Unconventional Monetary Policy Research Articles

International financial stress spillovers during times of unconventional monetary policy interventions

In this study, we estimate a Bayesian global vector autoregressive model to uncover the effects of financial stress on output growth, inflation, and interest rates, accounting for several advanced and emerging economies for a period spanning from February 2008 until May 2022. We construct a financial stress index applicable to all countries, tracking periods of financial instability in the economies, and employ shadow short rates as a proxy measure of unconventional monetary policy. This study provides strong evidence that financial stress shocks are transmitted abroad as financial stress increases in all the countries in the sample. Our results also show that financial stress innovation generates important domestic and cross-border output, inflation, and interest rate spillovers for several countries. Additionally, we identify the active role of the financial and bank credit channels in the transmission of shocks across financial systems, while macroprudential policy can intercept the propagation of the shock. Our results carry policy implications for monetary and regulatory authorities.

Revisiting the effects of conventional and unconventional monetary policies

SummaryThis paper extends the discussion on the effects of the two distinctive monetary surprises in the literature. First, we show that the proxy of conventional monetary shock Granger causes the endogenous variables in the vector autoregressive model. Second, we provide evidence that the existing model can be exposed to a weak instrument problem. With our alternative model mitigating these concerns, the second monetary shock can be interpreted as unconventional monetary news in general. The estimation results show contractionary effect of the unconventional policy. We find increases in output after a positive conventional monetary surprise, suggesting an important Fed's information effect.

Psychological inflation: Definition and measurement

Conventional monetary policy tools became less effective, with nominal short-term interest rates approaching the zero-lower bound during COVID-19. Instead, central banks adopted a range of unconventional monetary policies. Thus, perceived inflation has become a key channel for monetary policy transmission. Despite how vital perceived inflation is, quantifying perceived inflation with accuracy remains questionable and challenging. As a result, we focus on developing a novel measurement of perceived inflation - the psychological inflation index. Our approach is based on psychological theories and considers loss aversion, which creates advancements to previous versions. The new index satisfies many expected criteria: (i) it broadly co-moves with the headline inflation index during everyday contexts; (ii) it captures abnormal price evolution better than headline inflation during crisis periods; (iii) it links tightly with monetary policy and economic dynamics. Psychological inflation, therefore, might be helpful in forecasting headline inflation, estimating real interest rates, predicting economic players' behavior, and setting salaries and prices. Psychological inflation, combined with headline inflation, provides a clearer picture of the credibility of monetary policy.

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.

How is the ECB’s quantitative easing transmitted to the financial markets?

Purpose Over the last few years, the European Central Bank (ECB) has adopted unconventional monetary policies. These measures aim to boost economic growth and increase inflation through the bond market. The purpose of this paper is to study the impact of the ECB’s quantitative easing (QE) on the investor’s behavior in the stock market. Design/methodology/approach First, the authors theoretically identify the transmission channels of the QE shocks to the stock market. Then, the authors empirically assess the financial market’s responses to QE shocks in a data-rich environment using a factor augmented VAR (FAVAR). Findings The results show that the ECB’s unconventional monetary policy positively affects the stock market. A QE shock leads to an increase in stock prices and a drop in the realized volatility and the implied risk premium. The authors also suggest that the ECB’s QE is transmitted to the stock market through five main channels: the liquidity, the expectation, the portfolio reallocation, the interest rates and the risk premium channels. Practical implications The findings help to better understand the behavior of stock market assets in a data-rich economic context and guide investors and policymakers in the presence of unconventional monetary tools. For instance, decision-makers and investors should consider the short-term effect of the QE interventions and the changing behavior of the financial actors over time. In addition, high stock market returns can increase risk appetite. This can lead investors to underestimate the market risk. Decision-makers and market participants should take into consideration the impact of the large injection of money through the QE, which may raise the risk of a speculative bubble in the financial market. Originality/value To the best of the authors’ knowledge, this is the first study that incorporates a theoretical and empirical analysis to explore QE transmission to the stock market in the European context. Unlike previous studies, the authors use the shadow rate proposed by Wu and Xia (2017) to quantify the effect of the ECB’s QE in a data-rich environment. The authors also include two key risk indicators – the stock market risk premium and the realized volatility – to capture investors’ behavior in the stock market following QE shocks.

The economic impact of yield curve compression: Evidence from euro area forward guidance and unconventional monetary policy

Unconventional monetary policies have now been part of the toolkit of developed economy central banks for well over a decade. The question of how their effects have changed over time is therefore an important one. This paper studies the impact of multiple forms of monetary policy surprise for the case of the ECB. I employ a semi-parametric time-varying VAR-X framework, which allows one to chart the changing responses of a broad range of financial and macroeconomic variables simultaneously. I develop high-frequency series that separate forward guidance from yield curve compression surprises – the use of the latter allows one to learn about the effects of flattening yield curves through the history of the ECB, including those induced by its Expanded Asset Purchase Programme (APP). Forward guidance surprises are found to have their maximum impact on inflation when these policies were linked to the duration of the APP. Yield curve compression surprises are shown to transition from largely financial effects on equity markets and risk, to having a greater effect on prices at the time of the APP. However, the maximal effect of the APP on prices is found to occur after its maximal effect at flattening the yield curve, indicating delayed transmission.

