US Monetary Policy Research Articles

The Role of Global Oil Prices in US Monetary Policy Spillovers to Small Open Economies: Evidence From MINT Countries

We explore the importance of global oil prices in the spillovers of US monetary policy to four small open economies (SOEs): Mexico, Indonesia, Nigeria, and Turkey (MINT). Our findings indicate that oil prices amplify the spillover effects on MINT’s real GDP. The negative impact is more pronounced when oil prices fall. This suggests that oil prices are a crucial determinant of US monetary policy spillovers.

Dynamic Spillovers from US (Un)Conventional Monetary Policy to African Equity Markets: A Time-Varying Parameter Frequency Connectedness and Wavelet Coherence Analysis

Since the implementation of unconventional monetary policies (UMPs) by the US in response to the global financial crisis (GFC) and the COVID-19 pandemic, there have been increasing concerns that these forward guidance and quantitative easing programmes have had spillover effects on global equity markets. We specifically question whether the implementation of these UMPs have had spillovers to African equities, which have been previously speculated to be decoupled from global markets and shocks. Time-varying-parameter (TVP) frequency connectedness and wavelet coherency methods were used to examine the dynamic time-frequency spillovers between daily time series of the US shadow short rate and African equities returns/volatility between 1 January 2007 and 31 March 2023. On one hand, the TVP frequency connectedness analysis reveals robust long-run spillovers from US monetary policy to African equity markets during specific periods: 2009, 2013, 2020, and 2021. These coincide with instances when the Federal Reserve announced their transition from conventional to unconventional monetary practices and vice versa. On the other hand, the wavelet analysis provides insights into the ‘sign’ of the spillovers, indicating mixed phase dynamics during UMPs responding to the GFC. In contrast, anti-phase or negative co-movements characterize UMPs implemented during the COVID-19 pandemic, implying that these policies increased both returns and volatilities to African equities. Altogether, we conclude that US UMP has increasing deteriorated market efficiency and amplified portfolio risk in African equities whilst during ‘normalization’ periods US monetary policy has little transmission effect.

An Analysis on the Divergence of Monetary Policies Between China and the United States and Its Impact on the Trend of RMB Exchange Rate

The monetary policies of China and the US have differed due to their differing economic circumstances and stages of growth, which has had a significant impact on the RMB exchange rate's trend. This paper uses empirical analysis to examine the three channelsmarket expectations, China's foreign trade, and international capital flowsthrough which the monetary policy divergence between the two countries influences the RMB exchange rate. It also provides a detailed introduction to the historical development and current state of the policy divergence between the two countries.The findings demonstrate how market expectations are impacted by China and the US's divergent monetary policies, which first alter the US dollar index and interest rate disparity before influencing the direction of the RMB exchange rate. Finally, relevant suggestions are put forward on how to keep the RMB stable while addressing the strain on China's monetary policy brought on by the US and China's divergent monetary policies.

US monetary policy and business cycles in developing countries

The article examines modeling the impact of news shocks of US monetary policy on developing countries. The study analyzes the transmission mechanism of the Federal Reserve's interest rate news shock. The authors argue that the volatility of macroeconomic indicators in emerging economies can be explained by changes in monetary policy in other countries, and highlight the main channels of influence: financial sector indicators and trade indicators. In this paper the authors first use the LSDV-estimator of the panel vector autoregression and identify unexpected and news shocks. To achieve this goal, quarterly data was collected from the first quarter of 1998 to the third quarter of 2017 for Russia, along with data starting from the first quarter of 1995 for several developing countries. The results obtained indicate that the expected tightening of US monetary policy leads to a decrease in output, investment, and weakening of exchange rate in Russia. The monetary news regarding an increase in the US Federal Reserve's interest rate in two quarters also results in a short-term increase in trade balance and interest rates. News about future economic developments affects macroeconomic indicators up to two quarters before the implementation of monetary policy changes. Additionally, the news shock accounts for up to 11% of the variation in macroeconomic indicators in Russia. Accordingly, the monetary policy news shock is found to be as significant as an unexpected shock. The paper concludes with the analysis of the role played by various financial and trade channels.

