The Effects of Monetary Policy Shocks in the USA: A Forecast‐Augmented VAR Approach

This paper formulates a forward‐looking monetary policy function for the USA in a structural vector autoregression (VAR) model, by using forecasts of key macroeconomic variables, in addition to the ex post realised variables used in a standard VAR. Since this forecast‐augmented VAR (FOAVAR) uses both forecasted and realised variables, and the standard VAR uses only realised variables, the standard VAR is nested in the FOAVAR. I find that the Fed responds to forecasted macroeconomic variables more significantly than realised variables. I also find that the monetary policy shock in the FOAVAR generates impulse responses of variables that are consistent with the predictions of economic theories, while the policy shock in the standard VAR causes a price puzzle: an increase in the price level due to a contractionary policy shock. These results suggest that a monetary policy function identified in a standard VAR, by using only realised macroeconomic variables, may incorrectly represent the Fed's policy function.     

Analysis of shock transmissions to a small open emerging economy using a SVARMA model

Using a parsimonious structural vector autoregressive moving average (SVARMA) model, we analyse the transmission of foreign and domestic shocks to a small open emerging economy under different policy regimes. Narrower confidence bands around the SVARMA responses compared to the SVAR responses, advocate the suitability of this framework for analysing the propagation of economic shocks over time. Malaysia is an interesting small open economy that has experienced an ongoing process of economic transition and development. The Malaysian government imposed exchange rate and capital control measures following the 1997 Asian financial crisis. Historical decomposition and variance decomposition allow contrast of shocks propagating under different policy regimes. Malaysia is highly exposed to foreign shocks, particularly under the managed float exchange rate system. During the pegged exchange rate period, Malaysian monetary policymakers experienced some breathing space to focus on maintaining price and output stability. In the post-pegged period, Malaysia's exposure to foreign shocks increased and in recent times are largely driven by world commodity price and global activity shocks.     

Turkish monetary policy and components of aggregate demand: a VAR analysis with sign restrictions model

This article estimates the effects of monetary policy on components of aggregate demand using quarterly data on Turkish economy from 1987–2008 by means of structural Vector Autoregression (VAR) methodology. This study adopts Uhlig's (2005) sign restrictions on the impulse responses of main macroeconomic variables to identify monetary shock. This study finds that expansionary monetary policy stimulates output through consumption and investment in the short-run. However, expansionary monetary policy is ineffective in the long-run.     

Real and nominal effects of monetary policy shocks

Abstract.  We employ the identification scheme of Kahn, Kandel and Sarig (2002) to analyse the impact of Canadian monetary policy on ex ante real interest rates and inflationary expectations. First, we decompose nominal interest rates into ex ante real rates and inflationary expectations using the methodology of Blanchard and Quah (1989) . Then we estimate a recursive VAR model with innovations in a monetary aggregate and the overnight target interest rate as alternative measures of monetary policy shocks. We find that a negative policy shock raises both nominal and ex ante real interest rates, lowers inflationary expectations and real industrial output, and appreciates the Canadian dollar.     

Modest macroeconomic effects of monetary policy shocks during the great moderation: An alternative interpretation

Cholesky-VAR impulse responses estimated with post-1984 U.S. data predict modest macroeconomic reactions to monetary policy shocks. We interpret this evidence by employing an estimated medium-scale DSGE model of the business cycle as a Data-Generating Process in a Monte Carlo exercise in which a Cholesky-VAR econometrician is asked to estimate the effects of an unexpected, temporary increase in the policy rate. Our structural DSGE model predicts conventional macroeconomic reactions to a policy shock. In contrast, our Monte Carlo VAR results replicate our evidence obtained with actual U.S. data. Hence, modest macroeconomic effects may very well be an artifact of Cholesky-VARs. A combination of supply and demand shocks may be behind the inability of Cholesky-VARs to replicate the actual macroeconomic responses. The difference in the VAR responses obtained with Great Inflation vs. Great Moderation data may be due to instabilities in the parameters related to households’ and firms’ programs, more than to a more aggressive systematic monetary policy. A Monte Carlo assessment of sign restrictions as an alternative identification strategy is also proposed.     

Monetary policy reactions and the exchange rate: a regime-switching structural VAR for Canada

The objective of this study is to identify monetary policy reactions in a nonlinear, structural vector autoregression (VAR) framework, with regime-switching contemporaneous policy responses in a small open economy. The key finding is that monetary policy in Canada responds contemporaneously to disturbances in the real exchange rate, as well as the output gap and inflation. The Bank of Canada is found to have much larger responses to exchange rate fluctuations during volatile periods than more stable periods. However, the Bank is found statistically to have a relatively linear reaction function with symmetric responses to output and inflation shocks across interest rate regimes. The estimates for the contemporaneous responses to the output gap in both regimes are found to be virtually identical to the 0.5 weights in the original Taylor rule for the United States, while the responses to inflation surprises are slightly smaller. Overall, the Bank of Canada is found to have operated within the range of optimal responses suggested by small-scale structural models in the normative literature on monetary policy rules.     

