International comovements in inflation rates and country characteristics

Common shocks, similarities in central bank reaction functions, and international trade potentially produce common components in international inflation rates. This paper characterizes such links in international inflation rates with a dynamic latent factor model that decomposes 64 national inflation rates into world, regional, and idiosyncratic components. The world and regional components account for 35% and 16%, respectively, of annual inflation variability on average across countries, so that international influences together explain just over half of inflation variability. The importance of the world and regional components, however, differs substantially across countries. Economic policy choices and development measures strongly explain the cross-sectional variation in the relative importance of international influences. A subsample analysis reveals that the regional (world) factor increases in importance for a number of North American and European (Latin American and Asian) countries since 1980.     

Fundamental Economic Shocks and the Macroeconomy

We ask how macroeconomic and financial variables respond to empirical measures of shocks to technology, labor supply, and monetary policy. These three shocks account for the preponderance of output, productivity, and price fluctuations. Only technology shocks have a permanent impact on economic activity. Labor inputs have little initial response to technology shocks. Monetary policy has a small response to technology shocks but "leans against the wind" in response to the more cyclical labor supply shock. This shock has the biggest impact on interest rates. Stock prices respond to all three shocks. Other empirical implications of our approach are discussed.     

The Effects of Oil Price Uncertainty on Global Real Economic Activity

This paper investigates the effect of oil price uncertainty on global real economic activity using a quarterly vector autoregressive model with stochastic volatility in mean. Stochastic volatility allows oil price uncertainty to vary separately from changes in the level of oil prices, and allows one to incorporate an extraneous indicator of oil price uncertainty such as realized volatility that greatly improves the precision of the estimated uncertainty series. The estimation results show that an oil price uncertainty shock has negative effects on world industrial production all else equal. For example, it is shown that a doubling of oil price volatility is associated with a cumulative decline as high as 0.3 percentage points in world industrial production.     

The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross‐Country Analysis

This paper assesses the macroeconomic effects of unconventional monetary policies by estimating a panel vector autoregression (VAR) with monthly data from eight advanced economies over a sample spanning the period since the onset of the global financial crisis. It finds that an exogenous increase in central bank balance sheets at the zero lower bound leads to a temporary rise in economic activity and consumer prices. The estimated output effects turn out to be qualitatively similar to the ones found in the literature on the effects of conventional monetary policy, while the impact on the price level is weaker and less persistent. Individual country results suggest that there are no major differences in the macroeconomic effects of unconventional monetary policies across countries, despite the heterogeneity of the measures that were taken.     

How do oil supply and demand shocks affect Asian stock markets?

This paper examines how oil market shocks affect Asian stock prices using the structural vector autoregression (VAR) approach. Global oil supply and demand shocks are disentangled using sign restrictions and elasticity bounds. Oil price increases are bad news only if the source is from oil-market-specific demand shifts. Northeast Asian stock markets are more resilient as investors’ expectation of continued economic growth outweighs the adverse effect of higher oil prices. Increased global economic activity also stimulates stock prices. Global oil shocks are more important in explaining variability in Asian stock returns compared with the United States, suggesting different dynamics in Asia.     

Similarities and convergence in G-7 cycles

This paper examines the properties of G-7 cycles using a multicountry Bayesian panel VAR model with time variations, unit specific dynamics and cross-country interdependences. We demonstrate the presence of a significant world cycle and show that country specific indicators play a much smaller role. We detect differences across business cycle phases but, apart from an increase in synchronicity in the late 1990s, find little evidence of major structural changes. We also find no evidence of the existence of a Euro specific cycle or of its emergence in the late 1990s.     

The EONIA spread before and during the crisis of 2007–2009: The role of liquidity and credit risk

This paper provides an empirical assessment of the factors affecting the spread between the Euro Overnight Index Average (EONIA) and the main policy rate of the European Central Bank (ECB). Up until the period when Lehman Brothers collapsed in mid-September 2008, the spread was small and positive. After this point, the liquidity surplus that developed from the fixed rate full allotment tendering arrangement in refinancing operations drove the widening of EONIA spread (trading below the ECB policy rate), although other factors also played a significant role. This paper explains the drivers of spread across alternative non-crisis/crisis regimes. In addition, the paper examines how the EONIA spread reacts to shocks imposed on a range of liquidity and credit risk factors in alternative crisis/non-crisis regimes. The results have implications for factors that should be monitored closely across both regimes, and also the implications that this may have for steering an unsecured overnight rate in crisis times.     