Fiscal spillover in emerging economies: Real versus financial channels

Fiscal policy is an important tool for business cycle stabilization and has significant spillover through real and financial channels. This paper estimates the spillover of US fiscal policy shock in emerging economies which is distinct from US monetary policy spillover. We find that - similar to its effect in advanced economies as documented in the literature - the shock lowers both the nominal and real policy rates in emerging economies. Results suggest a disconnect between long-term and policy rates that leads to the steepening of the yield curve in emerging economies in the medium term due to the shock. Most of these effects of US government expenditure shock on the policy rate and the yield curve in emerging economies are direct effects (financial channel) and not indirectly driven by the effect of this shock on GDP growth and inflation (real channel). Contrary to its effect in the US, we find that this shock leads to a prolonged appreciation of real effective exchange rates in emerging economies, hurts their external competitiveness, and leads to a contraction in output in emerging economies. As expected, countries having higher exports and trade-to-GDP ratio experience a bigger decline in output.

US monetary policy, the global financial cycle and cross-country financial cycles

US monetary policy, the global financial cycle and cross-country financial cycles

Set-Identified Structural Vector Autoregressions and the Effects of a 100 Basis Point Monetary Policy Shock

Abstract I estimate impulse responses to a 100 basis point US monetary policy shock using setidentified structural vector autoregressions. Identified sets for these responses may be unbounded when the identifying restrictions admit zero impact response of the federal funds rate following a standard-deviation shock. Such a zero response is always admissible when there are fewer sign and zero restrictions than endogenous variables. This is the case under existing restrictions on the systematic component of monetary policy, which consequently yield uninformative identified sets. Additional sign and narrative restrictions yield informative identified sets and imply smaller output responses than some previous estimates.

Beyond the Dinar: Deciphering Monetary Policy Shocks in Kuwait’s Equity Market

Purpose: This study investigates the impact of US and Kuwait monetary policy on the Kuwait Stock Exchange (KSE). Study design/methodology/approach: Our study employs an event study approach focused on Federal Open Market Committee (FOMC) announcement dates to analyze the impact of US and Kuwait monetary policy on the Kuwait Stock Exchange. By utilizing futures markets, we distinguish between the expected and unexpected components of these announcements.Sample and data: A time series dataset of KSE main indices between 2012 and 2024. Results: US monetary policy strongly impacts KSE, which is predominantly driven by the anticipated component of monetary policy change. KSE is responsive to the unanticipated component predominantly for information shock samples. KSE became more responsive to monetary policy after privatization in 2018. The Premier Market segment is more responsive to monetary policy impact than the Main Market segment. Monetary policy has a different effect and is not uniform among the various industries within KSE. Finally, Kuwait’s monetary policy does not have the same impact on KSE as US monetary policy. Originality/value: Our paper is the first to examine the impact of monetary policy on KSE by decomposing monetary policy changes into expected and unexpected components. We further decompose shocks into monetary or information shocks. We contribute to understanding the interactions between monetary policy and equity markets in emerging economies. Research limitations/implications: The study’s findings show that KSE efficiently processes public information and is responsive to US fed rate changes rather than local discount rate changes.

Fast and order‐invariant inference in Bayesian VARs with nonparametric shocks

SummaryThe shocks that hit macroeconomic models such as Vector Autoregressions (VARs) have the potential to be non‐Gaussian, exhibiting asymmetries and fat tails. This consideration motivates the VAR developed in this paper that uses a Dirichlet process mixture (DPM) to model the reduced‐form shocks. However, we do not follow the obvious strategy of simply modeling the VAR errors with a DPM as this would lead to computationally infeasible Bayesian inference in larger VARs and potentially a sensitivity to the way the variables are ordered in the VAR. Instead, we develop a particular additive error structure inspired by Bayesian nonparametric treatments of random effects in panel data models. We show that this leads to a model that allows for computationally fast and order‐invariant inference in large VARs with nonparametric shocks. Our empirical results with nonparametric VARs of various dimensions show that nonparametric treatment of the VAR errors often improves forecast accuracy and can be used to analyze the changing transmission of US monetary policy.

Oil Market Dynamics and US Monetary Policy Uncertainty: Evidence from Explainable Artificial Intelligence Models

We utilize explainable artificial intelligence techniques to examine the main link between oil market dynamics and US monetary policy uncertainty. Our analysis unveils key findings. First, higher oil prices and rising oil market uncertainty are significantly associated with elevated levels of monetary policy uncertainty. Second, option-implied oil market volatility (an indicator of oil market uncertainty) emerges as the most important predictor of monetary policy uncertainty. Third, option-implied oil market volatility frequently interacts with option-implied gold market volatility while oil prices mostly interact with fluctuations in the US dollar. The findings offer valuable insights into the understanding of monetary policy uncertainty.