Testing the Dimensionality of Policy Shocks

Abstract This paper provides a nonparametric test for deciding the dimensionality of a policy shock as manifest in the abnormal change in asset returns’ stochastic covariance matrix, following the release of a macroeconomic announcement. We use high-frequency data in local windows before and after the event to estimate the covariance jump matrix and then test its rank. We find a one-factor structure in the covariance jump matrix of the yield curve resulting from the Federal Reserve’s monetary policy shocks before the 2007–2009 financial crisis. The dimensionality of policy shocks increased afterwards because of the use of unconventional monetary policy tools.

Türkiye’nin Gelenek Dışı Para Politikasının Lisanssız Güneş Santrallerinin Kârlılığı Üzerine Etkisinin Değerlendirilmesi

Türkiye’s unorthodox monetary policy implemented between September 2021 and June 2023 affected many macroeconomic indicators including inflation. Turkish Central Bank’s (CBRT) continuous lowering of the policy interest rate increased the negative real interest rate constantly. As a result, households invested in alternative assets including housing, foreign currency and gold in order to hedge against inflation. This increase in demand soared real estate prices. Besides, land is an important cost item for solar power plant investments. Considering the linear relationship between land prices and housing prices, this paper investigates the effect of the increase in housing prices on the capital expenditure (CAPEX) of 37 unlicensed solar power plant projects in Türkiye. According to the results, a correlation of -0.97 was determined between the real interest rate and housing price index in Türkiye. In addition, a correlation of 0.20 was found between housing price index and the CAPEX of unlicensed solar power plants. This situation indicates that the increase in housing prices primarily due to the unorthodox monetary policy might adversely affected the profitability of unlicensed solar power plants, since CAPEX is an important factor affecting the profitability. Although the unconventional monetary policy has been abandoned as of July 2023, the negative effects of this policy on the economy, especially inflation, still continue. Policies and practices that would increase the profitability of solar power plants will make significant contribution to the renewable energy investors and Türkiye's green transition. In this context, development and issuance of carbon development credits under the voluntary carbon market standards such as Global Carbon Council (GCC) Standard and International Carbon Standard (ICR) presents additionality to support solar power plant investors and help the country to reach her carbon neutrality target.

Impacts of Monetary Policy Shocks on Inflation and Output in New Zealand*

We identify monetary policy shocks in New Zealand as 1‐day changes in the whole yield curve around monetary policy announcements. The impacts of these shocks on inflation and output are estimated using functional local projections. We find that the effects of monetary policy shocks are standard in the short run but might be different in the long run. Monetary policy shocks in a small open economy have similar effects as in a large economy, except that unconventional monetary policy announcements have limited impact on long‐term interest rates. Accounting for forward guidance, used in New Zealand since 1997, is important.

The transmission of U.S. monetary policy to small open economies

This paper studies the transmission of a U.S. monetary policy tightening to a set of small open economies. It uses as policy instruments Wu and Xia (2016) shadow rate, the Fed funds rate (conventional monetary policy, CMP) and changes in the Fed balance sheet (unconventional monetary policy, UMP). The main findings include: (1) the shock always reduces foreign economic activity and contributes to the emergence of a “global” financial cycle. (2) The financial channel has become more important since 2008. 3) There is evidence of an oil transmission channel. (4) Cross-country differences do not depend on their international trade volume, exchange rate flexibility or financial openness. U.S. policymakers may need to consider the feedback effects of changes in their policy stance on world demand and inflation. Small open economies should assess the type of U.S. monetary policy shock to evaluate the channels through which their economies may be affected.

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.

Beneath the surface: The asymmetric effects of unconventional monetary policy on corporate investment

This paper explores the asymmetric effects of unconventional monetary policy on corporate investment in the aftermath of the Great Recession. Using a comprehensive dataset of US listed firms, our research unveils a compelling insight: firms with higher investment irreversibility and market power are less responsive to fluctuations in corporate bond yields following an unconventional monetary policy announcement. These results emphasize the critical importance of taking into consideration firm-specific characteristics when formulating monetary policy, providing valuable insights for central banks aiming to enhance the effectiveness of their policies.