Global Liquidity,House Prices,and the Macroeconomy: Evidence from Advanced and Emerging Economies

In this paper, we first compare house price cycles in advanced and emerging economies using a new quarterly house price data set covering the period 1990–2012. We find that house prices in emerging economies grow faster, are more volatile, less persistent, and less synchronized across countries than in advanced economies (AEs). We also find that they correlate with capital flows more closely than in AEs. We then condition the analysis on an exogenous change to a particular component of capital flows: global liquidity, broadly understood as a proxy for the international supply of credit. We identify this shock by aggregating bank‐to‐bank cross‐border credit and by using the external instrumental variable approach introduced by Stock and Watson (2012) and Mertens and Ravn (2013). We find that in emerging markets (EMs) a global liquidity shock has a much stronger impact on house prices and consumption than in AEs. We finally show that holding house prices constant in response to this shock tends to dampen its effects on consumption in both AEs and EMs, but possibly through different channels: in AEs by boosting the value of housing collateral and hence supporting domestic borrowing; in EMs, by appreciating the exchange rate and hence supporting the international borrowing capacity of the economy.     

The Structural Dynamics of U.S. Output and Inflation: What Explains the Changes?

We examine the dynamics of U.S. output and inflation using a structural time-varying coefficients vector autoregression. There are changes in the volatility of both variables and in the persistence of inflation, but variations are statistically insignificant. Technology shocks explain changes in output volatility; real demand disturbances variations in the persistence and volatility of inflation. We detect important time variations in the transmission of technology shocks to output and demand shocks to inflation and significant changes in the variance of technology and of monetary policy shocks.     

Inventory Dynamics and Business Cycles: What Has Changed?

To what extent can information-technology led improvements in inventory management account for the apparent moderation of economic fluctuations in the United States since the mid-1980s? We argue that changes in inventory dynamics played a reinforcing—rather than a leading—role in the reduction of output volatility. Since the mid-1980s, inventory dynamics have changed in a manner consistent with a faster resolution of inventory imbalances. However, these changes appear to be a consequence of changes in the response of industry-level sales and aggregate economic activity to monetary policy shocks. Our results suggest that it is the interaction between the changes in inventory behavior at the industry level and the macroeconomic environment—where the latter likely includes changes in the conduct of monetary policy and the responses of the economy to policy disturbances—rather than any single factor, that has contributed importantly to the observed decline in economic volatility.     

The expectations theory works for monetary policy shocks

In practice, the expectations theory of the term structure is employed extensively in monetary policy analysis despite its empirical failure. This paper performs a conditional test of the theory that is directly relevant to monetary theory and policy. It finds that the theory holds quite well conditional on identified monetary policy shocks, but fails conditional on aggregate supply shocks that prompt an immediate jump in prices. It also finds that policy responses to movements in the term structure play an important role in uncovering evidence for the theory as predicted by McCallum [1994. Monetary policy and the term structure of interest rates. NBER Working Paper Series, no. 4938].     

Regime switching and monetary policy measurement

This paper applies regime-switching methods to the problem of measuring monetary policy. Policy preferences and structural factors are specified parametrically as independent Markov processes. Interaction between the structural and preference parameters in the policy rule serves to identify the two processes. The estimates uncover policy episodes that are initiated by switches to “dove regimes,” shown to Granger-cause both NBER recessions and the Romer dates. These episodes imply real effects of monetary policy that are smaller than those found in previous studies.     

Estimation of a forward-looking monetary policy rule: A time-varying parameter model using ex post data

In this paper, we consider estimation of a time-varying parameter model for a forward-looking monetary policy rule, by employing ex post data. A Heckman-type (1976. The common structure of statistical models of truncation, sample selection, and limited dependent variables and a simple estimator for such models. Annals of Economic and Social Measurement 5, 475-492) two-step procedure is employed in order to deal with endogeneity in the regressors. This allows us to econometrically take into account changing degrees of uncertainty associated with the Fed's forecasts of future inflation and GDP gap when estimating the model. Even though such uncertainty does not enter the model directly, we achieve efficiency in estimation by employing the standardized prediction errors for inflation and GDP gap as bias correction terms in the second-step regression. We note that no other empirical literature on monetary policy deals with this important issue. Our empirical results also reveal new aspects not found in the literature previously. That is, the history of the Fed's conduct of monetary policy since the early 1970s can in general be divided into three subperiods: the 1970s, the 1980s, and the 1990s. The conventional division of the sample into pre-Volcker and Volcker-Greenspan periods could mislead the empirical assessment of monetary policy.     