A multiscale analysis of returns and volatility spillovers in cryptocurrency markets: A post-COVID perspective

ABSTRACT Since the onset of the COVID-19 pandemic, leading cryptocurrencies have undergone significant price fluctuations, prompting widespread interest in the interdependence and spillover effects among cryptocurrency markets, as well as in identifying the key cryptocurrencies that drive market movements. This study contributes to the existing literature by utilising innovative vector wavelet coherence (VWC) and wavelet local multiple correlation (WLMC) frameworks to investigate the time-frequency co-movements among four cryptocurrencies (Bitcoin, Ethereum, Tether, and Binance). By exploring the co-movements across multiple time scales over a period from 01/01/2020 to 10/04/2023 through continuous and discrete wavelet coherency analysis, we identify four key empirical findings. Firstly, the returns connectedness is stronger than the volatility connectedness. Secondly, high-frequency co-movements are more erratic and correspond to positive and negative unexpected news, while low-frequency co-movements vary with changes in US monetary policy. Thirdly, Tether and Binance exhibit the weakest returns and volatility connectedness with other cryptocurrencies. Lastly, Ethereum and Tether (not Bitcoin) are the primary cryptocurrencies that account for returns and volatility movements in the market. We discuss the implications of these findings for various stakeholders in cryptocurrency markets.

The effect of monetary policies on inflation: A fiscal perspective

We estimate how US monetary policies, namely the current fed funds rate, forward guidance, and large-scale asset purchases, affect inflation. The effect of large-scale asset purchases on inflation is found to be much smaller in the intended direction than the other policies. This difference is accounted for by the responses of fiscal policy. While fiscal policy is eased in response to monetary tightening in the short run, the long-run fiscal consolidation is less intense under unconventional monetary policies.

Monetary policy spillovers between the US and African Central Banks: A time- and frequency-varying connectedness study

This study investigates time and frequency connectedness between monetary policy in the US and 7 African countries to determine the extent to which US monetary policy influences policy conduct amongst African Central Banks. We use a time-varying parameter vector autoregressive (TVP-VAR) framework with frequencies to extract the spectral representation of the forecast error variance decompositions of the TVP-VAR and form 3 bands of frequency strata corresponding to long-run, medium-run and short-run. The results of the study are as follows: firstly, the static analysis shows that the US is the dominant transmitter of systemic shocks across all frequencies and the vulnerability of African countries as recipients of these shocks varies across frequency bands. Secondly, the dynamic analysis further reveals stronger short- and medium-run systemic connectedness during the periods of the Large Scale Asset Purchase programme and forward guidance policies whereas long-run connectedness is prominent during periods of US conventional monetary policy particularly in the COVID-19 era. The findings from the country-by-country dynamic spillover specifically show that countries which are more (less) responsive to US monetary policy shocks have lower (higher) inflation rates averages since the start of the pandemic. The findings suggest that African Central Banks can be benefit from higher coordination with the US Federal Reserve and we further propose that Central Banks worldwide in setting similar inflation targets.

Has the Transmission of US Monetary Policy Changed Since 2022?

Has the Transmission of US Monetary Policy Changed Since 2022?

Macroeconomic news, senior officials' speeches, and emerging currency markets: An intraday analysis of price jump reaction

We examine intraday emerging currency jumps in response to domestic and foreign macroeconomic news announcements, as well as US senior officials' speeches. We use the robust-to-jump volatility estimator to estimate currency jumps. We provide evidence that both emerging currency jumps and cojumps exhibit significant and pronounced responses to US monetary policy and real activity news releases. Moreover, we find that domestic monetary policy and economic real activity data, and senior Federal Reserve officials' speeches, trigger significant jumps in emerging currencies, leading to large currency fluctuations that would disrupt market stability, undermining economic resilience and potentially diminishing ESG ratings.

