Analyst Activity and Firm Value: Evidence from the REIT Sector

This paper is the first to examine (1) properties of analyst forecasts and (2) effects of analyst following on firm value for all REITs on CRSP, Compustat and I/B/E/S. Our results suggest that REITs operate in an information environment that has changed over time. We find that for periods when the REIT industry was either in the developmental stage (pre-1992), or after other structural changes in the industry (post-2000), more analysts cover REITs and forecasts are more accurate and less biased. Further, we find that mortgage REITs are more transparent than other REIT structures and exhibit properties of analyst behavior that are different from other types of REITs. Our investigation into the effect of analyst coverage on REIT value suggests that analyst coverage increases REIT value (as measured by Tobin’s q) and that the causality does not run the opposite way.

Nominal rigidities,asset returns,and monetary policy

Asset-return implications of nominal price and wage rigidities are analyzed in general equilibrium. Nominal rigidities, combined with permanent productivity shocks, increase expected excess returns on production claims. This is mainly explained by consumption dynamics driven by rigidity-induced changes in employment and markups. An interest-rate monetary policy rule affects asset returns. Stronger (weaker) rule responses to inflation (output) increase expected excess returns. Policy shocks substantially increase asset-return volatility. Price rigidity heterogeneity produces cross-sectoral differences in expected returns. The model matches important macroeconomic moments and the Sharpe ratio of stock returns, but only captures a small fraction of the observed equity premium.     

International interest rates and US monetary policy announcements: Evidence from Hong Kong and Singapore

This paper investigates the responses of market interest rates to US monetary policy announcements for the US and two emerging economies, Hong Kong and Singapore which are similar on many respects but have experienced opposite exchange rate regimes in the last twenty years. Our results, based on market expectations extracted from federal fund futures rates, document that FOMC announcements significantly affect the term structure of interest rate in the US and both Asian countries. Further, international interest rate differentials around FOMC meeting dates tend to be negative for short maturities with the impact gradually dissipating as bond maturity increases. Finally, for the case of Singapore, we find that domestic interest rates react to both external and domestic monetary policy announcements with a magnitude that is larger over the full bond maturity spectrum for domestic announcements. These results are robust to time-varying futures risk premia and alternative measures of interest rates expectations.     

Expectation-driven cycles in the housing market: Evidence from survey data

Using a vector-autoregression (VAR) model and data from the University of Michigan Survey of Consumers, we provide evidence on the importance of news and consumers’ beliefs for housing-market dynamics and aggregate fluctuations. We document that innovations to News on Business Conditions generate hump-shaped responses in house prices and other macroeconomic variables. We also show that innovations to Expectations of Rising House Prices are particularly important in explaining the path of macroeconomic variables during housing booms. To disentangle the effects of News on Business Conditions from other sources of expectation-driven cycles, we estimate a VAR where the News variable is ordered first. Innovations to News on Business Conditions generate Expectations of Rising House Prices. However, during housing booms, innovations to Expectations of Rising House Prices unrelated to News on Business Conditions account for a large part of macroeconomic fluctuations. Shocks to News and Expectations account together for more than half of the forecast error variance of house prices, and other macroeconomic variables, during periods of booms in house prices.     

Economic uncertainty and the influence of monetary policy

This paper explores if economic uncertainty alters the macroeconomic influence of monetary policy. We use several measures of U.S. economic uncertainty, and estimate their interaction with monetary policy shocks as identified through structural vector autoregressions. We find that U.S. monetary policy shocks affect economic activity less when uncertainty is high, in line with “real-option” effects from theory. Holding uncertainty constant, the effect on investment is approximately halved when uncertainty is in its top instead of its bottom decile.     

Search and matching frictions and optimal monetary policy

A recent literature has merged the New Keynesian and the search and matching frameworks, which has allowed the former to analyze the joint dynamics of unemployment and inflation. This paper analyzes optimal monetary policy in this kind of hybrid framework. I show that zero inflation is optimal when all wages are Nash bargained in every period and the economy's steady state is efficient. In the more realistic case in which nominal wage bargaining is staggered, a case against price stability arises: in response to real shocks, the central bank should use price inflation so as to avoid excessive unemployment volatility and excessive dispersion in hiring rates. For a plausible calibration, the welfare loss under the zero inflation policy is about three times as large as under the optimal policy.     