Impact of quantitative easing on the U.S. economy

The US economy is facing instability due to high inflation and high credit card debt. Central banks have adopted quantitative easing (QE) as a monetary policy tool to promote economic growth and reduce the risk of deflation. QE measures originated from the 2008 global financial crisis to counter the threat of recession and deflation. This paper examines the impact of quantitative easing on the U.S. economy in four stages through data, image analysis and collection of related literature. Quantitative easing is a high-risk monetary policy. However, while quantitative easing stimulates the economy by lowering interest rates, it can also lead to inflation and borrowing pressures. This paper applies a combination of qualitative analysis and quantitative analysis, has been about the theory of monetary policy on the basis of the process of successive QE is summarized, and the Federal Reserve's aggressive interest rate hikes in the past two years to review. Finally, this paper analyzes the impact of QE, an unconventional monetary policy on the economy, and analyzes the future forecast. The research in this paper can be a certain reference for the monetary policy to cope with the crisis and unconventional situations.

Quantitative Easing’s Effects on the U.S. Housing Market

As the housing bubble burst in the United States, the buildup of subprime lending led to the Global Financial Crisis. The Federal Reserve desperately slashes interest rates to reverse the economic recession, but the Zero Lower Bound significantly hindered the policy's future effectiveness with concerns of an existing liquidity trap. As a result, the unprecedented Quantitative Easing became the policymakers' last resort. Through the large-scale purchases of financial assets including mortgage-backed securities (MBS) and government bonds, the Fed attempts to stimulate the economy through reserve creation and instilling downward pressure on future interest rates. This literature review discusses how QE specifically affected the U.S. housing market during the GFC. An analysis is conducted on various social aspects and stakeholders by identifying the various channels through which QE is transmitted. The signaling, bank lending, and refinancing channels all suggest that MBS had the greatest effect on market expectations, bank behaviors, and consumer spending. As a result, many were many spillover effects into real estate, notably on asset prices, employment, and investment. Even though literature has criticized QE's ineffectiveness and its potential drawbacks, the unconventional monetary policy certainly played an essential role in preventing a worse outcome and effectively demonstrating its ability to reduce interest rates, generate wealth, and revive the economy.

Connectedness between (un)conventional monetary policy and islamic and advanced equity markets: A returns and volatility spillover analysis

Using the spillover index, we investigated the relationship between Islamic equity markets and unconventional monetary policy(UMP) in five advanced economies. We documented that the spillovers among equity markets (“intraconnectedness”) are stronger than the spillovers among equity markets and monetary policy (“interconnectedness”), based on a static analysis of both returns and volatility. Second, the time-varying total spillover index showed that the Islamic market is a dominant net receiver of returns and volatility shocks. Furthermore, their spillover effect strengthened during the financial turmoil and UMP periods. Third, the time-varying net spillover effects implied that the US is the most dominant transmitter of return shocks, whereas the EU and UK are the dominant transmitters of volatility shocks. In addition, the US and Canada are the dominant transmitters of monetary policy shocks, whereas Japan is the main net receiver of these shocks. These results will be useful to investors, portfolio managers, and regulators in terms of investment decisions, portfolio allocation, and risk monitoring.

Potential Risks of Implementing Quantitative Easing Monetary Policy

As a result of the global recession caused by the 2020 COVID-19 pandemic, many countries adopted unconventional monetary policies. In response to the phenomenon of hyperinflation, the implementation of quantitative easing policies became the solution for many central banks to stabilise inflation. This paper will discuss quantitative easing monetary policy, the unlimited expansion model of monetary policy in support of fiscal policy, and quantitative tightening monetary policy, using the measures implemented by the Federal Reserve and the European Central Bank in response to the COVID-19 epidemic and their effects as examples. It is concluded that by analysing the forms that quantitative tightening can take, it is pointed out that the central bank maintains the market with complete certainty by signaling to participants that it is going to start implementing quantitative tightening and stating that it will only lead to a natural loss of bonds and won't involve any active sales, but at the same time it will limit the flexibility of the central bank's policy.

New transmission channels of ECB’s unconventional monetary policies

New transmission channels of ECB’s unconventional monetary policies

FX Interventions as a Form of Unconventional Monetary Policy

FX Interventions as a Form of Unconventional Monetary Policy

Effects of Unconventional Monetary Policy at the Zero Lower Bound

Effects of Unconventional Monetary Policy at the Zero Lower Bound

Monetary policy spillovers among five systemic economies: Evidence from the time and frequency domains

Using the spillover index and frequency decomposition approach, this study explores the direction and magnitude of cross-border monetary policy spillovers among five systemic economies (S5): the United States, the Euro area, Japan, the United Kingdom, and China. The results suggest that China is the largest receiver and delivers the least to the other countries. Further, the findings reveal that massive monetary easing led by unconventional monetary policy implemented at home can transmit spillovers abroad. Notably, the overall spillover index peaks during a crisis. Moreover, both the static and dynamic frequency results show that short-term effects dominate spillovers. These findings suggest that both policymakers and investors should prevent foreign beggar-thy-neighbour monetary policies.