Spillover effects of multidimensional information in Fed statements on China's bond market

This paper shows significant information spillover effects of Fed statements on China's bond market. Regarding Fed monetary policy statements as external shocks, we extract both monetary policy information and narrative sentiment information from the statements, with the sentiment data measured using the text analysis method. Furthermore, it investigates spillover effects of the multidimensional Fed information on investors' trading behaviors in China's bond market, using the event study method. Our study emphasizes three key findings. First, both monetary policy and textual sentiment within Fed statements influence trading decisions of China's bond investors, generating international spillover effects. Importantly, the role of textual sentiments as an additional spillover channel of Fed statements has been overlooked in existing literature. Second, the US monetary policy information influences investors' expectations of China's short-term interest rates and their perceptions of risks associated with holding China's long-term bonds, while the Fed's negative and uncertain sentiments primarily impact investors' short-term rate expectations. Moreover, the spillover effects of Fed sentiments on China's yield curve cannot be blocked by China's managed floating exchange rate regime. Third, the heterogeneity test reveals that spillover effects of multidimensional information in Fed conventional monetary policy statements on China's bond market are stronger than those of Fed unconventional monetary policy statements. These findings suggest that Fed narrative sentiments should be incorporated into the research framework of international spillover effect of monetary policy, especially amidst the current period characterized by growing anticipation of federal funds rate cuts and enduring monetary policy uncertainty, providing valuable insights for trading decisions of China's bond market investors.

Global Spillovers from Fed Hikes and a Strong Dollar: The Risk Channel

We study the international transmission of US monetary policy shocks and a strong US dollar. We show that monetary tightening is linked to a higher risk premium, only in emerging markets, measured by deviations from uncovered interest parity. An appreciation of the US dollar, on the other hand, does not lead to higher risk premia anywhere, even though countries' currencies depreciate vis-a-vis the dollar. Our interpretation is that monetary policy shocks are a better proxy for global financial conditions than the exchange rate movements that may be capturing more fundamental shocks.

A Historical Perspective on US Treasuries Risk Premia

The uncontrolled growth of US public debt is causing some anxiety among investors in US Treasuries. It is therefore useful to estimate the current risk premia embedded in the US yield curve and assess the extent to which investors are pricing in potential future financing difficulties for the US government.In this paper, we provide both a theoretical and empirical explanation of the factors driving the US Treasuries yield curve and how it is possible to extract what market participants are currently pricing in.It is widely acknowledged that expectations about future US monetary policy play a crucial role in this market. However, there is a notable underestimation — even within academic literature — of the symmetrical role played by expectations regarding future risk premia. Through our original modeling of the US Treasuries yield curve, we document the history of these expected risk premia. Our findings indicate that from 2000 to 2022, investors consistently underestimated the strength of demandfor US Treasuries, which may explain the somewhat unusual behavior of this key market during that period.Since 2022, however, a new paradigm has emerged. Demand for longterm US treasuries has declined due to the resurgence of inflation, while debt issuance has surged, driven by substantial deficits and the Federal Reserve’s Quantitative Tightening policies. Consequently, risk premia have increased sharply.The future remains highly uncertain as lower inflation could once again bolster demand for US Treasuries while public debt is expected to continue its rapid expansion. In this volatile environment, our model will help investors manage their positions by enabling real-time comparisons between their own expectations and the actual market pricing.

The effects of US monetary policy on value stocks and growth stocks

The effects of US monetary policy on value stocks and growth stocks

U.S. monetary policy: The pushing hands of crude oil price?

This paper uses the bootstrap rolling-window Granger causality method to investigate the relationship between U.S. monetary policy (UMP) and crude oil price (COP). The method addresses the limitations of ignoring the instability of coefficients in the previous literature and supports the partial equilibrium model from the perspective of the time domain, which enriches the existing literature. The finding reveals a positive effect from COP to UMP, implying that the unexpected rise in COP may push UMP from expansionary into restrictive since the rising COP increases the U.S. inflation pressure. Meanwhile, the economic evidence shows that UMP has a negative effect on COP, which implies that expansionary monetary policy increases the rising pressure on COP. This finding is consistent with the partial equilibrium model, which states that UMP specifically influences COP, including consumption channels and financial channels. Specifically, the expansionary monetary policy may reduce companies' investment costs and stimulate investment and consumption, increasing the demand for crude oil and pushing COP. Given the critical role played by the monetary policy and COP in the U.S., the detailed understanding derived from the relationship between the variables may help the investors and policymakers forecast the energy price trend and adjust the policy strategies promptly.