A Markov Switching Factor‐Augmented VAR Model for Analyzing US Business Cycles and Monetary Policy

This paper develops a Markov switching factor‐augmented vector autoregression to investigate the transmission mechanisms of monetary policy for distinct stages of the US business cycle. We assume that autoregressive parameters and covariance matrices of the error terms are regime dependent, driven by an unobserved Markov indicator. Endogenously determined transition probabilities are governed by an underlying probit model that features a large set of possible predictors. The empirical findings provide evidence for differences in the transmission of monetary policy shocks that mainly stem from heterogeneity in the responses of financial market quantities.     

Optimal monetary policy in a regime-switching economy: The response to abrupt shifts in exchange rate dynamics

This paper examines the trade-offs that a central bank faces when the exchange rate can experience sustained deviations from fundamentals and occasionally collapse. The economy is modelled as switching randomly between different regimes according to time-invariant transition probabilities. We compute both the optimal regime-switching control rule for this economy and optimised linear Taylor rules, in the two cases where the transition probabilities are known with certainty and where they are uncertain. The simple algorithms used in the computation are also of independent interest as tools for the study of monetary policy under general forms of (asymmetric) additive and multiplicative uncertainty. An interesting finding is that policies based on robust (minmax) values of the transition probabilities are usually more conservative.     

Quasi ex-ante inflation forecast uncertainty

We propose a measure of the effects of monetary policy based on an analysis of the distribution of the ex-post inflation forecast uncertainty. We argue that the difference between the distributions of the ex-ante and ex-post uncertainties reflects the impact of monetary policy decisions. Using the theoretical background of the New Keynesian model with imperfect information and a monetary policy rule, we derive a proxy for ex-ante inflation uncertainty called quasi ex-ante forecast uncertainty, which is free to a certain extent of the effects of monetary policy decisions. Furthermore, we introduce the compound strength measure of monetary policy, as well as the uncertainty ratio, which approximates the impact of monetary policy on the reduction of the inflation forecast uncertainty. Our empirical results show that the greatest policy effect in reducing the inflation forecast uncertainty occurs for countries which conduct either a well-established or a relatively pure inflation targeting policy.     

Does monetary policy influence banks’ risk weights under the internal ratings-based approach?

This paper studies the extent to which monetary policy may affect banks’ perception of credit risk and the way banks measure risk under the internal ratings-based approach. Specifically, we empirically analyze the effect of different monetary policy variables on banks’ risk weights for credit risk. We present robust evidence of a strong, statistically significant relationship between monetary policy easing and lower implicit risk weights of banks using the internal ratings-based approach. Further, we show that the recent prolonged period of accommodative monetary policy has been instrumental in establishing this relationship. The presented findings have important implications for the prudential authority, which should be aware of the possible side effects of monetary policy on how banks measure risk.     

Private Sector Debt,Financial Constraints,and the Effects of Monetary Policy: Evidence from the US

We characterize the response of U.S. real GDP to monetary policy shocks conditional on the level of private sector debt and the degree to which financial constraints are binding. To incorporate state-dependent effects of monetary policy, we use the local projection framework. We find that although the amount of private sector debt potentially weakens the monetary policy transmission mechanism, policy shocks exert substantially larger effects on output when high private debt coincides with binding financial constraints.     

Monetary policy shocks: We got news!

We assess the role of monetary policy news shocks in the context of a medium scale DSGE model estimated on US data. We estimate several versions of the model and find decisive evidence in favour of the inclusion of monetary policy news shocks over a two-quarter horizon. According to our results, monetary policy news shocks account for a non-negligible fraction of the variance of real variables, especially at shorter forecast horizons. Further, we document that the importance of monetary policy news shocks goes beyond what was observed in recent years. The historical importance of monetary policy news shocks dates back to the 1999–2006 period when the official FOMC statements provided information about both the current policy setting and the expected future policy path. We also show that adding monetary policy news shocks to the model does not lead to identification problems.     

Does trade integration alter monetary policy transmission?

This paper explores the role of trade integration—or openness—for monetary policy transmission in a medium-scale new Keynesian model. Allowing for strategic complementarities in price setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation: a monetary contraction which appreciates the exchange rate lowers the local currency price of imported goods; this, in turn, induces domestic producers to lower their prices too. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on time series for the US relative to the euro area. Our estimation procedure yields plausible parameter values and suggests a strong role for strategic complementarities. Counterfactual simulations show that openness alters monetary transmission significantly. While the contractionary effect of a monetary policy shock on inflation and output tends to increase in openness, we find that monetary policy's control over inflation increases, as the output decline which is necessary to bring about a given reduction of inflation is smaller in more open economies.     