The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime

The study investigates how monetary policy affects bank risk-taking under a multiple-tool regime of Vietnam during 2007–2018. Particularly, we also consider the conditioning role of bank performance, broken down by bank profitability and cost efficiency, in this nexus. Using both dynamic and static panel models, we show that the liquidity injection initiated by the central bank’s asset purchases induces banks to take more risks, captured by the traditional Z-score and two alternative measures of credit risk. However, monetary policy easing through decreased interest rates is beneficial to the credit portfolio and financial stability of banks, which therefore challenges the functioning of the bank risk-taking channel. This startling result is robust across three different interest rate measures, including lending rates, refinance rates and rediscount rates. Further analysis reveals that our observed effects are alleviated for banks with higher performance — i.e., more profitable and efficient banks. This in-depth finding offers more insights into the “search for yield” incentive, based on the theory of information asymmetry and the two competing hypotheses of “bad management” and “cost skimping”.     

Option-implied expectations in commodity markets and monetary policy

In this paper we estimate the dynamic interactions between option-implied variance and skewness in agricultural commodity markets and monetary policy. Using a structural vector autoregressive (SVAR) framework, we find that an expansionary (contractionary) monetary policy upwardly (downwardly) revises commodity markets’ expectations about the price and volatility path of agricultural products. On the other hand, our empirical analysis reveals that monetary policy does not have a systematic and timely response to sudden changes in option implied expectations of commodity investors. In addition, we provide empirical evidence showing the robust forecasting power of agricultural option-implied information on monetary policy with R² values reaching almost 52%.     

Capital inflows,monetary policy,and financial imbalances

Ahead of the global financial crisis, financial imbalances built up across advanced economies as credit grew and was increasingly funded in wholesale financial markets. This paper investigates empirically three potential drivers of the build-up of these financial imbalances: rising global imbalances (capital flows); loose monetary policy; and inadequate supervision and regulation. We perform panel data regressions for OECD countries from 1999 to 2007 to explore the relative importance of these factors. We find that differences in the build-up of wholesale-funded credit were driven by the strength of capital inflows. Moreover, we document an interaction effect, whereby the effect of inflows on the build-up was amplified where the supervisory and regulatory environment was relatively weak. In contrast, differences in monetary policy did not significantly affect differences across countries in the build-up of these financial imbalances ahead of the crisis.     

The impact of monetary policy decisions on stock returns: Evidence from Thailand

Although numerous studies have examined the effect of monetary policy on stock prices, empirical research in the international setting remains relatively scant. Therefore, this topic is reexamined in the context of Thailand. In a sample of 50 repurchase rate announcements of the Bank of Thailand during 2003–2009, our regression results suggest that the raw change in the repurchase rate has a negative effect on stock returns at the market level, which is inconsistent with the literature. Contrary to the results of numerous studies, we find that at the market level the expected change in the repurchase rate has a negative effect on stock returns and the unexpected change in the repurchase rate exhibits no effect on stock returns. However, the effect of the unexpected change in the repurchase rate on stock returns is evident at the firm level. Our findings also suggest that the stock market's response to the repurchase rate change is asymmetric. The unexpected change in the repurchase rate that is considered as good news has a negative effect on stock returns. Overall, the evidence lends support to the notion that the monetary policy announcements have a significant effect on stock prices and further adds to the debate on whether the creditability of the monetary authority may contribute to the stock market's response to the monetary policy actions.     

The impact of conventional and unconventional monetary policy on investor sentiment

This paper examines the relationship between monetary policy and investor sentiment across conventional and unconventional monetary policy regimes. During conventional times, we find that a surprise decrease in the fed funds rate leads to a large increase in investor sentiment. Similarly, when the fed funds rate is at its zero lower bound, research results indicate that expansionary unconventional monetary policy shocks also have a large and positive impact on investor mood. Together, our findings highlight the importance of both conventional and unconventional monetary policy in the determination of investor sentiment.     

Narrative and VAR approaches to monetary policy: Common identification problems

Romer and Romer [Romer, C.D., Romer, D.H. 1989. Does monetary policy matter? A new test in the spirit of Friedman and Schwartz. In: Blanchard, O.J., Fischer, S. (Eds.), NBER Macroeconomics Annual 1989. MIT Press, Cambridge, MA, pp. 121–170; Romer, C.D., Romer, D.H., 1994. Monetary policy matters. Journal of Monetary Economics 34, 75–88] adopted a narrative approach to address the identification problems in time series models of monetary policy. Based on Federal Reserve documents, the Romers created a dummy variable equal to one in periods when the Federal Reserve contracted in response to perceived inflationary pressures. This paper shows: (1) the dummy variable is predictable from past macroeconomic variables, reflecting the endogenous response of policy to the economy; (2) unpredictable changes in the dummy do not generate dynamic responses that look like the effects of monetary policy. The identification problems that plague time series models also afflict the narrative approach.     

