common approach that treats high-frequency changes around FOMC announcements as pure policy surprises.

Announcement-Specific Decompositions of Unconventional Monetary Policy Shocks and Their Effects

Abstract I propose to identify announcement-specific decompositions of asset price changes into monetary policy shocks exploiting heteroskedasticity in intraday data, accommodating both changes in the nature of shocks and the state of the economy across announcements. I compute decompositions with respect to Fed Funds, forward guidance, asset purchase, and Fed information shocks from January 1996 to December 2019. The decompositions illustrate which announcements of unconventional policy measures had significant effects during the Great Recession. Overall, forward guidance and asset purchases have significant effects on yields, spreads, equities, and uncertainty, but the effects of monetary policy vary over time, particularly asset purchases.

Identification with External Instruments in Structural VARs

IV methods have become the leading approach to identify the effects of macroeconomic shocks. Conditions for identification generally involve all the shocks in the VAR even when only a subset of them is of interest. This paper provides more general conditions that only involve the shocks of interest and the properties of the instrument of choice. We introduce a heuristic and a formal test to guide the specification of the empirical models, and provide formulas for the bias when the conditions are violated. We apply our results to the study of the transmission of conventional and unconventional monetary policy shocks.

The effects of conventional and unconventional monetary policy on the unemployment rate in the US

PurposeThe purpose of this paper is to investigate the impact of the Federal Reserve's conventional and unconventional monetary policy shocks on the US unemployment rate.Design/methodology/approachThe authors employ a unified time-varying framework to an extensive data set from 1960 to 2019.FindingsThe authors find that both conventional and unconventional monetary policy influence the unemployment rate, but the effects of unconventional monetary policy vary greatly during the first, second and third rounds of quantitative easing (dubbed QE1, QE2 and QE3, respectively). It significantly influenced the unemployment rate in QE3. However, the effects are less persistent than the effects of conventional monetary policy shocks. The impact of unconventional monetary policy transmits to the real economy through conventional interest rates, exchange rates and asset price channels. The responses of unemployment rate are smaller during QE1 and QE2 due to the rise in inflation uncertainty and economic policy uncertainty.Originality/valueThe impact of the Fed's unconventional monetary policy shocks on the US unemployment rate during QE1, QE2 and QE3 is time-varying. It is explained by inflation uncertainty and real option channels.

Do house prices play a role in unconventional monetary policy transmission in Japan?

This study comprehensively analyzes the role of house prices in the transmission mechanism of unconventional monetary policy (UMP) in Japan using structural vector autoregression models. The empirical results show that house prices are significantly affected by UMP shocks, and fluctuations in house prices considerably affect macroeconomic variables. With a set of robustness checks and extensions, the findings indicate that house prices provide important channels for UMP transmission.

SPILLOVERS OF GLOBAL LIQUIDITY AND MONETARY POLICY DIVERGENCE FROM ADVANCED ECONOMIES TO VIETNAM

This paper studies the spillovers of global liquidity and monetary policy divergence from advanced economies to Vietnam. Applying the structural Bayesian Vector Auto-Regressive model with Sims–Zha prior distribution, we find that unconventional monetary policy shocks of major central banks led to a reduction in inflation and short-term interest rate as well as an appreciation of local currency in Vietnam. However, market liquidity provided by surge in the cross-border credit flow led to a temporary upward pressure on inflation, interest and foreign exchange rates. Both types of global liquidity caused an insignificant effect on stock price which evidence the dominance of traditional interest rate and bank-lending over asset price channels in Vietnam. When disintegrating the effects among the monetary shocks from the US, European Union and Japan, the empirical result reveals some evidence of contradictory effects. Accordingly, GDP decreased after Fed’s asset purchase while it slightly increased following the same action from European Central Bank. Quantitative easing shocks also caused a depreciation in USD and Euro, resulting in a decrease in foreign exchange rate but large-scale asset purchase from the Bank of Japan is translated into an upward trend in the exchange rate.

How persistent are unconventional monetary policy effects?

The weight of the evidence indicates that unconventional monetary policy (UMP) shocks had persistent effects on yields. To make this point, this paper illustrates that the most influential SVAR model of UMP effects, which implies transient effects, exhibits structural instability, sensitivity to specification and single observations that render the conclusions unreliable. Restricted SVAR models that limit asset return predictability are more stable and imply that UMP shocks were persistent. This conclusion is consistent with evidence from micro studies, surveys of professional forecasters, and quantity-of-debt models. Estimates of the dynamic effects of shocks should respect the limited predictability in asset prices.

Corporate debt and unconventional monetary policy: The risk-taking channel with bond and loan contracts

We investigate the effects of unconventional monetary policies on corporate debt through the risk-taking channel using corporate bond and syndicated loan contracts from 2000 to 2016 in Japan. In this period, the policy rate remained fixed near the zero bound. Using the daily changes in the yield curve on monetary policy meeting days, we identify one call rate shock and two unconventional monetary policy shocks that do not affect short-term rates. We find that QE shocks, which move all medium-to-long-term rates, increase the maturity of debt contracts, especially for syndicated loans. In addition, such QE shocks decrease the size of corporate bonds with short maturity. On the other hand, QQE shocks, which raise medium-term rates and lower long-term rates, decrease the size of loans and corporate bonds with longer maturity. These effects imply the existence of the risk-taking channel of unconventional monetary policy: it stimulates investment in longer-maturity assets and decreases investment in assets with lower yields. Our findings show that unconventional policies affect debt contracts even in an extremely low interest rate environment.