Monetary policy,housing rents,and inflation dynamics

In this paper we study the effect of monetary policy shocks on housing rents. Our main finding is that, in contrast to house prices, housing rents increase in response to contractionary monetary policy shocks. We also find that, after a contractionary monetary policy shock, rental vacancies and the homeownership rate decline. This combination of results suggests that monetary policy may affect housing tenure decisions (own versus rent). In addition, we show that, with the exception of the shelter component, all other main components of the consumer price index (CPI) either decline in response to a contractionary monetary policy shock or are not responsive. These findings motivated us to study the statistical properties of alternative measures of inflation that exclude the shelter component. We find that measures of inflation that exclude shelter have most of the statistical properties of the widely used measures of inflation, such as the CPI and the price index for personal consumption expenditures, but have higher standard deviations and react more to monetary policy shocks. Finally, we show that the response of housing rents accounts for a large proportion of the “price puzzle” found in the literature.     

How does Monetary Policy Respond to Exchange Rate Movements? New International Evidence*

This article analyzes how monetary policy has responded to exchange rate movements in six open economies, paying particular attention to the two‐way interaction between monetary policy and the exchange rate. We address this issue using a structural VAR model that is identified using a combination of sign and short‐term (zero) restrictions. Doing so we find that, while there is a instantaneous reaction in the exchange rate following a monetary policy shock in all countries, monetary policy responds significantly on impact to an exchange rate shock in only four of the six countries.     

Managed Floating as a Monetary Policy Strategy

Although there seems to be a broad consensus among economists that purely floating or completely fixed exchange rates (the so-called corner solutions) are the only viable alternatives of exchange rate management, many countries do not behave according to this paradigm and adopt a strategy within the broad spectrum of exchange rate regimes that is limited by the two corner solutions. Many of these intermediate regimes are characterized by significant foreign exchange market interventions and a certain degree of exchange rate flexibility with non-preannounced exchange rate targets. While academic research in this area usually concentrates on some specific aspects of intermediate regimes (such as the effectiveness of interventions or institutional aspects), managed floating has rarely been analyzed as a comprehensive monetary policy strategy. In this paper, we present a monetary policy framework in which central banks simultaneously use the exchange rate and the interest rate as operating targets of monetary policy. We explain the mechanics of foreign exchange market interventions and sterilization and we explain why a central bank has an interest of controlling simultaneously the two operating targets. We derive the monetary policy rules for the two operating targets from a simple open economy macro model in which the uncovered interest parity condition and the monetary conditions index play a central role.     

Effect of monetary policy shocks on the racial unemployment rates in the US

This study analyzes the effect of monetary policy shocks on the unemployment rate of different racial groups in the US, using data from 1969Q2 to 2015Q4. Employing a narrative approach to identify monetary policy shocks and local projections, we find that although an expansionary monetary shock affects White workers positively and significantly, the effect on Black workers is larger, and for Hispanic workers it is not statistically different from zero. These results are robust when considering unconventional monetary policy measures in the specification, and when exploring the impact of monetary policy on different genders and age groups. We also highlight how recession affects the transmission channel of monetary policy to the labor market for White and Hispanic workers. Finally, further extensions suggest that the Fed’s monetary policy is effective in reducing the racial unemployment gap, particularly between Whites and Blacks, and during economic booms.     

Energy prices and aggregate economic activity: an interpretative survey

In this article, we survey the theory and evidence linking fluctuations in energy prices to those in aggregate economic activity. We then examine the implications of this research for both monetary policy and energy policy in response to oil price shocks. The currently available research seems to provide relatively reliable guidance for monetary policy. Because the precise channels through which oil price shocks affect economic activity are only partially known, however, research offers less guidance about how countries should design energy policy should cope with oil price shocks.     

Nonlinearities in exchange rate determination in a small open economy: Some evidence for Canada

We analyze bilateral Canadian-US dollar exchange rate movements within a Markov switching framework with two states, one in which the exchange rate is determined by the monetary model, and the other in which its behavior follows the predictions of a Taylor rule exchange rate model. There are a number of regime switches throughout the estimation period 1991:2–2008:12 which we can each relate to particular changes in Canadian monetary policy. These results imply that an active monetary policy stance may account for nonlinearities in the exchange rate-fundamentals nexus. The strong evidence of nonlinearities also confirms the notion that exchange rate movements cannot be explained exclusively in terms of any one particular exchange rate model.     

