OIL PRICE SHOCKS AND STOCK MARKET BOOMS IN AN OIL EXPORTING COUNTRY

This paper analyses the effects of oil price shocks on stock returns in Norway, an oil-exporting country, highlighting the transmission channels of oil prices for macroeconomic behaviour. To capture the interaction between the different variables, stock returns are incorporated into a structural VAR model. I find that following a 10% increase in oil prices, stock returns increase by 2.5%, after which the effect gradually dies out. The results are robust to different (linear and non-linear) transformations of oil prices. The effects on the other variables are more modest. However, all variables indicate that the Norwegian economy responds to higher oil prices by increasing aggregate wealth and demand. The results also emphasize the role of other shocks; monetary policy shocks in particular, as important driving forces behind stock price variability in the short term.     

Oil prices and economic downturns: the case of Spain

We address the macroeconomic effects of an oil price shock in Spain. We apply a vector autoregression model (VAR) analysis to quarterly data for the Spanish economy since 1986, to elucidate the effects of variations in the oil price on the economy, considering the three main causes of disruptions in the oil markets: oil supply shocks, oil demand shocks and oil-specific (precautionary) demand shocks. We conclude that the effects in Spain strongly depend on the type of shock: the consumer price index (CPI) has mainly been influenced by oil demand shocks; output has only reacted to oil supply shocks; and monetary policy has mainly reacted after precautionary shocks. Second-round effects caused by the behaviour of nominal wages have not been found. Additionally, we discuss two facts: the ability of firms to increase markups in a context of rising demand and the procyclical role of monetary policy when faced with oil demand shocks.     

The asymmetric effects of investor sentiment and monetary policy on stock prices

We examine the impact of investor sentiment and monetary policy on the stock prices under different market states based on the Markov-switching vector autoregression (MS-VAR) model. The results show that the sentiment shocks, more than monetary policy shocks, lead to not only much larger fluctuations of stock prices but also much longer duration in the stock market downturn than in the stock market expansion, which shows obvious asymmetric effect. Moreover, the responses of stock prices to the sentiment shocks present an immediate effect, while the responses of stock prices to the monetary policy shocks show one-period lag effect.     

Asymmetric effects of monetary policy shocks on economic performance: empirical evidence from Turkey

This study investigates the asymmetric effects of monetary policy shocks on the macroeconomic variables of exchange rate, output and inflation for an emerging economy ? Turkey ? by using monthly data between 1990 and 2014. We employ the innovative nonlinear vector autoregressive model of Kilian and Vigfusson (2011), which allows us to observe the effect of different stances (tight or loose) and different sizes (small or large) of monetary policy actions. Our empirical evidence reveals that tight monetary policy, which, in this case, is captured with a positive shock to interest rate, decreases exchange rate, output and prices, as economic theory suggests. Loose monetary policy, which is captured with a negative shock to interest rate, has the opposite effect on these variables. However, the effects of loose monetary policy are weaker than the effects of tight monetary policy because loose monetary policy shocks are less effective than tight monetary policy shocks. Moreover, as the magnitude of a shock increases, the difference between the effects of tight and loose monetary policy policies also increases.     

AN ANALYSIS OF MONETARY POLICY SHOCKS IN JAPAN: A FACTOR AUGMENTED VECTOR AUTOREGRESSIVE APPROACH*

This paper analyses monetary policy shocks in Japan using a factor augmented vector autoregressive approach. There are three main findings. First, the time lags with which the monetary policy shocks are transmitted vary between the various macroeconomic time series. These include several series that have not been included thus far in standard vector autoregressive analysis, including housing starts and employment indices. Second, a coherent picture of monetary policy effects on the economy is obtained. Third, it is found that monetary policy shocks have a stronger impact on real variables, such as employment and housing starts, than industrial production.     

Monetary shocks and asymmetric effects in an emerging stock market: The case of China

In this paper, we study the effect of monetary shocks on the Chinese stock market over the period of 2005 to 2011 with the MSVAR–EGARCH model. The evidence suggests that Chinese monetary policies have significantly asymmetric effects on the stock market in different time periods and market cycles. The effects of shocks from interest rate and reserve rate vary across market cycles but effects from money supply and exchange rate do not. Empirical evidence from the non-linear model shows that monetary policy changes increase stock market volatility, even though these monetary policies are often aimed at stabilizing macro-economic activities. The evidence suggests that both the market conditions and the effects on stock markets should be taken into consideration in monetary policy design and implementation.     

Unemployment dynamics in emerging countries: Monetary policy and external shocks

This paper quantifies the impact of three key external shocks – external demand, interest rate, and uncertainty shocks – on emerging market economies (EMEs). We find that external shocks have a sizeable impact on macroeconomic fluctuations in EMEs and that a considerable fraction of this impact is through the domestic stock market. A decrease in external demand and an increase in external interest rate and uncertainty lead to a higher unemployment rate, lower stock market return, and a depreciation of the domestic currency. The EMEs' monetary policy actively responds to external shocks and dampens their impact on domestic activity.     