The international transmission of monetary policy through financial centres: Evidence from the United Kingdom and Hong Kong

This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the USA, euro area and Japan, on banks’ domestic lending behaviour. Using individual bank-level data we find that financial connections – in the form of lending to and borrowing from the country which changes monetary policy - play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the UK. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects.     

The impact of monetary policy surprises on asset return volatility: the case of Germany

This paper investigates the impact of monetary policy surprises by the FED or Bundesbank/ECB on the return volatility of German stocks and bonds using a GARCH-M model. We show that stock return volatility is susceptible to monetary policy surprises in the United States, whereas monetary policy surprises in the Euro zone matter for bond return volatility. These findings are robust for other Euro zone stock markets, but not significant for other Euro zone bond markets. The empirical evidence also suggests that monetary policy surprises have larger effects on German stock return volatility in bear markets than in bull phases. Moreover, our results support the claim that stock return volatility can be negatively correlated with stock returns, contradicting predictions made by many asset pricing models (e.g., CAPM or ICAPM) and the empirical finding of an insignificant relationship often reported in the literature.

Estimating the impact of monetary policy on income inequality in China

The article estimates the impact of monetary policy on income inequality in China. The empirical time series analysis finds that a battery of monetary indicators and the change in the unemployment rate lead to increases in the Gini coefficient. But only unemployment is statistically significant. The lack of significance of the monetary indicators is robust to running different econometric models using nominal output as an alternative to unemployment. Unemployment’s impact on income inequality is robust to considering a fiscal policy proxy alongside inflation in the benchmark equation.     

Endogenous objectives and the evaluation of targeting rules for monetary policy

Recent research in monetary economics has followed the advice of McCallum [1988. Robustness properties of a rule for monetary policy. Carnegie-Rochester Conference Series on Public Policy 29, 173-203] and investigated the robustness properties of monetary policy rules by evaluating them in a variety of models. Evaluation across models is typically based on an exogenously specified loss function. However, the theory on which many recent monetary policy models are based implies that changes in the structure of the model also have consequences for the policy objectives the central bank should pursue. Objectives are endogenous, not exogenous to the model. In this paper, I investigate the impact of endogenous objectives on the evaluation of targeting rules for monetary policy.     

Loss aversion and the asymmetric transmission of monetary policy

There is widespread evidence that monetary policy exerts asymmetric effects on output over contractions and expansions in economic activity, while price responses display no sizeable asymmetry. To rationalize these facts we develop a dynamic general equilibrium model where households’ utility depends on consumption deviations from a reference level below which loss aversion is displayed. State-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption generate competing effects on output and inflation. Contractions face the Central Bank with higher responsiveness of output to interest rate changes, as well as a flatter aggregate supply schedule.     

Futures prices as risk-adjusted forecasts of monetary policy

Many researchers have used federal funds futures rates as measures of financial markets’ expectations of future monetary policy. However, to the extent that federal funds futures reflect risk premia, these measures require some adjustment. In this paper, we document that excess returns on federal funds futures have been positive on average and strongly countercyclical. In particular, excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business-cycle indicators such as Treasury yield spreads and corporate bond spreads. Excess returns on eurodollar futures display similar patterns. We document that simply ignoring these risk premia significantly biases forecasts of the future path of monetary policy. We also show that risk premia matter for some futures-based measures of monetary policy shocks used in the literature.     

Learning and the monetary policy strategy of the European Central Bank

This paper examines the welfare implications of alternative inflation targeting proposals for the monetary policy of the European Central Bank. We assume that policy makers have to “learn” the laws of motion of inflation in an economy characterized by “stickiness” in domestic price setting behavior and subjected to recurring shocks to productivity, exports and foreign price. We find that a switch from an “asymmetric” inflation targeting strategy to an “symmetric” makes little difference in welfare payoffs, but it comes at a cost of much higher interest-rate variability. We also find that there are practically no welfare gains from switching from an inflation-targeting strategy based on the Harmonized Index of Consumer Prices (HICP) to a strategy based on the domestic price component of the HICP.     

Monetary policy matters: Evidence from new shocks data

The evidence suggests that monetary policy post 1988 became more forward-looking, invalidating the identifying assumptions in conventional methods of measuring monetary policy's effects, leading to spurious and unlikely results for this period. We propose a new identification scheme that uses factors extracted from Fed Funds futures to measure exogenous changes in policy. Using this shock series in a VAR, we recover the contractionary effect of monetary tightening on output. Moreover, we find that as much as half of the variability in output was driven by monetary policy shocks, and that there is a mild price puzzle.