Monetary policy surprises and international bond markets

We examine the impact and spillover effects of monetary policy surprises on international bond returns. Within the framework of Campbell and Ammer (1993), we decompose international bond returns into news regarding future returns, real interest rates and future inflation for Germany, the U.K. and the U.S. We examine how excess bond returns in these three countries are affected by surprise changes in monetary policy in each country. Our measure of the unanticipated element of monetary policy is based on futures markets rather than the more traditional vector autoregression. Our results indicate that excess bond returns primarily react to domestic as compared to foreign monetary policy surprises. We also find there is a strong divergence between the effects of domestic monetary policy on excess bond returns in Germany relative to the U.K. A surprise monetary tightening in Germany (U.K.) leads to a rise (fall) in the excess holding period return. We trace this effect to news about lower (higher) inflation expectations and could be potentially rationalized by differences in the credibility of the monetary policy authority in each country.     

Identification of New Keynesian Phillips Curves from a Global Perspective

This paper is concerned with the estimation of New Keynesian Phillips Curves (NKPC) and focuses on two issues: the weak instrument problem and the characterization of the steady states. It proposes some solutions from a global perspective. Using a global vector autoregressive (GVAR) model steady states are estimated as long-horizon expectations and valid instruments are constructed from the global variables as weighted averages. The proposed estimation strategy is illustrated using estimates of the NKPC for eight developed industrial countries. The GVAR generates global factors that are valid instruments and help alleviate the weak instrument problem. The steady states also reflect global influences and any long-run theoretical relationships that might prevail within and across countries in the global economy. The GVAR measure of the steady state performed better than the HP measure, and the use of foreign instruments substantially increased the precision of the estimates of the output coefficient.     

Emerging market corporate leverage and global financial conditions

This paper explores how global financial conditions influence corporate leverage growth in emerging markets (EMs). Using a sample of 800,000 listed and non-listed firms across 28 EMs, we find that accommodative global financial conditions—initially proxied with a measure of U.S. monetary policy—are associated with faster leverage growth. The impact is more pronounced for financially constrained firms, such as small- and medium-sized enterprises (SMEs), and for EMs whose domestic monetary policy is more aligned with that of the United States. The findings suggest that global financial conditions affect EM firms' leverage growth by influencing domestic interest rates and by relaxing corporate borrowing constraints. Finally, leverage increases disproportionately more for firms that are either relatively less profitable or less solvent when global financial conditions become looser.     

Monetary policy shocks: : Testing identification conditions under time-varying conditional volatility

We propose an empirical procedure, which exploits the conditional heteroscedasticity of fundamental disturbances, to test the targeting and orthogonality restrictions imposed in the recent VAR literature to identify monetary policy shocks. Based on U.S. monthly data for the post-1982 period, we reject the non-borrowed-reserve and interest-rate targeting procedures. In contrast, we present evidence supporting targeting procedures implying more than one policy variable. We also always reject the orthogonality conditions between policy shocks and macroeconomic variables. We show that using invalid restrictions often produces misleading policy measures and dynamic responses. These results have important implications for the measurement of policy shocks and their temporal effects as well as for the estimation of the monetary authority's reaction function.     

Dynamics of international integration of government securities’ markets

This paper investigates the dynamics of international government bond market integration in six of the G7 economies over two decades leading up to the global crisis. It examines whether such integration had been significant; the extent to which integration at the short and long end of the yield curve differed; the nature of such integration; and the extent of the decoupling of the long rates from short rates. These issues are investigated using the rigorous smooth-transition copula-GARCH model framework. The results show that integration at the long end of the yield curve had been increasing, had become pronounced, and was significantly greater than at the short end. Decoupling between the short and long end of the yield curve was notable, with important implications for the efficacy of monetary policy in the period before the crisis.     

Can Stock Volatility Be Benign? New Measurements and Macroeconomic Implications

We find nonsynchronized movements of two new measures of financial market uncertainty—good and bad volatility—which are based on the maximum and minimum stock prices within a month. Good (bad) volatility is associated with better (worse) expectations about the future economic situation and clearly signals acceleration (deceleration) in economic activity. The VAR results indicate that (i) output, employment, and stock price plummet rapidly in response to a bad volatility shock, while their responses to a good volatility shock are modest, and (ii) bad volatility shocks explain the bulk of economic activity and stock price fluctuations in the medium run.