Cross-country evidence on the relation between stock prices and the current account

This article explores the relation between stock prices and the current account for 17 Organization for Economic Co-operation and Development (OECD) countries in 1980–2007. A panel Vector Autoregressive (VAR) model is used to compare the effects of stock price shocks to those originating from monetary policy and exchange rates. While monetary policy shocks have little effects, shocks to stock prices and exchange rates have sizeable effects. A 10% contraction in stock prices improves the current account by 0.3% after 2 years. Hence a channel – in addition to the traditional exchange rate channel – is found through which external balance for an OECD country with a current account imbalance can be restored.     

Asymmetric responses of money demand to oil price shocks in Saudi Arabia: a non-linear ARDL approach

Saudi Arabia is an open oil-based economy with fixed exchange rates; therefore, it has limited monetary policy autonomy. Using non-linear autoregressive distributed lag approach, this article investigates the asymmetric effects of oil price shocks on the demand of money in Saudi Arabia over the period 1990:Q1–2014:Q4. The empirical results show evidence of positive long run but asymmetric effects of oil price shocks on the money demand. In particular, we find that the positive oil price shocks are more important than negative shocks. Therefore, two policy responses can be considered: either sustaining the fixed exchange rate regime and following an economic diversification policy or switching towards a flexible exchange rate regime to achieve price stability. In that case, the existence of a stable money demand function in Saudi Arabia is a necessary precondition for adopting a monetary policy strategy targeted to price stability using instruments like money targeting.     

Oil and the Euro area economy

We examine the macroeconomic effects of different types of oil shocks and the oil transmission mechanism in the Euro area. A comparison is made with the US and across individual member countries. First, we find that the underlying source of the oil price shift is crucial to determine the repercussions on the economy and the appropriate monetary policy reaction. Second, the transmission mechanism is considerably different compared to the US. In particular, inflationary effects in the US are mainly driven by a strong direct pass-through of rising energy prices and indirect effects of higher production costs. In contrast, Euro area inflation reacts sluggishly and is much more driven by second-round effects of increasing wages. The monetary policy reaction of the ECB to oil shocks is also strikingly different compared to the FED. The inflation objective, relative to the output stabilization objective, appears more important for Euro area monetary authorities than for the FED. Third, there are substantial asymmetries across member countries. These differences are due to different labour market dynamics which are further aggravated by a common monetary policy stance which does not fit all.
--- Gert Peersman and Ine Van Robays     

Shadow short rate and monetary policy in the Euro area

Empirical modelling of the monetary policy effects using conventional linear econometric models is put to a great test when interest rates approach the zero-lower bound. A possible remedy recently proposed in the literature is to introduce a shadow short rate (SSR) obtained from the yield curve model as an alternative monetary policy measure. This paper examines the usefulness of shadow rates as a policy stance measure for the Euro area. Moreover, the SSR can be used to study the country-specific monetary policy stance. We incorporate the shadow short rate in a standard vector autoregressive analysis to study the effects of monetary policy shocks both at the level of the Euro area and for two periphery EA countries, Italy and Spain, that endured significant financial stress during the crisis. Our analysis shows that monetary policy shocks identified form the SSR produce similar macro responses as shocks identified from the standard policy rate. The Euro area shocks can directly translate to a corresponding change in the country-specific financing conditions in the periphery, whereas the reverse effect is limited. The historical decomposition of the stochastic component of the SSR series shows that the unconventional policy measures were effective in stabilising the sovereign crisis in 2011, however, their relatively limited quantity provided only a weak stimulus to the economy.     

Asset prices and expected monetary policy: evidence from daily data

This article explores the relationships among Libor, gold prices, the exchange rate, oil prices, fed funds futures prices and stock prices at a daily frequency. This article examines whether expected monetary policy, measured by changes in the prices of fed funds futures contracts, reacts to high frequency changes in asset prices and, in turn, whether asset prices respond to changes in expected monetary policy. The article reveals that there are statistically significant relationships between expected US monetary policy and shocks to Libor and exchange rates. It also reveals that there is no evidence of a systematic relationship between stock prices and expected monetary policy changes. Splitting the data into expansionary and recessionary periods using NBER dating, we find results for the expansionary periods that are very similar to the results for the entire period. For the periods of recession, we find little evidence of significant linkages between markets.     