The effects of monetary policy using structural factor analysis

The traditional Vector Autoregression (VAR) method is widely used to trace out the effects of monetary policy innovations on the economy. However, this method suffers from the curse of dimensionality, so that in practice VARs are estimated on a limited number of variables, leading to a potential missing information problem. In this article we use the method of structural factor analysis to evaluate the effects of monetary policy on key macroeconomic variables in a data rich environment. This methodology allows us to extract information on monetary policy and its impact on the economy from a much larger data set than is possible with the traditional VAR method. We propose two structural factor models. One is the Structural Factor Augmented Vector Autoregressive (SFAVAR) model and the other is the Structural Factor Vector Autoregressive (SFVAR) model. Compared to the traditional VAR, both models incorporate information from hundreds of data series, series that can be and are monitored by the central bank in setting policy. Moreover, the factors used are structurally meaningful, a feature that adds to the understanding of the ‘black box’ of the monetary transmission mechanism. Both models generate qualitatively reasonable impulse response functions. For the SFVAR model, both the price puzzle and the liquidity puzzle are eliminated.     

Labor Market Dynamics and the Business Cycle: Structural Evidence for the United States*

We use a 12‐dimensional VAR to examine the aggregate effects of two structural technology shocks and two policy shocks. For each shock, we examine the dynamic effects on the labor market, the importance of the shock for labor market volatility, and the comovement between labor market variables and other key aggregate variables in response to the shock. We document that labor market indicators display “hump‐shaped” responses to the identified shocks. Technology shocks and monetary policy shocks are important for labor market volatility but the ranking of their importance is sensitive to the VAR specification. The conditional correlations at business cycle frequencies are similar in response to the four shocks, apart from the correlations between hours worked, labor productivity and real wages. To account for the unconditional correlations between these variables, a mixture of shocks is required.     

Macroeconomic transitions and the transmission mechanism: Evidence from Turkey

This paper investigates changes to the macroeconomic transmission mechanism in Turkey following a major reform of monetary policy in the early 2000s. We use a Threshold VAR (TVAR) framework to test for and then estimate a model with endogenous transitions between regimes. We detect two regimes, with a clear transition between them in 2003–4. The pre-reform regime is characterized by high inflation, passive monetary policy and persistent responses to shocks. The post-reform regime is characterized by low inflation, active and credible monetary policy and markedly less persistent responses to shocks. Using a model that contains sufficient variables to capture diverse transmission mechanisms, working through the real exchange rate, domestic credit and monetary policy, we find evidence of sharp changes in transmission mechanisms. Post-reform, the response of Turkey to macroeconomic shocks has changed to be similar to those in other modern, market-orientated economies.     

House prices,credit and the effect of monetary policy in Norway: evidence from structural VAR models

This paper investigates the responses of house prices and household credit to monetary policy shocks in Norway, using Bayesian structural VAR models. The analysis indicates that the effect of a monetary policy shock on house prices is large, while the effect on household credit is muted. This is consistent with a relatively small refinancing rate (refinancing rate refers to the share of outstanding mortgages that are refinanced each period due to changes in, for example, house prices or interest rate) of the mortgage stock each quarter. Using monetary policy to guard against financial instability by mitigating property-price movements may prove effective, but trying to mitigate household credit may prove costly in terms of GDP and inflation variation.     

Have budget deficits and money growth caused changes in interest rates and exchange rates in Canada?

This paper examines empirically the causal impact of monetary and fiscal policy on exchange rates and interest rates in Canada using a six-by-six vector autoregressive (VAR) model with variable lag structure. The results suggest that changes in the base money and budget deficits have no direct causal effects on exchange rates, a finding consistent with the monetary explanation that exchange rates follow a random walk. Also consistent with the Ricardian equivalence hypothesis, the results reveal no direct effect of budget deficits on interest rates, casting doubts on the crowding-out phenomenon for Canada. In contrast, changes in the base money unidirectionally cause changes in interest rates, implying some support for using interest rates as a key intermediate policy target for the Canadian monetary authorities.     

Can trade openness affect the monetary transmission mechanism?

This paper explores how trade openness influences the monetary transmission mechanism. The theoretical analysis develops an open economy New Keynesian model that features one‐way offshoring from an advanced economy to a less developed one. The model suggests that greater openness to regular trade or to offshoring reduces the effect of monetary policy on domestic economies, although these two influences affect the monetary transmission mechanism via different channels. The empirical section estimates an interacted‐panel VAR model with U.S. industry data and confirms that greater exposure to regular trade or to offshoring significantly reduces the effect of monetary policy.     

Firm Size, Industry Mix and the Regional Transmission of Monetary Policy in Germany

Abstract. This paper estimates the impact of interest rate shocks on regional output in Germany over the period from 1970 to 2000. We use a vector autoregression (VAR) model to obtain impulse responses, which reveal differences in the output responses to monetary policy shocks across ten German provinces. Next, we investigate whether these differences can be related to structural features of the regional economies, such as industry mix, firm size, bank size and openness. An additional analysis of the volatility of real GDP growth for the period 1992–2000 includes the Eastern provinces. We also present evidence on the interrelationship between firm size and industry, and compare our measure of firm size with those used in previous studies. We conclude that the differential regional effects of monetary policy are related to industrial composition, but not to firm size or bank size.     