Testing for optimal monetary policy via moment inequalities

The specification of an optimizing model of the monetary transmission mechanism requires selecting a policy regime: commonly, commitment or discretion. In this paper we propose a new procedure for testing optimal monetary policy, relying on moment inequalities that nest commitment and discretion as two special cases. The approach is based on the derivation of bounds for inflation that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specification tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the US economy.     

Testing the Structural Interpretation of the Price Puzzle with a Cost‐Channel Model*

We estimate a variety of small‐scale new‐Keynesian DSGE models with the cost channel to assess their ability to replicate the ‘price puzzle’, i.e. the inflationary impact of a monetary policy shock typically arising in vector autoregression (VAR) analysis. To correctly identify the monetary policy shock, we distinguish between a standard policy rate shifter and a shock to ‘trend inflation’, i.e. the time‐varying inflation target set by the Fed. Our estimated models predict a negative inflation reaction to a monetary policy tightening. We offer a discussion of the possible sources of mismatch between the VAR evidence and our own.     

Nonlinear effects of monetary policy on stock returns in a smooth transition autoregressive model

This paper employs smooth transition autoregressive (STAR) models to investigate the nonlinear effect of monetary policy on stock returns. The change in the Federal funds rate is used as an endogenous measure of monetary policy, and the growth rate of industrial production is also considered in the model. Our results show that the relationship between the monetary policy and excess returns on stock prices is positive and nonlinear. A decrease in the Federal funds rate causes a larger increase in excess returns if excess stock returns are located in the extreme low excess returns regime.     

Fiscal and monetary policies in complex evolving economies

What is the most appropriate combination of fiscal and monetary policies in economies subject to banking crises and deep recessions? We study this issue using an agent-based model that is able to reproduce a wide array of macro- and micro-empirical regularities. Simulation results suggest that policy mixes associating unconstrained, counter-cyclical fiscal policy and monetary policy targeting employment is required to stabilise the economy. We also show that “discipline-guided” fiscal rules can be self-defeating, as they depress the economy without improving public finances. Finally, we find that the effects of monetary and fiscal policies become sharper as the level of income inequality increases.     

财政政策与货币政策相对有效性研究

本文从实证的角度 ,对我国财政政策和货币政策的相对有效性进行了研究。运用协整分析方法并通过邹氏检验 ,对整个数据期间进行了制度检验。结果显示1980年以前平均来说 ,财政政策比货币政策有效 ,而其后平均来说货币政策比财政政策有效。这一结论与我国建国以来宏观经济调控政策选择的基本情况相吻合 ,为对宏观调控的政策选择提供了有力的支持。     

The Conduct of Monetary Policy Without Monetary Aggregates

A central dilemma for the monetary authorities is how to determine monetary policy. The increasing unreliability of monetary aggregates has led over the past few years to less concern for monetary targeting, both in the UK and elsewhere, and a greater influence for the exchange rate on monetary policy. But in the UK, most recently, there has been a move away from setting monetary policy in relation to the exchange rate and external considerations in favour of setting monetary policy in relation to domestic demand. Not surprisingly, this shift has occurred at a time of rising concern about domestic overheating. It illustrates the dilemma of whether monetary policy should be driven by domestic demand considerations or by external, exchange rate considerations. This dilemma is not just confined to the UK for it is a real source of conflict underlying the Louvre Accord and its successors that seek to determine G7 exchange rates in a cooperative manner. In what follows, we argue that exchange rate developments should have an appreciable influence on monetary policy, since this is helpful in attaining stable inflation. But we also suggest that this influence should not go too far, since this stability of inflation may be at the expense of stability of domestic demand and output. Targeting of exchange rates within narrow bands is unlikely to be desirable, unless fiscal policy can be used more flexibly to stabilize domestic demand. This suggests that, in the period up to the spring, the use of monetary policy to hold the £/JDM exchange rate within narrow limits may have been overdone. More seriously, international exchange rate agreements among the G7 countries are likely to founder under adverse market pressures, unless current imbalances in fiscal policy are adjusted. In the absence of greater flexibility in fiscal policy, policy makers will have to trade off domestic and exchange rate considerations in determining monetary policy. An important outstanding issue that needs further consideration is what indicators should be used for monetary policy, in a world in which monetary aggregates provide unreliable signals.     

The convergence of monetary policy between candidate countries and the European Union

We compare the convergence with German monetary policy of the transition-economy candidates for EU membership, of non-transition candidates, and of countries that have recently joined the EU. Significant linkages exist between German base money stock and that of recent members of the EU; the same holds true for non-transition-economy candidates. Among the transition economies, the ability to follow the policies of the Bundesbank is weaker or non-existent. Such weak policy coordination suggests the need for strengthening the financial sectors of these countries and for a period in which they tie their policies more closely to the ECB.