The recent boom–bust cycle: The relative contribution of capital flows, credit supply and asset bubbles

We use an estimated open economy DSGE model with financial frictions for the US and the rest of the world to evaluate various competing explanations about the recent boom–bust cycle. We find that the savings glut hypothesis is insufficient for explaining all aspects of the boom in the US. Relatively strong TFP growth and expansionary monetary policy are also not able to explain fully the volatility of corporate and in particular residential investment. We identify bubbles in the stock and housing market as crucial. Concerning the downturn in 2008/2009, the fall in house prices and residential investment only plays a minor role. Mortgage defaults have more explanatory power, especially in a specification of the model with a segregated equity market. Finally, the bursting of the stock market bubble was at least as important in this recession as in 2001. Because of various negative shocks hitting the economy at the same time in 2008/2009 and continued positive technology growth, not only the real interest rate declined but inflation fell rapidly and left insufficient room for monetary policy to play a similar stabilising role as in previous recessions.     

Optimal Monetary Policy with Vertical Production and Trade*

This paper explores the optimal monetary policy response to domestic and foreign technology shocks in an open economy with vertical structure of production and trade. We find that any stage‐specific productivity shock in one country may have a transborder spillover effect on the other country via the vertical trade. So when choosing optimal monetary rules, each monetary authority should respond to both home and foreign productivity shocks. Also, the flexible exchange rate cannot replicate the flexible price equilibrium, even under producer currency pricing, due to price stickiness in multiple stages. We also find that the existence of a transborder spillover effect depends on the currencies of price setting. Finally, vertical trade may affect the value of exchange rate flexibility under PCP and LCP setting.     

Unconventional monetary policy announcements and information shocks in the U.S.

We study unconventional policy shocks and information shocks associated with central bank announcements in the U.S. While unconventional policy shocks capture the direct influence of announced monetary policy actions, information shocks are associated with central bank information conveyed with the announcement. To disentangle these two types of shocks, we impose sign restrictions on high frequency changes in interest rates and stock prices around announcements. We find that information shocks lead to persistent declines in the 10-year government bond yield, whereas the actual unconventional policy shock induces only small interest rate responses. We also find that expansionary output effects of unconventional monetary policy are to some extent counteracted by the information shock.     

Stock market response to monetary and fiscal policy shocks: Multi-country evidence

A Structural VAR model is employed to investigate the effects of monetary and fiscal policy shocks on stock market performance in Germany, UK and the US. A significant number of past studies have concentrated their attention on the relationship between monetary policy and stock market performance, yet only few on the effects of fiscal policy on stock markets. Even more we know little, if any, on the effects of fiscal and monetary policies on stock market performance when the two policies interact. This study aims to fill this void. Our results show that both fiscal and monetary policies influence the stock market, via either direct or indirect channels. More importantly, we find evidence that the interaction between the two policies is very important in explaining stock market developments. Thus, investors and analysts in their effort to understand the relationship between macroeconomic policies and stock market performance should consider fiscal and monetary policies in tandem rather than in isolation.     

International demand and liquidity shocks in a SVAR model of the Australian economy

A structural vector autoregressive model of the Australian economy that allows for international shocks from the USA, Japan as well as world commodity prices is specified and estimated for the period 1979–1999. A block exogenous structure linking the three countries is imposed. The international linkages are modelled using a factor structure to circumvent problems from estimating large scale dynamic models. The factors are estimated recursively using a Kalman filter and are found to represent aggregate demand and liquidity shocks for the USA and Japan respectively. The key empirical result is the USA shocks are the dominant source of international shocks on the Australian economy with the Japanese economy having a dampening effect on the USA shocks. The empirical results also show that Australian monetary policy responds to domestic conditions rather than international monetary policy.     

South Africa’s monetary policy independence: evidence from a Global New-Keynesian DSGE model

We study the response of South African monetary policy decisions to foreign monetary policy shocks. We estimate the extent of foreign monetary policy pass through by augmenting standard Taylor rules and comparing the results within the context of a Global New-Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. The general equilibrium model captures important spill-over effects that would otherwise have been ignored in a single equation set-up. The results show that the relationship between foreign monetary policy shocks and South African interest rates is complicated – South Africa does not import foreign monetary policy directly, but is still affected. Except for the US, an increase in foreign interest rates leads to a decrease in South African interest rates – highlighting the complex channels that the monetary policy authority has to monitor outside of its economy.     

Should a central bank react to food inflation? Evidence from an estimated model for Chile

We examine whether food price shocks are a major source of macroeconomic fluctuations. We estimate a small open economy DSGE model using an alternative Taylor rule applied to Chilean data. The empirical evidence suggests that food inflation played a non-trivial role in shaping Chile's de facto monetary policy actions. Consistent with its commitment to price stability, the central bank increases the policy rate in reaction to food inflation. Despite an immediate monetary policy reaction to a food price shock, the policy rate gradually tapers off. This is due to a second-round effect on non-food inflation propagated by the food price shock. A main finding is that monetary policy that targets headline inflation is welfare improving.