The Effects of Monetary Policy Shocks in Bangladesh: A Bayesian Structural VAR Approach

This paper develops a Bayesian structural VAR model for Bangladesh in a small-open-economy context in order to estimate the effects of monetary policy shocks on various macroeconomic variables. To increase the precision of the model identification, we allow the macroeconomic variables of the model to interact simultaneously with each other. This paper finds that the liquidity effect and the exchange-rate effect of the monetary policy shock are realized immediately, while industrial production responds with a lag of over half a year, and the inflation rate responds with a lag of more than one year. I also find that monetary policy shocks are not the dominant source of industrial production fluctuations in Bangladesh.     

Sacrifice ratio dispersion within the Euro Zone: what can be learned about implementing a single monetary policy?

This article focuses on the comparison of sacrifice ratios as an indicator for structural dispersion within the euro area over the period 1972–2003. Estimates of the sacrifice ratio, defined as the cumulative output cost arising from permanent inflation reduction, are obtained using structural VAR models. Results from sub‐period analysis as well as 10‐year‐period rolling estimates lead to two main conclusions. First, empirical evidence displays a recent increase in the average sacrifice ratio, which can be linked to the simultaneous decrease in the average inflation rate: this negative relationship between the initial level of inflation and the cost of disinflation can be seen as a justification for the choice of an inflation objective close to 2% for the European Central Bank (ECB) rather than a target of perfect price stability, potentially very damaging. Second, we cannot provide evidence of any reduction in European sacrifice ratio dispersion, which would suggest that the nominal convergence triggered by the Maastricht Treaty did not involve a true reduction of structural differences. It is likely to be a problem in the stance of a single monetary policy, because structural differences imply asymmetric responses of real national economies to the same monetary impulse.     

The effects of monetary policy in the Czech Republic: an empirical study

In this paper, we examine the effects of Czech monetary policy on the economy within the vector auto regression (VAR), structural VAR, Bayesian VAR with sign restrictions, and factor-augmented VAR, frameworks. We document a well-functioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that a contractionary monetary policy shock has a negative effect on the degree of economic activity and the price level, both with a peak response after one year or so. Regarding prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from a single monetary policy regime. There is a rationale in using the real-time output gap instead of current GDP growth, as using the former results in much more precise estimates. The results indicate a rather persistent appreciation of the domestic currency after a monetary tightening, with a gradual depreciation afterwards.     

Measuring the effects of monetary policy in Pakistan: a factor-augmented vector autoregressive approach

This paper examines the effects of monetary policy on macroeconomic variables in Pakistan’s economy using a data-rich environment. We used the factor-augmented vector autoregressive (FAVAR) methodology, which contains 115 monthly variables for the period 1992:01 to 2010:12. We compared the results of VAR and FAVAR model and the results showed that FAVAR model explains the effects of monetary policy which are consistent with the theory and better than the VAR model. VAR model shows the existence of price puzzle and liquidity puzzle in Pakistan while FAVAR model did not provide any evidence of puzzles. Interest rate negatively influences prices, hence interest rate is a good instrument for controlling inflation in Pakistan but it takes a lag of 5 months. The transmission of monetary policy shock is faster in case of prices as compared to output in Pakistan. FAVAR model supports the effectiveness of interest rate channel in Pakistan.     

中国货币政策与股票市场的关系

本文提出的综合理论框架全面分析描述了以稳定物价水平、促进国民经济持续增长为目的的货币政策与股票市场的关系 ,着重对中央银行干预股票市场的必要性和有效性进行理论分析和实证检验。本文应用的动态滚动式的计量检验方法适应中国经济体制不断调整的特征 ,不但可以完成我们的理论分析 ,更可以检测中央银行对股票市场干预的机制及干预的有效性 ,从而分析进一步的政策含义 ,为中央银行的货币政策制订和预期效果提供一个前瞻性的预测分析框架。     

Bubble-free policy feedback rules

We consider a broad class of linear dynamic stochastic rational-expectations models made of a finite number N of structural equations for N+1 endogenous variables and to be closed by one policy feedback rule. We design, for any model of this class and any stationary VARMA solution of that model, a “bubble-free” policy feedback rule ensuring that this solution is not only the unique stationary solution of the closed model, but also its unique solution. We apply these results to locally linearisable models of the monetary transmission mechanism and obtain interest-rate rules that not only ensure the local determinacy of the targeted equilibrium in the neighbourhood of the steady state considered, but also prevent the economy from gradually leaving this neighbourhood.     

基于政策工具视角的我国货币政策冲击效应研究

本文在SVAR框架下构建一种混合识别法以考察主要货币政策工具(公开市场业务、准备金率、利率工具)实施的冲击对产出和价格的影响。研究发现:(1)紧缩性货币政策冲击对产出和价格施加负向影响;公开市场卖出或提高准备金率引致的冲击对产出有更强的影响;利率工具冲击使价格经历一个更持久的下跌过程;(2)准备金率冲击和公开市场冲击对产出预测方差有更大解释份额,而利率冲击对价格的长期限预测方差有更强解释力。