A tale of two global monetary policies

We compare the macroeconomic and financial spillovers of the unconventional monetary policies of the Fed and the ECB. Monetary policy tightenings in the two areas are followed by a contraction in global activity and trade, a retrenchment in global capital flows, a fall in global stock markets, and a rise in risk aversion. Bilateral spillovers in both directions are also powerful. We find that Fed and ECB monetary policies propagate internationally through the same channels – trade and risk-taking. While the magnitude of ECB spillovers to global aggregates is smaller, proxies for global risk aversion respond in the same way and to the same degree to ECB and Fed unconventional monetary policy shocks, pointing to an equally powerful risk-taking channel for their international transmission that operates through global financial markets. Spillovers of the unconventional policies of the two central banks to international asset prices are equivalent to a very large extent.

Using Stock Prices to Help Identify Unconventional Monetary Policy Shocks for External Instrument SVAR

Using Stock Prices to Help Identify Unconventional Monetary Policy Shocks for External Instrument SVAR

Sentiment Regimes and Reaction of Stock Markets to Conventional and Unconventional Monetary Policies: Evidence from OECD Countries

In this paper, we investigate how conventional and unconventional monetary policy shocks affect the stock market of eight advanced economies, namely, Canada, France, Germany, Japan, Italy, Spain, the U.K., and the U.S., conditional on the state of sentiment. In this regard, we use a panel vector auto-regression (VAR) with monthly data (on output, prices, equity prices, metrics of monetary policies, and consumer and business sentiments) over the period of January 2007 till July 2020, with the monetary policy shock identified through the use of both zero and sign restrictions. We find robust evidence that, compared to the low investor sentiment regime, the reaction of stock prices to expansionary monetary policy shocks is stronger in the state associated with relatively higher optimism, both for the overall panel and the individual countries (with some degree of heterogeneity). Our findings have important implications for academicians, investors, and policymakers.

Corporate debt and unconventional monetary policy: The risk-taking channel with bond and loan contracts

We investigate the effects of unconventional monetary policies on corporate debt through the risk-taking channel using corporate bond and syndicated loan contracts from 2000 to 2016 in Japan. In this period, the policy rate remained fixed near the zero bound. Using the daily changes in the yield curve on monetary policy meeting days, we identify one call rate shock and two unconventional monetary policy shocks that do not affect short-term rates. We find that QE shocks, which lower all medium-to-long-term rates, increase the maturity of debt contracts, especially for syndicated loans. In addition, such QE shocks decrease the size of corporate bonds with short maturity. On the other hand, QQE shocks, which raise medium-term rates and lower long-term rates, and decrease the size of loans and corporate bonds with longer maturity. These effects imply the existence of the risk-taking channel of unconventional monetary policy: it stimulates investment in longer-maturity assets and decreases investment in assets with lower yields. Our findings show that unconventional policies affect debt contracts even in an extremely low interest rate environment.

Effects of Conventional and Unconventional Monetary Policy Shocks on Housing Prices in the United States: The Role of Sentiment

In this paper, we use a Quantile Structural Vector Autoregressive (QSVAR) model, estimated over the quarterly period of 1975:Q3 to 2017:Q3, to analyze whether the impact of monetary policy shocks on growth rate of real house price in the United States is contingent on the initial state of housing market sentiment. We find that contractionary monetary policy reduces growth rate of real house price more strongly when the market is characterized by optimism rather than pessimism, with this effect being more pronounced under unconventional monetary policy decisions. Further robustness checks confirm our results. Our findings highlight the role in sentiments in driving the policy effectiveness and thus, have important implications for policy decisions.

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.

Unconventional Monetary Policy and Wealth Inequalities in Great Britain*

AbstractThis paper explores whether unconventional monetary policy operations have redistributive effects on household wealth. Drawing on household balance sheet data from the Wealth and Asset Survey, we construct monthly time series indicators on the distribution of different asset types held by British households for the period that the monetary policy switched, as the policy rate reached the zero‐lower bound. Using this series, we estimate the response of wealth inequalities on monetary policy, taking into account the effect of unconventional policies conducted by the Bank of England in response to the Global Financial Crisis. Our evidence reveals that unconventional monetary policy shocks have significant and lingering effects on wealth inequality: the shock raises wealth inequality across households, as measured by their Gini coefficients, percentile shares and other standard inequality indicators. Additionally, we explore the effects of different transmission channels simultaneously. We find that the portfolio rebalancing channel and house price effects widen the wealth gap, outweighing the counterbalancing impact of the savings redistribution and inflation channels. The findings of our analysis help to raise awareness of central bankers about the redistributive effects of their monetary policy decisions.